Thursday, March 19, 2015

Income Traps: It’s All About Convergence

A couple of recent papers have come out on “middle income traps”. First up from the World Bank (abstract):

Transitioning from low-income growth to high-income growth : is there a middle income trap?

Is there a "middle income trap"? Theory suggests that the determinants of growth at low and high income levels may be different. If countries struggle to transition from growth strategies that are effective at low income levels to growth strategies that are effective at high income levels, they may stagnate at some middle income level; this phenomenon can be thought of as a "middle income trap." This paper does not find evidence for (unusual) stagnation at any particular middle income level. However, it does find evidence that the determinants of growth at low and high income levels differ. These findings suggest a mixed conclusion: middle-income countries may need to change growth strategies to transition smoothly to high-income growth strategies, but this can be done smoothly and does not imply the existence of a middle income trap.

Translation: No, there’s no such thing as a middle income trap.

Second, from the Federal Reserve Bank of St Louis “On the Economy” blog (excerpt):

Can Countries Escape the Low- or Middle-Income Trap?

…This “low- or middle-income trap” phenomenon raises concern about the validity of the neoclassical growth theory, which predicts global economic convergence….

…Up to now, the growing literature about the low-income trap and the middle-income trap has focused on income divergence between the developed and developing worlds, but ignored the more pervasive phenomenon of the lack of convergence. This perspective can be important because even the poorest economies continue to grow at some positive rate every year.

Redefining the low- and middle-income traps as situations where income levels relative to the U.S. remain constantly low and without a sign of convergence allows us to study the issue of economic convergence (or the lack of it) directly….

…Convergence implies that income growth in these economies was significantly faster than in the U.S. In sharp contrast, per capita income relative to the U.S. remained constant and stagnant at 10 percent to 30 percent of U.S. income in the group of Latin American countries, which remained stuck in the middle-income trap and showed no sign of convergence to higher income levels, despite experiencing moderate absolute growth during the same period.

The lack of convergence is even more striking among low-income countries….

…Why do some countries remain stagnant in relative income levels while some others are able to continue growing faster than the frontier nations to achieve convergence? Is it caused by institutions, geographic locations or smart industrial policies? Examining the phenomenon of low- and middle-income traps based on relative income will help shed new light on the study of the prevalent factors behind economic convergence (or lack thereof).

Translation: There IS a middle income trap, but its been wrongly defined. The implication here is that as long as growth exceeds that of the US, you aren’t in a middle/low income trap.

How does Malaysia fare?


Apart from 1985-86 and 1998, Malaysia’s GDP growth has exceeded that of the US, and usually by a comfortable margin. This is true whether you take nominal or real GDP, or on an aggregate or per capita basis. Translation: Malaysia is not in a middle income trap.

Technical Notes

  1. Bulman, David; Eden, Maya; Nguyen, Ha, "Transitioning from low-income growth to high-income growth : is there a middle income trap?", Policy Research working paper no. WPS 7104, World Bank Group, 2014
  2. Yi Wen, Maria A. Arias, "Can Countries Escape the Low- or Middle-Income Trap?", On the economy blog, Federal Reserve Bank of St Louis, 2015, accessed March 19, 2015
  3. GDP data from the IMF World Economic Outlook (October 2014)


  1. Well, maybe - but would you classify Malaysia as a "low income" or "middle income" country and on what basis?

    How does Malaysia "transition smoothly to high income growth strategies"?

    1. @anon 3.01

      Income classifications are necessarily arbitrary, and relative.

      For transitioning to high income growth, pretty much what we're doing now. Focus on value-added and productivity, improve education, emphasize services.

    2. Well and good.

      Let's hope that good sense prevails all around and that race and religious issues are not allowed to derail this "transitioning to high income growth".

      I am hoping for a more "nuanced" transitioning, though, with conscious efforts being directed to reduce the inequality gap through carefully targetted social and fiscal measures.

      All said and done, education is still the best means of "levelling up", with the proviso that the economy will continue to be able to provide good jobs.

  2. The definition of terms can be manipulated. Ask yourself, are your living now like low income, middle income or high income?

    1. @anon 3.43

      That's the beauty of defining growth based on convergence - it's a continuum, and overrides arbitrary definitions of "income". In any case, the literature on human happiness and welfare shows that happiness is relative. You can feel pretty poor in a high income country.

  3. Sorry Hishamh,

    This article of yours might have been quite some times, but i do wonder, what's the relationship between having a middle income trap with the numbers of household within the range of middle income bracket?

    what does income convergence/divergence of developing to/from developed countries tells us? (in a case of middle income trap)

    is it about the growth of income or the growth of household number in middle income bracket?

    Thanks for the reply

    1. @Group 8

      1. Pretty much nothing. The very notion of a "middle income" household is relative to the distribution of income as a whole i.e. Rich and poor countries alike could have plenty of households in the middle of the income distribution. In fact, a poor country should theoretically have a more equal income distribution than a rich one.

      2. It's about the growth of average income, which of course says nothing about its distribution