Hello
As someone with 0 economics knowledge but keen interest I keep hearing this term “middle class trap” and how it is bad for countries long term economy and its people. What does it mean and why is it harmful for a country’s long term prospects ?
Thank you
In: 467
You might be referring to the “middle income trap”.
Low income countries generally have similar characteristics. Poor infrastructure, very low educational attainment in general, lack of institutions (legal and political), very basic trade and production that is predominantly agriculture. Families tend to be large and on average each person produces not a lot of value. At this point, GDP per capita is usually below USD5,000.
Although it isn’t easy, by any means, the pathway out of low income usually involves investment and development away from those characteristics. This typically involves infrastructure investment (energy, transportation), mandatory education (up to high school level) investment in manufacturing, healthcare, sound governance. This typically leads to higher degree of urbanization, smaller families, greater worker participation in the economy. This more productive economy (typically low to mid end manufacturing) raises the income of citizens generally. This can happen fairly rapidly (in some cases in less than 40-50 years) because a lot of the needed infrastructure and expertise can be “imported” through FDI and government loans and this investment directly adds to GDP. Generally speaking, industry focuses on exports rather than domestic consumption. GDP per capita is between 5,000-12,000 USD. Once GDP per capita gets to around 10,000 USD, a country is generally recognized as being a middle income nation.
This is where the “trap” happens. After 40-50 years the country would have developed many institutions that perpetuate this form of economy. Local successful companies lobby for protection. Political and economic stagnation can occur. After all, why change what has worked? Manufacturing is valued and many of the most talented citizens can migrate. The basics of food, shelter and security are present. There is a lot of institutional inertia. Generally speaking the poor still live in the countryside while a wealthier urban core develops.
The leap to a high income country is very difficult. There is no fixed path but generally the economy would need to migrate to high end services (engineering, finance, R&D) and higher education (need lots of college graduates). Women must participate in the economy, the country must be open for entrepreneurs and higher-end lifestyle services. Domestic consumption must become the biggest parts of the economy.
This is easy to describe but very hard to make happen. Higher incomes mean manufacturing has to transition to high value add, usually technical, with high capital requirements. A great deal of government stability and confidence in local institutions need to be established – no one pours billions of dollars into long term investments otherwise. Intellectual property must be protected. A well developed capital market and financial institutions are required. Few countries have crossed the gap to high income and even fewer with high populations. (There are some countries that have enormous natural resource wealth that have done so – but that is another story)
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