Asian Social Science; Vol. 10, No. 7; 2014 ISSN 1911-2017 E-ISSN 1911-2025 Published by Canadian Center of Science and Education 163 Addressing the Middle-Income Trap: Experience of Indonesia Aviliani 1 , Hermanto Siregar 2 & Heni Hasanah 3 1 STIE Perbanas, Jakarta, Indonesia 2 Department of Economics, Faculty of Economics and Management, Bogor Agricultural University (IPB), Indonesia 3 Department of Economics, Faculty of Economics and Management, IPB, Indonesia Correspondence: Heni Hasanah, Department of Economics, Faculty of Economics and Management, IPB, Bogor 16680, Indonesia. Tel: 62-251-862-2636. E-mail: heni_hasanah@yahoo.co.id Received: December 16, 2013 Accepted: February 13, 2014 Online Published: March 31, 2014 doi:10.5539/ass.v10n7p163 URL: http://dx.doi.org/10.5539/ass.v10n7p163 Abstract Middle-income trap (MIT) refers to a condition in which the middle-income countries are not able to follow the trajectory of an economic growth to achieve a new level as high-income countries. Using descriptive analysis, more than 30 countries are found to experience MIT including China and India. Some of countries in Africa are even experiencing low-income trap. Between 1970 and 2011 Indonesia was actually in a transition condition of low-income to middle-income economy. Indonesia has begun to face constraints that would inhibit the sustained growth, particularly on the supply side of the economy. It is better to do the anticipatory actions that can strengthen the economy’s fundamentals in order to avoid MIT. The estimated regression model used in this study indicates that the increase in current national income is affected by the previous national income and the share of gross fixed capital formation to GDP. So, to avoid MIT, the government of Indonesia should prioritize on investment for developing growth centers as well as for improving human resources and technology application. Keywords: middle-income trap, Indonesia, regression analysis, economic corridors 1. Introduction 1.1 Problem of Middle-Income Trap: Global Perspective The economic development of countries has been more or less a long sequence from low income to middle income and, ideally, to high income. That is to follow the expected trajectory of growth. However, countries get stuck in the low or middle income groups for a long period of time and do not move up. In the other cases, the reversals sequence may be happen. Countries in the middle income group slide back to the low income group. That could happen because of some major adverse shocks. Kuznets (1971) and Felipe (2012) stated that Economic development itself is a very complex process that involves: (i) the transfer of resources (labor and capital) from activities of low productivity sector into activities of higher productivity sector; (ii) capital accumulation; (iii) industrialization and the manufacture of new products using new methods of production; (iv) urbanization; and (v) changes in social institution and beliefs. Since the 1960s, rapid economic growth has pushed some economies to reach the level of middle income and high income categories. Meanwhile, some countries are still trapped in conditions of lower income or middle income groups. There are concerns that middle-income countries are difficult to get through the stages towards high income group. This is what is called the middle-income trap (MIT). There is no consensus yet about what causes a country to fall into a MIT, but Jitsuchon (2012) inferred that economic dynamism perhaps plays an important role. Based on World Bank, economies are divided according to 2011 Gross National Income (GNI) per capita, calculated using the World Bank Atlas method. The groups are, i) low income ($1.025 or less); ii) lower middle income ($1.026 - $4.035); iii) upper middle income ($4.036 - $12.475); and iv) high income ($12.476 or more). Trajectory of economic growth is expected from low income to the middle income and middle income to high income. MIT refers to a condition in which the per capita income of such country has grown insufficiently high that the economy of the country is becoming stuck or stagnant. As a result, the country has always been on the classification of middle-income. Figure 1 shows the distribution of the countries in the world based on the classification in period 1960 - 2008.