Poland has emerged as a standout performer among Eastern European economies. But the country’s journey from lower-middle-income to high-income status remains an exception. This column studies more than 100 countries stuck in various forms of the middle-income trap due to rising debt, ageing populations, and growing protectionism. In order for the six billion people now living in middle-income countries to see their economies achieve high-income status, governments must cultivate skilled talent while tempering the traditional reliance on cheap energy as a cornerstone of rapid development.
Over the past several decades, Poland has emerged as a standout performer among Eastern European economies. For years, when the country was under the weight of a centrally planned economy, the government controlled almost every aspect of life – from what people bought to where they worked and how businesses operated. This rigid system stifled creativity and innovation, leaving the nation grappling with chronic shortages, inefficiencies, and limited opportunities. Since transitioning to a market economy, Poland’s remarkable economic performance has turned it into a compelling success story. While it still has some distance to cover to achieve full convergence with the economic frontier (World Bank 2015), Poland stands as a beacon of hope and its progress deserves close attention from those looking to understand the path to prosperity for middle-income countries.
Winds of change: The fall of the Berlin Wall and a new dawn
In 1989, the winds of change swept across Europe. When the Berlin Wall – long a symbol of division and oppression – fell, Poland was a lower-middle-income country ready to rise from the ashes of its past and embrace the principles of a market economy. A team of reformers crafted a bold economic plan. Led by Leszek Balcerowicz, they crafted the Balcerowicz Plan, a radical strategy designed to rapidly transform Poland’s economy through ‘shock therapy’. The reforms were swift and decisive, allowing the market forces of supply and demand to take root. The initial impact was jarring: prices soared, businesses struggled, and the Polish people faced significant hardships as the economy adjusted to its newfound freedom. But amidst the turbulence, something extraordinary began to happen.
Awakening the entrepreneurial spirit and tapping into talent
Entrepreneurs, once stifled by rigid controls, began to emerge, creating a more dynamic business environment. New enterprises formed, and a spirit of innovation took hold of the nation. Foreign investors, drawn by Poland’s untapped potential, poured in, bringing new global technologies and ideas which then diffused across the country. Poland quickly became a hub of technology and production, with industries like automotive manufacturing and electronics leading the way (International Trade Administration 2020). The country integrated itself into global value chains, exporting goods far and wide, and attracting investment from around the world.
A key aspect of the transition was the restructuring and privatisation of state-owned enterprises (SOEs). The government imposed hard budget constraints as part of the shock therapy, forcing SOEs to cover costs through revenues, making them more accountable and efficient (Pinto 2014). Stringent bankruptcy laws were also introduced, meaning unprofitable SOEs could no longer rely on state bailouts and faced real bankruptcy risks if they mismanaged finances.
Poland’s transformation wasn’t just about businesses – it was also about nurturing talent. With newfound opportunities, Polish citizens pursued education, honed their skills, and embraced the challenges of the new economy. Recognising the importance of human capital, the government invested heavily in education and infrastructure, ensuring that the Polish workforce was equipped for the demands of the modern world.
These reforms also brought Poland closer to Europe. The country set its sights on joining the EU, which opened doors to even larger markets for Poland’s rapidly growing firms, integrated them into global value chains, expanded trade, and fostered international collaboration, further propelling Poland’s economic growth.
As its economy grew stronger, more resilient, and increasingly prosperous, Poland joined the ranks of 34 countries which had successfully escaped the middle-income trap that ensnared so many others and graduated into the high-income category. Today, Poland’s extraordinary transformation from a centrally planned economy to a thriving, market-driven powerhouse is a testament to the impact of bold reforms, healthy competition, creative destruction, and a commitment to meritocracy.
