Middle-income transitions: trap or myth?

Abstract

The newly coined term ‘middle-income trap’ has been widely used in recent years by policymakers to refer to those middle-income economies that seem to be stuck in the middle-income range of the income distribution. This has been done despite that there is no accepted definition of the term in the literature. In this paper, we study historical transitions across income groups to see whether there is any evidence that supports the claim that some middle-income economies do not advance. Overall, the data refute this proposition and, as a consequence, we reject the existence of a middle-income trap as a generalized phenomenon. Instead, we argue that what distinguishes economies in their transition from middle to high income is the speed of these transitions, fast versus slow, a standard growth question. We find that, historically, those economies that graduated from lower-middle income ($2000 in 1990 purchasing power parity [PPP] $) to upper-middle income ($7250 in 1990 PPP $) did it in about 55 years. Likewise, we find that, historically, it took 15 years for an economy to graduate from upper-middle income to high income (above $11,750 in 1990 PPP $). Our analysis implies that, as of 2013, there were 10 (out of 39) lower-middle-income economies and 4 (out of 15) upper-middle-income economies that were experiencing ‘slow transitions’ (i.e., above 55 and 15 years, respectively). The historical evidence presented in this paper indicates that economies move up across income groups. The analysis of a large sample of economies over many decades also indicates that many economies that today are high income spent many decades traversing the middle-income segment.

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