How India Can Avoid Middle-Income Trap

The World Development Report (WDR) 2024 titled "The Middle-Income Trap" reported that about 108 middle-income countries are hovering around this status for the last sixty years and despite multiple possibilities to introduce tried and true technology improvements, all are in the middle-income trap.

- JOYDEEP BISWAS

A middle-income trap occurs when a country has successfully traversed from low-income to middle-income status but gets "stuck" and fails to elevate itself to the high-income country status. The per capita income of these 108 economies lies between US $1136 and $13845.

Moreover, since 1970, the median per capita income of the middle-income countries has never transcended one-tenth of the US level. Ironically, since the 1990s, only 34 middle-income economies succeeded to high-income country status. The cumulative population of these 34 countries is less than 250 million, which is the population of Pakistan alone.

The decidedly daunting obstacles in the trajectory of these 108 countries are their population of six billion, rising external and internal debt, aging populations, escalating protectionism in industrialized economies, mounting pressure for speedy transition to alternative green energy and reducing carbon emissions. Such countries could not make a timely transition from resource-driven, labor- and capital-intensive growth to productivity-driven growth.

In a world in which economic development seems so ephemeral, it is pertinent that the middle-income countries need to acclimatize themselves to changing patterns of economic policies and strategies.

The trap occurs because traditional growth drivers, for example, investment of capital, availability of low-wage labor, trade liberalization, etc., implemented during the transitional phase from low to middle-income status began to lose their effectiveness. Countries in this situation often face rising wages that make labor-intensive exports less competitive and simultaneously struggle to develop innovative mechanisms and enhance productivity levels required for knowledge-based growth.