External restriction, structural change and varieties of the middle income trap

The middle income trap (MIT) has been interpreted as a slowdown growth within middle income thresholds, consequence of a double limitation that prevents these countries competing via prices while they are also unable to conduct structural changes to compete on base of diversified and innovative products.

 

Post Keynesian approaches offer valuable contributions to understanding the demand side constraints in middle income economies, but their do not offer a suitable treatment of supply side in middle income countries with little diversified productive structures. On the other hand, previous works from Schumpeterian and economic complexity approach have shown different trajectories of MIT and no-MIT countries. However, these works do not consider the demand side constraints faced by these countries.

 

We aim to contribute to the understanding of this issue by delving on the interaction between demand side mechanisms (external restriction, measured as the growth response to export margin) and supply side characteristics (productive structure and complexity). First, we identify MIT countries using a relative measure of slowdown growth processes. Second, we use dynamic panel data to test both a direct effect of the economic complexity on growth and a demand side indirect effect related to the margin of the exports. Finally, to analyse heterogeneous trajectories of development we calculated the complexity and relatedness indicators. 

 

Estimations show that MIT countries growth depends on cyclical and not frequent demand conditions (e.g. price-booms). Mapping the development trajectory according to complexity indicators, we show that MIT countries cannot maintain increasing sophistication without an unrelated diversification process towards more connected products. While some Asian and Eastern European countries have escaped from MIT on base of increasing related and unrelated diversity, Latin American and North African countries seem to be in a kind of a random walk inside the MIT zone, whit trajectories of reducing the sophistication levels with constant relatedness.