Middle-Income Trap

The World Development Report 2024 (WDR), published by the World Bank, explores the phenomenon of the middle-income trap. This term refers to the stagnation of growth rates that occurs when economies reach a certain level of income but struggle to transition to high-income status. The report highlights that only 34 middle-income economies have successfully made this transition in the past 34 years.

What is the Middle-Income Trap?

• The middle-income trap is characterized by stagnation in income per capita when economies reach about 11% of U.S. per capita income.
• Current Status: Middle-income countries, defined as those with per capita incomes between $1,136 and $13,845, often face challenges in sustaining growth.
• Strategies to Escape the Trap: The WDR emphasizes a “3i” approach for countries aiming to overcome the middle-income trap:

1. 1. Investment: Capital must be allocated efficiently to foster growth.
   2. Infusion: Introduction of new global technologies is crucial.
   3. Innovation: Encouraging domestic innovation can drive progress.

Role of the State (Case Study)

Successful Models: Countries that have successfully escaped the middle-income trap, such as South Korea and Chile, demonstrate the importance of state intervention:

• South Korea:
• Utilized a heavily interventionist state to direct private sector activities.
• Supported successful companies with access to technologies and allowed underperformers to fail.
• Chile:
• The government actively supported natural resource sectors, such as the salmon industry, through targeted interventions.

Lessons for India

For India to break the middle-income trap, the government must:

• Act as a neutral facilitator among private enterprises.
• Base support on performance rather than political connections.
• Encourage powerful business entities to innovate and invest in new technologies.

Challenges Facing India

• Increased Power of Billionaires: The concentration of wealth can create barriers to equitable growth and investment.
• Stagnation in Manufacturing: The manufacturing sector has been underperforming, and many jobs are returning to low-productive agriculture post-pandemic.
• Wage Growth Issues: Despite an estimated GDP growth of 7%, real wages for workers have not kept pace, with nominal wage growth around 5-7% compared to an inflation rate of about 5%.
• Premature Deindustrialization: Many economies are experiencing a decline in manufacturing share of income at much lower GDP levels than before, raising questions about the potential of the service sector to lead growth.
• Democratic Concerns: Historical examples from South Korea and Chile show that growth can come at the expense of democracy. It is essential to ensure that India maintains its democratic ethos while pursuing state-led growth initiatives.