‘World Development Report 2024: The Middle-Income Trap’

As per the World Bank's ‘World Development Report 2024: The Middle-Income Trap’ report, it may take India close to 75 years, China more than 10 years, and Indonesia nearly 70 years to reach one-quarter of the United States' income per capita.

Highlights of the Report:

• The report mentions the data from the past 50 years shows that countries usually hit a “trap” when they reach 10 percent of the annual US GDP per capita or middle of the range as per what the World Bank classifies as middle-income countries — equivalent to 8,0000 dollars as on date.
• By 2023-end, 108 countries with a total population of six billion (75 per cent of the world) were classified as ‘middle-income’.

What is Per-capita Income?

• Per capita income is a measure of the amount of money earned per person in a nation or geographic region.
• Per capita income is used to determine the average per-person income for an area and to evaluate the standard of living and quality of life of the population.

Classification of Countries based on Income Per capita:

• Based on per capita income, the World Bank has broadly classified countries into four categories.
• Low-income countries,
• Lower-middle income countries,
• Higher-middle income countries, and
• High-income countries.

Why transition from a middle-income country to a higher status is majorly a Trap?

• Shift towards higher value economy: To progress from middle to high income, a country needs to increase the productive output of its economy. At lower levels of development, this involves a structural shift from agricultural production to the manufacture of goods and increasingly, the provision of high-value services.
• Increasing modern technologies dependence: Agriculture remains important to output and additional increases in farm productivity raise income through mechanization and the application of modern technologies.
• At the same time, the demand for rural labor falls and this excess or “surplus” labor can be utilized in an expanding manufacturing sector.
• The competitiveness of such output depends, in no small part, on relative labor costs. Labor is employed at higher levels of productivity than in agriculture but at wage levels sufficiently low to ensure that the output can be priced and marketed competitively.
• Thus, a common growth strategy for low-income countries is to expand into low-wage, low-cost, low-technology manufacturing in such items as textiles and food processing.
• Manufacturing adds to the total productive output of the economy, thus increasing income per capita.
• This pattern is adequate to move a country from low to middle income but growth will be limited if the national competitive strategy remains rooted in low-end manufacturing.

Limitations of Per Capita Income:

• Living Standards: Since per capita income uses the overall income of a population and divides it by the total number of people, it doesn't always provide an accurate representation of the standard of living. In other words, the data can be skewed, whereby it doesn't account for income inequality.
• Inflation: Per capita income doesn't reflect inflation in an economy, which is the rate at which prices rise over time. For example, if the per capita income for a nation rose from $50,000 per year to $55,000 the next year, it would register as a 10% increase in annual income for the population.
• International Comparisons: The cost-of-living differences can be inaccurate when making international comparisons since exchange rates are not included in the calculation. Critics of per capita income suggest that adjusting for purchasing power parity (PPP) is more accurate, whereby PPP helps to nullify the exchange rate difference between countries.
• Savings and Wealth: Per capita income doesn't include an individual's savings or wealth. For example, a wealthy person might have a low annual income from not working but might draw from savings to maintain a high-quality standard of living. The per capita metric would reflect the wealthy person as a low-income earner.
• Children: Per capita includes children from the total population who don't earn any income. Countries with many children would have a skewed result since they would have more people dividing up the income versus countries with fewer children.
• Economic Welfare: The welfare of the people isn't necessarily captured with per capita income. For example, the quality of work conditions, the number of hours worked, education level, and health benefits are not included in per capita income calculations. As a result, the overall welfare of the community may not be accurately reflected.