Middle-Income Trap

Context :

TheWorld Development Report 2024by theWorld Bankhighlights the “middle-income trap,” wheregrowth rates slowasincomes increase. It emphasises adopting a“3i” Approach(Investment, Infusion of new technologies, and Innovation).

• Middle-Income Traprefers to a situation in which acountry’s growth slowsafterreaching middle-income levels, preventing it from achieving high-income status. This happens because theeasy gainsfromcheap labourand low-hanging industrialisation fade as countries climb out of poverty.

Challenges for India

• Slow Growth in Manufacturing:Manufacturing is no longer the growth engine, with developed nations going protectionist.
• Premature deindustrialisation:Modern economies are seeing a decrease in manufacturing share at much lower GDP levels compared to the past.
• Rising Power of Billionaires:Increasing control of the Indian economy by a few billionaire groups may hinder broad-based investment and equitable growth.
• Agriculture’s Persistent Role:Reverse structural transformation: Post-pandemic, India has seen rising employment in low-productivity sectors like agriculture.

Way Forward

• Promote Export-Led Growth:Even with global trade headwinds, India must integrate into global value chains and push for service sector growth.
• Domestic Innovation:Emphasize technology transfer, foster innovation, and support start-ups and industries with R&D investment.
• Inclusive Growth:Ensure workers benefit from economic growth through real wage increases and improved labour conditions.
• Neutral State Role:The government should maintain neutrality, supporting all sectors based on merit and performance, not proximity to power.

Lessons from South Korea and Chile

• South Korea
• State Intervention:Directed private sector activities and promoted export-driven growth.
• Economic Planning:Disciplined local elites and ensured adherence to state economic plans.
• Business Success:Successful companies received state support, non-performers were allowed to fail.
• Chile
• Resource Export:State intervention ensured success in natural resource sectors like Salmon industry.
• Targeted Support:Multiple fronts of state support ensured industry growth.