World Bank warns 108 countries risk being stuck in ‘middle-income trap’

More than 100 countries – including China, India, Brazil and South Africa – risk becoming stuck in a “middle-income trap” unless they adopt radical growth strategies for their economies, the World Bank has said.

The Washington-based development organisation said emerging market nations would struggle to close the gap on US living standards unless they relied less heavily on investment to increase growth.

In its World Development Report, the World Bank said the lesson of the past 50 years was that as countries grew wealthier they hit a “trap” where incomes per head averaged at about 10% of US levels – the equivalent of $8,000 (£6,261).

Since 1990, only 34 middle-income economies had managed to shift to high-income status – with more than a third of them either beneficiaries of integration into the European Union, or of previously undiscovered oil.

Indermit Gill, the World Bank’s chief economist, said on current trends it would take China 10 years and India 75 years to have incomes per head of 25% of US levels.

“The battle for global economic prosperity will largely be won or lost in middle-income countries,” Gill said. “But too many of these countries rely on outmoded strategies to become advanced economies. They depend just on investment for too long – or they switch prematurely to innovation.

“A fresh approach is needed: first focus on investment; then add an emphasis on infusion of new technologies from abroad; and, finally, adopt a three-pronged strategy that balances investment, infusion, and innovation. With growing demographic, ecological and geopolitical pressures, there is no room for error.”

According to the World Bank, 108 countries were classified as middle-income at the end of 2023, each with annual incomes per head in the range of $1,136 to $13,845.

Middle-income countries were home to 6 billion people – 75% of the global population – with two out of every three people living in extreme poverty. They generated more than 40% of global gross domestic product, were the source of more than 60% of carbon emissions and faced far bigger challenges than their predecessors in escaping the middle-income trap: rapidly ageing populations, rising protectionism in advanced economies, and the need to speed up the energy transition.

Gill said it would be tough for countries to break out of the middle-income trap.

“We are not naive enough to think this will be easy. Middle-income countries will have to work miracles – not only to lift themselves up to high-income status but also to shift away from carbon-intensive growth paths that will lead to environmental ruin.”

The Bank proposed a “3i strategy” for countries depending on their stage of development. Low-income countries could focus solely on policies designed to increase investment – the 1i phase. Once they reached lower-middle-income status, they needed to shift gears and expand the policy mix in the 2i phase: investment and infusion, which involved adopting technologies from abroad and spreading them across the economy. At the upper-middle-income level, countries should shift gears again to the final 3i phase: investment, infusion, and innovation.