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
It’s not a for sure thing. There’s still debate. But the idea is that if an economy loses its industrialized/manufacturing base it must move to a high skill/service economy.
For example, the US saw a lot of manufacturing moving overseas in the last several decades. But that economic activity was replaced by high value industries like software. Similar story in China as it moves from agriculture to industrialization and manufacturing to software and consumer services. England as well – their biggest industry is finance and banking.
But these industries are extremely competitive and skill-intensive. A nation can’t just decide to create a financial capital of the world like London or NYC or Singapore. They would need decades to hundreds of years of experience navigating and even coordinating national/world economies. The US and England have that. You need a mass of highly educated people as well. How many finance and CS graduates are being produced by Ghana or by Portugal on the other hand? How many are they keeping? And what sort of global problems are they getting to experience?
In other words, it’s hard to make the leap to those “tier one” industries. Harder than it is to leave manufacturing.
And they can’t go back because manufacturing is now cheaper elsewhere. Why would companies build factories in the US when Mexico provides similar services at a lower price point?
So, what happened to a lot of countries is that they lost their “lower tier” manufacturing bases but failed to move that economic activity to sectors like software/banking/etc. So they’re stuck in this area of mid-level GDP per capita. Long term, because if you’re not moving forward you’re falling behind, being stuck in this space can set you even further behind. New “tier 1” industries will emerge and nations will be 2 steps behind. And other nations, maybe the ones you outsourced your manufacturing to, will make that leap.
Latest Answers