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

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  • Han , Xuehui

    (Asian Development Bank)

  • Wei, Shang-Jin

    (Asian Development Bank)

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.

Suggested Citation

  • Han , Xuehui & Wei, Shang-Jin, 2015. "Re-examining the Middle-Income Trap Hypothesis: What to Reject and What to Revive?," ADB Economics Working Paper Series 436, Asian Development Bank.
  • Handle: RePEc:ris:adbewp:0436
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    Cited by:

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    2. Glawe, Linda & Wagner, Helmut, 2020. "China in the middle-income trap?," China Economic Review, Elsevier, vol. 60(C).
    3. Lee, Minsoo & Han, Xuehui & Gaspar, Raymond & Alano, Emmanuel, 2018. "Deriving Macroeconomic Benefits from Public–Private Partnerships in Developing Asia," ADB Economics Working Paper Series 551, Asian Development Bank.
    4. Shang-Jin Wei & Zhuan Xie & Xiaobo Zhang, 2017. "From "Made in China" to "Innovated in China": Necessity, Prospect, and Challenges," Journal of Economic Perspectives, American Economic Association, vol. 31(1), pages 49-70, Winter.
    5. Joshua Aizenman & Yothin Jinjarak & Gemma Estrada & Shu Tian, 2018. "Flexibility of Adjustment to Shocks: Economic Growth and Volatility of Middle-Income Countries Before and After the Global Financial Crisis of 2008," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(5), pages 1112-1131, April.
    6. Gong, Gang, 2016. "Two Stages of Economic Development," ADBI Working Papers 628, Asian Development Bank Institute.
    7. Takatoshi Ito, 2017. "Growth Convergence and the Middle-Income Trap," Asian Development Review, MIT Press, vol. 34(1), pages 1-27, March.
    8. Erik Biørn & Xuehui Han, 2017. "Revisiting the FDI impact on GDP growth in errors-in-variables models: a panel data GMM analysis allowing for error memory," Empirical Economics, Springer, vol. 53(4), pages 1379-1398, December.
    9. Jungsuk Kim & Jungsoo Park, 2018. "The Role of Total Factor Productivity Growth in Middle-Income Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(6), pages 1264-1284, May.
    10. Mr. Prakash Loungani & Mr. Chris Papageorgiou & Manoj Atolia & Milton Marquis, 2018. "Rethinking Development Policy: Deindustrialization, Servicification and Structural Transformation," IMF Working Papers 2018/223, International Monetary Fund.

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    More about this item

    Keywords

    conditional inference regression tree; economic growth; growth determinants; infrastructure; middle-income trap;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • F01 - International Economics - - General - - - Global Outlook
    • F60 - International Economics - - Economic Impacts of Globalization - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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