Vertical specialization and the middle-income trap: an explanation based on global value chains
DOI: https://doi.org/10.3846/tede.2026.25762Abstract
This paper aims to provide theoretical and empirical evidence to explain the middle-income trap from the perspective of Global value chains (GVCs). GVCs improve vertical specialization in two possible ways: (i) “economies of specialization”, induced by market expansion among developed countries; and (ii) the inequity of factor prices between emerging markets and developed ones (comparative advantages). This paper clarifies the differences between the two channels with a model considering two kinds of labor – technological labor and regular labor – and shows how vertical specialization plays an important role in the socalled “middle-income trap”. We argue that GVCs accelerate global market integration, which makes the labor wage in emerging markets to approach the middle-income level. Through vertical specialization, emerging markets lose their advantage of low labor costs, while the disadvantage in terms of technological production increases. We also explore the differences between vertical specialization patterns in empirical part to check whether the data can verify what we find in the theoretical part. We find that middle-income countries are at a more disadvantaged position than other countries in vertical specialization (they are locked in an unfavorable situation of international division of labor), which provides evidence for what are derived from the theoretical model.
First published online 3 April 2026
Keywords:
vertical specialization, technological monopoly, global value chains, middle-income trap, international division of laborHow to Cite
Share
License
Copyright (c) 2026 The Author(s). Published by Vilnius Gediminas Technical University.
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Abreha, K. G., Kassa, W., Lartey, E. K. K., Mengistae, T. A., Owsu, S., & Zewfack A. G. (2021). Industrialization in Sub-Saharan Africa: Seizing opportunities in global value chains. Africa Development Forum, World Bank. https://doi.org/10.1596/978-1-4648-1673-4
Acemoglu, D., & Robinson, J. A. (2012). Why nations fail: The origins of power, prosperity, and poverty. Profile Books.
Ahmed, R. (2020). Monetary policy spillovers under intermediate exchange rate regimes. SSRN. https://doi.org/10.2139/ssrn.3545521
Aiyar, S., Duval, R., Puy, D., Wu, Y., & Zhang, L. (2018). Growth slowdowns and the middle-income trap. Japan and the World Economy, 48, 22–37. https://doi.org/10.1016/j.japwor.2018.07.001
Antràs, P., Chor, D., Fally, T., & Hillberry, R. (2012). Measuring the upstreamness of production and trade flows. American Economic Review, 102(3), 412–416. https://doi.org/10.1257/aer.102.3.412
Antràs, P., & Chor, D. (2017). On the measurement of upstreamness and downstreamness in global value chains (Working Paper No. 24185). National Bureau of Economic Research. https://doi.org/10.3386/w24185
Antràs, P., & Chor, D. (2018). On the measurement of upstreamness and downstreamness in global value chains. In L. Y. Ing & M. Yu (Eds.), World trade evolution: Growth, productivity and employment (pp. 126–194). Routledge. https://doi.org/10.4324/9781351061544-5
Ashraf, S., & Umar, Z. (2023). Does global value chain participation induce economic growth? Evidence from panel threshold regression. Applied Economics, 55(24), 2788–2800. https://doi.org/10.1080/00036846.2022.2106032
Barro, R., & Sala-i-Martin, X. (2004). Economic growth (2nd ed.). MIT.
