World Bank report highlights challenges in becoming a high-income economy
Over a hundred countries, including China, India, Brazil, South Africa and Thailand, face significant challenges in their quest to become high-income economies in the coming decades, according to a new World Bank study released earlier this month.
Drawing on the past 50 years, the “World Development Report 2024: The Middle Income Trap” provides a comprehensive roadmap for developing countries to overcome the so-called "middle-income trap".
It found that countries typically encounter a hurdle when their gross domestic product (GDP) per capita reaches around US$8,000 – a level considered middle-income by the World Bank.
Since 1990, only 34 middle-income economies have transitioned to high-income status, with many of these benefiting from European Union membership or oil discoveries.
At the end of 2023, 108 countries were classified as middle-income, home to 6 billion people – 75% of the global population. These nations generate over 40% of global GDP but also account for more than 60% of carbon emissions.
They face unprecedented challenges including ageing population, rising protectionism in developed economies, and the imperative to accelerate the energy transition.
World Bank Group chief economist Indermit Gill pointed out that the battle for global economic prosperity will largely be won or lost in middle-income countries.
“However, many of these countries rely on outdated strategies to become advanced economies. They depend excessively on investment or prematurely shift to innovation. A fresh approach is required: prioritising investment, followed by technology adoption, and finally balancing investment, technology infusion, and innovation. Given increasing demographic, ecological, and geopolitical pressures, there is no margin for error,” he said.
The report then proposes a "3i strategy" for countries to achieve high-income status. This involves a sequenced and increasingly sophisticated policy mix.
Low-income countries should focus solely on investment policies, while lower-middle-income nations should transition to a combination of investment and technology adoption. Upper-middle-income countries should then balance investment, technology adoption, and innovation.
Somik V Lall, director of the 2024 World Development Report, said that achieving progress would be difficult, but it is possible even in today’s challenging environment.
“Success hinges on balancing creation, preservation, and destruction. Countries avoiding reforms and openness will miss out on the benefits of sustained growth,” he said.
South Korea exemplifies the 3i strategy. Its per capita income soared from $1,200 in 1960 to $33,000 by the end of 2023. The country began with policies to boost public and private investment, transitioning in the 1970s to a strategy encouraging domestic firms to adopt foreign technology. Samsung, once a noodle manufacturer, became a global technology leader through technology licensing and investment in skilled labour.
Poland and Chile also followed similar paths. Poland focused on productivity gains through Western European technology adoption, while Chile encouraged technology transfer and domestic innovation, notably in salmon farming, the report says.
Interestingly, the report found a correlation between low carbon production and overall competitiveness.
Countries with higher levels of green complex product exports tend to have stronger overall economies.
The green complexity index, measuring a country's ability to export complex green products, highlights middle-income leaders like China, Bulgaria, India, Mexico, Türkiye, Serbia, Belarus, Thailand, Bosnia and Herzegovina, and Tunisia.
Moreover, many middle-income countries possess untapped potential in green technology exports.
China, Türkiye, India, Bulgaria, and Thailand, for instance, could significantly expand theirintegrate into low-carbon value chains.
This requires careful framing of industrial policy to avoid prot production of wind turbines and electric vehicles, the report says.
To fully contribute to global decarbonisation and domestic green market development, middle-income countries must ectionism and market distortions while supporting emerging low-carbon technologies.
While countries face legitimate concerns about energy security and political feasibility, well-coordinated industrial policies are crucial for a successful low-carbon transition, the report said.
