CAN INDIA ESCAPE MIDDLE-INCOME TRAP

THE CONTEXT: According to the World Bank’s World Development Report (WDR) 2024, economies often experience stagnation in income per capita when they reach approximately 11% of the per capita income level of the United States. Over the past 34 years, only 34 out of 109 middle-income economies with per capita income between $1,136 and $13,845 have successfully transitioned to higher income levels.

MIDDLE-INCOME TRAP: It refers to a situation where a country’s growth slows after reaching middle-income levels, making it challenging to transition into a high-income economy. This occurs when nations previously experienced rapid growth through low-cost labor, and capital accumulation finds these advantages waning as wages rise and technological advancement stalls.

THE “3I” APPROACH TO ESCAPING THE TRAP:

• Investment: Robust investment in infrastructure, education, and technology is crucial. For example, China has massively invested in infrastructure projects like the Belt and Road Initiative, enhancing connectivity and trade opportunities. Investments in education improve human capital, as seen in Singapore, where government spending on education helped create a highly skilled workforce.
• Infusion of New Technologies: Integrating global technological advancements into the domestic economy helps improve efficiency and drives innovation. Vietnam, for instance, has attracted foreign direct investment (FDI) from technology firms like Samsung, which has set up large manufacturing plants, facilitating technology transfer and boosting industrial capabilities.
• Innovation: Cultivating an environment that encourages domestic innovation is essential. Israel is a prime example, often called the “Startup Nation” due to its high number of startups per capita. Government support for research and development (R&D), along with solid venture capital presence, has fostered a culture of innovation.

COUNTRIES ESCAPED THE MIDDLE-INCOME TRAP: South Korea and Chile achieved economic growth under authoritarian regimes. South Korea was under military rule until the late 1980s, when labor unions were suppressed to maintain low wages and high productivity. Similarly, Chile underwent a military coup in 1973, leading to General Augusto Pinochet’s regime, which implemented neoliberal reforms while restricting political freedoms.

SOUTH KOREA:

• Adopting an export-driven growth strategy, South Korea focused on producing goods for international markets. By the 1980s, South Korea became a leading exporter of ships, automobiles, and electronics. Exports grew from $32 million in 1960 to over $500 billion by 2011.
• The government disciplined local elites by rewarding companies that performed well with access to credit, technology, and support, while allowing underperforming firms to fail. Conglomerates like Samsung, Hyundai, and LG received state support contingent on meeting export targets.

CHILE:

• Chile leveraged its rich natural resources through state intervention. The government supported sectors like mining, particularly copper, which accounts for about 50% of Chile’s export earnings.
• The salmon industry in Chile flourished due to targeted state interventions. In the 1980s, the government collaborated with international organizations like UNIDO (United Nations Industrial Development Organization) to introduce salmon farming techniques. By 2006, Chile became the world’s second-largest producer of farmed salmon, with exports worth over $2.2 billion.

CHALLENGES IN REPLICATING PAST SUCCESSES:

• Slowing World Export Growth: Global export growth has decelerated. According to the World Trade Organization (WTO), the volume of world merchandise trade grew by only 1.2% in 2019, down from 3% in 2018. The COVID-19 pandemic further disrupted global trade, making export-led strategies more challenging.
• Trend Towards Protectionism: An increase in protectionist policies worldwide has made it more difficult for countries like India to access foreign markets. The Global Trade Alert reported that since 2008, G20 countries have implemented over 1,600 trade-restrictive measures. The U.S.-China trade war exemplifies this trend, affecting global supply chains.
• Premature Deindustrialization: Economist Dani Rodrik describes a trend where developing economies experience a decline in manufacturing’s share of GDP at much lower income levels than historically observed. Countries like Brazil and South Africa have seen manufacturing peak at around 15-20% of GDP, compared to 30% in earlier industrialized nations.
• Limitations of Manufacturing-Led Growth: With manufacturing no longer serving as the primary growth engine for developing economies, it remains uncertain whether the service sector can effectively fill this role. While countries like India have seen growth in IT services, these sectors may not absorb the large labor force transitioning from agriculture.

INDIA’S SPECIFIC CHALLENGES:

• Concentration of Economic Power: The increasing influence of billionaires and large business conglomerates in India raises concerns. Oxfam’s 2022 report states that the top 1% of India’s population holds 42.5% of national wealth. Companies like the Adani Group and Reliance Industries have significant sway, potentially leading to policy biases.
• Stagnation in Manufacturing: India’s manufacturing sector contributes about 17% to GDP, which has remained relatively stagnant. The National Manufacturing Policy 2011 aimed to increase this to 25% and create 100 million jobs by 2022, but this target remains unmet.
• Reversal of Structural Transformation: Post-pandemic, agriculture and low-productivity sectors have shifted back to agriculture. The Periodic Labour Force Survey (PLFS) 2019-20 showed an increase in agricultural employment to 45.6% from 42.5% in 2018-19, indicating a reversal of structural transformation.
• Disconnect Between GDP Growth and Wage Growth: Despite official estimates of around 7% real GDP growth in recent years, wage growth has lagged. The PLFS Quarterly Bulletin (April-June 2023) indicates that nominal wages for regular workers grew by approximately 5%, with inflation at similar levels. This implies minimal real wage growth, reducing consumption demand and potentially slowing the economy.

THE WAY FORWARD:

• Need for Neutral, Performance-Based State Support: The government should maintain neutrality among private sector players, offering performance-based support rather than favoritism. Implementing transparent public procurement, merit-based incentives, and anti-corruption measures can enhance fairness.
• Promoting Investment and Innovation: Policies should incentivize investment in key sectors and foster an environment where innovation thrives. The Atal Innovation Mission and Startup India are steps in this direction, aiming to promote entrepreneurship and support startups through funding and mentorship.
• Addressing Wage Stagnation and Inequality: Policies must focus on increasing real wages and reducing income inequality to ensure that economic growth translates into improved living standards. Implementing minimum wage reforms, investing in education, and enhancing social safety nets are crucial. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) can be strengthened to provide better income support.
• Maintaining Democratic Values While Pursuing Growth: India must strive for economic development without compromising its democratic ethos. Upholding civil liberties, encouraging public participation in policymaking, and ensuring transparency are essential. Strengthening institutions like the Judiciary, Election Commission, and free media helps maintain checks and balances.

THE CONCLUSION:

To escape the middle-income trap, India must foster inclusive growth by ensuring robust state intervention that supports innovation and investment while maintaining democratic principles. By aligning economic policies with the “3i” approach—investment, infusion of technology, and innovation—India can navigate current global challenges and achieve sustainable development.

UPSC PAST YEAR QUESTION:

Q. Normally, countries shift from agriculture to industry and then later to services, but India has shifted directly from agriculture to services. What are the reasons for the huge growth of services vis-a-vis industry in the country? Can India become a developed country without a strong industrial base? 2014

MAINS PRACTICE QUESTION:

Q. Discuss the strategies countries like South Korea and Chile have employed to overcome the middle-income trap. What lessons can India learn considering its unique socio-economic and political landscape?

SOURCE:

https://www.thehindu.com/business/Economy/can-india-escape-middle-income-trap/article68740618.ece