The potential role of aid in escaping the middle-income trap

Abstract

Recently, the middle-income trap (MIT) has gained considerable attention – besides European countries, several African, Asian, and Latin-American developing countries are also affected. Many countries have remained in the middle-income bracket for decades, whilst only a few have advanced to high-income status. Felipe et al. in 2012 showed that an annual growth rate of at least 3.5 and 4.7% sustained for a period of 14 and 28 years is required respectively for upper-middle-income and lower-middle-income countries to escape the MIT. Economic growth is influenced by several factors including foreign aid received. Thus, in this study, we aim to answer the question of how aid affects economic growth in middle-income countries and whether aid may contribute to escaping the MIT. Focusing on the countries that have remained in the middle-income group between 1990 and 2017, our analysis confirms that aid contributes to economic growth; however, the impact is positive in the upper-middle-income countries and negative in the lower-middle-income countries. Aid is therefore, likely to be more effective in helping the upper-middle income countries to escape the MIT but not the lower-middle income countries.