Upper-middle income status: The hardest step is still ahead

Reaching a milestone is always a paradox. It does not matter whether it's graduating from university, winning a long-awaited award, or finally buying the house of your dreams— reaching a long-awaited milestone always comes with a bittersweet feeling. 

First comes the celebration and the happiness rush of finally getting what we desperately wanted. It does not take long

before the existential dread sets in about whether we will be able to live up to expectations and, more importantly, what we will pursue next.

This is exactly the questioning that came to Manila this past July after the World Bank published its revised Group Country Income Classifications, which separate countries into four categories based on their Gross National Income (GNI) per capita: low-income, lower-middle-income, upper-middle-income, and high-income. 

The Philippines, along with its ASEAN fellow member Viet Nam, finally reached the long-awaited classification as an upper-middle-income country.

The announcement was met with celebration, but now that the excitement is fading, the rising question is whether this represents a step towards high-income status or just a warm welcome to the famous "middle-income trap."

The term was coined by World Bank economists Intermit Hil and Homi Kharas to describe the phenomenon in which countries that have surpassed the low-income stage after significant economic growth enter a period of stagnation.

After reaching a certain level of development, countries face a new, challenging scenario in which their labour costs are not low enough to remain internationally competitive, but where their economies are not yet productive or innovative enough to compete with advanced economies. 

While the term is still highly debated since the classification's creation in 1987, only 40% of countries that were at some point in the upper-middle-income tier have reached high-income status. 

Countries like Malaysia and my home country, Mexico, have been stuck in the classification for over three decades despite their growing manufacturing sectors, open markets, and efforts towards economic integration. Similarly, Brazil and Turkey have been stuck since the early 2000s, while Thailand has been pushing for a high-income status since 2011.

While stagnation seems to be the norm, a handful of success stories raise the question of what is needed to escape the trap. One of the best-known cases is South Korea, which transformed itself from a low-income agrarian economy into a high-income industrial and technological powerhouse through export-led industrialisation, investment in education, and sustained

productivity growth. 

More recently, Costa Rica surprised the world when it reached high-income status in 2025. The small Central American country transformed itself from an exporter of coffee and tropical fruit into a leading manufacturer of high-value products, such as medical devices and semiconductor components, while also becoming competitive in the business and IT services sectors.

Whether the Philippines will be able to escape the trap remains an open question, but several indicators suggest the jump may be harder than expected. Between 2010 and 2023, the GDP of the Philippines grew by an average of 5.2% per year. 

However, the World Bank cited more than 90% of this growth came from capital accumulation (investment), with human capital making an almost negligible contribution and total factor productivity accounting for less than 10% of overall growth. 

In addition, the World Bank’s World Development Indicators show personal remittances represented 8.7% of GDP in 2024 and were a leading driver of household consumption, making the Philippines one of the world’s most remittance-dependent

economies. 

This means that while there have been improvements in income per capita, a significant proportion has been income earned abroad rather than homegrown value that can sustain productivity and efficiency in the longer term. 

Furthermore, of the 11.7 million jobs created since 2010, 75% were in non-tradable sectors, such as retail and domestic services, which tend to contribute less to export-oriented or knowledge-intensive industries. 

Moreover, the World Bank (2025) reports a decline in export competitiveness, with the number of exporting firms decreasing over recent decades, signalling a challenging path toward high-income status.

Even if the Philippines can improve its overall industrial competitiveness, an even bigger challenge will be reducing inequality and improving the living conditions of the most vulnerable sectors of the population amid decreased foreign aid and development loans. 

Reaching the new status also comes with the disadvantage of being “too rich for aid” while still grappling with serious social and economic challenges that demand high levels of investment the Philippines cannot fund on its own. 

The Philippines has funded many of its large-scale infrastructure projects through Official Development Assistance (ODA), with an active portfolio of US$ 39.6 billion in 2024, according to the Philippine News Agency. Under the new status, access to

concessional financing will likely be limited, placing new pressures on the government to fund infrastructure and social programmes through domestic resources.

Escaping the middle-income trap will require a strong strategy that, like Costa Rica's, can attract and sustain high-quality foreign investment, along with continuous improvements in human capital and technological capabilities. 

However, success will rely on the capacity to promote innovation while managing environmental risks and prioritising the economic and social development of the most vulnerable sectors of the population. 

The objective should be to build a strong and resilient economy that goes beyond mere classifications and statistics to one that

supports tangible, dignified living standards for all Filipinos.

Gretel Cuevas is a researcher and writer whose work explores the intersection of critical minerals, the energy transition, and economic development. Her research focuses on how resource-rich countries can build more equitable and sustainable futures through better governance, industrial policy, and international cooperation.

She is a researcher at the Department of Engineering at the University of Cambridge, where she works with the Climate Compatible Growth (CCG) program on research related to critical mineral supply chains, industrial development, and the energy transition. Her work spans collaborations with governments, international organizations, and development partners.

As a Watson Fellow, Gretel conducted field research in mining communities across Africa and Asia. She has also collaborated with the UK's Foreign, Commonwealth & Development Office (FCDO), as well as governments and civil society organizations in Zambia and Malawi, on issues related to critical minerals, industrial policy, and economic transformation.

Alongside her academic work, Gretel writes essays and fiction exploring the human dimensions of extraction, development, and environmental change.

Disclaimer: The opinions expressed by the author are her own and do not in any way reflect those of Paraluman News.