The upgrade is “a highly encouraging milestone,” says Khuong Minh Vu, a professor at Singapore’s Lee Kuan Yew School of Public Policy. “It represents strong international recognition of the development progress achieved by the two economies.”

Yet it will also force both countries to confront the so-called middle income trap that has stalled many other developing countries, including several in Southeast Asia, on their path to upper-income status.

The World Bank determines a country’s economic status by its Gross National Income (GNI) per capita in the year before. The development bank classifies a country as upper-middle-income if its 2025 GNI per capita fell between $4,636 and $14,375.

The World Bank cited Vietnam’s export boom and the Philippines’ broad-based economic growth—which reflected gains across all major industries, rather than just a single-sector—to explain the reclassification. In 2025, Vietnam and the Philippines reported gross national income per capital of $4,970 and $4,850, respectively.

Vietnam’s economy grew by 8% last year, the highest among Southeast Asian countries. Fueled by trade diversions from the U.S.-China trade war, foreign direct investment into Vietnam surged, and the U.S. became the country’s largest export market.

Hanoi is targeting average GDP growth of 10% through to the end of the decade, and wants to rise to high-income status by 2045. The country has passed a series of economic reforms and is investing heavily in infrastructure, including a $67 billion high speed railway to shuttle travelers between Hanoi and Ho Chi Minh city within eight hours.

The Philippines grew by a more moderate 4.4% last year, after the country was battered by super typhoon Ragasa and an especially strong El Nino season, which resulted in around $24 million in losses nationwide.

“Despite global and domestic shocks, we have relentlessly pursued inclusive growth, strengthened fundamentals, and remained on track with our development agenda,” Arsenio Balisacan, the country’s economic planning secretary, said in a July 2 statement released following the World Bank’s reclassification.

Both countries are expected to continue growing this year. The ASEAN+3 Macroeconomic Research Office projects that Vietnam will grow by 7.4% and the Philippines by 5.3%. This trumps the organization’s prediction for ASEAN as a whole, which they expect will experience 4.6% growth. (Neighboring nations were also given more conservative estimates, with Singapore’s GDP growth estimated at 3.4%, and Thailand’s, at 1.7%, for the same time period.)

The middle income trap

Yet Khuong cautions that the upgrade also signifies “the beginning of a far more demanding phase of development.”

“Once countries enter the upper-middle-income group, sustaining rapid growth becomes exceptionally difficult,” he explains. After lifting themselves out of poverty, many countries fall into the “middle income trap”, where their economies stall after a period of rapid growth. These economies lose their cheap labor advantage, but don’t have the domestic innovation to create the high-value sectors to compete with wealthier nations.

Becoming an upper-middle-income country also cuts off development funding from organizations like the World Bank. “The main point is, the more you go up the ladder of their classification means you are more self-sufficient and able to supply your own needs and resources as a nation, including the fiscal part,” Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines, told Bloomberg.

(The World Bank is reportedly considering a plan to phase out lending to China, currently designated an upper-middle-income country, by 2031, after years of declining lending to the world’s second-largest economy.)

Breaking out of the middle-income trap is tough. Malaysia has been an upper-middle-income country for 37 years, Thailand for 15 years, and Indonesia for six. Since entering the group, all three nations have generally experienced long-term growth rates of less than 5%.

“For both Vietnam and the Philippines, the path to high-income status will require a decisive shift from factor-driven growth to productivity, innovation, and value creation-led development,” Khuong says. “For Vietnam in particular, effectively harnessing the AI revolution while capitalizing on an unprecedented wave of institutional reforms will be imperative to sustaining rapid growth and realizing its 2045 aspirations.”

On July 3, Vietnam reported that its economy grew 8.4% in the second quarter of the year, with 10.5% growth in industry and construction. Still, its economy will need to grow even faster in order to meet Hanoi’s full-year target of 10%. 

The Philippines will release its second-quarter GDP numbers in early August. Yet economists are preparing for a weak number, with those at the University of Asia and the Pacific forecasting just 2.6% growth for the previous quarter.