Middle-income countries are in a race against time. Since the 1990s, many of them have done well enough to escape low-income levels and eradicate extreme poverty, leading to the general perception that the last three decades have been great for development. But this is because of abysmally low expectations—remnants from a period when more than two-thirds of the world lived on less than a dollar a day. So what can middle-income countries do to tackle poverty and, climate change and elevate themselves into the higher-income bracket?. To us find out more, Somik Lall, Director of the latest World Bank Group World Development Report, joins Expert Answers.
Timestamps
00:00 Introducing the topic and expert
01:35 Middle-income countries advancing to the high-income level
02:53 Growth strategies for middle-income countries
04:14 Using capital, labor and energy more efficiently
05:57 Examples of successful transition from middle-income to high-income
Transcript
[00:00] - You're driving a car in stick shift. You're in first gear, you're kind of revving it up, speed increases, but not much faster. The same thing with economies.
- Hello, and welcome back to "Expert Answers". I'm Andrea Tapia. Today we'll be looking at a group of countries in a race against time to break through onto a path to bigger and better economic growth. But they face something called the middle-income trap, which acts as a bar to attaining high-income status. So, why is this important to all of us? Well, at the end of 2023, 108 countries were classified as middle-income. You might be surprised to know that they include China, Brazil, and South Africa, just to name a few. These 108 countries are home to 6 billion people. That's 75% of the global population. They generate 40% of global GDP and more than 60% of carbon emissions, and two out of every three people in these countries live in extreme poverty. So, how hard is it to break through? Well, since 1990, only 34 economies have managed to shift from middle to high-income status. And the big question we'll address today, how can countries escape the middle-income trap? Let's find out. Today I'm joined by Somik Lall, Senior Advisor to the Chief Economist at the World Bank, and also the director of the latest World Development Report that looks at how to address the middle-income trap. Somik, welcome to "Expert Answers".
- Thank you, Andrea. I'm really glad to be here.
[01:35] - Can you begin by explaining why it is so tricky for middle-income countries to advance to the high-income level?
- Andrea, let me start by giving an example. If you were to look at the median incomes of a middle-income country and compare it with the United States, that median income has never been more than a 10th of the United States incomes for the last 50 years. Regardless of how the world has changed, that number has been constant. And what we have found is that while in the halls of government in India, in China, in Brazil, in South Africa, there's a lot of optimism that countries will move from middle-income to high-income. In the real world, that's not happened. And what we see is that as economies grow larger, they also change the economic structures. So now, the policies that are needed to guide economies through the new structures need to be different, and yet countries find it very difficult to have policies and institutions that are compatible with these new economic structures. So they get stuck in doing the same thing again and again, and that's what we call the middle-income trap.
[02:53] - And speaking of growth, the report highlights three growth strategies to help middle-income countries escape this trap. Can you talk a little more about them?
- Absolutely. So, let's imagine that you're driving a car in stick shift. You're in first gear, you're kind of revving it up, speed increases, but not much faster. The same thing with economies. They start off their journeys to growth, accelerating investment. They invest in private capital, they invest in education and infrastructure, but soon, they can only do so much of it. They need something different. And that's what we say at that time, the economy needs to move from this one I strategy that looks at investment, to a two I strategy that looks both at investment and infusion. Infusion means getting ideas from the rest of the world and diffusing it to your local economy. And then again, the returns to that slow down. At that time, countries need to switch to innovation, what we call the three I strategy of combining investment with infusion and innovation. And they keep need to making these gear changes so that when the times come, they can recalibrate the economic policies to make it compatible with structures for a high-income economy.
[04:14] - So, those three I's, as you call them in the report, are not the end of the story, right? What are some specific measures policy makers should also focus on to use capital, labor, and energy more efficiently?
- So, in the report, we question commonly held sort of beliefs on how we should go about diagnosing economic policy. Often, when you think about firms, we think about large firms as being villains. If we see markets, we see some large firms dominating markets as being a problem. But what we show is that both large firms, whom we call incumbents, and small firms, who may be entrants, both can add value. It's to make sure that the relationships between these large firms and small firms is not a predatory one, it's a symbiotic one. So we say, hey, listen, don't look at firm size. Look at value added. Who adds more value? The same ideas can be looked at in terms of talent. For example, we often think about elite in society as being villains, but often, it's the elites who create the opportunities for the rest of the economy to get access to new ideas. The fact that you can have kids from disadvantaged areas and families get access to the same education opportunities in fact gives us a new way of thinking about it. So we say, don't only look at inequality, start thinking about social mobility. So these are new metrics that we have introduced, and what we have found is that when countries have changed the tack, they've started doing much better.
[05:57] - And before wrapping up, can you talk about specific examples of countries that have successfully transitioned from middle-income to high-income, and what can we learn from them?
- I'd like to start with a country example from Korea. Korea in the 1960s was one of the poorest countries in the world. And now when we look at Korean data, Korea is one of the most affluent countries in the world, with incomes per capita close to 35,000. So what did Korea do? Korea during the 1960s and 70s encouraged its companies, its large conglomerates, like Samsung, to send their engineers to globally leading companies, like NEC in Japan, and to learn how things are done. At the same time, the Korean government said they're not only going to focus on giving loans or financial access to firms that build factories, but those that get ideas from the rest of the world. So if you were to get a license from a leading company and produce it at home, you got a tax incentive. And through that combination of learning from the world, getting ideas from the world, Korea started mastering technology related to televisions, radios, et cetera, and soon, Koreans could do it better than the Japanese could. Now, the Japanese got really concerned. At that time, they increased the cost of these licensing, and the Koreans switched their ideas from just infusing Japanese technology to doing their own innovation. So, carefully, and very in a focus manner, they moved from investment to adding infusion to investment, and later, only later, added innovation to the mix. So you see this Korean idea of this one I, two I, three I play out in other parts of the world, and in the World Development Report, we talk of how Chile has done the same strategy, how countries like Poland have done the same strategy, and now today, how countries like India and China are trying out these strategies.
- Great to end on those positive examples. Thanks so much, Somik.
- Thank you very much, Andrea.
- Well, that's all for me today, but if you wanna take a deeper dive into the middle-income trap and how countries can break through, you can check out the full World Development Report on the World Bank website. Bye for now.
