The “Middle-Income Trap” and Careers

In the 60s, Simon Kuznets said that there are four kinds of countries in the world: developed, undeveloped, Japan, and Argentina. This was always funny (for an economics joke) but has gotten less true over time. Today, you’d have a longer and clunkier list: there’s America, other developed countries, some countries stuck in a deep poverty trap (too poor to build institutions necessary for the investment they’d need to get rich), some stuck in a natural resource trap (what can you do in Saudi Arabia, Qatar, Nigeria, or Chile that matches the profits from resource extraction? Moreover, what can you do that’s not a threat to the people who profit from resource extraction?), and a surprisingly large number of countries in the “middle-income trap”: richer than they used to be, but with no long-term prospects of joining the rich world.

The path to the middle-income trap is straightforward: poverty, followed by light industry that competes on price, followed by rising wealth that erodes the country’s cost advantage, and then… stasis. Any country with semi-functional institutions can start on the path to accelerating GDP growth: sneakers, t-shirts, lawn furniture, and beer are all pretty simple-but-labor-intensive industries that various countries have used to kick-start their industrial development. If your GDP per capita is at extreme poverty levels (say, under $2k), you’re practically guaranteed to be the low-cost provider of these goods.

And once you’re selling goods around the world, there’s a natural path towards climbing up the value chain: import better machinery for your textile factories, import trucks and backhoes to build more infrastructure, find an industry that’s close by in the supply chain but a little harder to get into (making synthetic fibers instead of just stitching together clothes, for example), and expand to that.

But the trouble with getting rich off cheap exports is that the richer you get, the less cheap your exports are. There’s a global market in capital goods: when a German factory makes machine tools, they’re happy to sell them in Germany, America, or Indonesia. The market for labor, of course, is local. As local labor costs rise, labor becomes a bigger share of total costs, so the cheap-exports model quickly reaches diminishing returns.

Some countries have escaped this. Japan used to compete by selling cheap clothes, then cheap steel, but eventually they started selling Toyotas, Hondas, Walkmen, and capital goods; South Korea started out selling cheap clothes and cheap steel, but now they sell Hyundais, Samsung chips, and speciality chemicals. There’s a pretty obvious pattern here: successfully competing on cost raises, your costs, so you have to find some other way to compete. Turkey and Mexico are both stuck at similar average incomes, with similar problems: they can manufacture fairly-but-not-extraordinarily affordable goods, but they haven’t produced global brands or unique technologies that other countries can’t copy.

It’s not especially fun to live in a country that’s escaping the middle-income trap: the economy is growing, but your wages aren’t growing quite as fast, because investment is outpacing consumption. In some cases, this might happen naturally, but historically it’s usually the result of government intervention — East Asian countries typically kept deposit rates low and tariffs high to discourage consumption and transfer savings from individuals to companies. (They didn’t execute perfectly, though; Honda had to fight the government’s plan to merge auto companies in service of greater efficiencies.) It is, however, very nice to live in a country that has made the transition.

Your Middle-Income Trap

Plato thought the best way to figure out personal morality was to start at the level of a state and work backward. Smart guy! He’s going places. As in The Republic, so in the Republic of South Korea: the history of industrial development points to obvious career pitfalls.

At the start of your career, there are a few white-collar tracks with a pretty linear path upward: banking, law, accounting, and consulting all have jobs that are designed so a smart 22- to 25-year-old will be a) paid very well, relative to other options, and b) underpaid, compared to how much their employer charges for their services.

This seems like a pretty sweet deal. A professional services firm is a Service Factory, whose inputs are reputational capital (the partners, the brand name), lots of unskilled labor (people who just completed 16 to 19 years of education and are now tabulae rasae, ready to learn how to do something valuable), and also a lease and some office supplies. The deal gets sweeter over time, as a new employee’s value to the company rises and their comp rises as a percentage of value.

Except that at some point, there’s a record-scratch moment where the job switches from mostly doing the work to mostly getting clients and running projects. These are very different skills! Unless a company has a very top-heavy organizational structure, or it’s growing exceptionally fast, there aren’t enough senior jobs for every new hire to get promoted to a senior role. Some people get promoted until they’re stuck. Not senior management material, but not worth firing — until the company needs to lay people off, at which point mid-career employees are the easiest targets because they’ve accumulated nice base salaries but don’t have big bonuses that could be reduced.

Most professional services companies don’t emphasize this part of the career trajectory, and why would they? It’s a lot easier to hire people if they all expect to be making seven figures in a decade or two, and anyway picking up on lies from someone who is trying to do business with you is a crucial skill for managers.[1]

Escaping the Middle-Income Trap

When you’re young and broke, most entry-level jobs are a pretty good deal. You’re underpaid, but you can pay the rent, and you’ll probably learn something useful that you can use in your next job. But the more you advance in your career, the less of a cheapness cushion you have. And as you get older, your costs go up. I was fine living on beans and rice in a bad neighborhood when I was 20, but I’m not okay with my kids having that standard of living. My wife might also object.

The way to get out of the middle-income trap is to compete on brand and technology rather than price, and that generally means making a job that doesn’t exist yet. There wasn’t a market for Walkmen before Sony made them; they had to build the product and then sell it.

The good news and bad news about this is that it never gets easier: the more you move up in a traditional career, the more you’re locked in, and the more of a cost center you are.

While it’s a lot easier to accept an offer at a prominent company than to do something new, there’s a fun paradox about starting from zero: the U-shaped response curve of cold emails. If you got a cold email from the most prominent person in your field, you’d almost certainly answer; there’s a category of super-successful/super-famous people who can cold-contact basically anyone in the world and expect to get a meeting. If you’re a nobody, most of your cold emails don’t get an answer — but the recipient immediately forgets about them, so they’re zero-cost. And a surprising number of people are really flattered to get randomly contacted by someone who wants their advice.

If you’re in the middle of the prominence curve and you send a cold email, though, you have a problem. You have to answer the implicit question: “Why are we not getting introduced by one of our mutual friends?”

This is the career middle-income trap: you lose the optionality of being a nobody before you’re any particular somebody.

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[1] Darwinism works extra fast when some of the participants understand it and others don’t — see cows, bananas, and pugs for more real-world examples of this phenomenon.

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