Towards Sustainable Development: Revisiting the Middle-Income Trap Hypothesis for the Southern Common Market Countries

One of the Sustainable Development Goals (SDGs) of the United Nations is to promote, sustained, inclusive, and sustainable economic growth. However, it is observed that many countries struggle to move up from the middle-income to high-income level, which refers to the middle-income trap (MIT). In this paper, we test the MIT hypothesis using a novel unit root test of Gómez-Zaldívar et al. (2013) across the Southern Common Market (MECOSUR) countries. To do so, we follow a different path from the existing literature and use a novel unit root testing strategy. We first test the significance of the trend term and then examine the unit root properties of the series by allowing multiple structural breaks according to the existence/non-existence of the trend term. Our results provide evidence of stationarity for Brazil, Colombia, Ecuador, and Peru, indicating that these four MERCOSUR countries are in MIT.


Introduction
The concept of sustainable development was defined in detail by the United Nations World Commission in its 1987 report entitled Our Common Future. In the report, sustainable development is defined as a development that meets the demands of the present without compromising future generations to meet their own needs (WCED, 1987). However, there are several definitions of the concept (Elliott, 2013). For example, according to Turner (1988), an optimal (sustainable growth) strategy would attempt to maintain an acceptable rate of increase in real per capita incomes without depleting the national capital asset stock or the natural environmental asset stock. There are many dimensions of sustainable development. Pawłowski (2008Pawłowski ( , 2011 argues that sustainable development has moral, ecological, social, economic, legal, technical, and political dimensions. In 2015, the United Nations adopted the 2030 Agenda for Sustainable Development, which includes 17 Sustainable Development Goals (SDGs) with 169 targets, to end poverty and hunger, protect the world from degradation, and maintain peace and prosperity. Regarding the economic dimension of sustainable development, one of the SDGs is to promote sustained, inclusive, and sustainable economic growth. However, it is observed that many countries fail to achieve sustainable growth because most of them struggle to move up from middle-income to high-income level which creates obstacles to sustainable long-term growth (Leven, 2019). The middle-income trap (MIT) refers to the barriers to sustainable growth encountered by some developing middle-income countries. It is obvious that some middle-income countries may not achieve sustained growth and not be able to move up to the high-income level. For example, in 1987, while Chile was a lower-middle-income country, Argentina was an upper-middleincome country according to the World Bank income classification. However, as of 2021, Argentina is still an upper-middle-income country, whereas Chile moved to high-income status in 2012. The term MIT was introduced by Gill and Kharas (2007), and since then, it has become one of the most controversial and discussed topics in economic growth literature. The MIT typically refers to countries that reach a middle-income level after experiencing a rapid growth period but have not been able to reach the high-income level (Glawe and Wagner, 2020). The MIT concept is also explained within the framework of comparative advantage. Middle-income countries have difficulty competing with both low-income countries that have a comparative advantage in labour-intensive sectors and rich countries with advanced technology and innovation-based growth, and they are caught in MIT (Gill and Kharas, 2007). Although there are some mathematical models explaining (e.g., Agenor and Canuto, 2015; Dabús et al., 2016) the MIT concept, there is no specific theory of MIT. The MIT hypothesis can be explained within the context of neoclassical growth theory and the Lewis-type development model (Ursavaş and Sarıbaş, 2020). The neoclassical steady-state equilibrium, in which per capita income is constant over time due to decreasing returns on capital, can be defined as the MIT. The MIT concept can also be explained within a Lewis-type development model. During the initial stages of the development process, the low-income country can compete internationally by producing labour-intensive and low-cost products using imported technologies. These low-income countries gain significant productivity through the relocation of workers from low-productivity agricultural sectors to high-productivity industries. However, when reaching the middle-income level, the labour supply turns into a labour shortage, and wages begin to rise, resulting in a decline in competitiveness. Eventually, due to the growth slowdown, countries that become less competitive in global markets fall into MIT ( 2011), which suggests that a growth slowdown occurs if the following three conditions are satisfied: (i) a seven-year average GDP per capita growth rate should be at least 3.5% before the slowdown; (ii) the difference between the seven-year average growth rate before and after the growth slowdown should be greater than at least two percentage points; (iii) the GDP per capita should be higher than $10,000 in the year of a growth slowdown. The other most used empirical definition of MIT is proposed by Robertson and Ye (2013), who introduced a statistical definition of MIT based on time-series analysis. According to Robertson and Ye (2013)'s approach, the following two conditions must be fulfilled: the expected value, or long-term forecast, country i's per capita income relative to the reference country is time-invariant and lies within the middle-income band. This definition allows us to determine whether countries are in MIT by checking the stationary of the related series. Therefore, numerous studies have tested the MIT hypothesis for different samples using various unit root tests after the introduction of Robertson and Ye (2013) methodology. Within this context, following the method of Roberton and Ye (2013), this paper tests the MIT hypothesis for MERCOSUR countries using a novel unit root test of Gómez-Zaldívar et al. (2013). The Southern Common Market (MERCOSUR) was founded in 1911 by four South American countries: Argentina, Brazil, Paraguay, and Uruguay. Venezuela last attended as a full member country in 2012; then, its membership was suspended indefinitely in 2016. Associated members of the organization are Bolivia, Chile, Colombia, Ecuador, Guyana, Peru, and Suriname. The union's primary objective has been to promote a common space that generates business and investment opportunities through the competitive integration of national economies into the global market. It encompasses nearly 15 million square kilometers of territory with a population of more than 295 million. This territory includes a vast array of natural wealth and treasures, such as water, biodiversity, energy resources, and fertile lands. In 2019, the nominal gross domestic product (GDP) of Mercosur was about $4.6 trillion. This made it the fifth-largest economy in the world (MERCOSUR, 2022). The motivation to select MERCOSUR countries as a sample is based on several reasons. First, most of these countries have been stuck in middle-income status for several decades. Only one member of the union was among low-income countries in 1987. Five others were among low-middle-income countries, and six were among upper-middle-income countries. While Bolivia consistently stayed low-middle-income throughout the period, only two of them, Uruguay and Chile, managed to rise to the level of high-income countries. The remaining nine countries were clustered around the upper-middle-income level between 1987 and 2021 (World Bank, 2022), which is the first reason why we chose MERCOSUR countries as a sample. When historical GDP per capita data are compared for the last 200 years between MERCOSUR countries, Argentina, Chile, and Uruguay diverged from the rest of the others in the second half of the nineteenth century. Today, not surprisingly, Uruguay and Chile are high-income countries, and Argentina reached this level twice in 2014 and 2017. Venezuela's rapid rise in the 1930s began with oil exports and brought it to the top of the countries within the organization, but this situation ended in the 1990s (Maddison, 2022). The second reason is that the member countries of MERCOSUR mostly have a similar economic and social structure, geography, and colonial history (Bulmer-Thomas, 2014; Koengkan et al., 2020). The third reason is that, to the authors' best knowledge, the MIT hypothesis has not been tested before for MERCOSUR countries. This paper contributes to the existing literature on two fronts. First, this paper uses a novel unit root test strategy by testing the significance of the trend term and then testing the unit root properties of the series by allowing multiple structural breaks according to the existence/non-existence of the trend term. Second, this paper tests the MIT hypothesis for MERCOSUR countries which have been mostly in the middle-income range for a long time. Besides, to the authors' best knowledge, this study is the first to test the MIT hypothesis for MERCOSUR countries in the literature. The next part of the study summarizes the related empirical literature. Section three presents the data set and econometric methods. Section four gives the empirical results. Finally, section five concludes.

