World Bank Report 2024: Middle-Income Trap
Kartavya Desk Staff
Syllabus: Indian Economy
- •Source: World Bank*
Context: The World Bank Report 2024 report offers a roadmap to help developing countries escape the Middle-Income Trap, where countries with GDP per capita between $1,136 and $13,845 face growth slowdowns and struggle to reach high-income levels.
What is a Middle-Income Trap?
The World Bank defines the middle-income trap as a situation where a middle-income country struggles to become a high-income economy due to rising costs and declining competitiveness. There are concerns that India may fall into this trap, potentially stalling at a per capita income of USD 5,000-6,000 on its path to becoming a developed economy.
Key Highlights of the Report:
• Wealthy countries often hit a growth slowdown at around $8,000 per capita (10% of U.S. GDP per person).
• Since 1990, only 34 middle-income countries (MICs) have transitioned to high-income status.
• As of end-2023, 108 MICs host 75% of the global population and generate over 40% of global GDP.
• Challenges for MICs include ageing populations, rising protectionism, and the need for faster energy transitions.
• India, a Lower MIC since 2007, has a GNI per capita of $2,540 and may take 75 years to reach one-quarter of U.S. income per capita at current trends.
Why Countries Fall into the Middle Income Trap
• Struggles of Developing Countries: Middle-income nations often lag due to competition with low-wage producers and lack of innovation, stalling growth.
• Structural Shift: Transitioning sectors or growth drivers risk stagnation in per capita income, especially if innovation capabilities are lacking.
• Rising Income Inequality: High-income inequality, exemplified by large wealth gaps, restricts consumer spending and economic progress.
Reasons for India’s Susceptibility to Middle-Income Trap:
Reason | Description
Rising Protectionism | Increasing global protectionism may prevent India from benefiting from hyper-globalization, unlike China, South Korea, and Japan.
Structural Transformation | India’s high dependency on agriculture (45-50% of the population) and premature deindustrialization hinder the shift from primary to secondary and tertiary sectors.
State Control | Persistent state control, including retrospective taxation and unstable policies, limits private sector growth and investment.
Human Capital Formation | The quality of education and employability of graduates is below international standards, with around 55% of graduates deemed unemployable.
Climate Change | Frequent climate-related disasters and reliance on monsoon-dependent agriculture pose significant risks, consuming resources and impacting productivity.
Key Recommendations of the Report:
• Adopt the 3I (Investment, Infusion, Innovation) strategy.
• Stimulate business dynamism by rewarding value-adding firms.
• Provide equal opportunities to women, minorities, and disadvantaged groups.
• Reflect environmental costs in energy prices to enhance economic efficiency.
What more can be done?
Action Needed | Description
Greater Divestitures | Privatize inefficient public enterprises to raise funds, improve productivity, and attract foreign investment.
Boost Middle Class | Cut taxes or replace income tax with a consumption tax to increase disposable income and simplify the tax system.
Increase Labor Force Participation | Invest in education and skill development; support initiatives like the New Education Policy and Skill India Mission.
Accelerate Infrastructure Pipeline | Invest in and speed up the execution of infrastructure projects, such as roads and power, to enhance connectivity and quality of life.
Build on Manufacturing Momentum | Enhance India’s role as a global manufacturing hub with initiatives like PLI; improve ease of doing business and labour laws.
Boost Private Investment | Attract more foreign and domestic investment through support for infrastructure and manufacturing projects.
Implement Structural Reforms | Undertake targeted reforms to improve productivity and competitiveness in sectors like finance, urban planning, and e-commerce.
Increase Capital Accumulation | Boost investment to achieve the USD 30 trillion economy goal, with government support for infrastructure and manufacturing.
Mains Links:
• Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (UPSC 2020)
Prelims Links:
Which of the following gives the ‘Global Gender Gap Index’ ranking to the countries of the world? [UPSC 2017]
(a) World Economic Forum (b) UN Human Rights Council (c) UN Women (d) World Health Organization
Answer: (a)