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Escaping the Middle-income Trap: The Role of Strategic Public Investment and Industrial Structure Change

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  • Kato, Yuta

Abstract

This article examines how the middle-income trap occurs in developing economies, and how fiscal policies and development strategies can help them avoid or escape this development challenge. Using a dual-sector model with public investment in infrastructure and education, we analyze how different policy choices affect growth trajectories and development outcomes. The findings suggest that appropriate fiscal policies and investment strategies are crucial for avoiding development traps and achieving sustainable economic growth. However, insufficient infrastructure investments and a high tax rate can lead to the stagnation of industrialization and economic development, potentially leading to a middle-income trap. The model also reveals an important relationship between poverty and middle-income traps, showing that even after escaping initial poverty through external assistance, countries need appropriate fiscal policies to achieve sustainable development.

Suggested Citation

  • Kato, Yuta, 2025. "Escaping the Middle-income Trap: The Role of Strategic Public Investment and Industrial Structure Change," MPRA Paper 124758, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:124758
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    More about this item

    Keywords

    middle income trap; industrial transition; public investment; fiscal policy;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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