The Middle Income Trap

The middle income trap is a term to describe a situation where a country struggles to maintain rapid economic growth once they reach a certain level of income. Currently, many Asian countries such as Malaysia, Thailand, and Vietnam are at this level, each having economic growth rates of 3.1%, 1.5%, and 2.6%, which are far lower than their expectations. 

Before these middle income countries reached their current levels of GDP per capita, they could utilize their low wages to focus on the production of manufactured goods for sustaining their economies. However, as their economies developed, the wages eventually increased, thus not being able to compete with the newly developing nations. Currently, India is the main nation that has taken over this role with a far lower GDP per capita of $2,500 and a healthy GDP growth rate of 8.7%. 

To escape the middle income trap, the country needs to find a way to keep up with the more developed economies in markets that have greater values. These markets often involve technology, which needs proper dedication and investment to catch up to countries that have decades more of experience. 

One primary example of a country that made this breakthrough is Korea. By developing profitable industries such as semiconductors and automobiles until they were able to compete in the global market, Korea was able to reach a GDP per capita of $30,000 without any major difficulties. Luck was also a part of this breakthrough as China, one of the fastest growing markets in the early 2000s, was responsible for more than half of Korea’s exports during this time. However, with China also having a hard time escaping the middle income trap nowadays, other Asian nations that had a slower start than Korea are failing to make large profits in their exports to China. 

Problems are emerging in countries stuck in the middle income trap, with one of them being low birth rates. Low birth rates are usually a problem of developed nations that have achieved enough economic growth. However, with the economic growth stunned, the Asian middle income countries are facing low birth rates as well. China and Thailand are in the worst situation with a birth rate of just 1.09 and 1.16, respectively. This is especially crucial for these countries because having a young population that can provide enough working force is the key for developing industries.

With global recession occurring, the economic struggles of the middle income countries are getting worse every day, further increasing the gap between themselves and the developed countries. To move out of this trap, they will have to swiftly find a solution for fundamental flaws in their economic structures.