Why you should care
Because if China, India and Brazil stopped growing, the global economy would go into a tailspin.
Economists can be a pessimistic bunch, which may be why they have worried about the idea of the “poverty trap” for much of the last 50 years. This gap refers to a vicious circle in which low income leads to poor health and poor education, undermining productivity and, in turn, blocking growth and perpetuating poverty. But poor countries have been growing rapidly, demonstrating that they are far from trapped, which puts the idea of a poverty trap on thin ice.
Truly determined pessimists, then, have been forced to raise the bar. Cue the “middle-income trap,” which suggests that countries like China or Brazil might grow for a bit but are destined to remain relatively poor in the long run. Thankfully for those countries and the global economy, the evidence of a middle-income-growth collapse holds up about as well as the original poverty trap notion.
Since 1950, middle-income countries have nearly always grown faster than expected.
The World Bank’s definition of a low-income country is one where national income per head is less than $1,025 per person. In 2000, there were 63 low-income countries; 16 years later, there were less than half that — just 31 countries were classified as low income in 2016. And even those 31 are doing far better than they were before — average income is up from $232 per person per year in 2002 to $619 in 2015, and life expectancy has climbed from 53 years to 61. So much for the poverty trap.
Recently, we have seen growing interest in a new barrier to development: the middle-income trap. The 108 middle-income countries worldwide have a national income per head above the low-income threshold, but below the $12,615 cutoff to be considered “high income.” For comparison’s sake, the U.S. national income per head is $55,980. But World Bank experts worry that “many countries have developed rapidly into middle-income status, but far fewer have gone on to high-income status.”
If there is a barrier to further growth at somewhere around $10,000 per person, that’s bad news for a considerable proportion of the world’s population. China, for example, has an average income of $7,930. Many economists fear that the techniques the country used to go from poor to middle income (combining machines and equipment invented in the West with cheap local labor) won’t work to go from middle to high income. Beijing, in other words, needs to find new sources of economic growth, and the theory of a middle-income trap suggests that it will be hard to do so.
But that would only be a problem if the trap actually existed. Arvind Subramanian, India’s chief economic adviser, went looking for evidence of a middle-income trap, doubtless because India is now a middle-income country itself. The good news for India, as well as China, Brazil and the rest? Subramanian couldn’t find any proof of the trap. Since 1950, middle-income countries have nearly always grown faster than expected. Looking just at the past decade and a half, current middle-income countries that had an average gross national income of $2,381 in 2000 have seen that more than double, to $4,951 in 2015. U.S. income, in contrast, climbed just 15 percent over the same period.
Look at the development trajectory of particular countries that had “middle incomes” a few decades ago. According to data from the Penn World Tables, China in 2014 was about as rich as Germany in 1965 or Singapore in 1980. Brazil in 2014 was as rich as Canada in 1963 or Italy in 1974. A “middle-income trap” prevented none of these countries from becoming among the world’s richest today, and there is no reason why China and Brazil can’t follow suit.
China’s growth over the past 30 years has been historically unprecedented. There are a lot of good reasons to think it might slow down, and the same applies to India’s last two decades. Brazil might go the other way after 40 years of comparatively lackluster economic performance. Whatever happens, though, the malign influence of an arbitrary income cutoff isn’t going to be the cause.