The Role of Total Factor Productivity Growth in Middle-Income Countries

Abstract

We examine the importance of total factor productivity (TFP) growth in middle-income countries based on cross-country panel data for the period 1975–2014. We find that TFP growth contributed significantly to a country’s upward transition from middle-income to high-income country group. The TFP growth model reveals that the catch-up effect, human capital, smaller population, weak currency, and research and development (R&D) growth are significant sources of TFP growth. We do not find a systematic difference in the TFP growth models for middle-income countries. In analyzing the role of factors influencing TFP growth at different income stages, strengthening innovative activities and building innovative capacities are important in overcoming the challenges that middle-income countries face when transitioning to the high-income group. Governments of upper-middle-income countries need to initiate reform to motivate innovation by optimizing national R&D systems, and redesigning the educational system to target promoting innovation.

Keywords: economic growth, human capital, middle-income countries, research and development, total factor productivity

JEL Classification: O47, O57