Lower-Middle Income Countries
Countries in the lower-middle income category have enough income to lift much of the population above subsistence level, but only some countries have managed to do so – in many cases, inequality of wealth and income remain a significant challenge. These countries must work both on creating the conditions for growth through productivity enhancements and ensuring that the growth process proceeds in a broad-based and inclusive way. This relatively large grouping includes several South Asian economies, and a number of countries from the Middle East and North Africa (MENA) region and sub-Saharan Africa.
Egypt has experienced significant political upheaval in recent years and struggles across most of the areas that drive inclusive growth. The education system does not reach a sufficient proportion of the population and lacks quality for those who are enrolled. This contributes to a low labor force participation rate and high unemployment, particularly among the young. Despite a history of entrepreneurship, business and employment creation remain constrained by insufficient finance, poor transport infrastructure, and pervasive corruption. Many workers are in vulnerable employment situations, often in the informal economy.
El Salvador has built better infrastructure than many other countries at the same income level. The country also benefits from a reasonable level of entrepreneurship compared with its peers, yet this does not translate into much new business and employment creation due to red tape and a lack of financing. The education system is also not producing the students needed for a dynamic economy, with significant improvements needed to boost access and quality.
Ghana’s economy benefits from relatively low unemployment and a business environment that is not characterized by a stifling dominance of large incumbent firms. Yet, median income has been slow to rise and poverty remains entrenched with just over half of the population living on less than $2 a day. Corruption is less prevalent than in many peer countries. However, youth employment is somewhat higher than the overall average implies, no doubt related to the relatively low educational enrollment rates in a system that requires major improvements in quality and greater equity of performance regardless of socioeconomic background. Improving infrastructure and basic services such as health will be critical, requiring a more inclusive and developed financial sector.
India must take further action to ensure that the growth process is broad-based in order to expand a small middle class and reduce the share of the population living on less than $2 a day (many of them in poverty despite being employed). Educational enrollment rates are relatively low across all levels, and quality varies greatly, leading to notable differences in educational performance among students from different socioeconomic backgrounds. While unemployment is not as high as in some other countries, the labor force participation rate is low, the informal economy is large, and many workers are in vulnerable employment situations with little room for social mobility. India under-exploits the use of fiscal transfers. Its income tax is regressive and social spending remains low, which limits accessibility of healthcare and other basic services. Sanitation continues to be a problem across the board. India scores well in terms of access to finance for business development and real economy investment, yet new business creation continues to be held back by the large administrative burden of starting and running companies, corruption, and underdeveloped infrastructure.
Indonesia has a reasonably robust education system, although it does not yet reach all potential students, and there are important differences in attainment and outcomes depending on income level. Overall unemployment is relatively low, though youth unemployment is above 20% and a large proportion of workers are in vulnerable employment situations. Women’s participation in the labor force remains low and women earn only 50 percent of what men do for similar work. The tax system needs to be made more effective to raise the resources for upgraded critical infrastructure and basic services and to reduce poverty, income, and wealth inequality, which is among the highest in this group given the resources at the country’s disposal.
The Islamic Republic of Iran scores at the top of lower-middle income countries in terms of its fiscal transfers, driven mainly by relatively high spending on social protection and tax progressivity. The country has a comparatively large middle class (34%) which has, however, been shrinking in recent years along with median living standards ($7.84 per day). To address this, the quality of the education system and the availability of vocational training could be improved to provide workers with the necessary skills to find productive employment. In addition to a reasonably large informal sector, large gender gaps also persist in education, employment, and health, which deprive the country of potential talent. Iran performs fairly well in terms of home ownership (an important source of asset building) and financial inclusion of those in the bottom 40%. However, businesses’ access to credit could be greatly improved.
Jordan is characterized by relatively well-developed transport and electricity infrastructure as well as good basic services compared with its peers, particularly in providing basic sanitation and healthcare. Poverty rates are low relative to peers, with only 2% of the population living on less than $2 a day. The country also delivers high median living standards and a large and growing middle class – at 61%, surpassing its peers. There is reasonable availability of financing for business creation and investment, although this is not translating into significant new business activity and job creation. Indeed, unemployment remains high, nearing 30 percent for young workers. This is despite labor force participation that is among the lowest in the world at just over 40 percent, and which is exceptionally low for women, depriving the economy of talent. It is critical to improve the education system’s ability to provide the skills needed for a dynamic economy.