Literature Review
Numerous studies have tested the MIT hypothesis, particularly since the pioneering papers of Eichengreen et al.  2021) show that seven Southeast Asian countries are not in the MIT using the FADF unit root test.

Testing Strategy
To test whether a country is in MIT or not, generally, the unit root properties of the following series are tested: where yi,t and yr,t show the logarithm of i th country's per capita income and logarithm of the reference country's per capita income in year t. By employing the augmented Dickey-Fuller (ADF) unit root test, we can reveal the integration level of xi,t. Test regression of the ADF unit root test can be presented as follows: where p shows the optimal lag length. The null of a unit root ( Ho : ß2 = 0 ) can be tested against the alternative of ( Ho : ß2 < 0 ) using the following test statistic: The critical values are tabulated by Dickey and Fuller (1981). The rejection of the null shows that the considered country in the MIT. But Ye and Robertson (2016) stated that the rejection of the null of a unit is a requirement for MIT but not sufficient. To conclude that a country in the MIT also necessities the deterministic trend term (trend) must be statistically insignificant because a trend indicates that global income distribution will collapse. The nation with the highest coefficient ( δ ) will become infinitely large compared to all other countries, which violates MIT since MIT disproves the premise that distribution exists. So, along with testing the unit root hypothesis, the significance of δ must also be tested to reveal whether a country is in the MIT or not.
In this study, we follow the test strategies of Elder and Kennedy (2001) If both situations (a and b) produce similar results, then apply the unit root test with structural breaks by employing / not employing a trend term according to the test results. (iii) If cases (a and b) provide contradictory results, then test the null of ß2 = δ = 0. If the null is not rejected, test the unit root hypothesis by assuming no trend in the test regression and allowing structural breaks. Else, test the unit root hypothesis by considering a time trend and structural breaks.

Testing for Trend
We first test the statistical significance of the trend term by considering the stationary and unit root cases. In the case of a stationary series, one can test the null hypothesis of α1 = 0 in the following equation by using a conventional t-test. ,

Testing for Unit Root
Since the milestone study of Perron (1989) where m shows the number of structural breaks. The null of the unit root can be tested using: ( )

