How Digital Infusion Could Help Overcome the “Middle-Income Trap”

Co-authored by Kong Lingbo, Public Policy Expert, Government Affairs Dept, Huawei Technologies

The economic theory of convergence asserts that over time, poorer countries tend to grow at a faster rate than wealthier countries. This ‘catch-up’ effect occurs because poorer nations benefit commensurately more from existing technologies, capital, and institutional frameworks from richer countries. Capital should also flow more readily from richer countries to poorer ones, as the returns from investment are also higher. Income gaps between rich and poor countries should eventually narrow and even close.

For the first decade of this century, the economic data panned out as predicted. As globalisation accelerated, middle-income countries were on average steadily increasing their GDP per capitas relative to that of the United States’ (see chart 1). Economic convergence was well underway (a trend that had started again in the 1990s for many countries). And then it stopped. For the duration of the 2010s, the average GDP per capita of the middle-income group of countries (as defined by the World Bank) stagnated as a proportion of US GDP per capita and had even nudged lower by 2023 compared to 2011. 

Chart 1: Nominal GDP per capita as a proportion of US GDP per capita (%), 2000-2023

Source: World Bank data

The “Middle-Income Trap” was a hot topic in 2024, discussed at length by the likes of the IMF and the World Economic Forum. Indeed, the World Bank devoted its annual flagship World Development Report to the issue. One of its main prescriptions for middle-income country governments was to adopt a strategy that promotes infusion, in which a country embraces advanced technologies from abroad and successfully diffuses them domestically.

The World Bank’s research team suggest that digital technologies – such as the Internet, mobile phones, social media, and web-based information systems – can play a prominent role in infusion. They go on to say that “digital technologies offer the promise of boosting skills, entrepreneurship, and incomes.”

Chart 2: Middle-income countries must engineer two successive transitions to move to high-income status

Source: World Bank 2024, World Development Report “The Middle-Income Trap”

Huawei commissioned the world leading management consulting company, Roland Berger to write a report titled Paradigms for National Digitalization. The report includes potential pathways for improved digital technology infusion and diffusion in middle-income countries, as suggested by the World Bank. To this end, Roland Berger’s research was centred around two main goals.

The first was to find multiple real-world examples where the proactive digitalisation of industry and government led to noticeable improvements in economic growth, efficiency, or improved governance. The second focus was to provide best practice solutions to help middle-income governments better diffuse digital infrastructure and broader digitalisation throughout their economies.

Roland Berger’s research provides over 50 diverse case studies from more than 30 countries (mostly middle-income). The case studies in their report highlight that governments can leverage digital technologies to enhance social stability, business environments, and levels of technological development and innovation, thereby promoting high-level economic growth.

In Rwanda, for example, one in every 30 people is a coffee farmer. In recent years, cross-border e-commerce platforms have given them access to the global market, increasing their average revenue per ton of coffee beans by 20%.

Nigeria has improved the efficiency of getting agricultural products from the field to the market by 32% through digital supply chain management; Mexico's national pharmaceutical regulatory platform has used blockchain technology to reduce the rate of counterfeit drugs by over 20%.

In 2016, food delivery platforms began to emerge as a crucial part of Indonesia's digital economy. Centred on digital tools, they utilized mobile Internet, big data, and intelligent distribution systems to enhance order processing and delivery efficiency, improving the user experience for both riders and consumers. Food delivery platforms have now created 2.5 million jobs in Indonesia. Both riders and food establishments have gained more orders and income opportunities through these platforms, with some workers experiencing a 250% increase in monthly income compared to more traditional forms of employment.

The Roland Berger team further assert that digital transformation offers a clear latecomer advantage for developing nations at this point in time. Adopting advanced digital technologies and concepts reduces sunk costs due to changes in technological trajectories; replicating mature business models quickly achieves scale in digital industry development; and embracing the relocations of digital industry supply chains shares the dividends of global digital industry development.

Chart 3: Digital infusion: from strategy to execution

After analysing the digital strategies and execution of those 30 governments worldwide, the Roland Berger team go on to explain that national digital infusion and diffusion can best be promoted through four broad complimentary and integrated channels:

• Strategic planning
• Digital infrastructure construction
• Organizational efficacy
• Environment nurturing

For strategic planning, governments should specify development goals in the fields of social wellbeing, governance, and the economy by developing national digital strategies. It is best to set out clear, differentiated implementation paths and specific action plans for digital development, such as 10-gigabit cities, inclusive connectivity, and digital government, while simultaneously establishing a digital progress assessment framework for regular review.

ICT infrastructure is the foundation for national digitalization. At the digital application level, attention must be paid to the creation of digital identity and digital payment systems, and the incubation of super apps. At the digital platform level, the construction of government cloud platforms can be promoted to provide social security and public services, and the development of industry cloud platforms could be encouraged. At the digital infrastructure level, investment in communication and power grid coverage in remote areas is needed for inclusive and ubiquitous connectivity and to provide a boost to national compute capabilities.

For organization efficacy, governments should set-up decision-making committees and dedicated implementation bodies to organize high-level leaders, cross-departmental heads, and expert organizations. Through the allocation of authority and interests, they can best mobilize various departments to ensure the efficient implementation and successful deployment of the national digital development strategy.

For environment nurturing, governments should open up their digital infrastructure to the public, such as educational networks, hospital networks, and rural networks; cultivate digital talent and protect digital assets; create regulatory sandboxes, set up industrial parks, and encourage enterprise innovation; support industry alliances, encourage standard setting, and foster an open and vibrant market environment.

Looking ahead, we hope this whitepaper will provide practical references for governments worldwide as they formulate, evaluate, and enact digital policies. Additionally, we hope that this can also serve as an aid to help countries advance digitalization and escape the middle-income trap. Ultimately, this will contribute to a more prosperous and inclusive global society.

Co-authored by:

Kong Lingbo

Public Policy Expert, Government Affairs Dept, Huawei Technologies

Lingbo serves as a cross-regional ICT and industry development expert for Huawei's digital initiatives and provides consultant advice for public policy issues.

Disclaimer: Any views and/or opinions expressed in this post by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Huawei Technologies.