Bräuning, F., & Sheremirov, V. (2019). Output spillovers from U.S. monetary policy: The role of international trade and financial linkages (Research Department Working Papers No. 19–15). Federal Reserve Bank of Boston. https://doi.org/10.29412/res.wp.2019.15
Cheng, W., Sachs, J., & Yang, X. (2000). An inframarginal analysis of the Ricardian model. Review of International Economics, 8(2), 208–220. https://doi.org/10.1111/1467-9396.00216
Chun, H., Hur, J., & Son, N. S. (2021). Global value chains and servicification of manufacturing: Evidence from firm-level data. Japan & The World Economy, 58, Article 101074. https://doi.org/10.1016/j.japwor.2021.101074
Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35(1), 128–152. https://doi.org/10.2307/2393553
CM, J., Hoang, T. N., & Yarram, S. R. (2024). The transition from middle-income trap: Role of innovation and economic globalization. Applied Economics, 56(1), 1–21. https://doi.org/10.1080/00036846.2023.2267821
Dai, F., Liu, R., Guo, H., & Du, X. (2020). How does intermediate consumption affect GVC positions? – A comparison between China and US. China Economic Review, 63, Article 101531. https://doi.org/10.1016/j.chieco.2020.101531
De Soyres, F., & Gaillard, A. (2019). Value added and productivity linkages across countries. (International Finance Discussion Paper No. 1266). Board of Governors of the Federal Reserve System. https://doi.org/10.17016/ifdp.2019.1266
Ding, N., & Field, B. C. (2005). Natural resource abundance and economic growth. Land Economics, 81(4), 496–502. https://doi.org/10.3368/le.81.4.496
Eichengreen, B., Park, D., & Shin, K. (2012). When fast-growing economies slow down: International evidence and implications for China. Asian Economic Papers, 11(1), 42–87. https://doi.org/10.1162/ASEP_a_00118
Engel, J., & Taglioni, D. (2017). The middle-income trap and upgrading along global value chains. In Global value chain development report 2017: Measuring and analyzing the impact of GVCs on economic development (pp. 119–139). World Bank.
Fally, T. (2012). Production staging: Measurement and facts. University of Colorado-Boulder. https://www2.gwu.edu/~iiep/assets/docs/fally_productionstaging.pdf
Felipe, J. (2012). Tracking the middle-income trap: What is it, who is in it, and why? Part 2 (Asian Development Bank Economics Working Paper Series No. 307). SSRN. https://doi.org/10.2139/ssrn.2094725
Galor, O., & Weil, D. N. (2000). Population, technology, and growth: From Malthusian stagnation to the demographic transition and beyond. American Economic Review, 90(4), 806–828. https://doi.org/10.1257/aer.90.4.806
Ge, J., Fu, Y., Xie, R., Liu, Y., & Mo, W. (2018). The effect of GVC embeddedness on productivity improvement: From the perspective of R&D and government subsidy. Technological Forecasting and Social Change, 135, 22–31. https://doi.org/10.1016/j.techfore.2018.07.057
Georgiadis, G. (2016). Determinants of global spillovers from US monetary policy. Journal of International Money and Finance, 67, 41–61. https://doi.org/10.1016/j.jimonfin.2015.06.010
Gereffi, G. (2019). Global value chains, development, and emerging economies. In P. Lund-Thomsen, M. W. Hansen & A. Lindgreen (Eds.), Business and development studies: Issues and perspectives (pp. 125–158). Routledge. https://doi.org/10.4324/9781315163338-6
Gill, I., & Kharas, H. (2007). An East Asian renaissance: Ideas for economic growth. World Bank.
Groningen Growth and Development Centre. (n.d.-a). Penn World Table. https://www.rug.nl/ggdc/productivity/pwt/
Groningen Growth and Development Centre. (n.d.-b). World Input-Output Database. https://www.rug.nl/ggdc/valuechain/wiod/
Hansen, G. D., & Prescott, E. C. (2002). Malthus to Solow. American Economic Review, 92(4), 1205–1217. https://doi.org/10.1257/00028280260344731
Hausmann, R., Hwang, J., & Rodrik, D. (2007). What you export matters. Journal of Economic Growth, 12, 1–25. https://doi.org/10.1007/s10887-006-9009-4
Hegerty, S. W., & Weresa, M. (2023). The determinants of innovative capacity in the medical sector in Central Europe and across the European Union. Technological and Economic Development of Economy, 29(1), 74–90. https://doi.org/10.3846/tede.2022.17737
Howitt, P., & Mayer-Foulkes, D. (2002). R&D, implementation and stagnation: A Schumpeterian theory of convergence clubs (Working Paper No. 9104). National Bureau of Economics Research. https://doi.org/10.3386/w9104
Hummels, D., Ishii, J., & Yi, K.-M. (2001). The nature and growth of vertical specialization in world trade. Journal of International Economics, 54(1), 75–96. https://doi.org/10.1016/S0022-1996(00)00093-3
