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There is No Middle Income Trap

Ha Minh Nguyen's picture

Concerns about the so-called “middle-income trap” have recently emerged among many middle-income countries, particularly after the term was coined in 2007 by two World Bank economists.  Worried that they may become “trapped” at the middle-income level, these countries are seeking a set of policies that can help them achieve strong and sustained growth and eventually help them join the league of high-income countries.

 In our recent paper, we try to shed some light on both issues. First, we do not find that countries are trapped at middle income. “Escapees” – countries that escaped the middle-income trap and obtained a per capita income higher than 50% of the U.S. level – tend to grow fast and consistently to high income, and do not stagnate at any point as a middle-income trap theory would suggest. In contrast, “non-escapees” tend to have low growth at all levels of income. In other words, while the existence of a middle income trap implies that growth rates systematically slow down as countries reach middle-income status, no such systematic slowdown is apparent in the data. Second, we provide some descriptive and econometric evidence for a different set of “fundamentals” that enable middle-income countries to grow faster than their peers. We find that faster transformation to industry, low inflation, stronger exports, and reduced inequality are associated with stronger growth.

Why Serbia Needs to Start its Export Engine

Dusko Vasiljevic's picture
Also available in: Српски

City square in Belgrade This is the story of a country located next to the largest and most connected economic block in the world, with fairly low labor costs and a relatively well educated workforce. You would expect that country to do well. However, the state of Serbia’s economy is problematic. Today, Serbia’s output is below what it was in the 1980s (in the time of Yugoslavia) and only half of its working age population has a job in the formal sector.

At the heart of Serbia’s problems are two interconnected imbalances, which explain why the country appears to be stuck on its path to prosperity. First, the economy is running on domestic consumption, which was fueled by financial inflows since 2000, while exports remain well below potential. Second, employment is driven by the state, not the private sector, with almost half (45%) of all formal jobs in the government or State Owned Enterprises.

Can Tax Reforms Help Create Jobs?

Sebastian Eckardt's picture

Europe faces a significant job challenge. At an average of 11 percent, unemployment remains stubbornly high while labor force participation, at 58 percent of the working age population, lags behind most other regions of the world. This means, that only every second person in working age currently has a paying job across the region. Addressing the job challenge requires multifaceted labor market policies. We argue however that reducing the tax burden on labor, which remains high across the region, holds the promise of improving labor market outcomes. Such tax cuts could especially target low-wage workers, which often face the highest marginal tax rates and very elastic labor demand and are therefore most likely to be priced out of the formal labor market.