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.
| Do you know ? – The “middle-income trap” describes a situation where countries struggle to attain high-income status. – The concept introduced by Indermit Gill and Homi Kharas in 2007, highlights the challenges faced by countries transitioning from low to middle-income levels. |
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
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