The Peter Zeihan Podcast Series - Avoiding the Middle-Income Trap || Peter Zeihan

Episode Date: September 5, 2025

There's a point in many nations' timelines where the per capita income stalls. This is known as the middle-income trap...Join the Patreon here: https://www.patreon.com/PeterZeihanFull Newsletter: https://mailchi.mp/zeihan/avoiding-the-middle-income-trap

Hey, Peter Zine here, coming from Colorado. Today we are taking a question from the Patreon crowd, specifically how do countries avoid the middle income trap and become advanced rich countries? For those of you who don't follow economic development, like I do, the middle income trap is this concept that you can build the infrastructure, you can get into manufacturing, you can make a lot of stuff for export, but you're never able to cross a threshold of roughly $10,000 to $12,000 income per person. The issue is eventually you hit a value-ad point that you can't push past, and you can only take manufacturing so far because the technology will eventually provide more of the value add than the

people, and so you're kind of stuck in a situation where people are working in the factories that can't do anything more advanced because they're not educated enough, and the machines do more which bleeds off some of the income and sends it to the people who own them. So if you want to get past that, you're talking about graduating to a fundamentally different economic tier and it's a different sort of cultural and industrial structure than what you have as a mid-tier manufacturing country. So for that, you need four things, really three things and one to make it stick. First, you need to be open, very open, almost painfully open to foreign capital. The cost of building the physical infrastructure and the industrial plant is a big part of this.

And if you can allow the money to come in, do its thing, and then take some of the money out once profits start happening, that generates a degree of openness in your system that, that it will enable more and more people on the outside to assist with your development process. But it's more than just building the plant. Because the plant is what comes first. The plant is what the foreigners are first interested in. But as your income levels rise, that capital can be used for other things like credit cards and mortgages. And you start building a consumption-driven society.

And when you get a more broad base like that, then you can see the numbers start to go up as people hive off of the manufacturing industries and start opening up their own firms and doing their own value-added work. So that's one, capital. Number two. Investment, which can come from foreign money, doesn't have to, but not just investment in infrastructure and manufacturing plant, but in more advanced things like education that gets outside of the technical fields, infrastructure that is beyond road and rail and industrial facilities, basically making the money available to invest in different sorts of economic activities that are related to more than just making widgets. Again, that broad-based unlocks the creativity of the people, especially if you're investing in creative education,

so that people can kind of take it from there. One of the big secrets of getting past the middle income trap is that you have to let go. Because the more that the state is organizing, yes, the faster you can move, the more national enterprises you can conquer, but that's not where real high-end growth comes from in the long term. It comes from having millions of people

who are making decisions every single day about what is best for them, and then they put their back into a way that they just don't do it on an assembly line. let's see what was number three rule of law if you're going to move into a system where the state is not the sole decision maker if you're going to allow capital have a degree of rights you're going to allow people to have a say in what they do in their own lives you need a system that gives them a leg to stand on you need a legal structure of rule of law where people know what the system is they know what their rights are and they can prosecute to protect them and defend them if you stay with a kind

single-tier manufacturing system, you're never going to get that because people always are going to be facing a risk of challenging the system just to do anything. So these are these three things, these are the big ones. And this is part of the reason why China just can't advance past where it is right now. Foreign capital has always been a little stingy with. It wants to keep everything under control. It's definitely not rule of law. It's law by rules. And the educational system they've built excels at the technical side of things, the stuff you can memorize. But giving people the freedom to go after what they want is a political threat. And so China is stuck roughly at that 9 to 12,000 range, and they're never going to get past it. And one of the big reasons that we know is they're never going to get

past it is number four. And that is have babies. This doesn't sound like much of an industrial policy. It's work with me here. When you have people in their 20s and their 30s who are willing to work 60, 80 hours a week, yes, you get a lot of productivity from that and you get wealth generation from that, but you can only do that once. Because if by the time they get 40, if they haven't had kids yet, they can't work 80-hour weeks anymore, at least not with the same degree of regularity, their productivity starts to peak and then eventually fall off and there's no replacement generation. So it's all well and good if you can push past $12,000 a person, but if there's no one coming up from behind, then does it really matter? Part of the problem in the world

with some of the countries that have beaten the middle-income trap. And I'm thinking here about Germany or Ireland or Korea, is that yes, they've made these jumps. Yes, they've respected rule of law. Yes, they've been open to capital. Yes, they've expanded their educational systems. But they forgot that it doesn't end with the current generation. And now some of these places are facing the sharpest contractions in birth rates and national prerogatives in human history. Now, here in the United States, we've done this process over several generations. And the drop our birth rate is something that really didn't even start in any meaningful way into the 1970s. But we now, we have dropped below replacement levels, and we are also ejecting millions,

or the plan for the current administration is to eject millions of people from the workforce who have higher birth rates. So the United States is in this weird little situation where we've done everything more or less right to this point. And now we're looking around to the world and figuring out what didn't work and applying that in force. And if that keeps up for any number of years, that is something that we are going to regret for generations to come.