Nigeria, despite the opportunity offered by its significant oil revenues over the years, has not put in place the factors necessary for creating an inclusive growth process. Despite some significant gaps in data measuring educational outcomes, the picture remains one of low enrollment, insufficient quality, and wide divergence in student performance based on socioeconomic background. Participation in the labor force is quite low, with a large informal sector and much of the population working hard but unable to pull their families out of poverty. Only 3.9% of income goes to labor, resulting in low wages and over 80% of the population living on less than $2 a day. The country suffers from poor infrastructure and a lack of basic services, with corruption and diversion of public funds making it difficult for the government to deliver public goods. Despite a relatively entrepreneurial environment, Nigeria is not yet able to ensure growth that is sustainable and broad-based.
The Philippines benefits from a financial market that allocates resources reasonably well to business development through channels including banks, the equity market, and venture capital. Access to the education system has expanded but still has scope for improvement, and its quality needs to be improved to better prepare the population for a dynamic economy. This would help tackle the high youth unemployment rate, which would also benefit from reduction in red tape to encourage the creation of new businesses and related jobs. Upgrading infrastructure and the provision of basic services presents another area of opportunity for reducing high levels of income inequality (post-transfer) and increasing the inclusiveness of the growth process in the country.
Thailand has a number of building blocks of inclusive growth in place, which have resulted in low levels of poverty (4%) and a growing middle class (40%). Its education system, while not yet at an advanced economy level, ranks second among countries in this income category. This is attributable to reasonably high enrollment rates at different education levels and reasonable equity in student performance regardless of income level or gender. Thailand ranks first in this group for financial system inclusion, with relative ease of access to credit for business investment. The country has also managed to develop reasonable basic services and infrastructure, and has a low unemployment rate. Efforts should be made to encourage greater entrepreneurship and business creation to bring workers from the informal economy into the formal sector, to develop a more effective social safety net, and to tackle rampant corruption. While the country relies mainly on market mechanisms to deliver inclusive growth, pre-transfer inequality has increased over the last several years, indicating room for further improvement.
Tunisia has developed relatively good basic services, in particular its healthcare system. Yet the country that launched the Arab Spring protest movement requires significant improvement across most other building blocks of inclusive growth. The education system, while reaching many young people, does not provide the quality needed to prepare them for the workforce. Unemployment, particularly of the youth, is very high with many workers forced into the informal sector. Tunisia must foster an environment that is conducive to new business and job creation to meet the needs of the many young people entering the workforce.
Ukraine receives the best assessment of all countries in this income group for its education and skills profile, particularly due to high enrollment rates and the equity of student performance regardless of income level. This strength has translated into very low levels of inequality, pre- and post-transfer, and a large and rapidly growing middle class. Yet the quality of both traditional education and training must be upgraded to meet the needs of the economy and reduce the high unemployment rate, particularly among the young. Business creation is hindered by red tape, rampant corruption, and the consequent lack of financing for business development. Without job opportunities the country will continue to suffer a brain drain of talent leaving for opportunities elsewhere. The recent hostilities in the east of the country may undo some of the progress achieved in recent years, as they are likely to disproportionately affect the least well-off.
Vietnam tops the pillar measuring employment and labor compensation, with a high labor participation rate accompanied by very low unemployment, although youth unemployment is somewhat higher. This is probably driven by the country’s relatively strong entrepreneurialism. To improve its ability to deliver inclusive growth, Vietnam must urgently upgrade its education system by improving the quality of schooling and increasing enrollment at all levels. Healthcare quality, access, and affordability must also be improved to avoid high out-of-pocket expenses. The financial sector must be developed to provide financing for business development and investment, and infrastructure and basic services need to be upgraded. Despite huge reductions in poverty over the last decade, the country has a small middle class and relatively low median living standards (and could potentially benefit from greater use of fiscal transfers).