Escaping the Middle-Income Trap

Syllabus :GS 3/Economy 

In News

• The World Development Report 2024 calls attention to the phenomenon of the “middle-income” trap, or the slowing down of growth rates as incomes increase. 

About the report 

• It was authored by the World Bank  and it estimates a stagnation of income per capita when economies reach a level of per capita incomes 11% of that of the U.S., hindering their journey to high-income status. 
• It details the policies and strategies necessary to break out of the trap based on the development experiences of those countries that did manage the transition.

Key Findings 

• Global export growth has slowed, and many countries face protectionism.
  • Premature deindustrialization is affecting the manufacturing sector, diminishing its role in growth.
• Over the last 34 years, only 34 middle-income economies — defined as economies with per capita incomes between $1,136 and $13,845 — have transitioned to higher income levels.
• Many successful countries were part of the European Union, benefiting from free capital and labor mobility.
• Successful cases like South Korea and Chile illustrate the role of state intervention.
  • South Korea’s government directed private sector activities towards an export-driven growth model, rewarding successful companies with support while allowing underperformers to fail. 
  • Similarly, Chile’s targeted interventions bolstered its natural resource sectors.

Economic Challenges for India

• Scenario in India : The influence of billionaires close to the state has hindered domestic capital investment.
  • Stagnation in manufacturing and a shift back to low-productive jobs in agriculture post-pandemic.
  • Real GDP growth is not translating to wage growth, leading to low consumption demand.
  • Nominal wage increases have lagged behind inflation, resulting in minimal real wage growth.
    • According to the PLFS, nominal wages for regular wage workers at the all-India level between April and June 2023-24 has only grown at around 5%, and that of casual workers at roughly 7%.
  • Insufficient worker participation in economic growth risks perpetuating the middle-income trap.

Suggestions 

• The recent report highlights the importance of the “3i” approach: investment, infusion, and innovation.
  • Economies must invest, ensure the infusion of new global technologies, and develop an environment conducive to domestic innovation. 
  • This is no easy task and requires nimble and responsive state policy. 
• In the modern economy, there are plenty of headwinds that India must overcome to successfully navigate the middle-income trap.
  • Powerful business entities can drive growth through investment and innovation.
• Historical examples from South Korea and Chile demonstrate that authoritarian regimes can achieve rapid growth, but at a cost to democracy.
  • Therefore there is a need for Balancing effective state intervention with democratic principles is crucial for India to navigate the middle-income trap.

Source: TH