The report provides a comprehensive roadmap to enable developing countries to break out of the “middle-income trap.” The middle-income trap is a situation in which a middle-income country (with annual GDP per capita in the range of $1,136 to $13,845) experiences systematic growth slowdowns because it is unable to adopt the new economic structures needed to sustain higher income levels.
Key Highlights of the World Development Report 2024
Middle Income Trap
- 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.
- India is at a crucial juncture, benefiting from favorable demographics and advancements 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 report notes that only 34 middle-income economies have transitioned to high-income status since 1990, often due to special circumstances like European Union integration or oil reserves.
- Middle-income countries face challenges in sustaining economic growth due to diminishing returns on physical capital.
- While low-income countries benefit from building physical capital and improving basic education like India in the 1980s, where capital deepening was crucial, middle-income countries encounter diminishing returns as they invest further.
- Simply increasing saving and investment rates to meet growth targets isn’t sufficient; these countries also need to address factors beyond physical capital.
- Despite having relatively high capital endowments, middle-income economies struggle with productivity issues, highlighting that physical capital alone isn’t the main barrier to further growth.
- The World Bank criticizes many middle-income countries for using outdated economic strategies focused mainly on expanding investment.
Global Economic Impact
- Middle-income countries are home to six billion people, representing 75% of the global population, and generate over 40% of global Gross Domestic Product (GDP).
- The success or failure of these countries in achieving high-income status will significantly impact global economic prosperity.
Per Capita Income Disparity
- India is identified as the fastest growing major economy, but it would take 75 years for its per capita income to reach a quarter of the US income levels if current trends continue.
- China would take over 10 years, Indonesia nearly 70 years, and India 75 years to reach a quarter of US income per capita.
Challenges and Risks
- Middle-income countries face significant obstacles, including ageing populations, rising debt, geopolitical and trade frictions, and environmental concerns.
- These countries are at risk of not achieving reasonably prosperous societies by the middle of the century if they continue with current trends.
Strategic Recommendations
- 3i Strategy: Report recommended a three-phase approach for countries to reach high-income status:
- 1i Phase: Focus on investment for low-income countries.
- 2i Phase: Investment and infusion of foreign technologies for lower-middle-income countries.
- 3i Phase: Investment, infusion, and innovation for upper-middle-income countries.
- The report highlighted South Korea as an example, starting with a per capita income of USD 1,200 in 1960, South Korea reached USD 33,000 by 2023 by sequentially adopting the 3i strategy.
Policy Recommendations
- India’s aim to become a developed nation requires a comprehensive approach that enhances overall economic performance, rather than focusing on isolated sectors.
- Focus on horizontal policies rather than vertical debates (e.g., manufacturing vs. services).
- Emphasize improving education and skills to enable better absorption of technology and innovation.
- Strengthen connections between universities and industries to enhance knowledge transfer.
- India shows potential in technology preparedness, with a good track record in digitalization. However, there is a need for greater dynamism in firms to absorb and utilize these technologies effectively.
- The report highlights the prevalence of microenterprises in India, suggesting that barriers exist for productive firms to grow due to policies favoring smaller firms.
Middle Income Trap
- The middle-income trap refers to a situation where a country, after reaching a middle-income status, struggles to transition to high-income status.
- This typically happens when economic growth slows down after an initial period of rapid progress, and the country remains stuck at a middle-income level without advancing further to high-income levels.
- According to the World Bank, the Middle Income Trap refers to the economic stagnation that countries encounter when their GDP per capita reaches about 10% of the United States level, or around USD 8,000 currently.
- Low-income countries often experience rapid growth when transitioning to middle-income levels due to factors such as low wages, cheap labor, and basic technology catch-up.
- At the middle-income stage, countries may face stagnation due to exhaustion of initial growth drivers, institutional weaknesses, income inequality, and lack of innovation.
- Current Status: By the end of 2023, 108 countries were classified as middle-income, with GDP per capita between USD 1,136 and USD 13,845.
- These countries house 75% of the global population and generate over 40% of global GDP, contributing to more than 60% of carbon emissions.
- Until 2006, the World Bank categorised India as a low-income nation. In 2007, India transitioned to the lower-middle income group and has remained in that classification since then.
- Economists view that India’s growth has been sluggish at lower-middle-income levels, with per capita income stuck between USD 1,000 and USD 3,800. Emphasized that India’s growth has been driven primarily by the top 100 million people and warned that this model might not be sustainable.