Avoiding - Mid-Life Economic Crisis for India

 

Avoiding - Mid-Life Economic Crisis for India

The term "middle-income trap" has become increasingly common among policymakers to describe middle-income economies that seem unable to transition to high-income status. This concept, discussed in the World Development Report 2024, highlights that countries often hit a "trap" at about 10% of annual U.S. GDP per person, around $8,000 today. As of 2024, India's GDP per capita is $2,731 (nominal), and its GNI per capita is $10,123 (PPP).

Understanding the Middle-Income Trap:

According to the World Bank, lower middle-income economies have a GNI per capita between $1,136 and $4,465, while upper middle-income economies fall between $4,466 and $13,845. High-income economies have a GNI per capita above $13,846. Over the past 70 years, many low-income countries have rapidly developed, lifting millions out of poverty. However, only a few have achieved high-income status, with income growth often being variable and volatile.

In recent years, policymakers in slower-growing middle-income countries have focused on the middle-income trap. While its existence is debated, the concept encourages a reassessment of strategies once traditional growth sources diminish. Middle-income countries must drive productivity, innovation, and competitiveness while strengthening economic fundamentals to foster and stabilize growth. Achieving high-income status is challenging and prone to growth slowdowns, but stagnation is not inevitable.

Origins and Evidence of the Middle-Income Trap:

The middle-income trap was first described by Indermit Gill and Homi Kharas, noting that regions like Latin America and the Middle East often experience slowdowns after rapid growth from low to middle income. This growth, driven by cheap labour and basic technology catch-up, eventually loses momentum as wages rise and the rural labour force shrinks. Without new growth sources, countries struggle to compete with low-wage or high-innovation economies.

Empirical evidence from Latin America and the Middle East supports the middle-income trap, with many economies remaining at middle-income levels for decades. Of the 101 middle-income countries in 1960, only 13 became high-income by 2008. Research shows that growth slowdowns are more likely at middle-income levels, particularly around per capita incomes of $10,000-$11,000 and $15,000-$16,000 (PPP-adjusted). Some models suggest low-productivity equilibria in middle-income countries, characterized by low shares of skilled workers.

However, other evidence questions the trap's existence. Many countries have seen steady income growth since 1960, and the transition from middle to high income does not take longer than other transitions. Historical evidence shows economies move up across income groups, with those achieving high-income status experiencing faster growth even at lower income levels.

Avoiding the Middle-Income Trap:

The World Development Report 2024 outlines strategies for developing economies to avoid the middle-income trap. Lower-middle-income countries must adopt modern technologies and business practices, while upper-middle-income countries need to push the global frontiers of technology. This requires reconfiguring economic structures to enable greater economic freedom, social mobility, and political contestability.

Today, 108 countries are classified as middle-income, housing 6 billion people. Since the 1990s, only 34 middle-income economies have attained high-income status, accounting for less than 250 million people. The median income per capita of middle-income countries has never risen above 10% of the US level. Climbing to high-income status will be harder due to high debt, aging populations, and growing protectionism.

The "3i strategy" recommended by the World Development Report 2024 includes:

1)     Investment: Low-income countries should focus on increasing investment.

2)     Infusion: Lower-middle-income countries need to adopt modern technologies and business practices.

3)     Innovation: Upper-middle-income countries must drive innovation and push technological frontiers.

 

Key Actions for Middle-Income Countries:

1)     Discipline Vested Interests: Implement competition regimes to encourage new entrants and prevent large corporations from stifling growth.

2)     Reward Merit: Accumulate and allocate talent efficiently, enhancing the use of skilled workers.

3)     Capitalize on Crises: Use crises as opportunities for tough policy reforms, focusing on energy efficiency and emissions reduction.

 

Conclusion:

For India to escape the middle-income trap and achieve high-income status, it must transition from a trading economy to a manufacturing one with a prime focus on exports. Emphasizing research, innovation, and technological development is crucial. Additionally, designing an education system that is industry-centric while preserving cultural values will support this transformation.