The Validity of the Convergence Hypothesis within the Framework of the Middle Income Trap: New Evidence from the Fourier Panel KPSS Test

Abstract

This study aims to test whether the convergence hypothesis is valid in the framework of the middle-income trap for the period 1960-2019 and 47 middle-income countries. Pesaran’s (2007) CADF and CIPS tests, the structural break test, Carrion-i-Silvestre, Barrio-Castro and López-Bazo (2005) panel unit root test (PANKPSS), and, the Fourier Panel KPSS (FKPSS) stationarity (as suggested by Nazlioglu and Karul (2017)) tests were used in the empirical analysis. Accordingly, the convergence hypothesis is supported by the results of both the PANKPSS and FKPSS unit root tests. Given the panel CIPS unit root test result, the convergence hypothesis is not valid. As a common finding, the convergence hypothesis was valid for only 4 countries (Argentina, Indonesia, Iran Islamic Rep., and Lesotho). Moreover, the present study revealed that countries under the convergence hypothesis can overcome the middle-income trap, while diverging countries will remain in it.

JEL: O11, F43, O47, C23.