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Abstract
Do middle-income countries face difficult challenges producing consistent growth? Using transition matrix analysis, we can easily reject any unconditional notion of a 'middle-income trap' in the data. However, countries have different fundamentals and policies. Using a non-parametric classification technique, we search for variables that separate fast- and slow-growing countries. For middle-income countries, a relatively large working age population, sex ratio imbalance, macroeconomic stability, and financial development appear to be the key discriminatory variables. We do the same exercise for low-income countries. This framework yields conditions under which countries in the low- and middle-income ranges are trapped or even move backward.
Highlights
Are low-income economies likely stuck in a poverty trap? Is a typical economy in the middle-income group likely to be trapped in middle-income status forever, unable to attain a high absolute level of income? Perhaps more importantly, within any given income group, why do some economies grow faster than others? Are there clear and quantifiable indicators that will separate fast-growing economies from slow-growing ones? These are the questions that this paper will investigate
To understand the roles of these fundamentals and policies, in the second part, we introduce a nonparametric classification technique and examine which proposed determinants are most relevant in separating fast- and slow-growing economies, and how these separating variables may differ across income groups
Infrastructure, macroeconomic management, and openness to foreign direct investment (FDI) are especially important for growth
Summary
Are low-income economies likely stuck in a poverty trap? Is a typical economy in the middle-income group likely to be trapped in middle-income status forever, unable to attain a high absolute level of income? Perhaps more importantly, within any given income group, why do some economies grow faster than others? Are there clear and quantifiable indicators that will separate fast-growing economies from slow-growing ones? These are the questions that this paper will investigate. Instead of focusing solely on the unconditional income transition or economic growth slowdown (as did, for example, Eichengreen, Park, and Shin [2013]; Felipe, Kumar, and Galope [2014]; and Im and Rosenblatt [2013]), we examine what fundamentals and policies can separate fast- and slow-growing economies in a given income group. All economies of the Asia and Pacific (in red dots) experienced positive growth rates, with a majority of them managing to move out of low-income status to at least the lower-middle-income group. We probe it further by looking at the short-term transition using a shorter time span starting from 1980. Some Asian economies managed to move up to the higher income group even in relative terms
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