Avoiding the Middle Income Trap: Evidence and Examination of Few Countries

Abstract

The middle income trap is a spectre looming up in front of countries who have performed well to rise up to middle income level from the lower income level, and are hoping for a quick admission to upper income echelons. Unfortunately, the trap seems unavoidable for many middle income nations, as seen poignantly in the case of Argentina and even Brazil. This paper tries to pinpoint the performance parameters that distinguish countries such as Malaysia and Chile who have been successful in avoiding getting mired in the trap – and may be now even viewing it nonchalantly as just a mirage appearing during the development process. The parameters identified as probable positive forces include the pillars of the Global Competitive Index, in addition to the usual suspects appearing in economic growth theory and estimations. Estimation of coefficients was carried by cross-country regressions using a sample of seventy upper and lower income nations. ICT adaptation, innovative capabilities, health standards, and openness as represented by FDI and export ratios to GDP were identified as parameters identified as important in closing the per capita income gap towards high income nations.