The middle income trap is a paradigm that assumes that countries that are “divided” from poor to middle will have “greater difficulty” moving up the ladder again from developed.

The World Bank divides countries into In the world according to income, there are 4 types:

  1. Poor countries (low-income countries) with GNI per capita less than $1,135 per year in 2022.
  2. lower middle country (lower middle income countries) with GNI per capita estimated at US$1,136 to US$4,465 per year in 2022.
  3. Upper middle income countries (upper middle income country) GNI per capita is estimated to be between $4,466 and $13,845 per year in 2022.
  4. developed countries (high income country) with GNI per capita exceeding $13,845 per year by 2022.

After 1945, there were many countries that were able to move from poor to middle class countries, such as Indonesia and Malaysia. However, few of these countries were It can “rise again” to developed country status. Countries that have difficulty moving up the ladder of developed countries are stuck in the middle-income trap.

Understanding the middle income trap

As explained above, simply put: middle income trap It is a mindset that understands that countries that are “divided” from poor to middle countries will have “more difficulty” in raising another class to developed countries.

This theory was first popularized by Gill and Kharas in 2007. In this research, Gill and Kharas concluded that poor countries will accelerate their national production. This will cause the economy to grow faster. However, when the country becomes a developing country The economic growth of formerly poor countries will slow.

Gill and Kharas also stated that of the 101 countries they studied in the Middle East, East Asia and Latin America, only 13 countries have escaped this middle-income trap. This includes South Korea and Japan.

Causes of the middle income trap

1. Production costs are more expensive.

Poor countries are usually those with large human resources in terms of population and rich in unexplored natural resources. As a result, many investors are investing in these low-income areas.

However, in addition to increased production and economic development, Prices of raw materials and daily necessities have also increased. As a result, salaries and overall production costs in the area will also increase.

2. International competition

An increase in production costs in countries that do not increase the quality of human resources and innovation will cause that country It is “uncompetitive” in terms of foreign investment from other developing or even poor countries.

For example, foreign companies If production costs in Indonesia are more expensive than production costs in Vietnam, it is likely that the company will choose Vietnam as an investment destination.

3. Structural factors

Not only economic problems Social and political problems also affect the country to remain stuck in this middle-income trap for a long time. For example, the difficult and complex business title deed process may make domestic and foreign investors reluctant to invest. In addition, the condition of human resources that Low levels also make investors reluctant to invest in the country.

How to overcome the middle income trap

Basically There is no single way for any country to escape the middle-income trap. However, there are a number of strategic focuses that are often used as weapons to escape the middle-income trap, namely:

1. Improving the quality of human resources

Healthy and well-educated human resources (HR) can have an exponential impact on the economy. Not only can you become a high-paying employee. Good quality human resources can also create new jobs. Spread knowledge and is an honest leader

Currently, the Indonesian government is also promoting the improvement of the quality of human resources by increasing the education budget to 20% of APBN for programs such as scholarships, improving educational facilities, and others. However, the challenge is how to translate these expenditures. How does education translate to the quality of human resources produced?

2. An export-oriented economy

Some countries manage to leave. middle income trap Home to export-oriented countries such as Japan, Singapore and South Korea, this East Asian country was previously known as an area with few natural resources. So will they have to find it? unique selling point which can be sold abroad

An export-oriented economy has at least two benefits: it increases labor absorption; and help provide foreign exchange reserves for the country To help maintain the stability of the exchange rate

Indonesia is currently promoting downstream projects. This is especially true for nickel mining. The reason is that, as one of the main materials for producing electric vehicle batteries in the world, nickel from Indonesia is still available as raw material. This downstream project aims to ensure that nickel from Indonesia is sold overseas as finished material. So that the selling price is much more expensive.

3. Structural improvements

There are many structural improvements that are still the work of the Indonesian government. If we want to be a developed country, corruption, collusion and nepotism (KKN), on the other hand, ease of opening businesses and joint ventures and economic equality on the other.

It is not uncommon for the ease of opening a new business and job opportunities not to accompany the increase. Pay the house bill or salary– in fact The goal of improving the status of developing countries to developed countries is basically to reduce poverty and not increase the level of inequality.

4. Build a smarter economy

No country can develop and generate high incomes if its economic fundamentals are unstable. Therefore, middle-class countries that want to become developed countries must build their economic foundations more intelligently. Important economic indicators such as inflation Reference interest rateeconomic growthPoverty and unemployment levels and the exchange rate must be maintained as best as possible.

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