Escaping the Middle-Income Trap by Moving Up the Technology Ladder?

The middle-­income trap is the phenomenon of middle-­income countries failing to graduate into the ranks of high-income nations after previous rapid growth. Their stagnation can be explained by a competitive squeeze between low-­wage producers on one side, and highly skilled, fast-­moving innovators on the other. Accordingly, it is proposed that moving up the technology ladder, mastering innovation and increasing value added can regain competiveness and thereby offer a way out. This paper is interested in the robustness and validity of this claim. Therefore an empirical investigation of the relationship between economic upgrading and middle-­income growth rates is presented. More specifically, can increasing export complexity indeed serve as a way to escape or avoid the middle-­income trap? Using a panel of current and former middle-­income countries and trade data induced proxies for export complexity it is found that upgrading of the export basket does not significantly predict middle-­income growth. The results hold for several robustness checks including segmenting the dataset in different subgroups. Noted however should be that due to global value chains and fragmented production, measuring actual value added from trade data is found to be very challenging. Insights stemming from alternatives measures of complexity, perhaps better able to capture value-­added, are therefore welcome contributions.