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” approach—investment, 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.
