Part 1

Those in their thirties and forties today—part of the Millennial and Centennial generations—bear the heavy burden of preventing the Philippines from falling into the "Middle-Income Trap" that has ensnared many Latin American economies. By July 2026, Philippine per capita income will likely cross the threshold into the upper-middle-income category of approximately $4,500—a milestone Vietnam reached two years ago. Whether our economy can attain high-income status within the next generation will depend on how future leaders currently in their thirties and forties—the likes of Vico Sotto, Vince Dizon, and Kiko Benitez—navigate the pitfalls of this transition.

Exactly what is the Middle-Income Trap? It refers to a situation in which a country successfully transitions from a low-middle-income category to an upper-middle-income one, only to experience prolonged stagnation and fail to graduate into a high-income economy. This is a difficult stage that our "Tiger" neighbors like Singapore, Taiwan, and South Korea managed to surpass. At this level, countries can no longer compete with low-income economies on cheap labor and basic manufacturing, yet they cannot yet compete with advanced economies in high-value, innovation-driven industries like those in Silicon Valley. They are, in a word, caught between the devil and the deep blue sea. As a result, growth slows, productivity declines, and incomes plateau for decades.

The key characteristics of countries caught in this trap include:

1. Over-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 a persistent skills mismatch.

5. Weak institutions characterized by corruption and regulatory uncertainty.

6. High inequality, which constrains domestic demand.

7. Insufficient industrial upgrading.

Latin America is often cited as the region most affected by this phenomenon. Take Brazil, for example. It reached middle-income status more than half a century ago in the 1970s. Since then, average per capita growth has remained sluggish. Its problems stem from an overdependence on commodities (such as soybeans, iron ore, and petroleum), low productivity, a lack of manufacturing competitiveness, and complex regulations (the "Custo Brasil") that discourage both domestic and foreign investment. A textbook case of the trap, Brazil’s per capita income today is not much higher in relative terms than it was 40 years ago.

Another notable case is Mexico, which became a middle-income economy in the 1980s. Despite being part of the North American Free Trade Area (with the U.S. and Canada), which opened opportunities for manufacturing exports, its productivity growth has stagnated. Innovation and domestic value-adding remain limited, and the economy is heavily dependent on the U.S. market.

Then there is Argentina, which was among the richest countries in the world in the early 1930s. It eventually fell into repeated cycles of macroeconomic instability, with inflation reaching annual levels of 1,000 percent or more and suffering frequent debt crises. It never sustained productivity-led growth, making it a perfect example of a "fallen" middle-income economy.

The most extreme example is Venezuela. By the 1970s, Venezuela was one of Latin America’s wealthiest countries and was 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 and neglected agriculture and manufacturing.

The situation went from bad to worse as leaders implemented populist policies, including price controls, nationalization, and capital controls. The politicization of state institutions—reminiscent of the martial law regime of President Marcos Sr.—eroded property rights and investor confidence. By the 2010s, Venezuela moved from stagnation to total implosion: hyperinflation, massive GDP contraction, and a collapse of public services led millions to emigrate. Venezuela didn't just get stuck in the Middle-Income Trap; it fell out of the bottom. By early 2026, the country had devolved into a narco-state, leading to the dramatic intervention where the U.S. moved to capture Maduro and oversee the government.

Other nations such as Chile, Colombia, and Peru must also remain wary. In the 1970s, Chile was Latin America’s best-performing economy. The "Chicago Boys"—disciples of Milton Friedman—advised General Augusto Pinochet to adopt free-market policies that spurred high growth. However, after 2010, growth slowed as the economy failed to diversify beyond copper exports.

Similarly, Colombia and Peru, once models of solid macroeconomic management, are now struggling. Growth remains overly dependent on mining and natural resources, and both face low productivity and massive informal sectors. In fact, Colombia was recently overtaken by Vietnam as the world's second-largest coffee exporter.

Key Lessons for the Philippines: As we approach upper-middle-income status, the Latin American experience offers vital lessons:

1. Natural resources cannot replace productivity.

2. Populism can destroy decades of progress. (The populist policies of the Duterte administration, for instance, brought the Philippine economy to a precarious edge.)

3. Institutions matter more than ideology.

4. Macroeconomic discipline is essential.

5. Diversification is non-negotiable.

To be continued.