MIDDLE-INCOME TRAP
The Middle Income Trap refers to a situation where a country's economy grows rapidly enough to transition from low-income to middle-income status but then struggles to advance further to high-income levels. The country gets "trapped" because it is unable to sustain the factors that drove its earlier growth and fails to develop new competitive advantages that high-income countries typically possess.
Here are key aspects of the Middle Income Trap:
- Many developing nations experience initial growth by relying on low-cost labor, exporting goods, and foreign direct investment (FDI). This leads to a rise in income, but these drivers eventually lose their effectiveness as wages increase and labor becomes more expensive
- As wages rise, the country can no longer compete with lower-income countries in labor-intensive industries. At the same time, it lacks the innovation, technological development, and productivity gains needed to compete with high-income countries
- Without significant improvements in education, infrastructure, innovation, and governance, the economy's productivity growth stagnates.
- Middle-income countries often rely heavily on technology imports rather than developing their own, which limits their capacity to innovate and compete globally
- To avoid or escape the middle-income trap, a country typically needs to shift towards higher value-added industries, improve governance, invest in education and infrastructure, and foster innovation and entrepreneurship
- Brazil and South Africa are often cited as examples of countries that have struggled to break through the middle-income barrier. Both have achieved middle-income status but face challenges in diversifying their economies and boosting productivity
- 3i Strategy: Emphasize investment, integration of global technologies, and fostering innovation. Nations that successfully reached high-income status effectively implemented these principles.
- Government Intervention: In South Korea, the government played a crucial role by guiding private enterprises and assisting successful firms with technological access. Inefficient companies were allowed to collapse, enhancing overall productivity.
- Export-Led Growth: South Korea's economic expansion was largely driven by manufacturing exports. While this approach is less viable today due to slowing global trade growth, it remains a valuable lesson.
- Targeted Industry Support: Chile's government provided specific assistance to its natural resource sectors, such as the salmon industry, to stimulate economic development
- Wage stagnation: Despite India's real GDP growth rate being projected at 7%, wages have not increased at the same rate. Regular workers saw nominal wage growth of approximately 5%, while casual workers experienced a 7% increase. However, with inflation hovering around 5%, real wage growth has been minimal, reducing consumption demand.
- Manufacturing stagnation: The manufacturing sector has failed to grow significantly, and following the pandemic, many workers have moved back to agriculture and other low-productivity sectors, undoing progress in structural transformation.
- Influence of billionaires: India’s wealthy business elites are perceived as having close ties with the government, yet their investment levels remain low, contributing to slower economic growth.
- Challenges in global exports: Export opportunities are constrained due to rising global protectionism and declining demand in developed nations, affecting India's prospects for export-driven growth.
- Premature deindustrialization: Manufacturing has diminished as a primary driver of growth, and it remains uncertain whether the service sector can effectively take its place
- Implement the "3i" strategy: India should prioritize investment, the integration of global technologies, and innovation. These elements were crucial to South Korea's success, where businesses used technological advancements and innovation to fuel economic growth.
- Adapt to global economic changes: While South Korea’s model of manufacturing exports drove its growth, it may not be as feasible for India today, given the slowdown in global export growth. India must acknowledge these shifts and explore new strategies for growth, while addressing the issues in its manufacturing sector.
- Preserve democratic values: Unlike the authoritarian regimes in South Korea and Chile, which curtailed labor movements, India must remain committed to its democratic values. While the government should actively support economic growth, it must also ensure fairness, protect labor rights, and uphold democratic principles
- Economic growth in a country is often driven by factors such as export competitiveness (e.g., low wages) or abundant natural resources. As the economy grows, per capita income also rises.
- However, over time, the initial competitive advantages that fueled growth can diminish, such as when wages increase. If the economy does not undergo structural transformations, growth may slow down, stall, or even reverse, leading to stagnant income levels.
- Population stabilization plays a role as well—if the population continues to grow, the per capita income may increase too slowly to have a meaningful impact on living standards.
- Several countries in Southeast Asia (like Thailand, Vietnam, and Malaysia), Africa (such as South Africa), and Latin America (e.g., Brazil) are currently experiencing this phenomenon, which hinders their progress from middle-income to high-income status.
- From 1960 to 2010, only 15 out of 101 middle-income economies successfully transitioned to high-income status, including Japan, Singapore, and South Korea.
For Prelims: Labor Force Participation Rate (LFPR), Employment Rate (ER), Centre for Monitoring Indian Economy (CMIE), and Labour Force.
For Mains: 1. Discuss the significance of the Labor Force Participation Rate (LFPR) as a critical labor market indicator in the context of economic development and policy formulation. (250 words).
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Previous year Question1. In India, which one of the following compiles information on industrial disputes, closures, retrenchments, and lay-offs in factories employing workers? (UPSC 2022)
A. Central Statistics Office
B. Department for Promotion of Industry and Internal Trade
C. Labour Bureau
D. National Technical Manpower Information System
Answer: C
2. Which of the following brings out the 'Consumer Price Index Number for Industrial Workers'? (UPSC 2015)
A. The Reserve Bank of India
B. The Department of Economic Affairs
C. The Labour Bureau
D. The Department of Personnel and Training
Answer: C
3. International Labour Organization's Conventions 138 and 182 are related to (UPSC 2018)
A. Child labour
B. Adaptation of agricultural practices to global climate change
C. Regulation of food prices and food
D. Security
Answer: A
4. Which of the following statements about the employment situation in India according to the periodic Labour Force Survey 2017-18 is/are correct? (UPSC CAPF 2020)
1. Construction sector gave employment to nearly one-tenth of the urban male workforce in India.
2. Nearly one-fourth of urban female workers in India were working in the manufacturing sector.
3. One-fourth of rural female workers in India were engaged in the agriculture sector.
Select the correct answer using the code given below:
A. 2 only
B. 1 and 2 only
C. 1 and 3 only
D. 1, 2 and 3
Answer: B
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