AVOIDING MIDDLE INCOME GROWTH TRAP THROUGH INNOVATION

The previous paper presented the analysis of binding constraints on growth [22]. In this paper we extend diagnostics to problems of longrun growth slowdown and Middle Income 6rowth Trap (MI6T). Countries caught in the MI6T are unable to compete with low-income, lowwage economies in manufactured exports and also unable to compete with advanced economies in high-skill innovation goods. The root cause of the MI6T is failure to shift out of lower middle (LMI) income to upper middle income (UMI) growth strategy. The former is designed to support supply-oriented capital accumulation and labor relocation from agriculture to higher productivity industry, while the latter seeks to support skill (knowledge) intensive manufacturing activities ("moving up the value chain") and business services. LMI strategies embrace diversification and simple export expansion, while UMI strategies foster specialization and export growth based on innovations (new processes) new products, new markets, and highly-educated labor force; they also promote a blend of competition and public support in guiding the "discovery processthat leads to "smart specializationand innovation based growth. Zence, MI6T can best be avoided through strong research and innovation systems, which critically depend on: (i) Research excellence, including scientific collaboration, involvement of diaspora, and merit based financing and incentive systems; (ii) Modern research infrastructure and other innovation inputs; (iii) Closer collaboration between research organizations and enterprises, better technology transfer offices, protection of patents, trademarks and other industrial property rights (IPR); (iv) Better financing at all stages of the innovation process, especially early stages where existing financial markets have limited knowledge and instruments; and (v) 8etter governance of the R&I process and financing.