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Critical Topics and Their Significance for the UPSC CSE Examination on October 14, 2024

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Can India escape middle-income trap?

For Preliminary Examination:  Current events of nattional and international importance

For Mains Examination: GS III - Indian Economy

Context:

The World Development Report 2024 — authored by the World Bank — calls attention to the phenomenon of the “middle-income” trap, or the slowing down of growth rates as incomes increase. The World Bank estimates a stagnation of income per capita when economies reach a level of per capita incomes 11% of that of the U.S., hindering their journey to high-income status. Over the last 34 years, only 34 middle-income economies — defined as economies with per capita incomes between $1,136 and $13,845 — have transitioned to higher income levels.

Read about:

What is Middle-income Trap?

Challenges facing by India

Key takeaways:

The World Development Report 2024, produced by the World Bank, highlights the "middle-income trap," where growth rates decline as income levels rise. According to the World Bank, countries may experience stagnation in per capita income once they reach 11% of U.S. per capita income, obstructing their path to high-income status. Over the past 34 years, only 34 middle-income nations—defined as those with per capita incomes between $1,136 and $13,845—have successfully advanced to higher income levels.

The report outlines the necessary policies and strategies to escape this trap, drawing lessons from countries that successfully transitioned. It emphasizes the "3i" approach: investment, infusion of global technologies, and fostering innovation. Economies need to invest, embrace new technologies, and cultivate an environment that encourages domestic innovation. This is a challenging endeavor that demands agile and responsive state policies. In the current economic landscape, India faces significant obstacles to overcome the middle-income trap.

Role of the State

• Most nations that successfully avoided the trap were part of the European Union, which facilitated growth through the mobility of capital and labor among its members. However, many countries lack such institutions; while they liberalize capital inflows, they often impose restrictions on labor movement. A notable exception is South Korea, which managed to escape the trap.
• The South Korean government played an active role in guiding the private sector and promoting an export-driven growth model. Successful companies were granted access to new technologies and supportive measures, while underperforming firms were allowed to fail. This approach was not a pure free market but involved significant state intervention to achieve developmental goals, maintaining oversight of local elites and ensuring alignment with the state’s economic strategy.
• Chile is another country that escaped the middle-income trap, thanks to state intervention that supported its natural resource sectors, such as the successful salmon industry, which benefited from targeted government actions.
• The lessons from South Korea's government strategy are crucial for India today. The state must maintain neutrality among private enterprises and allow underperforming firms to fail. Support from the government should be performance-based, rather than reliant on personal connections to power.
• The presence of influential business groups can foster growth if they prioritize investment, adopt new technologies, and drive innovation. South Korean conglomerates, or chaebols, are now leaders in innovation.

Challenges Ahead

• South Korea's success was largely built on manufacturing exports, a strategy that is less viable today. Global export growth has slowed, particularly due t