Debt-deflation theory and middle-income trap: system dynamics approach

Abstract

The article analyzes the theoretical and practical aspects of the theory of the relationship between national debt and deflationary processes using the example of the impact of the economic recession in China on the decline in global economic growth, and determines the systemic effects of the national economy falling into the middle income debt trap and exiting it. With the help of simulation models, which are based on the methodology of system dynamics, the interrelationship of economic processes of global and national economies is presented. It was found that deflation leads to an increase in the price of the existing external and internal debt and inhibits economic growth and economic development of the national economy and is one of the forms of the country’s middle income trap. The use of the scenario approach made it possible to identify the basic options for the development of the world economy under the influence of negative economic phenomena at the national level and to develop appropriate recommendations for middle-income countries to achieve the goals of macroeconomic and financial stabilization with the appropriate access to the trajectory of new economic development. The study found that the factors of education, social and innovative development are of decisive importance in the country’s achievement of the goal of leaving the middle income trap. The economies of such countries as China are unable to independently overcome this trap without further involvement in global integration and trade processes, and at the same time they themselves form deflationary processes at the global level. In addition, the policy of economic and political semi-isolation leads to the destabilization of the existing world economic and financial systems.

Keywords

• debt-free economy
• middle income trap
• system dynamics
• economic growth
• debt-deflation
• business cycle theory