To Reach Sophisticated Economies, Middle-Income Countries Must Undergo Two Successive Transitions
According to a World Bank report published on August 1st, middle-income countries must complete two transitions to achieve more sophisticated economies.
First Transition: Investment and Infusion
Initially, these countries, mainly lower-middle-income countries, must focus on imitation and diffusion of modern technologies. This infusion of technology is a crucial intermediate step.
Second Transition: Innovation
Subsequently, innovation is added to the mix, enabling upper-middle-income countries to develop domestic capabilities and become innovators.
The Complexity of Transitioning to High-Income Status
The passage from middle-income to high-income status is complex, as countries cannot directly jump from investment-based growth to innovation-based growth. The infusion of technology is a vital intermediate step.
Examples of Successful Transitions
The experiences of countries like South Korea, Poland, and Chile illustrate this process. For instance, South Korea began by increasing investments, then adopted foreign technologies, and finally focused on innovation to maintain sustained growth.
Poland, after its transition to a market economy in the 1990s, followed a similar path by allowing investments, focusing on the infusion of Western European technologies, and transforming interest rates.
Chile also utilized the infusion of knowledge from advanced economies to diversify its exports and strengthen its SMEs.
The Importance of Rebalancing Economic Growth Engines
These examples demonstrate the importance of rebalancing the mix of three economic growth engines – investment, infusion, and innovation – as countries progress towards high-income status.
