Abstract
This paper studies the existence of middle-income growth traps in a two-period overlapping generations model of economic growth with two types of labor and endogenous occupational choices. It also distinguishes between “basic” and “advanced” infrastructure, with the latter promoting design activities, and accounts for a knowledge network externality associated with product diversification. Multiple steady-state equilibria may emerge, one of them taking the form of a low-growth trap characterized by low productivity growth and a misallocation of talent—defined as a relatively low share of high-ability workers in design activities. Improved access to advanced infrastructure may help to escape from that trap. The implications of other public policies, including the protection of property rights and labor market reforms, are also discussed.
Highlights
Since the 1950s, rapid growth has allowed a significant number of countries to achieve middle-income status
The key result that we are able to establish is that if the marginal benefits associated with nonrival knowledge depends in a nonlinear fashion on the share of the population involved in design activities, as a result of a knowledge network effect, multiple equilibria may emerge, one of them being synonymous with a middle-income trap
We show that escaping from that trap may be achieved by a sufficiently large increase in investment in advanced infrastructure
Summary
Since the 1950s, rapid growth has allowed a significant number of countries to achieve middle-income status. This paper offers an alternative view on the cause of a middle-income trap It fundamentally agrees on productivity slowdowns as being a source of these traps, it differs from the existing literature in terms of the reasons why productivity growth may be constrained, and what type of public policies can be implemented to promote a broad-based innovation strategy and escape a middle-income trap. The key result that we are able to establish is that if the marginal benefits associated with nonrival (disembodied) knowledge depends in a nonlinear fashion on the share of the population involved in design activities (being high for a range of values for that share), as a result of a knowledge network effect, multiple equilibria may emerge, one of them (the lower-growth equilibrium) being synonymous with a middle-income trap.
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