Is Trade a Solution to the Trap? : An empirical study on the effects of international import and export on a country’s risk of being caught in the middle-income trap

Abstract: The middle-income trap (MIT) theory has gained popularity amongst policy makers looking to avoid the trap since it first arose in 2005. Multiple studies discuss the possible existence of the trap, what it is caused by and what possible solutions it might have. We use the empirical definition of the trap presented by Aiyar et al. (2018) to test for the middle-income trap in order to analyze the effect that international trade, defined by import and export, may have on the MIT. The Arellano-Bond estimator and random-effects probit model are used on data from the Penn World Data Table 9.1 to carry out this investigation. Based on our dataset we generate results slowdowns that give evidence to the MIT and find that import has a negative effect on a country’s risk of landing in an MIT whereas export has a positive effect on the risk.