Promising economic growth during the 2000s obfuscates the reality that Latin American countries are facing the acute threat of a middle-income trap. In a review of the literature on the middle-income trap I distinguish two approaches to the middle-income trap: one focuses mainly on the lack of structural change, the driving forces behind it, and the national and global context in which it unfolds; the other stresses growth slowdowns irrespective of time and place. I offer an extension of the structural change approach with an emphasis on the implications of the current globalization process. A productive capabilities-focused analysis reveals serious gaps in social and firm level capabilities in Latin America economies, though the magnitude differs across indicators and countries. The experiences of China and small latecomers trying to move from the middle to the high-income level (Chile, the Dominican Republic, Jordan, Ireland, and Singapore) suggest that a cohesive productive capabilities-focused development strategy holds out great promise for generating growth enhancing structural change. I conclude with a discussion of the key challenges Latin American countries have to overcome for the successful implementation of such a strategy to avoid the middle-income trap.

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