E-Paper
India, China risk falling into mid-income trap: World Bank report
If middle-income countries don’t change their economic models, then it will take China more than 10 years just to reach one-quarter of US income per capita, Indonesia 70 years, and India 75 years, the report said
New Delhi: More than 100 nations, including India and China, face “serious obstacles” in their transition to high-income developed economies amid increasing chances of getting stuck in the so-called middle-income trap, the World Bank said in its flagship World Development Report 2024 released on Thursday.
The bank said since 1990, only 34 middle-income nations were able to leap to the high-income category. “Middle-income countries will have to work miracles. They can’t rely on the old playbook. That’s like driving a car in first gear and trying to go fast,” it said.
The main challenge for a total of 108 middling countries is that traditional growth environments of connected trade and open economies no longer exist or are fast crumbling. Climate change is an additional hurdle because adaptation mechanisms will cost poor countries more than the rich, it said.
“Drawing on lessons of the past 50 years, our report finds that as countries grow wealthier, they usually hit a trap at about 10% of annual US GDP per person—tthe equivalent of $8,000 today,” said Indermit Gill, the World Bank’s chief economist, in a statement. “That’s in the middle of the range of what the World Bank classifies as middle-income countries.”
The global economic order is increasingly being marked by rising geopolitical tensions, de-globalisation, offshoring, and protectionism, changing trade in complex ways, the bank said.
If middle-income countries don’t change their economic models, then it will take China more than 10 years just to reach one-quarter of US income per capita, Indonesia 70 years, and India 75 years, the report said. It noted India’s aim to become a developed nation by 2047 as a laudable goal.
The report unveiled its first-ever three-stage roadmap to avoid a stall in progress: invest, infuse, and innovate. Each phase will require a different mix of policies, the report added.
While least developed economies need to keep focusing on asset creation, capital investments for too long alone aren’t sufficient for mid-level countries to raise per capita incomes, the report said.
Countries, such as India, now need “infusion,” or the import of an array of foreign technologies, which must be then widely diffused, along with a highly skilled workforce.
Old, especially inefficient, state-run and private-sector companies must be replaced by numerous new firms in the economy, which should not be dominated by a few large enterprises, the report said.
In the final phase, these economies must get into the innovation mode, the report said, citing Korea as an exceptional case, with a current per capita income of $33000.
Chile escaped the middle-income trap by importing Norwegian salmon farming technologies, while socialist Poland made the jump by integrating into Europe and benefiting from the continent’s technologies, the report said.
Mid-sized countries are also “getting old before getting rich,” as the elderly population is increasing due to falling death rates, the report said.
India could be already facing a demographic transition. Addressing reporters at a recent council meeting of state-run think tank Niti Aayog, CEO BVR Subrahmanyam said: “Some states have requested addressing demographic management. India will need a demographic-management policy to manage the elderly population.”
Gill’s report highlighted India’s Aadhaar-enabled public digital infrastructure and also the path taken by the Tata group, which imported computers for its offices in an era when imports were conditional on exports, as notable innovations.
To meet state-mandated export obligations, the Tata group computerised its office and started exporting software services for the first time to the US by setting up the Tata Consultancy Services.
“Once at the upper-middle-income level, countries should shift gears again to add innovation to investment and infusion. In the innovation phase, countries no longer merely borrow ideas from the global frontiers of technology—they push the frontier.”
