India and China at Risk of Falling into the "Middle Income Trap"
A recent World Bank report has warned that India and China, among other countries, are at risk of falling into the "middle income trap," a phenomenon where countries struggle to transition from middle-income to high-income status. The report, titled "World Development Report 2024: The Middle-Income Trap," highlights the challenges faced by over 100 countries, including China, India, Brazil, and South Africa, in their efforts to become high-income countries in the next few decades.
The Middle Income Trap
The report defines the middle income trap as a situation where countries reach a certain level of economic growth, typically around 10% of annual US GDP per person (approximately $8,000 today), but fail to progress further. Since 1990, only 34 middle-income economies have managed to transition to high-income status, with many of these countries benefiting from integration into the European Union or the discovery of oil reserves.
India's and China's Progress
According to the report, at current trends, it will take India 75 years to reach a quarter of the US per capita income, while China will take over 10 years. This is a concerning projection, especially given India's ambitious target of becoming a developed nation by 2047. China, Vietnam, and other middle-income countries have also set plans to raise their per capita incomes to match those of developed nations.
Escaping the Middle Income Trap
The World Bank report proposes a "3i strategy" for countries to escape the middle income trap. The strategy involves a sequenced and progressively sophisticated mix of policies, depending on a country's stage of development. Low-income countries should focus on policies designed to increase investment (the "1i" phase). Once they attain lower-middle-income status, they need to shift gears and expand the policy mix to the "2i" phase, which involves adopting technologies from abroad and spreading them across the economy. At the upper-middle-income level, countries should shift gears again to the final "3i" phase, which involves investment, infusion, and innovation.
Innovation and Growth
The report emphasizes the importance of innovation in driving economic growth and escaping the middle income trap. Countries that successfully transition to high-income status are those that are able to innovate and push the global frontier, rather than simply borrowing ideas from others. The World Bank's 3i strategy provides a framework for developing countries to achieve this goal and join the ranks of high-income nations.
