In the 1980s and 1990s, countries like Thailand, Brazil, and Malaysia seemed to be on an unstoppable rise. Factories were booming. Millions were leaving poverty behind. A growing middle class was buying cars, building homes, and sending children to school. The trajectory felt certain — these nations were on their way to joining the world's wealthiest economies.

Then growth slowed. And it stayed slow. Economists call this the middle income trap — a pattern where countries escape poverty but can't quite reach prosperity. They get stuck in an awkward in-between, too expensive to compete with poor nations on cheap labor, too far behind to compete with rich ones on technology and innovation. Billions of people live in countries caught in exactly this position today.

When a poor country first opens up to global trade, its biggest asset is cheap labor. International companies set up factories, exports surge, and wages begin to rise. This is the classic development success story — it's how China, Vietnam, and Bangladesh have lifted hundreds of millions out of extreme poverty in recent decades.

But success plants the seeds of its own challenge. As wages climb, the country becomes less attractive for the simple, labor-intensive manufacturing that drove its growth. Companies start eyeing the next lowest-cost option. The garment factories, the electronics assembly lines, the shoe manufacturers — they begin relocating to countries where workers still cost a fraction of what they do now.

This is the wage squeeze in action. A country like Thailand, where manufacturing wages have risen significantly over two decades, finds itself competing against Vietnam and Cambodia for factory contracts — and losing. But it can't yet compete with Japan or Germany on advanced manufacturing, because it hasn't built those capabilities. The very engine that pulled the country out of poverty begins to stall, and there's no obvious replacement waiting in the wings.

Takeaway

The strategies that lift countries out of poverty are not the same ones that carry them to prosperity. Success at one stage can actually undermine competitiveness at the next.

The obvious answer to the wage squeeze sounds simple: move up the value chain. Stop making cheap goods and start making sophisticated ones. Develop your own brands, your own technology, your own innovations. In theory, this is exactly how you escape the trap.

In practice, it's extraordinarily difficult. Moving from assembling someone else's products to designing your own requires a completely different set of capabilities. You need research universities producing world-class scientists. You need a legal system that protects intellectual property. You need financial systems willing to fund risky ideas. And you need education that teaches creativity and critical thinking, not just rote memorization.

Most middle-income countries have serious gaps in all of these areas. Their education systems were built to produce reliable factory workers — not entrepreneurs and innovators. Their institutions often lack the sophistication needed to support a knowledge economy. Building these capabilities takes decades of sustained investment and political commitment. During those decades, growth stays sluggish and public patience wears thin. It's a long bridge to cross, and many countries find themselves stranded in the middle of it.

Takeaway

Innovation ecosystems can't be built overnight. They require decades of investment in education, institutions, and culture — and there are no shortcuts for this kind of transformation.

The good news is that some countries have broken through. South Korea is perhaps the most dramatic example. In the 1960s, it was poorer than many African nations. Today, it's home to Samsung, Hyundai, and a thriving creative economy. Taiwan followed a similar path, transforming itself into a global leader in semiconductor manufacturing.

What did these success stories share? They invested massively in education — not just primary school, but technical training and university research. They practiced what economists call industrial policy, where governments strategically supported specific industries while demanding results and global competitiveness. And they maintained a relentless focus on exports, which forced their companies to meet international standards rather than hiding behind protected domestic markets.

These aren't easy lessons to copy. South Korea and Taiwan benefited from specific historical conditions — land reform, foreign aid, and strong state institutions. But the core principles transfer: invest in people, build capable institutions, move up the technology ladder step by step, and hold industries accountable for becoming competitive. Countries like Poland and Chile are showing that the trap, while real, is not permanent. The escape route exists — it just demands patience, strategy, and sustained commitment.

Takeaway

Escaping the middle income trap requires deliberate strategy, not just more of what worked before. The countries that break through invest in people and institutions long before the returns become visible.

The middle income trap is not a law of nature. It's a pattern — a common failure point on the development path. Countries get stuck because the playbook that lifted them from poverty isn't the same one that carries them to prosperity. Recognizing that shift is the first step toward doing something about it.

For the billions living in middle-income countries today, the stakes couldn't be higher. But neither could the opportunity. With deliberate investment in education, stronger institutions, and a long-term vision for innovation, the trap can be broken. Development is never a straight line — but the destination remains reachable.