In many developing countries, rapid growth over the past decades has enabled the transition from low- to middle-income status. However, this progress often stalls before countries reach high-income levels – a phenomenon known as the middle-income trap (Gill & Kharas, 2007). Escaping this trap requires more than investment and industrial expansion; it demands a transformation of human capital, innovation, and institutional capacity. Among these drivers, youth education and economic inclusion emerge as critical levers for sustaining growth and ensuring equitable development.
The middle-income trap occurs when economies that initially grow through low-cost labor and capital accumulation lose competitiveness as wages rise, yet fail to develop sufficient innovation capacity to move up the value chain. According to Gill and Kharas (2007), countries trapped at this stage can no longer compete with low-income economies on cost nor with advanced economies on technology. The transition to a knowledge-driven economy thus depends on strengthening the quality of education, promoting innovation, and improving institutional efficiency.
The dual-economy model by Lewis (1954) provides a useful lens: early growth comes from transferring labor from agriculture to industry, but sustaining growth later requires a skilled, innovative workforce. Hence, investing in education and youth inclusion is essential to shift from factor-driven to innovation-driven growth. Education is the foundation of human capital accumulation and technological advancement. Yet, in many developing countries, the education system does not adequately prepare youth for the evolving labor market. The World Bank estimates that nearly 70% of children in low- and middle-income countries are “learning poor,” meaning they cannot read and understand a simple text by age ten. This learning crisis translates directly into lower productivity, weak innovation, and economic stagnation.
Moreover, the relevance of education matters as much as its accessibility. Developing countries often face a skills mismatch – where graduates possess theoretical knowledge but lack the practical, digital, or entrepreneurial skills demanded by modern industries. To overcome this, education systems must prioritize vocational training, digital literacy, and critical thinking. Countries that have successfully escaped the middle-income trap – such as South Korea and Singapore – invested heavily in youth-centered education reforms that linked schools, universities, and industries, enabling continuous learning and innovation.
Economic Inclusion as a Growth Engine
Youth education is only impactful when it translates into productive employment and entrepreneurship. Yet, youth unemployment remains alarmingly high across developing regions. According to World Bank data, the global youth unemployment rate stands at around 14%, but exceeds 25% in the Middle East and North Africa and 20% in Sub-Saharan Africa. Furthermore, a significant proportion of youth – especially women – are not in education, employment, or training (NEET), with rates surpassing 30% in some developing economies.
This exclusion has both social and economic costs. It limits potential output, reduces tax revenue, and increases inequality and social tension. Inclusive economic systems, by contrast, generate more innovation, encourage entrepreneurship, and strengthen social cohesion. Policies promoting financial inclusion, youth entrepreneurship, and equitable access to credit are therefore vital to transform education into real economic participation.
The Link Between Education, Inclusion, and Structural Transformation
The capacity of developing countries to achieve structural transformation – shifting from agriculture to manufacturing and services – depends on how effectively they mobilize their youth. Without skilled, economically active youth, industrial upgrading and technological progress stagnate, locking economies into low-productivity activities.
Agénor and Canuto (2015) identify three key drivers to escape the middle-income trap: human capital, infrastructure, and knowledge spillovers. Youth education enhances all three. A well-educated youth population accelerates technological adoption, stimulates domestic demand through higher incomes, and supports innovation ecosystems. Economic inclusion, meanwhile, ensures that this human capital is effectively deployed within productive sectors. Youth education and economic inclusion are not peripheral social goals; they are central to economic transformation and sustainable development. Developing countries cannot rely solely on capital accumulation or external demand; they must invest in their youth as drivers of productivity, innovation, and social progress. A well-educated and economically included young generation is the key to escaping the middle-income trap, achieving structural transformation, and securing shared prosperity for the future.
