Can the Development of Total Factor Productivity Help Middle-income Countries to Overcome the Middle-Income Trap?

Abstract

Falling into the middle-income trap is a common phenomenon experienced by most middle-income countries. The key characteristics of countries fallen into the middle-income trap is that their GDP per capita, instead of rising, is constant throughout the years. A dominant explanation to this problem is that middle-income countries’ total factor productivity is slowing, leading to slow technological development and application. This caused reduced international competitiveness of the developing countries in a sense that neither can they compete against low-income countries or other newly emerged middle-income countries over low level manufacturing as their workers’ wages had risen, nor can they compete against other developed economies over research and development as these middle-income countries lacked the TFP for improvements. Another school of thought asserted that middle-income countries struggling in the middle-income trap is mainly due to the extractive institutions and the misallocation of resources that result in an inefficient growth of TFPs. This study aims to utilize the historic researches and country-specific cases to examine how countries can escape such trap as well as policy implications to boost TFP and reform institutions. The findings of this research suggests that on one hand, middle-income countries should improve their education and research and development. However, TFP growths cannot be fully achieved without improvements in institution. So, on the other hand, they should allocate more resources to the domestic industries to achieve maximum TFP growths and to reduce reliance on multinational enterprises and foreign high-income countries to minimum the effect of extractive institutions.