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Capital account flows, consumption ratios and the middle‐income trap

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  • Daping Zhao
  • Sajid Anwar
  • W. Robert J. Alexander

Abstract

The existing literature suggests that it is important to understand the factors that may slow the transition of an economy from middle to high income. Many factors have been suggested as promoting or retarding economic growth, but little attention has been paid to the roles of the capital account and consumption ratio. Using panel regressions involving 48 countries over the 1950–2013 period as well as employing extreme bounds analysis, we find that foreign investment outflows are associated with a mature economy and that there is an optimal consumption ratio that must be surpassed to break out of middle‐income status. These findings are robust to an extreme bounds analysis incorporating a wide range of variables potentially related to growth performance.

Suggested Citation

  • Daping Zhao & Sajid Anwar & W. Robert J. Alexander, 2019. "Capital account flows, consumption ratios and the middle‐income trap," Review of Development Economics, Wiley Blackwell, vol. 23(3), pages 1459-1476, August.
    • Handle: RePEc:bla:rdevec:v:23:y:2019:i:3:p:1459-1476
    DOI: 10.1111/rode.12597
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    JEL classification:

    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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