Self-reproducing Fiscal Restrictions in the Middle-Income Growth Trap

Abstract

The paper presents how each fiscal restriction generates the next one in the middle-income growth trap. In order to do this, we extend the Ramsey-model refined by Cass (1965) and Koopmans (1965) by introducing production function (24) into the model. The perturbation term in the square bracket represents a permanent negative technological shock, which can generate the emergence of the middle-income growth trap. As a result, we get the continuous-time dynamic system presented in Section 2. This system undergoes a bifurcation as the amount of the shock increases resulting in three singular points, which we can determine by using equations system (18) and (19). These singular points are illustrated in Figure 4 with some typical trajectories. Some of these trajectories converge towards the vertical axis; these are called hedonistic consumption-accumulation paths. Some other trajectories tend to the vertical axis. These are the abstinent consumption-accumulation paths. Furthermore, the figure depicts both saddle paths associated with the singular point characterized by the lower and higher equilibrium capital-effective labor ratio. The lower one represents the middle-income growth trap.