Mission Impossible? Challenges for Countries in Escaping the Middle-Income Trap

Why do some economies manage to escape the middle-income trap while others remain trapped? To answer this question, we develop an overlapping-generations model in which economies can choose between a primitive technology subject to diminishing returns and an advanced technology capable of sustaining long-run growth. Adoption becomes viable only when human capital, capital-use efficiency, and demographic conditions are sufficiently favorable; otherwise, the economy may converge to a middle-income steady state from which escape is nearly impossible. We test these predictions using panel data for 185 economies over 1950–2023. The results show that higher human capital and stronger institutional quality are robustly associated with a greater likelihood of escape, whereas aging becomes an obstacle primarily for economies that grow old before achieving high-income status. Additional evidence based on economic complexity and imports of manufactures and machinery supports the model’s central technology-adoption mechanism which determines whether an economy successfully completes the transition out of middle-income status.