World Bank Note: Avoiding Middle-Income Growth Traps

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Avoiding Middle-Income Growth Traps

Authors: Pierre-Richard Agénor, Otaviano Canuto, and Michael Jelenic

Since the 1950s, rapid growth has allowed a significant number of countries to reach middle-income status; yet, very few have made the additional leap needed to become high-income economies. Rather, many developing countries have become caught in what has been called a middle-income trap, characterized by a sharp deceleration in growth and in the pace of productivity increases. Drawing on the findings of a recently released working paper (Agénor and Canuto 2012), as well as a growing body of research on growth slowdowns, this note provides an analytical characterization of “middle-income traps” as stable, low-growth economic equilibria where talent is misallocated and innovation stagnates. To counteract middle-income traps, there are a number of public policies that governments can pursue, such as improving access to advanced infrastructure, enhancing the protection of property rights, and reforming labor markets to reduce rigidities — all implemented within a context where technological learning and research and development (R&D) are central to enhancing innovation. Such policies not only explain why some economies — particularly in East Asia — were able to avoid the middle-income trap, but are also instructive for other developing countries seeking to move up the income ladder and reach high-income status.

The Economic Premise notes are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the institution.

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