The middle peasants forever: how can Russia avoid the middle income trap
Over the past 30 years, the picture of global economic development has turned out to be uneven. Dozens of states have made a leap from the category of "average" incomes to the "club of the rich." However, for seven countries — Argentina, Mexico, Brazil, Libya, Gabon, South Africa and Malaysia — this threshold proved insurmountable. A study by the Expert RA rating agency, which was received by Izvestia, analyzes the reasons for this long-term stagnation and tries to find a recipe for overcoming the "middle income trap" that is relevant, including for Russia.
GDP per capita is not growing
In 1994, there were 30 "above average" income countries in the world. By 2024, 20 of them have successfully moved into the "high" income category. The seven States that became the subject of the study remained at the same level. For comparison, Chile, Russia and Poland not only passed the threshold during this period, but also significantly exceeded it. The example of China is particularly impressive, which, starting from a low-income level, has come close to the border of high incomes.
The main indicator of the problem is sluggish GDP growth per capita. In six of the seven countries (except Malaysia), its average annual rate for 30 years did not exceed 1.4%. In fact, we are talking about long-term stagnation, when economic growth barely keeps pace with population growth: the demographic bonus of each of these countries has been significant over the past 30 years, and the real incomes of citizens are practically not growing.
Investment has traditionally been considered a key factor in long-term growth. The selected group had obvious problems with them. Only three of the "seven" countries (Mexico, Gabon, and Malaysia) have had investment-to-GDP ratios consistently above 20% for 30 years. But compared to the control group, these are not the most outstanding indicators, especially compared to China with its 39%.
An even more important indicator was the effectiveness of investments — whether they led to a better and more innovative structure of the economy. According to the study, three countries from the list at once faced a real decrease in the specific volume of gross product per employee: Mexico — by 5.6%, Gabon — by 29.8%, Libya — by 46.5%. The increase in employee productivity occurred in Argentina (+4.9%), Brazil (+30.3%), South Africa (+39.6%) and Malaysia (+71.9%). But even this is not enough: over the same period, output per employee in Russia increased 2.0 times, in Poland — 2.7 times, and in China — 9.6 times. However, in the case of China, the high relative growth rates were partly due to the effect of a low base.
Why investments don't work
In fact, the results are so weak that even the investments that were made did not pay off — especially in the case of Mexico and Gabon (Libya, with its civil war, is still a separate case). Expert RA identifies several structural reasons that negate the effect of investments.
Firstly, it is a huge informal sector. In Argentina, Mexico, Libya and Gabon, more than half of the employed work in the shadows. The economy is divided into two unrelated parts: advanced, capital-intensive enterprises and a huge sector of low-productivity, non-investing informal firms. This creates a "dual economy" that slows down overall growth.
Secondly, the dependence of many of these countries on raw materials ensures strong economic volatility. Libya and Gabon demonstrate the risks of over-reliance on resources. In Gabon, for example, depletion of deposits led to a drop in oil production, which resulted in negative growth in per capita GDP, despite favorable price conditions. Thirdly, production facilities are regularly underutilized. A striking example is Argentina, where political and macroeconomic instability has undermined demand. The level of industrial capacity utilization in 2024 fell to 55.6%, and investments in new funds in such conditions lose their meaning.
The study notes that investments without sustained demand are fruitless. Domestic demand in the G7 countries is limited by two key factors: high inequality and weak credit development. The higher the Gini coefficient (an index showing the level of income inequality among the population), the narrower the stratum of the middle class — the main consumer of high-quality goods. South Africa is the world's anti-record holder (0.63), and Libya (0.55) and Brazil (0.52) also have extremely high inequality. This narrows the domestic market and makes it impossible for companies to scale before entering the international arena.
As for the available financing, in Argentina, Libya and Gabon, the volume of loans to the private sector does not reach even 25% of GDP. Low availability of financing stifles both consumer and investment demand. Additional barriers are weak logistics infrastructure (especially in Libya, Gabon, Argentina and Mexico) and limited access to foreign markets due to the small number of free trade agreements (this is most evident in Libya and Brazil).
It can be stated that the countries have not been able to complicate their economies. The export complexity index has increased over the past 30 years only for Mexico, Malaysia and Gabon (and then in the latter case, mainly due to a reduction in agricultural exports). Brazil and Argentina remain highly dependent on agricultural and mineral exports. This is reinforced by the chronic underfunding of science and research (R&D). None of the group's countries reaches the World Bank's recommended threshold of 2% of GDP, while Malaysia, the leader, spends only 1.4%. The natural consequence is a meager number of patents — less than 50 per million people per year, compared to 5,603 in South Korea.
Relevant experience for us
In recent years, the Governments of these countries have been launching ambitious initiatives in recent years. For example, Malaysia is betting on semiconductors and digital technologies, Brazil has launched an industrial modernization program with a budget of $60 billion, and Argentina is implementing radical reforms and plans to export nuclear technology. We will see how successful these programs will be in a few years.
The experience of the "seven" is extremely important for Russia, which is on the threshold of high incomes. The reserves of extensive growth through increased employment have been exhausted, and the aging of the population is exacerbating this problem. The way forward lies solely through the growth of labor productivity.
Analysts believe that a comprehensive strategy is needed: improving investment efficiency through improving the institutional environment, combating informality and stimulating capacity utilization, stimulating domestic demand by reducing inequality, developing private lending and logistics infrastructure, expanding external demand through deepening economic integration (for example, within the framework of BRICS or the EAEU), as well as overcoming the raw materials dependence through the purposeful complication of the economy: support for non-primary exports, increased R&D costs and integration into global value chains.
Kirill Lysenko, an analyst on sovereign and regional ratings at the Expert RA agency, explained to Izvestia that a key component for getting out of the trap is creating conditions in which businesses will have interest and opportunities to make long—term investments.
— Companies need a high-quality and convenient institutional and infrastructural base that ensures minimization of non-market risks, reduces transaction and logistical costs, opens up wide sales markets, and provides organizations with highly qualified personnel and affordable capital resources. And, of course, this soil should be fertilized by an industrial policy to encourage private investment in R&D — without this, it is difficult for the country in the 21st century to move from simple technology borrowing to a highly competitive model of mass innovation generation," the analyst states.
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