Tracking the Middle-Income Trap: What is It, Who is in It, and Why? (Part 1)

This paper provides a working definition of what the middle-income trap is. It classifies 124 countries that have consistent data for 1950–2010. First, the paper defines four income groups of gross domestic product per capita in 1990 purchasing power parity dollars: low-income below $2,000; lower middle-income between $2,000 and $7,250; upper middle-income between $7,250 and $11,750; and high-income above $11,750. In 2010, there were 40 low-income countries in the world, 38 lower middle-income, 14 upper middle-income, and 32 high-income countries.

Second, the paper calculates the threshold number of years for a country to be in the middle-income trap: a country that becomes lower-middle income (i.e., that reaches $2,000 per capita income) has to attain an average growth rate of per capita income of at least 4.7% per annum to avoid falling into the lower middle-income trap (i.e., to reach $7,250, the upper middle-income level threshold); and a country that becomes upper middle-income (i.e., that reaches $7,250 per capita income) has to attain an average growth rate of per capita income of at least 3.5% per annum to avoid falling into the upper middle-income trap (i.e., to reach $11,750, the high-income level threshold).

Avoiding the middle-income trap is, therefore, a question of how to grow fast enough so as to cross the lower middle-income segment in at most 28 years, and the upper middle-income segment in at most 14 years.