Johnson, R. C. (2018). Measuring global value chains. Annual Review of Economics, 10, 207–236. https://doi.org/10.1146/annurev-economics-080217-053600
Koopman, R., Powers, W., Wang, Z., & Wei, S.-J. (2010). Give credit where credit is due: Tracing value added in global production chains (Working Paper No. 16426). National Bureau of Economic Research. https://doi.org/10.3386/w16426
Koopman, R., Wang, Z., & Wei, S.-J. (2014). Tracing value-added and double counting in gross exports. American Economic Review, 104(2), 459–494. https://doi.org/10.1257/aer.104.2.459
Lin, J. Y. (2017). Industrial policies for avoiding the middle-income trap: A new structural economics perspective. Journal of Chinese Economic and Business Studies, 15(1), 5–18. https://doi.org/10.1080/14765284.2017.1287539
Lopes, J., & Banaitienė, N. (2024). A model for construction sector development in middle-income sub-Saharan African countries. Technological and Economic Development of Economy, 30(5), 1229–1255. https://doi.org/10.3846/tede.2024.21453
Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A contribution to the empirics of economic growth. Quarterly Journal of Economics, 107(2), 407–437. https://doi.org/10.2307/2118477
Miller, R. E., & Temurshoev, U. (2017). Output upstreamness and input downstreamness of industries/countries in world production. International Regional Science Review, 40(5), 443–475. https://doi.org/10.1177/0160017615608095
North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge University Press. https://doi.org/10.1017/CBO9780511808678
Pan, Z. (2020). Employment impacts of the US global value chain participation. International Review of Applied Economics, 34(6), 699–720. https://doi.org/10.1080/02692171.2020.1755238
Qin, M., Chang, H.-L., Su, C.-W., Răcătăian, R.-I., & Crăciun, A.-F. (2026). Substitution or creation? Identifying the role of artificial intelligence in employment. Technological and Economic Development of Economy, 32(1), 21–42. https://doi.org/10.3846/tede.2024.21929
Qu, C., Shao, J., & Cheng, Z. (2020). Can embedding in global value chain drive green growth in China’s manufacturing industry? Journal of Cleaner Production, 268, Article 121962. https://doi.org/10.1016/j.jclepro.2020.121962
Rodrik, D. (2016). Premature deindustrialization. Journal of Economic Growth, 21, 1–33. https://doi.org/10.1007/s10887-015-9122-3
Rodrik, D. (2018). New technologies, global value chains and the developing economies (Working Paper No. 25164). National Bureau of Economics Research. https://doi.org/10.3386/w25164
Sachs, J., Yang, X., & Zhang, D. (2000). Globalization, dual economy, and economic development. China Economic Review, 11(2), 189–209. https://doi.org/10.1016/S1043-951X(00)00017-1
Sala-i-Martin, X., Artadi, E. V., & Subramanian, A. (2003). How can Nigeria address the natural resource curse? (IMF Working Paper No. 03/129). International Monetary Fund.
Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65–94. https://doi.org/10.2307/1884513
Taglioni, D., & Winkler, D. E. (2016). Making global value chains work for development. World Bank Group. https://doi.org/10.1596/978-1-4648-0157-0_fm
Tombazos, C., & Yang, X. (2006). Inframarginal contributions to development economics (Increasing returns and inframarginal economics: Vol. 3). World Scientific Publishing. https://doi.org/10.1142/6026
UN Comtrade Database (n.d.). https://comtradeplus.un.org/
Woo, W. T. (2012). China meets the middle-income trap: The large potholes in the road to catching-up. Journal of Chinese Economic and Business Studies, 10(4), 313–336. https://doi.org/10.1080/14765284.2012.724980
World Bank & Development Research Center of the State Council. (2006). East Asia economic development report 2006. China Financial & Economic Publishing House.
Yang, X., & Ng, Y.-K. (1993). Specialization and economic organization: A new classical microeconomic framework. Vol. 215: Contributions to economic analysis. Elsevier.
Yi, K. M. (2003). Can vertical specialization explain the growth of world trade? Journal of Political Economy, 111(1), 52–102. https://doi.org/10.1086/344805
Yülek, M. A. (2017). On the middle-income trap, the industrialization process and appropriate industrial policy. Journal of Industrial Competitiveness and Trade, 17, 325–348. https://doi.org/10.1007/s10842-016-0237-9
View article in other formats
CrossMark check
Published
Issue
Section
Copyright
Copyright (c) 2026 The Author(s). Published by Vilnius Gediminas Technical University.
License
This work is licensed under a Creative Commons Attribution 4.0 International License.