Growth Slowdowns and Middle Income Trap

Middle income trap is the phenomenon of rapidly growing economies which experience sudden stops and ultimately led to stagnation at middle income, failing to rank among the high income ones. The main reasons proposed by the literature are the inability to compete with low-wage exporters and the lack of knowledge and skills to link growth with high productivity activities. Reaching this point, middle income countries have to invest on key sectors of the economy in order to create long-lasting conditions that can sustain high growth and reap the benefits that scale economies have to offer. There are two main approaches in Middle Income Trap literature, Growth Slowdowns and Structural Change & Capability Convergence. This thesis is following the former one, assessing Middle Income Trap as a phenomenon fitted into the neo-classical model. Through this specific approach the current paper is devoted in validating the existence of Middle Income Trap in the Latin American continent – including all Latin American & Caribbean countries. Exploiting Eichengreen et al (2011, 2013) methodology and adjusting it in order to fit for the Latin American case, this study identifies numerous slowdowns episodes from the 1960 to 2010. Therefore, using a probit model several indicators are examined to identify which are the specific factors that raise, or, lessen the likelihood of growth slowdown episodes and consecutively drive Latin American countries into stagnation.