Factors effecting output in the middle income trap: An analysis on low middle income and high middle income countries

Middle income trap (MIT) has been one of the topics that have been of interest to researchers recent in economic literature. Although there is no complete definition in the literature, the middle income trap can be difficult for countries to transition from effective growth strategies at low income levels to strategies at high income levels and become stagnant at middle income levels. If the countries that fall into the middle income trap fail to move to the higher income group, they are exposed to the competition of the countries that fall behind and lose their markets to these countries and get worse economically. In this context, it is very important that countries rise to upper income levels in their development processes without being caught in the middle income trap. Since it is important for countries not to be caught in the middle income trap, it is also important to identify the factors that are effective for them not to be caught in this trap. Research in this area has been found that R & D, education spending and foreign direct investment are often important factors for countries not to fall into the middle income trap or to get out of this trap. In this study, the factors that are effective to avoid or exit the middle income trap were tried to be identified. The study analyzed data from two different groups of countries with middle income levels between 1995 and 2017, unlike the literature. In the last five years GDP per capita by purchasing power parity over the past five years the ratio of the US to GDP per capita countries with less than 40% were analyzed separately as low-middle income countries and countries with greater than 40% as high-middle income countries. As a result of the study, it was determined that foreign direct investments, fixed capital investments and domestic consumption expenditures in the group of low-middle income countries were effective for Exiting the middle income trap. In the group of high-middle income countries, foreign direct investments, fixed capital investments and gross domestic savings were found to be effective. In this study, there is no study examining whether domestic consumption expenditures and gross domestic savings variables are effective in coming out of the middle income trap. As a result of the study, it can be said that low-middle-income countries can increase fixed capital investments in the early stages of their development, attract foreign direct investments, and grow based on domestic consumption. However, it can be stated that it is important to increase fixed capital investments, to attract foreign direct investment and to increase their domestic savings in order to move to higher income levels without falling into the middle income trap after the country has passed a certain stage. Keywords: Middle Income Trap, Horizontal Section Dependence, CADF, ECM