The World Development Report (WDR) 2024 titled “The MiddleIncome 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. A middle-income trap occurs when a country has successfully traversed from low-income to middleincome status but gets “stuck” and fails to elevate itself to the highincome 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 middleincome countries has never transcended one tenth of the US level.
Ironically, since the 1990s, only 34 middleincome economies succeeded to highincome 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 industrialised 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, labour- and capitalintensive 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 acclimatise 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 labour, trade liberalisation, 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 labour-intensive exports less competitive and simultaneously struggle to develop innovative mechanisms and enhance productivity levels required for knowledge-based growth. In the middle-income category, there are two stages, the lower-middleincome and upper-middle-income countries. During the transformation from lower-middle incomes to upper middle incomes, all such countries need to embrace a strategy that emphasises investments, infusion of modern technologies, adapts successful business strategies from abroad and diffuses them domestically.
However, having graduated to the upper-middle-income status, countries need to change, with embedded attention to innovation and infusion of global technological development. The handful of middle-income economies that rose to high-income levels have innovated specialised mechanisms, are able to infuse global technologies and diffuse them domestically in addition to disciplining powerful large corporations, state-owned enterprises and powerful citizens. All such countries encouraged new entrants, without either coddling small and medium-size enterprises or vilifying big corporations. These countries have also successfully restructured enterprises, working environment and energy use with an even greater emphasis on economic freedom, social mobility and political contestability. They also rewarded talent, effectively used cheap and renewable green energy and capitalised on financial crises for policy reforms, and made institutions that no longer suit the purposes defunct. Hence, to avoid the middleincome trap, countries are required to successfully manage three critical transitions
(i) specialisation in production
(ii) total factor productivity-led growth that necessitates major changes in the knowledge and innovation economy, and
(iii) encouraging decentralised economic management.
It is evident that middle income countries need to embrace another set of economic reforms programmes. The Indian scenario is somewhat different as India stands at a low-middle-income level and is yet to ascend to upper-middle-income status before it can aspire to the high-income level by 2047, the hundredth year of independence.
Like many emerging countries, India went through market-oriented economic reforms in the 1990s as a part of the Structural Adjustment Programmes (SAPs) and Economic Recovery Programmes (ERPs) to tackle both the domestic debt and balance of payment crisis. The objective of such overhaul was to restructure and revitalise economic growth. Resultantly, in India, and accentuating the paradigm shift, the determinants of economic growth like financial development, poverty alleviation, educational attainment, infrastructure development etc. got favourable impetus. However, recent experiences manifest that India needs to emphasise total factor productivity (TFP) growth.
A decline in the TFP ratio indicates that India’s recent growth has been more input-driven rather than efficiency-driven. The contribution of the agricultural and manufacturing sectors in the gross domestic product (GDP) has stagnated around 15-17 per cent for the past decade, significantly below the targeted 25 per cent. Unlike East Asian economies such as China and South Korea, where industry contributes around 40 and 32 per cent of output, respectively, the industrial sector of India accounts for around 27.6 per cent of India’s GDP. India’s economic structure is somewhat different.
World Bank Group data shows that in 2023 one-third of the employment was contributed by the industrial sector in China and Vietnam, compared to 26 per cent in India. The bypassing of the manufacturing sector has created a structural imbalance in the Indian economy, leaving a large number of the labour force in agriculture with negligible marginal productivity. Though the share of the primary sector has moderated from 28 per cent in 1990 to 17 per cent in 2022, 40 per cent of the total labour force is still engaged in this sector for livelihood. Through the vicissitudes of the last three decades, the services sector stood as the bulwark of India’s economic growth.
India’s economic growth has primarily been driven by the service sector, which contributes over 50 per cent to the country’s GDP. While this has been a strength, it poses challenges for widespread generation of employment and inclusive growth. The inability to create mass employment in high-productivity sectors restricts the potential for rapid increases in per capita income, a crucial factor in evading the middle-income trap. This trend is particularly concerning as it limits the potential for productivity gains and technological spill-overs, typically associated with a robust manufacturing sector.
India’s economy is characterised by the dominance of the informal sector which accounts for about 90 per cent of the workforce. This high level of informality leads to low productivity growth and limits access to credit and technology. The World Bank’s Logistics Performance Index 2023 ranked India 38th out of 139 countries, which indicates a space for improvement. The most appalling situation the country has been facing is with generation of adequate employment in the non-agricultural productive sectors.
There are innumerable ways to exemplify the snags that unemployed youth have been encountering while applying for acceptable employment. The overall labour force participation rate in India is around 50-57 per cent which is abysmally lower than the global average of 65 per cent and lower than that of Vietnam at 78 per cent, China 76 per cent, Indonesia 65 per cent, and Bangladesh at about 60 per cent. In tune with the 3i strategy as envisioned in WDR 2024, the Union Budget 2024-2025 proposed to allocate Rs 20,000 crore to research and development to implement private sector driven research, development and innovation initiative.
Although India’s investment in R & D has been increasing over the years, the expenditure on this head as a percentage of GDP remained comparatively low. It was reported that India’s gross expenditure on research and development (GERD) as a percentage of GDP is between 0.6 and 0.7 per cent, much lower than countries like China (2.4 per cent), US (3.5 per cent), and Israel (5.4 per cent). Despite higher gross enrolment ratio (GER) in primary and higher education, about a quarter of the Indian adult population remains illiterate, which in turn casts a shadow on their employability in higher productivity activities in the industrial sector. The mean years of schooling for the adult Indian population is only around 6.5 years, compared with 7.9 for China and 8.0 for Indonesia.
So, the employability of the adult population in higher productivity occupations needs to be properly addressed to evade the middle-income trap. To get out of the middle-income trap and to accelerate economic growth, India needs to have another set of structural transformations with embedded emphasis on adopting a policy regime with rapid productivity enhancement employment, inducing global technological advancement, low-cost energy and further allocation of funds for the knowledge economy and R&D. These advancements shall have to be implemented in such a manner that it does diminish the job opportunities for unemployed youths.
(The writer is Principal Secretary, Faculty Council for Post Graduate Studies in Science, University of North Bengal)