An empirical approach to understanding the lower-middle and upper-middle income traps

Abstract

Purpose The purpose of this paper is to investigate the factors that are significant in contributing to the per capita income growth of countries that are experiencing or have experienced the lower-middle and upper-middle income traps. Design/methodology/approach The study comprises 85 countries over the period 1960 to 2017 spanning across three income groups: lower-middle, upper-middle and high. A panel data structure was used to run a fixed effect and random effect estimation on three models of income groups. The Hausman specification test, which was used for further statistical fitness, confirmed the appropriateness of fixed effect over the random in explaining the estimation of factor variables. Findings The results show that unemployment is a pervasive problem that negatively affect countries at all income levels. Foreign direct investment and population of dependents are associated with economic progression of countries that have experienced or are experiencing the lower-middle income trap. Furthermore, rising income inequality and foreign aid assistance are detrimental to countries that have experienced or are experiencing the upper-middle income trap. Moreover, income inequality, disproportionate urban population and rising dependent population are damaging for high income countries that never experienced any of the middle-income traps. Conversely, openness to trade, inflation and exchange rate volatility had limited capacity in explaining growth dynamics. Research limitations/implications This study could not incorporate geopolitical, demographic, geographical and other such exogenous factors, which could have episodes of influences on the economic development of countries. These were outside the study's realm of quantitative analysis. Originality/value This paper contributes to existing literature by providing an empirical cross-sectional comparative analysis of countries belonging to different income groups. The prevailing literature lacks such a cross-tabulated presentation of factors affecting countries that avoided the middle income trap and those that could not.