How uneven development deepens middle-income gap

Edo Andriesse

Bouncing back after the COVID-19 pandemic has proven to be more difficult than anticipated. Many countries continue to be trapped in the middle-income category and breaking out remains hard. The domestic — both personal and geographical — dimensions of this trap and how integrated policies could contribute to economic transformation and inclusive development deserve closer attention. Ideally, these efforts could help countries escape the middle-income trap.

According to the World Development Report 2024, Poland managed to break out of this trap; crossing the threshold of a gross national income (GNI) per capita of $14,005 — the benchmark for high-income economies. But what if Poland had not been a member of the European Union? Poland has greatly benefited from increased trade, investment, migration and remittance flows since 2004. In other parts of the world like Latin America, Asia and the Pacific, the overall picture is less rosy.

Notable Asian-Pacific upper middle-income countries are Malaysia, Thailand, Kazakhstan, Maldives, Fiji and so far, China as well. In these countries economic growth slowed down in the 2010s and public policies did not sufficiently benefit the middle class. People began to protest, even before the COVID-19 pandemic, and in Indonesia, the fourth most populous country in the world with over 280 million people, the middle class shrank. Instead, the aspiring middle-class group expanded between 2019 and 2024, with approximately 50 percent of the Indonesian population now belonging to this group. For India, the economist Sandhya Krishnan warned that more quality jobs are needed to expand the Indian middle class and avoid social unrest.

Explanations for these suboptimal development trajectories often point to international trends like the changing geopolitical conditions — such as the US-China rivalry — increasing protectionism, automation of production processes, climate change impacts, the lack of human capital and the slowdown of official development assistance. However, one overlooked factor in Asia and the Pacific is the uneven development within countries. The benefits of economic growth and innovation are disproportionally concentrated in a few central business districts.

Recent research in Southeast Asia demonstrates that we need to look beyond the international, macroeconomic dimensions of the middle-income trap. An important first step has been to personalize this trap by “bringing individual and household experiences, decisions and outcomes into the explanatory frame," according to researchers on the topic. As Bangkok experienced rapid economic growth, many people from northeastern Thailand (temporarily) migrated to the sprawling metropolis, yet most have not been absorbed by the emerging knowledge economy and have not been able to become part of a stable middle class. Building on this work, my research conducted with collaborators on rural inequality in Indonesia, Vietnam and Thailand points out that in many provinces a process of catch-up cannot be found. Instead, many provinces suffer from growth that fails the poor. Overall, rural coping mechanisms are geared toward piecemeal livelihood diversification and migrating out on a circular basis. Another way to research middle-class dynamics and its linkages with macroeconomic and structural phenomena in middle-income countries is to pay more attention to religion and ethnicity, as has been recently done in a study of Indonesia and Malaysia.

In sum, economic growth and innovative capacity are necessary but insufficient conditions to climb the socioeconomic ladder. Wealth creation in core areas does not automatically trickle down to the provinces. To avoid the middle-income trap, we need to pay more attention to overcoming the skewed economic geographies. Given that 75 percent of the world’s population and 62 percent of the world’s poor live in middle-income countries, what are the prospects of escaping the middle-income trap? Besides addressing international economic trends, it is necessary to better integrate three dimensions of public policy: sectoral, place-based and universal policies.

Sectoral policies are concerned with a specific socioeconomic domain. An important question is what sectors could drive emerging economies in the 21st century given the difficulty of catching up to high-tech clusters in Japan, South Korea, Singapore and Taiwan. In this regard, U.N. Trade and Development proposed to consider “selecting realistic opportunities for diversification” when looking at the digital economy and transforming to a low-carbon world.

It is also clear that place-based policies should also be part of the policy mix — particularly in areas with a relatively high population density. Policymakers can consider renewable energy, biomass and greening agricultural and fishing practices. For the poorest, least promising regions, outmigration might be the only viable alternative. Improving education is then imperative to foster smoother migration trajectories.

The third set of policies is universal policies, with the most common being cash transfers. Conditional transfers have become very popular since the early 2000s. To deal with climate change impacts, it could be worthwhile to link such transfers to climate finance.

Overall, the policy domains described above indicate that it is not simply a matter of the wealthy top 1 percent versus the marginalized. This also has an important implication for the future of South Korea’s overseas development aid. The Korea International Cooperation Agency and related agencies would benefit from thinking through how international aid flows and humanitarian assistance could be more effective, given the challenges of multiple socioeconomic groups in recipient countries. One way to do that is to consider how South Korea can contribute to integrating sectoral, place-based and universal policies. Such an approach would do more justice to the economic, geographical and social components of the middle-income trap.

Edo Andriesse is a professor of geography at Seoul National University. His research interests are rural development, coastal governance and poverty reduction in the Global South. He is presently leading a project on local just transitions.