Economic development
Indermit Gill on what China and India must do to join the rich club
First invest, then infuse foreign technology and then innovate, says the World Bank’s chief economist
“TO GET RICH is glorious” is the maxim that inspired one of the most successful development strategies of the past 50 years. It’s an aspiration widely shared across developing countries—and for good reason. When countries become wealthier, the results can be glorious. Living standards rise. Poverty recedes. The propensity to pollute dwindles, as products and production methods improve.
That’s why a growing number of developing countries are setting national deadlines to become developed economies: China by 2035, Vietnam by 2045, India by 2047. In the absence of a miracle, their chances of success are slim—because of a distinctive affliction that strikes countries as they climb the income ladder. In the coming decades the fate of the world will depend on whether it can be cured.
In their drive for wealth, few countries get anywhere near the top. Economic growth in developing countries tends to level off during the middle-income stage. It’s what the World Bank calls “the middle-income trap”. This idea has been disputed over the past decade or so. Yet the latest evidence is compelling: since 1970 the average per-person income of middle-income countries has never risen above 10% of the level in America.
Since 1990 only 34 economies have managed to move up from middle- to high-income status—and more than a third of those were beneficiaries of either integration into the European Union or previously undiscovered oil. The number of people living in these economies is less than 250m—roughly the population of Pakistan.
Today middle-income countries (defined by the World Bank as having gross national income per person of between roughly $1,150 and $14,000) are home to about 6bn people and nearly two-thirds of those who struggle in extreme poverty. They produce about 40% of the world’s economic output and nearly two-thirds of its carbon emissions. In short, the global effort to end extreme poverty and spread prosperity and liveability will largely be won or lost in these countries.
Middle-income countries now face far heavier burdens than their predecessors did: ageing populations, geopolitical and trade frictions, and the need to speed up growth without fouling the environment. Yet most remain wedded to an approach out of the last century: policies focused heavily on attracting investment. That’s the equivalent of driving a car entirely in first gear: it will take forever to get to the destination. A few try to leapfrog to innovation. That’s the equivalent of shifting from first gear to fifth and stalling the car.
There is a better way. The World Bank proposes a sequenced, three-pronged plan.
Low-income countries are best served by a strategy focused mainly on attracting investment. Once they become lower-middle-income countries, they need a more sophisticated approach. Investment must be supplemented by the deliberate infusion of technology from abroad. That means acquiring modern technologies and business models and diffusing them domestically to enable enterprises to become global suppliers of goods and services.
Infusion requires an ever-larger talent pool: more engineers, scientists, managers and other highly skilled professionals. To expand the pool, skills must be sharpened across the workforce. One of the most self-defeating attributes of middle-income economies is their proclivity to sideline women by limiting their educational and economic opportunities. The payoff can be immense when such practices are halted. In America, for example, more than a third of the growth that occurred between 1960 and 2010 can be attributed to decreasing racial and gender discrimination in education and the workforce. Without these changes, America’s income per person would now be $50,000, not the $80,000 it is.
Once a country has mastered both investment and infusion, it is ready for the final push—towards global innovation. South Korea stands out in all three categories. In 1960 its per-person income stood at just $1,200. By the end of 2023 it had climbed to $33,000. No other country has managed to pull off a performance like that.
South Korea began with a simple set of policies to increase public investment and spur private investment. That morphed in the 1970s into an industrial policy that encouraged South Korean firms to adopt foreign technology and more cutting-edge production methods. Samsung, once a local trading company dealing in dried fish and noodles, began making televisions using technologies licensed from Japanese companies.
Samsung’s success fuelled demand for engineers, managers and other skilled professionals. The South Korean government did its bit to help the economy meet this demand. The education ministry, for instance, set targets and increased funding for public universities to help develop the new skills sought by domestic firms. The results are clear to see. Today Samsung is an innovation powerhouse—one of the world’s two largest smartphone manufacturers and its largest memory-chip manufacturer.
To make the transitions necessary to reach high-income status, governments in middle-income countries must enact competition policies that create a healthy balance between large corporations, mid-sized firms and startups. The benefits will be greatest when policymakers focus less on the size of the company and more on the value it brings to the economy, and when they encourage the upward mobility of all of their citizens instead of fixating on zero-sum policies to reduce income inequality.
They should also seize opportunities arising from the need to tackle climate change—by producing and exporting electric vehicles, wind turbines, solar panels and so on. Middle-income countries should not be expected to immediately forgo the use of all fossil fuels in their quest for faster economic growth. But they should be expected to become more energy-efficient and cut emissions.
If they stick to the old approach, most developing countries will miss their target of reaching high-income status by the middle of this century. On current trends it will take China another 11 years to reach just one-quarter of America’s income per person. It will take Indonesia 69 years and India 75. By adopting a “3i” strategy—first investment, then infusion, then innovation—they can multiply their odds of getting there. The rest of the world would benefit, too, because policies that reward merit and efficiency enable growth that is quicker, kinder and cleaner. ■
Indermit Gill is chief economist and senior vice-president of the World Bank Group.
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