The political economy of the middle-income trap: Implications for potential growth

Abstract

Why do some middle-income economies implement policies to achieve sustainable growth driven by innovation, while others fail to do so? In this paper, I propose a politico-economic explanation: innovation leads to the creative destruction of existing technology that can harm the interests of the pivotal policy maker. Therefore, the pivotal policy maker may implement policies that prevent innovation and harm potential growth in order to protect its own interests. Political institutions, which are endogenously determined by fundamentals of the economy such as state capacity, shape policy maker decisions. This paper studies the relationship between growth, policies, institutions, and fundamentals. Understanding the relationship allows for the design of more efficient aid programs to help the growth of middle-income economies, especially in the long run.