At the Threshold: The Increasing Relevance of the Middle-Income Trap

IMF Working Papers, April 26, 2024

Source details

Canonical URL: At the Threshold: The Increasing Relevance of the Middle-Income Trap

We investigate the existence of a middle-income trap using finite state Markov chains, constant growth thresholds, and mean passage times.
As well as studying output per head, we examine the dynamics of its proximate determinants: TFP, the capital-output ratio, and human capital.
We find upwards mobility for the capital-output ratio and human capital, but not for relative TFP.
The lack of upwards mobility in relative TFP, at least from an intermediate level, suggests that escaping the middle-income category can take many years, and such traps may become increasingly apparent in the years to come.

Analytical tools: finite state Markov chains, constant growth thresholds, mean passage times.
Variables analyzed: output per head, total factor productivity (TFP), capital-output ratio, human capital.

Differential mobility across proximate determinants implies heterogeneous obstacles to convergence:
- Capital-output ratio: evidence of upwards mobility.
- Human capital: evidence of upwards mobility.
- Relative TFP: no evidence of upwards mobility from intermediate levels.
The persistence (mean passage times) associated with relative TFP can prolong durations in the middle-income category, increasing the relevance of the middle-income trap for countries at intermediate TFP levels.