Why in the News?

The World Development Report 2024 highlights the “middle-income trap,” where economies stagnate as growth slows. Only 34 middle-income nations advanced to high-income status in 34 years.

How does the World Bank define the threshold for middle-income economies?

• The World Bank defines middle-income economies as those with incomes between $1,136 and $13,845 per capita.
• The middle-income trap refers to a slowdown in growth when an economy reaches a certain income threshold, about 11% of U.S. per capita income.
• Only 34 middle-income countries have transitioned to higher-income status over the last 34 years, indicating the difficulty of escaping the middle-income trap.

Why is state intervention crucial for breaking the middle-income trap?

• State intervention is vital for coordinating development goals, as seen in South Korea and Chile, where governments played an active role in shaping industries and ensuring the private sector’s alignment with national development objectives.
• The state ensures investment, infusion of global technologies, and domestic innovation, which are critical for modern economies. This is known as the 3i approach (Investment, Infusion, Innovation).
• State intervention disciplines local elites, ensuring firms succeed based on performance, not political connections. Underperforming firms are allowed to fail, promoting efficiency and innovation.

What lessons can be drawn from South Korea and Chile?

• South Korea adopted a state-led industrialization strategy with a focus on export-driven manufacturing:
  • The state actively directed private sector activities, ensuring businesses were competitive on the global stage.
  • Chaebols (large business conglomerates) were supported based on their performance, promoting technological advancement and innovation.
• Chile achieved success by focusing on natural resource exports, like its salmon industry:
  • The state’s role was crucial in developing and supporting industries with growth potential, showing how targeted interventions can help small but strategically important sectors thrive.

What challenges does India face in balancing state intervention with democratic values?

• Economic Power Concentration: India faces a growing concentration of wealth among powerful business houses, which are perceived to be closely linked to the state. This risks cronyism rather than performance-based growth, which could hinder innovation and investment.
• Manufacturing Stagnation: Unlike South Korea, India’s manufacturing sector has not experienced significant growth. With global export demand slowing and increased protectionism, manufacturing is less likely to drive India’s growth.
• Wage Stagnation: Real wage growth has been stagnant, as inflation erodes the benefits of nominal wage increases. This limits domestic demand, a critical factor in economic dynamism.
• Premature Deindustrialization: India, like many developing economies, faces premature deindustrialization, meaning that manufacturing’s contribution to GDP is declining at a lower level of income than historically seen in developed economies.
• Balancing State Intervention with Democracy: South Korea and Chile implemented aggressive state interventions under authoritarian regimes. However, India, as the world’s largest democracy, must ensure that growth strategies do not come at the cost of democratic values and labor rights.

Way forward: 

• Economic Growth Strategy: Niti Aayog CEO  emphasized the need for a comprehensive economic strategy to avoid the middle-income trap, which he described as the “biggest threat” to India’s growth.
• Free Trade and Global Integration:  Niti Aayog CEO advocated for increased openness to free trade and alignment with global value chains.
• Urban Development and Infrastructure: The government should focus on transforming urban areas into economic hubs, which is seen as crucial for driving growth.

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