DCID director Indermit Gill’s work at the World Bank is referenced in a special feature of this week’s The Economist. In 2007, Gill and his colleague Homi Kharas from the Brookings Institution coined the term “middle-income trap” to describe the challenges to growth faced by economies that fall between rich and poor. Almost a decade later, after the theory’s popularity peaked, Gill and Kharas returned to the middle-income trap in a retrospective paper. Although the debate is ongoing in economic circles, The Economist points out that rigorous data show less empirical support for the idea than intuition may have predicted. In their paper, Gill and Kharas emphasize the underpinning context still matters for policymakers in today’s global economy:
First, to us, the middle-income trap was more the absence of a satisfactory growth theory that could inform development policy in middle-income economies than the articulation of a generalized development phenomenon. It was a trap of ignorance about the nature of economic growth in middle-income countries: endogenous growth theories addressed the problem in high-income economies (where about 1 billion people live today), and the Solow growth model was still the work-horse for understanding the growth problem in low-income countries (where another 1 billion live), but neither are satisfactory for understanding what to do in countries where the remaining 5 billion people in the world live—those in middle-income countries.
Second, the trap was meant to convey an empirical regularity that past success was no guarantee of future success. In the wake of daily articles on “the Asian century”, there was a real risk that countries in the region could become trapped by complacency. The trap was meant to warn policy makers that lack of vigilance could trigger a long period of below potential growth. [We leave until later the meaning of a “long” period, but Yegor Gaidar, the eminent Russian reformer, allegedly asserted that his country had been trapped in middle-income for two centuries. The same could be said of Belarus and the Ukraine.]
Third, the trap was a device to spark a discussion of policy choices in middle-income countries. It was not intended to be a statement of determinism that low growth rates were a matter of destiny for middle-income countries. As we will see below, this is more than a matter of semantics. For us, the “middle-income trap” was short-hand for “a trap that can catch middle-income countries”. It was not a statement that middle-income countries are more likely to be trapped than other countries. In fact, we were silent on low-income countries and high-income countries because the focus of our attention was on policy making in middle-income countries. In retrospect, it would have been helpful to clarify this.
Read The Economist article: “The middle-income trap has little evidence going for it”
Read Gill and Kharas’ retrospective paper: “The Middle-Income Trap Turns Ten”