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…