Transitioning from low-income growth to high-income growth: is there a middle-income trap?

Abstract

Is there a ‘middle-income trap’? Theory suggests that the determinants of growth at low and high income levels may be different. If countries struggle to transition from growth strategies that are effective at low income levels to growth strategies that are effective at high income levels, they may stagnate at some middle-income level; this phenomenon can be thought of as a ‘middle-income trap.’ Defining income levels based on per capita gross domestic product relative to the United States, we do not find evidence for (unusual) stagnation at any particular middle-income level. However, we do find evidence that the determinants of growth at low and high income levels differ. These findings suggest a mixed conclusion: middle-income countries may need to change growth strategies in order to transition smoothly to high income growth strategies, but this can be done smoothly and does not imply the existence of a middle-income trap.