Some middle income countries are stuck within certain level of income and not able to move to the high income level range. How to overcome this and move towards high income?
They need to make better strategies and implement them with high commitment. My country is trying to reach mid income for over 30 years.
commitment to spending on infrastructure is the first step. Many others follow.
Most of these countries experiencing middle income trap consistently have low spending on basic research. In addition R&D spending is quite low; thus, there is near absence of innovation or invention of new techmology. Such countries generally make themselves sources of labor for production to more developed economies, i.e. assembly production, but never produce new products or invent new products on their own. This type of client economy experience only marginal benefits from small growth. Most educational institutions in these countries exists to serve the industry, not for the sake of education. Thus, universities feeds graduates into the industry not producing researchers and scientists. This feeds into the cycle of non-innovation and on-inventiveness, no R&D. How to change? Not easy. Change in policy is not enough. The whole generation of policy makers needs to have new vision of the role of education, industry, politics, etc.
Totally agree with Paul Louangrath
The intensive economic growth needs R&D investments and labour productivity growth with rates higher than the real wages growth plus a boost in human and intellectual capital.
I believe, in addition to internal factors mentioned earlier, external ones play comparably crucial role. Harsh regional competition among countries in attracting FDI sent some countries into the middle income trap.
Many countries had done well before they got entangled in the middle income trap. Their economy grew remarkably well when they graduated from low income countries. This growth was notably supported by knowledge and technology transfer which come along with FDI.
However, as wage increased, which was shown by high GDP per capita, they lost their competitiveness. In addition, high inflation also made their economy more vulnerable. In another word, their economy became overheat. Accordingly, investor shied away from them toward the rising star in the neighborhood. This emerging economy was more attractive to investors as it offered lower wage among many other incentives. As a result, these countries' productivity declined due to lost capital and technology.
Some of them tried to win back FDI by offering tax holiday. Unfortunately, this strategy made things even worse as it incited race to the bottom. Eventually, these countries found themselves inside the middle income trap.
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