Abstract
We provide an outline for viewing the middle-income trap through the lens of the Schumpeterian growth paradigm, which places the notion of creative destruction at the center of economic growth. Economic growth and development come from the interplay between changes in economic structure and supporting institutions at different stages of development, i.e., structural transformation. We present a view of the process of economic development that takes the microlevel growth of firms and their competitive interaction as its building blocks. We discuss how institutional factors affect the evolution of these building blocks in understanding growth outcomes at different stages of development.
Highlights
This paper provides an outline for viewing the middle-income trap through the lens of the Schumpeterian growth paradigm, which places the notion of creative destruction at the center of economic growth
We argue that economic growth and development come from the complex interplay between changes in economic structure and supporting institutions at different stages of development, i.e., structural transformation
We present a view of the process of economic development that takes the microlevel growth of firms and their competitive interaction as its building blocks
Summary
This paper provides an outline for viewing the middle-income trap through the lens of the Schumpeterian growth paradigm, which places the notion of creative destruction at the center of economic growth. Firm size and firm age are more highly correlated in developed economies than in emerging economies This is related to the fact that small firms exit more frequently, but the ones that survive tend to grow faster than the average growth rate in the developed world (Aghion, Akcigit, and Howitt 2013). Hsieh and Klenow (2009) suggest that both India and the PRC could have increased their manufacturing output substantially if the relatively large firms in each country were able to expand at the cost of smaller firms in their industries Understanding why such reallocation does not happen in emerging economies is one of the key factors that explains how countries get stuck in the convergence trap
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