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

Yuta Kato

MPRA Paper from University Library of Munich, Germany

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.

Keywords: middle income trap; industrial transition; public investment; fiscal policy (search for similar items in EconPapers)
JEL-codes: E22 E62 H54 O11 O41 (search for similar items in EconPapers)
Date: 2025-05-15
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