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Understanding the Middle-Income Trap


Why is it in the news?

  • The World Development Report 2024 by the World Bank highlights the “middle-income trap,” where economies face stagnation in growth as their incomes rise. Middle-income economies are defined as those with per capita incomes between $1,136 and $13,845.
  • The report notes that only 34 countries have transitioned to higher income levels in the last 34 years, emphasizing a “3i” approachinvestment, infusion of global technologies, and fostering domestic innovation—to escape this trap, which requires nimble state policies.

 

An Analysis

 

The Role of State Intervention

  • Successful transitions out of the middle-income trap often involved significant state intervention. Countries like South Korea effectively directed private sector activities towards an export-driven growth model, rewarding successful firms with access to new technologies while allowing underperformers to fail.
  • This strategic intervention was key to achieving developmental goals and ensuring local elites adhered to state economic plans.
  • Chile also employed targeted government support for natural resource sectors, such as the salmon industry, demonstrating the importance of state involvement.

 

Challenges for India

  • India faces unique challenges in its quest to escape the middle-income trap. The influence of billionaires closely connected to the state complicates efforts to drive domestic investment.
  • The manufacturing sector has stagnated, and structural transformation has reversed, with an increase in low-productive employment in agriculture post-pandemic.
  • Despite government reports of 7% real GDP growth, wage growth has not kept pace, resulting in negligible real wage increases that undermine consumption demand essential for economic advancement.

The Democracy Dilemma

  • The issue of democracy further complicates India’s path. Historical examples, such as South Korea’s military regime and Chile’s military coup, reveal the costs of sacrificing democratic values for economic growth.
  • It is crucial for India to avoid these pitfalls and instead promote state interventions that drive growth while upholding democratic principles.
  • Balancing necessary government support with democratic integrity will be vital for India to successfully navigate the challenges of the middle-income trap.
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