Re-Examining the Middle-Income Trap Hypothesis: What to Reject and What to Revive?

39 Pages Posted: 23 Dec 2015

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2015

Abstract

Why do some economies grow faster than others? Do economies in the middle-income range face especially difficult challenges producing consistent growth? Using a transition matrix analysis on decade-level growth rates, we find that the data clearly reject the idea that middle income economies either have a high absolute probability of being stuck where they are or have a higher relative probability of being stuck than the low- or high-income groups. In this sense, the notion of a “middle-income trap” is not supported by the data. However, economies in a given income range have different fundamentals and policies, and relative growth across economies may depend on these variables. Since development economists and practitioners have proposed a long list of variables that could affect growth, we employ a recently developed nonparametric classification technique (conditional inference tree and random forest) to decipher the relevance and relative importance of various growth determinants. We find that the list of variables that can help distinguish fast- and slow-growing economies is relatively short, and varies by income groups. For low-income economies, favorable demographics, macroeconomic stability, good education system, and good transport infrastructure appear to be the most important separating variables. For middle-income economies, favorable demographics, macroeconomic stability, sound global economic environment, and openness to foreign direct investment (FDI) appear to be the key discriminatory variables. This framework also yields conditions under which economies in the low- and middle-income range are trapped or even move backward.

Keywords: conditional inference regression tree, economic growth, growth determinants, infrastructure, middle-income trap

JEL Classification: C14, C30, F01, F60, O11, O43

Suggested Citation

Han, Xuehui and Wei, Shang-Jin, Re-Examining the Middle-Income Trap Hypothesis: What to Reject and What to Revive? (July 1, 2015). Asian Development Bank Economics Working Paper Series No. 436, Available at SSRN: https://ssrn.com/abstract=2707454 or http://dx.doi.org/10.2139/ssrn.2707454

Shang-Jin Wei

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

No contact information is available for Xuehui Han

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
42
Abstract Views
439
PlumX Metrics