The relationship between economic growth, industrialization, and middle income trap: An empirical analysis of growth models based on innovation of escape strategies

The vast majority of the middle income countries (MIC) in the world economy has been unable to increase their income from the level which they present to the high income countries group (HIC) for a long time. This phenomenon is called "middle income trap". One of the aspects of the middle-income trap is that the underlying reasons behind the middle-income trap and exiting strategies from the middle-income trap. In recent years, it has been witnessed that MIC countries which implemented export-oriented industrialization strategies have been experiencing significant difficulties. Kanchoochat and Intarakumnerd (2014) suggest countries that have fallen to middle-income trap due to problems in export-oriented industrialization strategies should increase product diversity in exported goods baskets in order to exit from the middle income trap. Export diversity which refers to the export composition, structure and diversification of a country as a whole is examined the effect of the exit from the middle income trap. According to the Robertson and Ye (2013) approach, country groups divided in to the two groups for the period of 1975-2015 as the countries in middle income trap (MIT) and countries in non-middle income trap (NMIT). In this framework, first, the relationship between export diversity and economic growth analyzed for MIT and NMIT countries over the years of 1995-2015. To determine export intensity, the Herfindahl-Hirschman Index (HHI), mostly used in related studies utilized in the analysis. The empirical results show that the impact of export diversity on economic growth is positive for MIT group and negative for the NMIT group. According to the results, policy makers in the MIT group should focus on increasing in export diversity and the NMIT group should focus on specializing in the production of exported goods. Following Cirera et al. (2015), Mbayi (2014), Bebczuk and Berettoni (2006), MIT and NMIT countries should implement innovation-based growth strategy, such as the diversification and specialization in exports. In this direction, in order to evaluate the effect of the innovation on the exit from the middle income trap, an innovation index is calculated taking into account 27 different innovation indicators for MIT and NMIT countries for the period of 1996-2015 using the Principal Component Analysis (PCA). In this framework, the relationship between innovation index and economic growth examined employing second generation Panel Data Analysis Methods and Dumitrescu and Hurlin (2012) Panel Causality Tests. The findings show that the contribution of innovation to economic growth much lower in MIT group than the NMIT group as expected. As a result of the analysis, there are several proposals for the exit from the middle income trap in the conclusion of the study.