Middle income trap

The typhoons late last year, geopolitical conflicts, and now the global upheaval unleashed by Category-5 Hurricane Trump have made the Marcos administration reset its target for the Philippines’ transition to upper-middle income status from this year to 2026.

But a World Bank official has said a more realistic target would be 2027.

With the global headwinds faced by the country as well as the instability expected from the worsening political warfare among the ruling elite, the goal may even have to be moved back to 2028.

According to the World Bank, middle income countries account for 75 percent of the global population and a third of global GDP. Among the MICs, there are 51 classified as lower-middle income economies and 54 upper-middle income. The Philippines has been classified as lower-middle income since 1987.

If it’s any consolation to despairing folks, the country is not alone in struggling to get out of the middle-income trap and the problems faced by many MICs including poverty, hunger, inequality, climate change, a widening digital divide, aging populations and debt burdens.

Economists have also pointed out that the Philippines must be prepared to see its access to foreign aid diminish if the country transitions to upper-middle income status.

Haoliang Xu, United Nations under-secretary-general and associate administrator of the UN Development Program, tends to look on the bright side, seeing the pluses in the Philippines that may allow the country to attain its upper-middle income goal.

These include sound macroeconomic fundamentals, the professionalism that he sees in the civil service, and yes, our “vibrant” democracy.

“Overall, the Philippines is still moving in the right direction,” Xu says, although he thinks the upper-income goal could take two or three more years to be reached.

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Xu is in town for the High-Level Conference of Middle-Income Countries, which aims to craft a strategic plan of action for MICs from 2025 to 2030. The inaugural gathering was hosted by Morocco in February last year. The UNDP, says Xu, appreciates Manila’s hosting of this conference from April 28 to 29.

“This conference is a symbol of support for multilateralism at a time when multilateralism is under pressure,” Xu told The STAR at a meeting yesterday morning in Makati.

The MIC gathering was held in the shadow of US President Donald Trump’s reciprocal tariffs and other policies, which have upended the rules-based international trade order and stopped a third of global foreign aid-funded development programs.

Xu said that even before Trump’s victory, official development assistance (ODA) worldwide had already been in decline.

The COVID pandemic, followed by the armed conflicts that have disrupted global supply chains and exacerbated the refugee problem, have thinned resources for international aid, Xu told us.

Now, with Trump cutting off US aid, which accounts for about 30 percent of international assistance, “the equilibrium has been broken,” he said.

Because of global headwinds, the delay in progressing to upper-middle income status, Xu said, “is not unique” to the Philippines.

While Xu has a sanguine view of the Philippine aspiration for upper-middle income status, the measures he cited for its attainment have been long-running challenges for the country.

We seem stuck in the middle income trap. Propounded for the first time in 2007 by the World Bank, this concept refers to states or economies that stagnate within a certain range of per capita gross national income. For lower-middle income states, the current GNI per capita ranges from $1,146 to $4,515. For upper-middle income, it’s $4,516 to $14,005.

In 2023, the Philippines’ GNI per capita was $4,230.

Economies in the middle income trap have slid in global competitiveness after a period of growth anchored on cheap labor and cheap capital, unable to move up to the high-value-added market because of insufficient investments in innovation, human capital development and infrastructure.

Definitions of countries stuck in the middle income trap will sound familiar to Filipinos, particularly the wide income inequalities and the idea that being mired in the trap is more a problem of political will and governance since there are economic ways out of it.

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Whether or not the Philippines is stuck in a middle income trap, Xu emphasizes the importance of “transparency, accountability, open government.”

He cites the 11 principles of good public administration for sustainable development, as laid out by the UN. Among these are effectiveness, accountability, rule of law, transparency, equity and inclusiveness, non-discrimination and leaving no one behind.

OK… we get dismal marks in all those categories.

The 11 principles also include multisectoral collaboration and citizen participation in decision-making, usually through free elections. But for this to work, there must be an informed vote – also a challenge given the slide in our quality of education.

Xu stressed the need for an “integrated national financing framework” to support development priorities. I told him we have the funds (backed by ODA and foreign borrowings) and well-meaning professionals who craft the national expenditure program, which unfortunately ends up mutilated by the looters in Congress.

How can we ever develop a strong innovation ecosystem, as suggested by the UNDP, when the politicians are diverting to their pork barrel billions from programmed budgets for education, health and scientific research?

Xu also cited the need for setting out clear goals for both short and long term. But this has become almost impossible considering our chaotic system and lack of coordination between the national and local governments.

And now here comes Donald Trump trampling on the rules-based world order.

Still, on a bright summer morning, I told Xu it was nice to chat with a development official with positive views on the Philippines, and who points out that since the 1990s, dozens of MICs have graduated from lower to upper-middle income classification.

“Every country has problems,” Xu said, grinning. “You have to be happy.”