Poland is an exception: A rare journey among middle-income countries
Poland’s journey from a lower middle-income to a high-income country is truly remarkable. But how do other middle-income countries fare? In the latest World Development Report (WDR), we dive into the middle-income trap and explore this fundamental question (World Bank 2024). Unfortunately, Poland’s success story has not been the norm for the other 108 middle-income countries, but rather an exception (Figure 1). According to the World Bank, middle-income countries – a group to which Poland used to belong – are home to 75% of the global population and account for nearly one-third of global GDP. The 108 middle-income countries, with per capita incomes ranging from $1,136 to $13,845, are looking to achieve high-income status within the next 20 to 30 years. When assessed against this goal, the picture is bleak: since 1990, the total population of middle-income economies that have transitioned to high-income status is less than 250 million, roughly equivalent to the population of Pakistan. As several previous VoxEU analyses have shown (de Souza 2024 on China, Fan et al. 2019 on East Asia and the Middle East, Yueh 2018), these economies often find themselves stuck in various forms of the middle-income trap (Gill and Kharas 2007).
Figure 1 Income per capita of middle-income countries relative to that of the US has been stagnant for decades
Source: World Bank (2024).
In the past decade, the prospects of middle-income countries have worsened. Rising debt, ageing populations, growing protectionism in advanced economies, and increasing pressures to accelerate the energy transition have left today’s middle-income economies increasingly cornered. The likelihood that the six billion people living in today’s middle-income countries will see their nations achieve high-income status within one or two generations is quite low.
Drawing on decades of development experience since the 1950s and insights from Schumpeterian economic analysis, the WDR 2024 outlines strategies for developing countries to avoid the middle-income trap. Central to WDR 2024’s recommendations is a ‘3i’ strategy, which involves two key transitions across three stages of economic development (Figure 2).
Figure 2 Middle-income countries must engineer two successive transitions to move to high-income status
Source: World Bank (2024).
In the first stage, which applies to the lowest-income countries, the focus is on substantial capital investment to build the foundational production capacity of a country. As economies progress to the second stage, a ‘2i’ strategy becomes essential. Here, the need is to combine continued investment with ‘infusion’ – the process of bringing in and effectively integrating global technologies and successful business practices, as in the Polish experience. Countries that have accumulated sufficient capital now aim to leverage these resources by infusing modern technologies domestically, reshaping their industries to become key players in global supply chains.
In the third and most advanced stage, a 3i strategy is necessary to complement investment and infusion with innovation. For upper-middle-income countries that have successfully mastered infusion, the next step is to not only adopt ideas from global technology frontiers, but also to participate in pushing those frontiers outward. This stage involves developing homegrown innovations that can lead to breakthroughs on the global stage, ensuring sustained economic growth and progress beyond the middle-income trap. In an earlier blog, Guriev et al. (2019) detailed how Korea successfully navigated its transition to innovation-led growth.
Transitions across growth strategies are not automatic; they depend on how effectively societies manage the Schumpeterian forces of creation, preservation, and destruction. Success requires a delicate balance: disciplining incumbents who, if left unchecked, may engage in strategic behaviour such as aligning with politicians to secure their interests rather than focusing on innovation (Figure 3). It also requires rewarding merit and seizing opportunities in times of crisis. Incumbents – whether large corporations, state-owned enterprises, or influential individuals – can be drivers of immense value, but they can also stifle progress. To ensure a dynamic economy, governments must establish competition frameworks that encourage new entrants while avoiding the extremes of overly protecting small and medium-sized enterprises or demonising big corporations.
Figure 3 In Italy, market leaders increase their political connections while reducing innovation
Source: Akcigit et al. (2023).
Middle-income countries, with smaller pools of skilled talent compared to advanced economies, must improve both the accumulation and the allocation of this critical resource. In addition, the traditional reliance on cheap and reliable energy as a cornerstone of rapid development must now be tempered with a focus on energy efficiency and reducing emissions to keep our planet liveable.
Emerging challenges – such as the rise of populism, growing global protectionism, and the urgent need to address climate change – present opportunities to dismantle outdated structures and pave the way for new approaches. While crises are undoubtedly painful, they can also catalyse the consensus needed to enact difficult but necessary policy reforms, especially in democratic societies.
Source : VOXeu