Data and Empirical Results
In this research, we test whether the eight MERCOSUR countries (Argentina, Bolivia, Brazil, Colombia, Ecuador, Paraguay, Peru, and Venezuela) are in the MIT or not. We exclude Uruguay and Chile since they are high-income countries according to the World Bank income classification. We also exclude Suriname and Guyana due to data unavailability. We choose the USA as the reference country by following Ye and Robertson (2016). We obtain the per capita GDP (2011 prices) from the Maddison Historical Statistics (Groningen, 2022). Figure 1 illustrates the GDP per capita data of the considered MERCOSUR countries along with the USA. As can be seen from Fig.1 We first aim to reveal whether the trend terms are statistically significant before continuing to the testing for a unit root in t x series: The critical values at the 1% and 10% levels of the t-test are 2.576 and 1.645, respectively. Critical values at the 10% level for the R 2 is 0.84 and for the F is 0.89. t shows the test statistic for testing the significance of the trend term when the series is stationary, R 2 shows the test statistic used for the same purpose when the series has a unit root. F shows the test statistic used for testing the unit root and non-significance of the trend term.
The results of the t-test and R 2 test are different for all series except Venezuela. Both results of the tests show that the trend term is not significant for Venezuela, so we should apply Gómez-Zaldívar et al. (2013) unit root test for Venezuela. Since these two tests produce contradictory results for the remaining countries, we test the null of a unit root and the non-significance of the trend term for these countries using the F test. The results of the F test indicate that we could not reject the null for all series; that is, the null of a unit root should also be tested, excluding the trend term from the test equation. Consequently, the test results show that we should test the unit root using the unit root test of Gómez-Zaldívar et al. (2013). We apply this test and tabulate the test results in Table 3. The results in Table 3  In general, our results are not consistent with previous studies testing MIT for these countries. There may be possible reasons for these differences. First, we follow a different path to test the hypothesis. Second, our sample covers a wide range of data.

Conclusion
One of the dimensions of sustainable development is economic sustainability. In this context, SDG(s) adopted by United Nations emphasizes the importance of sustained, inclusive, and sustainable economic growth. However, it is observed that many countries fail to achieve sustainable economic growth. Especially, countries are struggling to move up from middle-income level to high-income level, which refers to middle-income trap (MIT). Within this context, this paper tests the MIT hypothesis for eight Southern Common Market (MERCOSUR) countries by using the methodology developed by Robertson and Ye (2013). More specifically, we analyze whether MER-COSUR countries are in the MIT by testing the unit root properties of the series using the test developed by Gómez-Zaldívar et al. (2013), which helps to determine the location and number of structural breaks endogenously. To do so, this paper follows a different way from the related literature by first testing the significance of the trend term and then testing the unit root properties of the series by allowing multiple structural breaks according to the existence/non-existence of the trend term. The results of the unit root test show that four out of eight MERCOSUR countries are in MIT. While Brazil, Colombia, Ecuador, and Peru are in the MIT, Argentina, Bolivia, Paraguay, and Venezuela are not in the MIT. Although MERCOSUR countries experienced rapid growth in the past, the challenge is whether current drivers of economic growth will support the transformation to a modern sustainable economy. To avoid MIT and to maintain sustainable growth and improvement, several policy recommendations can be proposed. First, the structure of production matters for sustainable growth. Countries should shift their production structure from low-value-added to high-value-added sectors. In these countries, input-based growth has come to an end. Technological advancement will increase total factor productivity and enable these countries to jump into the high-income range. To produce high-technology products, countries should focus on the human capital level. Primary education may be sufficient to produce low-value-added products. However, if these countries want to produce more technologically sophisticated products, they should increase higher education quality and provide a more qualified labor force. Second, developing countries should increase their institutional quality. In recent years, growth theories have indicated that institutional quality is important for sustainable growth. For example, weak institutions may discourage innovation or decrease the effectiveness of resource allocation. Third, these countries should benefit from their demographic structure. The share working-age population is higher in developing countries than in developed countries. However, to benefit from this labor surplus, appropriate education and employment policies are required. Finally, it is noteworthy to consider the concept of MIT in terms of the COVID-19 pandemic which has affected humanity not only in terms of health but also in terms of economy, hence sustainable development. Because of the COVID pandemic, the worst economic performance occurred in Latin America and South Asia in 2020; both regions' aggregate GDP shrank by 6.7 percent. Among MERCOSUR countries, the GDP of Paraguay, Brazil, and Uruguay decreased less than that of Bolivia, Argentina, and Peru. In response to the decline in GDP, unemployment rates in these countries rose sharply. As evidenced by the historical projections of these countries, increasing global trade has stimulated economic growth, albeit at varying rates. International demand and prices for goods began to increase as Chinese factories started operating earlier than the rest of the world due to better containment. After a steep decline in the first half of 2020, energy and mineral prices surpassed pre-pandemic levels. Even during the earliest stages of the pandemic, agricultural exporting countries in Latin America benefited from rising prices. As a result, MERCOSUR countries averagely grew in 2021 at least as much as they fell in 2020. However, these economies continue to be fragile. A contraction in China, their primary market, would reduce their export volumes. Moreover, the invasion of Russia into Ukraine raises fertilizer costs and, hence, their agricultural expenditures. However, the deterioration of macroeconomic balances during the pandemic contribute to the unpredictability. Restricting rising inflation risks increases already-high interest rates at a time when the U.S. is also raising rates. The future of the revived economic expansion is, therefore, uncertain (World Bank 2021; World Bank 2022). So, the direction of the COVID-19 pandemic spread for the next few years will be decisive for the sustainable development process in these countries, and the rest of the world as well.