To belong to the middle class and to work in or own a medium-sized enterprise in a middle-income country is to risk falling into one of the unignorable middle-income traps. Once this has happened, escaping such a trap can take a miracle.  

Starting with middle-income countries, the World Development Report (WDR) 2024 recently released by the World Bank, classifies these as countries with annual GDP per capita ranging from $1,136 to $13,845. It counts 108 of them. Together they account for 40 per cent of the world’s economy and are home to 75 per cent of the world’s population, among whom are 63 per cent of people who live in extreme poverty.

Some of these countries have achieved major economic breakthroughs that have raised them from the ranks of the poor and lower-income countries and to the middle-income ranks.  China through its investment and steady growth policies succeeded in lifting hundreds of millions of its citizens out of poverty and eliminating extreme poverty altogether by 2020.

Much of the credit for this success is due to the pragmatic approach of the 20th-century exceptional economic reformer Deng Xiaoping. While some quarters of the developing world rallied around the slogan that “poverty is not a sin,” as though to justify poorly thought-out initiatives that only made their countries poorer and entrenched a culture hostile to hard work and competition in the pursuit of wealth and profit, Xiaoping took the opposite tack encapsulated in the slogan that “to get rich is glorious” as cited in the WDR.  

Moreover, he launched the reforms in 1978 in a society that had been nurtured on opposing ideas for decades. Under his guidance, China pursued four modernisation drives targeting industry, agriculture, science, and defence. These programmes invested in people through education, capacity-building programmes, and public health services, boosted infrastructure and urban development, and attracted large amount foreign direct investment.

In short, China produced an economic miracle that was the product of hard work, thoroughly studied policies, and institutional resolve.

In the forward to WDR, Indermit Gill, Chief Economist of the World Bank Group, observes that countries trying to escape the ‘Middle Income Trap’ now have to contend with “even stiffer challenges than those seen in the past.” The new challenges include “rapidly aging populations and burgeoning debt, fierce geopolitical and trade frictions, and the growing difficulty of speeding up economic progress without fouling the environment,” he said.

The WDR argues that, given such constraints, following the old mode of growth will forfeit opportunities for development in the future as it will yield lower average growth rates. According  to the WDR analysis,  it could take China, for example, more than ten years to reach one quarter of the US per capita income, and India 75 years.

Governments do not need more “ambitious plans.” Indeed, as the boxer Mike Tyson reminds us, “everyone has a plan until they get punched in the mouth.” The frequent and unpredictable kicks and punches our current age is meting out require a different strategy.

According to the WDR, middle-income countries should pursue a three-pronged approach to growth: increasing overall investment; incorporating new technology from around the world; and innovation. In its opinion, lower middle-income countries should prioritise technology transfer and its infusion domestically when investment increases, while upper-middle-income countries should focus on innovation and research and development.  

It proposes that middle-income countries should adopt enterprise and labour market policies aimed at instilling fair competition, upgrading workforce skills, promoting meritocracy and effective social mobility and immigration policies. It also addresses limitations to energy resources, calling for investment in efficient energy generation and distribution and in the restructuring of energy production sectors.

The report’s three-pronged approach to investment in growth draws on the 20th-century economist Joseph Schumpeter’s concept of “creative destruction,” which he discussed in his book Capitalism, Socialism and Democracy. This concept entails striking a balance between enterprises that perform poorly and should be allowed to fail, those that can be preserved through the application of new ideas, and those that can be created from scratch.

In economic terms, “creative destruction” is not a wholesale process that applies to the good and salvageable along with the bad. It is not about throwing the baby out with the bathwater. It is a practical approach to promoting economic progress, impetus, and competitiveness through a dynamic interplay between the currently existing features of the economy and the enterprises, skills, resources and energy sources of the future.  

At its heart are the central questions of fair competition, a level playing field for all, and the liberation from growth-inhibiting constraints related to the transfer of technology.

This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.

* A version of this article appears in print in the 8 August, 2024 edition of Al-Ahram Weekly