The middle income trap is an economic development situation, where a country which attains a certain income (due to given advantages) will find further growth difficult.The concept was coined in 2007.A country in the middle income trap may lose competitive edge in the export of manufactured goods because wages are on a rising trend. An emerging market brimming with potential really starts growing rapidly, generating growth and prosperity, but as it moves into the middle of the global economic table, growth slows down. Hopes for future wealth diminish. It’s trapped.
For examples of this trend, you might look to Mexico, Brazil, Indonesia, or Thailand, countries that saw per capita income stagnate after achieving middle-income status. There are counter-examples, though: consider South Korea and Taiwan, which went from the range of 10% to 20% of US income up to the 60%-70% range with nary a pause.
Avoiding the middle income trap entails identifying strategies to introduce new processes and find new markets to maintain export growth. Ramping up domestic demand is also important—an expanding middle class can use its increasing purchasing power to buy high-quality, innovative products and help drive growth.
The biggest challenge is moving from resource-driven growth that is dependent on cheap labor and capital to growth based on high productivity and innovation. This requires investments in infrastructure and education–building a high-quality education system which encourages creativity and supports breakthroughs in science and technology.
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