An Empirical Analysis on “Middle Income Trap” and Accumulation of Human Capital

Abstract

A “middle income trap” broadly refers to a situation in which a developing economy succeeds in achieving a middle-income level but fails to reach a high-income level for a sustained period of time due to a slowdown in growth rates. Debates on the causes of such trap point to varying factors including: lack of human capital accumulation; weak institutions, and lack of technological innovation leading to a failure of upgrading industrial structure suitable for a high-income level. This paper focuses on accumulation of human capital as one of the determining factors for escaping the trap and investigates how the economies that are stuck at a middle-income level and those that succeed in achieving a high-income level differ in terms of human capital conditions. Two main results are obtained. First, those that are stuck in the trap are characterized by a low ratio of population completing secondary education or above compared with those that succeeded in achieving a high-income level. This implies that human capital accumulation equivalent to secondary education or higher is required for reaching high-income level. Second, regression analyses using cross-section data found that the economies that succeeded in achieving high-income level had attained relatively higher education among their populations even as they entered a middle-income level. Consequently, it is important that the economies accumulate adequate human capital beyond secondary education level to escape the middle-income trap.