Productivity, education, and innovation are central to the long-term success and prosperity of developing industrial nations. Failing to address these factors results in what is known as the “middle-income trap.” Evan Applegate describes how a nation falls prey to the trap (“Correlations: The Middle-Income Trap” Bloomberg Businessweek, 6/17/13–6/23/13, p. 18):
“By deploying a cheap labor force in light manufacturing, poor nations move into the middle-income range. Wages rise, and their competitive advantage weakens. Manufacturing leaves for cheaper countries such as Bangladesh. Unable to build a knowledge economy but too costly for low-end manufacturing, nations get trapped.”
The good news is the nation has risen into the middle-income level where per capita income is between $3,000 and $13,000. That is very different from where it started. The bad news is it became stuck in that middle-income level instead of continuing to advance to the high-income level (per capita above $13,000).
This is an interesting and important phenomenon. Currently 36 nations are low income, 108 are middle income, and 70 are high income. Nations currently in this middle-income trap include Brazil, Mexico, and Peru. The trick seems to be fueling growth and development in productivity, education, and innovation. Without that additional quality growth and development, a plateau or a decline will occur.
Some nations strategize and navigate this transition successfully such as Taiwan and Korea. Their focus on creating and exporting sophisticated goods paid off. Given its current trajectory, China is projected to achieve similar standing soon.
My theory is some nations become so thrilled to experience any growth, they forget about the higher-level growth opportunity beyond the status quo. This phenomenon illustrates how and why strategy can never be ignored or assumed. Whether a nation, a company, or a person, strategy must always be a priority. Development without a strategy does not always produce desirable results. On the other hand, strategic development will move us much closer to enduring success.