Felipe, Abdon and Kumar (2012) argue:
- a country that becomes lower-middle-income (i.e., that reaches $2,000 per capita income) has to attain an average growth rate of per capita income of at least 4.7 percent per annum to avoid falling into the lower-middle-income trap (i.e., to reach $7,250, the upper-middle-income threshold)
- a country that becomes upper-middle-income (i.e., that reaches $7,250 per capita income) has to attain an average growth rate of per capita income of at least 3.5 percent per annum to avoid falling into the upper-middle-income trap (i.e., to reach $11,750, the high-income level threshold
- Avoiding the middle-income trap is a question of how to grow fast enough so as to cross the lower-middle-income segment in at most 28 years, and the upper-middle-income segment in at most 14 years.
They argue that escaping the middle-income trap lies in a country’s ability to undergo structural transformation (from low-productivity activities into high-productivity activities), the kind of goods they produce and export (sophistication of products), and the diversification of economy. They find that Korea was able to gain comparative advantage in a significant number of sophisticated products and was well connected, but Malaysia and the Philippines were able to gain comparative advantage in electronics only. Hence, Korea was able to escape the middle-income trap. Lower income group countries need to grow faster for longer period of time to escape the middle-income trap.
Using highly disaggregated trade data, we compare the exports of countries in the middle-income trap with those of countries that graduated, across eight dimensions that capture different aspects of a country’s capabilities to undergo structural transformation, and test whether they are different. The results indicate that countries that made it into the upper-middle-income group had a more diversified, sophisticated, and non-standard export basket at the time they were about to jump than those in the lower-middle-income trap today. Likewise, countries that have attained upper-middle-income status had more opportunities for structural transformation at the time of the transition than countries that are today in the lower-middle-income trap. We also find that the sophistication of the export basket of countries in the upper-middle-income trap is not statistically different from that of the countries that made it to high-income at the time they were about to make the transition. However, countries in the upper-middle-income trap are less diversified, are exporters of more standard products, and had fewer opportunities for further structural transformation than the countries that made it into the high-income group.
They provide working definition of four income groups of GDP per capita in 1990 PPP dollars:
- low-income below $2,000
- lower-middle-income between $2,000 and $7,250
- upper-middle-income between $7,250 and $11,750
- high-income above $11,750
They show that in 2010, 35 out of the 52 middle-income countries were in the middle-income trap, 30 in the lower-middle-income trap (9 of them can potentially graduate soon as they have been in this income group over 28 years); and 5 in the upper-middle-income trap (2 of them can potentially leave it soon as they have been in this income group over 14 years). 8 out of the remaining 17 middle-income countries (i.e., not in the trap in 2010) are at the risk of falling into the trap (3 into the lower-middle-income and 5 into the upper-middle-income).
In South Asia, while Sri Lanka could escape the trap soon Pakistan could fall back into the trap. Altogether 37 countries have always been low-income since 1950 (Afghanistan, Bangladesh and Nepal from South Asia).
