The Middle-Income Health Trap by Tom Achoki & Walter O. Ochieng

Many countries that graduate from low- to middle-income status soon find themselves stuck in the position of being too rich to qualify for aid, too poor to secure reliable market-based financing, and too indebted to expand public-health spending. But it doesn’t have to be this way.

NAIROBI—In the lexicon of development, few words sound as reassuring as “graduation,” which suggests progress past critical milestones and an escape from dependency. In global health, however, graduation increasingly creates a trap. When a country crosses the World Bank’s threshold from low- to middle-income status, it is deemed too rich to qualify for aid, even though it is not yet rich enough to cover its health costs.

The implications of reaching this milestone (which is based on gross national income per capita) are therefore profound. Achieving middle-income status means that concessional loans will increasingly have to be replaced by market-rate borrowing, and that grants will shrink or disappear as global health programs wind down.

But pathogens do not recognize income thresholds, and the resources available to health systems do not necessarily grow smoothly with GDP. In many countries, disease burdens remain stubbornly high long after aid eligibility has expired. If there is any lag in the growth of the government’s fiscal capacity, the result will be a widening gap between health needs and health financing. Neither markets nor donors are well equipped to fill it.

This is a massive problem. Middle-income countries now account for over 70% of the world’s poor, for most deaths from tuberculosis, and for a still-high share of deaths from HIV and non-communicable diseases. Yet they receive a shrinking share of global health assistance, which is increasingly concentrated in a small number of fragile, low-income states.

If graduation to middle-income status reliably coincided with robust tax systems, deep capital markets, and comprehensive insurance schemes, it would make sense for recent grads to fend for themselves. But many middle-income countries face rising debt-service costs and collect less than 15% of GDP in taxes, owing to their large informal sectors. They may be richer on paper, but their health ministries are often poorer in practice.

When donor-funded programs supported by institutions such as Gavi or the Global Fund taper off, governments are expected to assume full financial responsibility for vaccines, antiretrovirals, and malaria control, often within the space of a few budget cycles. But such costs are often large, recurrent, and have low visibility, which weakens political incentives to prioritize them over other spending.

Consider Romania. Following its entry into the European Union in 2007, its economy started to grow, creating a key condition for the withdrawal of Global Fund support for HIV preventative services in June 2010. When the government failed to cover this new funding gap, harm-reduction services collapsed, and the country experienced a resurgence of infections among vulnerable populations.

Debt compounds the problem. When countries graduate, external financing shifts from concessional to commercial terms just as aid flows recede. Yet the private lenders that capitalize on the situation by charging high interest rates (usually citing the economic volatility that characterizes most newly graduated countries) have no appetite to renegotiate terms when economic headwinds emerge. In the end, the fiscal space that departing donors assumed would materialize is consumed by interest payments.

These are not temporary adjustments. Many middle-income countries find themselves stuck indefinitely in the position of being too rich for aid, too poor for markets, and too indebted to expand public spending. When that happens, the only available adjustment is to cut back on health and other services.

Many are then told that the private sector will offer the solutions they need. Newly graduated countries are expected to attract investment, expand insurance markets, and leverage blended finance. But even when private capital is available, it tends to flow to profitable areas such as urban hospitals, diagnostics, and specialist care. High-impact preventive services, primary care, and other public-health functions that generate lower financial returns are left to the state. The result is often a two-tier system that widens inequality and stalls progress toward improving population health.

To be sure, exit strategies are now typically accompanied by technical assistance and bridge financing, with “transition planning” becoming the latest buzzword. But the underlying logic remains unchanged: graduation is treated as an administrative event rather than a political and fiscal one. But income per capita is a poor proxy for state capacity. A country can grow rapidly in GDP terms while remaining unable to raise revenue, regulate markets, or sustain complex delivery systems. Health financing depends on all three capabilities.

The irony is that success in global health often creates the conditions for failure. Better child survival rates and disease control contribute to population growth, urbanization, and epidemiological transition (when the leading causes of death shift from infectious diseases to chronic, degenerative conditions). Health needs become more complex and more expensive just as external support wanes. Faced with funding gaps, governments and donors often reach for guarantees, loans, and public-private partnerships. But these often deepen fiscal exposure and shift risk forward in time. Rather than an exit from dependency, graduation begins a more fragile equilibrium, sustained by borrowing, cross-subsidization, and quiet rationing.

There are alternatives. Donor organizations should adopt pragmatic eligibility criteria that are more attuned to countries’ disease burdens and fiscal capacity than to projected income status. At the same time, global health institutions should offer longer, more predictable transition periods to account for the recurrent costs related to health-care delivery. Recipient countries should advocate for debt relief to be integrated into health transitions, rather than treated as a separate macroeconomic issue. In return, they should commit to improving tax-collection systems and efficiently allocate a significant portion of those resources to proven health programs.

Graduation to middle-income status is supposed to signal success. When it comes to public health, it must not mark the moment when progress slows, systems strain, and hard-won gains begin to erode.