The middle income trap exists for some countries that make significant progress in reducing extreme poverty and experience structural change and growth but then find it difficult to make the climb from being a middle-income country to achieve high-income fully-developed status. GDP growth rates often slow down and a country can struggle to build and maintain international competitiveness. Research from the World Bank finds that only 13 of the 101 countries deemed to be middle-income countries in 1960 had achieved high-income levels in 2011. Different studies find different thresholds for where growth tapers off, ranging from $8,500 to $18,500 at 2010 prices, adjusted for purchasing power parity.
Possible causes of the middle income trap
Rising wages / unit labour costs
Gains in productivity growth slow down / failure to achieve innovation
Institutional Failures and Social Capital weaknesses
Maintaining macro-economic stability
Key to avoiding the trap is for each country to find the right mix of demand and supply-side policies to sustain a further lift in per capita incomes and to achieve balanced growth sourced from domestic and overseas markets. Every country has a different set of economic, social, cultural, demographic and political circumstances so there is no unique policy mixes to avoid the middle income trap – some of the approaches often mentioned include the following:
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