Confronting the Middle Income Trap: Insights from Small Latecomers

Middle income countries have always faced the challenge of how to move from commodity production to more knowledge-intensive activities. The current globalization process is turning this middle income dilemma into a possible middle income trap. To understand better how countries can achieve broad-based upgrading to confront the middle income trap, we develop an analytical framework that links the macroeconomic context with microeconomic behavior and mesoeconomic conditions contingent upon path dependency and global circumstances. This capabilities-based approach draws from structuralist and evolutionary economic thought and global value chain analysis. We use the approach to analyze the particular set of factors that have enabled or constrained upgrading efforts under a liberal trade and investment regime in five small latecomers: Chile, the Dominican Republic, Jordan, Ireland, and Singapore. The country analyses demonstrate that strategic, pro-active, and coherent government policies for capability advancement are a key determinant of upgrading in open economies, both at the country level and in the development of “pockets of excellence.”