ROLE OF GOVERNANCE IN TRANSITION FROM MIDDLE-INCOME TRAP

Abstract

This study examines the role of governance in transitioning from middle-to high-income status in 20 countries. All the growth models indicate that the rule of law plays a significant role. Significant interactions among government effectiveness were observed in the post-transition period. A significant effect of political stability and corruption control and a significant interaction effect of government effectiveness were also observed in the transition to high income, using extended Cox regression. The probit regression revealed that the interaction of low government effectiveness, low insurance, heavy reliance on agriculture, high fertility rates, high inflation, limited foreign investment and excessive public debt posed obstacles to achieving high-income status. The weak rule of law, corruption control and regulatory quality also affected the failure of the 42 upper-middle-income countries to reach a high-income level.