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Structural Change, Industrial Upgrading, and Middle-Income Trap

Author

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  • Justin Yifu Lin

    (Peking University)

  • Yong Wang

    (Peking University)

Abstract

Motivated by several stylized facts about middle-income trap, we develop a simple multi-sector general equilibrium model of structural change and industrial upgrading. The model features the distinction between production service and consumption service and the input-output linkages between different sectors. We show that the role of production service is asymmetric at different levels of development. Whereas an underdeveloped sector of production service is not a binding obstacle for development (sometimes even beneficial) at an early stage of development, it becomes a key bottleneck when the economy reaches a middle-income status. To escape the middle-income trap, government intervention is needed to prevent premature de-industrialization and facilitate beneficial industrial upgrading. Moreover, it also requires a timely reduction of entry barrier to the production service and improvement in its productivity. These theoretical findings are shown to be consistent with the stylized facts and also useful to China. The analysis provides a justification for the government’s strategic use of industrial policies to avoid middle-income trap.

Suggested Citation

  • Justin Yifu Lin & Yong Wang, 2020. "Structural Change, Industrial Upgrading, and Middle-Income Trap," Journal of Industry, Competition and Trade, Springer, vol. 20(2), pages 359-394, June.
  • Handle: RePEc:kap:jincot:v:20:y:2020:i:2:d:10.1007_s10842-019-00330-3
    DOI: 10.1007/s10842-019-00330-3
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    2. Keun Lee, 2024. "Economics of technology cycle time (TCT) and catch-up by latecomers: Micro-, meso-, and macro-analyses and implications," Journal of Evolutionary Economics, Springer, vol. 34(2), pages 319-349, April.
    3. Mariko WATANABE, 2025. "Industrial Policy and International Commercial Rules: How to deal with China’s overcapacity phenomenon (Japanese)," Discussion Papers (Japanese) 25003, Research Institute of Economy, Trade and Industry (RIETI).
    4. Deepak Nayyar & Gaurav Nayyar, 2024. "Made in India: Industrial Policy in a Changing World," Journal of Industry, Competition and Trade, Springer, vol. 24(1), pages 1-27, December.
    5. Han, Junhee & Lee, Keun, 2022. "Heterogeneous technology and specialization for economic growth beyond the middle-income stage," Economic Modelling, Elsevier, vol. 112(C).

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    More about this item

    Keywords

    Structural change; Industrial policies; Middle-income trap; Chinese economy; Economic growth;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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