Escaping the Middle-income Trap: The Role of Strategic Public Investment and Industrial Structure Change

Kato, Yuta (2025): Escaping the Middle-income Trap: The Role of Strategic Public Investment and Industrial Structure Change.

Abstract

This article examines how the middle-income trap occurs in developing economies, and how fiscal policies and development strategies can help them avoid or escape this development challenge. Using a dual-sector model with public investment in infrastructure and education, we analyze how different policy choices affect growth trajectories and development outcomes. The findings suggest that appropriate fiscal policies and investment strategies are crucial for avoiding development traps and achieving sustainable economic growth. However, insufficient infrastructure investments and a high tax rate can lead to the stagnation of industrialization and economic development, potentially leading to a middle-income trap. The model also reveals an important relationship between poverty and middle-income traps, showing that even after escaping initial poverty through external assistance, countries need appropriate fiscal policies to achieve sustainable development.

• Item Type: MPRA Paper
• Language: English
• Keywords: middle income trap; industrial transition; public investment; fiscal policy
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H5 - National Government Expenditures and Related Policies > H54 - Infrastructures ; Other Public Investment and Capital Stock; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

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