Those who are in their thirties and forties today (part of the Centennial and Millennial generations) have the heavy burden of preventing the Philippines from being caught in the so-called “Middle Income Trap” that befell a good number of economies in Latin America.  By July 2026, it is most probable that the Philippine per capita income will cross the threshold that leads to the upper-middle income category of approximately $4,500—which Vietnam crossed two years ago.  Whether or not our economy can attain high income category in the next generation or so will depend on how the future leaders of the country, who are now in their thirties and forties (the likes of Vico Sotto, Vince Dizon and Kiko Benetiz) will be able to avoid the country falling into what is known as the Middle-Income Trap.

              Just exactly what is the Middle-Income Trap?  It refers to a situation in which a country that has successfully transitioned from low-middle income category to an upper-middle income one subsequently experiences prolonged stagnation and fails to graduate into a high-income economy.  This is that difficult stage (which our tiger economy neighbors like Singapore, Taiwan and South Korea were able to surpass) in which countries can no longer compete with low-income economies on cheap labor and basic manufacturing.  At the same time, they cannot compete with advanced economies in high-value, innovation-driven industries (like those in Silicon Valley in the U.S.)  In a word, they are caught between the devil and the deep blue sea.  As a result, growth slows, productivity stagnates and income plateau for decades.

              The key characteristics of countries caught in this trap are:  1.  Reliance on commodities or low-value manufacturing; 2.  Weak productivity growth, especially in agriculture; 3. Limited innovation and R&D; 4. Poor quality of education and skills mismatch; 5.  Weak institutions (rampant corruption, regulatory uncertainty); 6.  High inequality, which constrains domestic demand; and 7) Insufficient industrial upgrading.

              Latin America is often cited as the region most affected by the middle-income trap.  Take for example Brazil.  It reached middle-income status more than a half century ago in the 1970s.  Since then, average per-capita growth has been very low.  Its problems have been overdependence on commodities (such as soy bean, iron ore and petroleum), low productivity growth, lack of competitiveness of its manufacturing sector and complex regulations (“Custo Brasil”) which discourage investments, both domestic and foreign.  A textbook middle trap case, the per-capita income of Brazil today is not much higher than it was 40 years ago in relative terms.

              Another notable case is Mexico which became a middle-income economy in the 1980s. Despite its being part of the North America Free Trade Area (together with the U.S. and Canada) which opened up many opportunities for manufacturing exports to its neighbors, its productivity growth has been stagnant.  Innovation and domestic value-adding have remained limited and it is heavily dependent on the U.S. market. Then there is Argentina, considered as among the richest countries in the world during the early 1930s. It fell into repeated cycles of macroeconomic instability with inflation reaching annual levels of 1,000 % or more and suffering from debt crises repeatedly. It never sustained productivity-led growth.  It is the perfect example of a “fallen” middle-income economy.  The worst example was Venezuela, now very much in the news.  By the 1970s, Venezuela was one of Latin America’s richest countries, already classified as an upper-middle income economy.    Oil revenues financed rapid urbanization, public services and a growing middle class.  Venezuela successfully escaped poverty but failed to transform its economy. It became overly dependent on petroleum revenues and neglected both agriculture and manufacturing.  There was little effort to move into higher value industries.

              Venezuela went from bad to worse.  Its leaders implemented populist policies like price controls, nationalizations of industries, and capital controls.  There was politicization of state institutions (like what happened during the martial law regime of President Marcos Sr.), especially in the oil industry.  There was serious erosion of property rights and investor confidence.  By the 2010s, Venezuela moved from middle-income stagnation to economic implosion whose symptoms were hyperinflation, massive GDP contraction, shortage of basic goods, collapse of public service and large-scale emigration (millions emigrated to countries like Colombia).  Venezuela is not just stuck in the Middle-Income Trap.  It fell out of it downward.  What was even worse, it became a narcotic state under President Maduro which brings us to early 2026 when President Trump of the U.S. ordered the capture of Maduro and the U.S. formally took over the running of the government of this unfortunate Latin American country.  

              Other Latin American countries that should be wary about falling into the Middle-Income Trap are Chile, Colombia, Peru and Chile.  In the 1970s, Chile was considered Latin America’s best performing economy.  The so-called “Chicago boys” who were disciples of Nobel laureate Milton Friedman advised its authoritarian leader General Augusto Pinochet to adopt free market policies of deregulation, liberalization and privatization that resulted in high economic growth, enabling it to escape poverty and achieve upper-middle incoAfter 2010, however, growth slowed down as the economy failed to diversify and innovate, relying heavily on copper exports.  Chile is near the edge of the Middle-Income trap unless its policy makers are able to introduce significant structural reforms.

              Other candidates for the Middle-Income trap are Colombia and Peru which were models of solid macroeconomic management.  Growth, however, is overly dependent on mining and other natural resources.  Both countries are struggling with low productivity.  Colombia, for example, was recently dethroned by Vietnam as the second largest exporter of coffee in the world.  Both Colombia and Peru countries are overly dependent on the informal economic sector and have weak innovation systems.  In fact, the underground economy of Peru was celebrated in a best-selling book entitled “The Other Path” by Peruvian economist Hernando de Soto Polar.

              Key lessons to countries now at the level of upper-middle economy that can be learned from the Latin American experiences (with special relevance to the Philippines) are:

1.      Natural resources cannot replace productivity.

2.      Populism can destroy decades of progress.  President Rodrigo Duterte was at the verge

of destroying decades of progress of the Philippine economy with his populist policies.

3.      Institutions matter more than ideology

4.      Macroeconomic discipline is essential.

5.      Diversification is non-negotiable.

To be continued.