Growth Strategies to Avoid the Middle-Income Trap

33 Pages Posted: 28 Jan 2020

See all articles by Homi Kharas

Homi Kharas

The Brookings Institution

Indermit S. Gill

Duke University

Date Written: December 1, 2019

Abstract

Since we coined the term in 2006, “the middle income trap” has been the subject of scores of investigations. The investigators have generally tried to answer one of two questions: Is there evidence to support the existence of the trap, and what can middle-income countries do to spring free of it? The evidence in support of its existence has been mixed, and the policy discussions have—to put it bluntly—been largely unhelpful. But our original proposition was that of the possibility of a trap, not its inevitability. We were more convinced of the absence of a functional theory of economic growth for middle-income economies. Solow-Swan models that stressed capital accumulation and exogenous technological change did well to explain growth in low-income countries, and Lucas-Romer models emphasizing learning and endogenous technical change identified the main drivers of growth in advanced economies and explained why capital and knowhow did not easily flow to poorer economies. Neither class of models has, to our knowledge, satisfactorily explained successful transitions from one type of growth to the other. In this paper, we propose that Schumpeterian models proposed by Aghion, Howitt and others that stress creative destruction and institutional change could provide the analytical foundations for understanding middle-income economies better. We present evidence that is consistent with the main predictions of this approach, and discuss its key policy implications, especially effective competition regimes, mechanisms to maintain social mobility, and adept management of economic crises.

Keywords: middle income trap, economic growth, creative destruction

Suggested Citation

Kharas, Homi and Gill, Indermit S., Growth Strategies to Avoid the Middle-Income Trap (December 1, 2019). Duke Global Working Paper Series No. 17, January 2020, Available at SSRN: https://ssrn.com/abstract=3526261 or http://dx.doi.org/10.2139/ssrn.3526261

Homi Kharas (Contact Author)

The Brookings Institution ( email )

1775 Massachusetts Ave., NW
Washington, DC 20036
United States

HOME PAGE: http://www.brookings.edu/experts/kharash.aspx

Indermit S. Gill

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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