Strategies to escape the middle-income trap

Source: The post strategies to escape the middle-income trap has been created, based on the article “Can India escape middle-income trap?” published in “The Hindu” on 11th October is 2024

UPSC Syllabus Topic: GS Paper 3 – Indian Economy and issues relating to growth.

Context: The article explains how some countries escaped the middle-income trap by using state intervention, especially in South Korea and Chile. It emphasizes the need for strong state policies in India while ensuring democracy and addressing economic challenges, including wage stagnation and manufacturing decline.

For detailed information on Middle-Income Trap read this article here

What is the middle-income trap?

1. The middle-income trap refers to economies experiencing slower growth as incomes rise.
2. The World Bank estimates stagnation when economies reach 11% of U.S. per capita income.
3. Over the past 34 years, only 34 middle-income economies have transitioned to high-income levels.
4. Middle-income economies have per capita incomes between $1,136 and $13,845.
5. Countries like South Korea and Chile broke the trap through state intervention.

What are the strategies to escape the middle-income trap?

1. 3i Approach: Focus on investment, infusion of global technology, and innovation. Countries that transitioned to high-income status applied these principles effectively.
2. State Intervention: South Korea’s government intervened heavily, directing private firms and supporting successful businesses with access to technology. Poorly performing firms were allowed to fail, promoting efficiency.
3. Export-driven Growth: South Korea relied on manufacturing exports, boosting its economy. Although this strategy is less feasible today due to slowing global export growth, it remains a key lesson.
4. Targeted Support: Chile’s government provided targeted support for its natural resource sectors, like the salmon industry, to foster economic growth.

For detailed information on Avoiding the Middle-Income Trap read this article here

What are the economic challenges facing India?

1. Wage stagnation: While India’s real GDP growth is estimated at 7%, wages have not kept pace. Nominal wages for regular workers grew by about 5% and for casual workers by 7%. With inflation around 5%, real wage growth remains minimal, limiting consumption demand.
2. Manufacturing stagnation: The manufacturing sector has not grown, and post-pandemic, employment has shifted back to agriculture and low-productivity sectors, reversing structural transformation.
3. Power of billionaires: India’s wealthy business elites are seen as close to the state, but they have not been investing at high levels, slowing growth.
4. Global export challenges: Export opportunities are limited due to global protectionism and slower demand in developed economies, which affects India’s export-led growth prospects.
5. Premature deindustrialization: Manufacturing has lost its role as a growth engine, and it remains uncertain if the service sector can effectively replace it.

What should be done by India to escape the middle-income trap?

1. Adopt the “3i” approach: India must focus on investment, infusion of global technologies, and innovation. These strategies were key to South Korea’s success, where businesses innovated and adopted new technologies to drive growth.
2. Adapt to global shifts: South Korea’s model of manufacturing exports may not be viable for India today, as global export growth has slowed. India needs to recognize these changes and find new approaches to growth while addressing the challenges in the manufacturing sector.
3. Maintain democratic values: Unlike South Korea and Chile’s non-democratic regimes, which suppressed labor movements, India must uphold its democratic principles. The state should intervene to promote growth but also ensure fairness, protect workers’ rights, and uphold the democratic ethos.

Question for practice:

Examine the economic challenges India faces in escaping the middle-income trap, and what steps the country should take to overcome them.