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

Abstract

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.

Keywords: middle-income trap, middle-income trap definition, middle-income transition, income transitions, income groups, economic development

JEL Classification: O40, O54, C33