The Path to Overcoming the Middle‐Income Trap

ABSTRACT An interesting question is whether middle‐income nations and areas will be stuck in the middle‐income trap inevitably? If the answer is positive, how to overcome such trap? To shed light on this question, we introduce a nonlinear time‐varying factor model to conduct a convergence test for 136 nations and areas classified into three convergence clubs during 1980–2024. We further investigate the upgrade process of total factor productivity (TFP). We find the middle‐income trap to be an unstable state in the long run. Transitional convergence of middle‐income nations and areas and convergence club formation are conditional. TFP plays a key role in forming convergence clubs. While technology introduction and imitation and technology spillover contribute to the upgrade process of TFP, medium‐income nations and areas aiming to transition to high‐income levels must pay close attention to the indispensable effect of independent innovation on the upgrade process of TFP, which provides a solid foundation for overcoming the middle‐income trap.