India is among 100 countries, including China, at risk of falling into the "middle income trap," where countries struggle to transition from middle-income to high-income status. According to a new World Bank research issued earlier this month, over a hundred countries—including China, India, Brazil, South Africa, and Thailand—face considerable obstacles in their quest to become high-income economies in the coming decades.
India is at a crucial juncture!
India is at a crucial juncture, benefiting from favourable demographics and advancement in digitalization, but faces a tougher external environment compared to the past. India's aim to become a developed nation by 2047 requires a comprehensive approach that enhances overall economic performance, rather than focusing on isolated sectors.
The "World Development Report 2024: The Middle Income Trap" offers developing nations a thorough road map for escaping the so-called "middle-income trap" by drawing on the previous 50 years of development. It was shown that nations usually face difficulties when their GDP per person approaches US$8,000, which the World Bank classifies as middle-income.
34 MI Economies transitioned to High-income status
Since 1990, only 34 middle-income economies have transitioned to high-income status, with many of these benefiting from European Union membership or oil discoveries.
At the end of 2023, 108 countries were classified as middle-income, home to 6 billion people – 75% of the global population. These nations generate over 40% of global GDP but also account for more than 60% of carbon emissions. They face unprecedented challenges including ageing population, rising protectionism in developed economies, and the imperative to accelerate the energy transition.
World Development Report 2024
World Bank Group chief economist Indermit Gill pointed out that the battle for global economic prosperity will largely be won or lost in middle-income countries.
“However, many of these countries rely on out-dated strategies to become advanced economies. They depend excessively on investment or prematurely shift to innovation. A fresh approach is required: prioritising investment, followed by technology adoption, and finally balancing investment, technology infusion, and innovation. Given increasing demographic, ecological, and geopolitical pressures, there is no margin for error,” he said.
The World Bank defines the Middle Income Trap (MIT) as a situation where a country's economic growth stagnates and fails to transition from middle-income to high-income status.
Characteristics of the Middle Income Trap
Slow economic growth: Middle-income countries experience slower economic growth, often due to a decline in productivity growth.
Lack of economic diversification: Countries rely heavily on a few sectors or industries, making them vulnerable to external shocks.
Inadequate investment in human capital: Insufficient investment in education, healthcare, and skills development hinders the growth of a highly productive workforce.
Institutional weaknesses: Inefficient institutions, corruption, and poor governance hinder economic development.
Dependence on external factors: Middle-income countries often rely heavily on external factors such as foreign investment, aid, or commodity prices.
Solutions to avoid the Middle Income Trap
Diversify economies: Encourage economic diversification to reduce dependence on a few sectors.
Invest in human capital: Increase investment in education, healthcare, and skills development.
Improve institutions: Strengthen institutions, reduce corruption, and improve governance.
Promote innovation: Encourage innovation, research, and development to drive productivity growth.
Foster regional integration: Encourage regional trade and integration to expand markets and opportunities.
Countries that have avoided the Middle Income Trap
South Korea: Successfully transitioned from middle-income to high-income status through economic diversification, investment in human capital, and innovation.
Singapore: Maintained high economic growth through a highly developed human capital base, innovative economy, and strong institutions.
Countries currently facing the Middle Income Trap
Brazil: Struggling with slow economic growth, inadequate investment in human capital, and institutional weaknesses.
South Africa: Facing challenges such as low economic growth, high inequality, and inadequate investment in human capital.
Can India face Middle Income Trap crisis?
Experts say ‘Yes’. India faces the risk of falling into the Middle Income Trap (MIT). Despite being one of the fastest-growing major economies, India's growth has been slowing down, and several challenges could hinder its progress.
Some reasons why India might fall into the MIT
Slow productivity growth: India's productivity growth has been sluggish, mainly due to inefficient industries and lack of investment in research and development.
Inadequate human capital: India's education and healthcare systems face significant challenges, which could limit the development of a highly skilled workforce.
Corruption and institutional weaknesses: Corruption, bureaucracy, and inefficient institutions can hinder economic growth and discourage investment.
Dependence on external factors: India's economy is heavily influenced by external factors such as global demand, commodity prices, and foreign investment.
Inequality and poverty: High levels of income inequality and poverty can limit domestic demand and hinder economic growth.
India also has strengths that can help it avoid the MIT
Large and young population: India's demographic dividend can drive growth and innovation.
IT and services sector: India's IT and services sector is a significant driver of economic growth and exports.
Government initiatives: The government has launched initiatives like "Make in India" and "Digital India" to promote manufacturing and digital innovation.
Foreign investment: India attracts significant foreign investment, which can bring in new technologies and management practices.
To avoid the MIT, India should focus on…
By addressing these challenges and leveraging its strengths, India can avoid the Middle Income Trap and achieve sustained economic growth.
Improving productivity growth
Investing in human capital
Strengthening institutions and governance
Promoting innovation and entrepreneurship
Addressing inequality and poverty
