Middle-income trap: Matching US pay scale will take decades for Indians, says World Bank

Middle-income trap: More than 100 countries, including India, face major challenges in becoming high-income nations in the coming decades. According to a World Development Report 2024: The Middle Income Trap India may require nearly 75 years to reach just one-quarter of the US income per capita.

The report says that it will take China over 10 years to achieve one-quarter of the US income per capita, while Indonesia might take nearly 70 years.

“The battle for global economic prosperity will largely be won or lost in middle-income countries,” said Indermit Gill, Chief Economist of the World Bank Group and Senior Vice President for Development Economics.

What is the middle-income trap? 

The middle-income trap describes a situation where countries that have achieved middle-income status experience a slowdown in growth, making it difficult for them to advance to high-income levels. The stagnation arises because these nations can no longer compete with low-income countries on cost or with high-income countries on innovation and productivity.

As of the end of 2023, 108 countries were classified as middle-income, with annual GDP per capita ranging from $1,136 to $13,845. These countries are home to six billion people, accounting for 75 per cent of the global population and two-thirds of those living in extreme poverty.

Key characteristics of the trap include stagnating growth rates and a loss of competitive advantage in low-cost manufacturing, which shifts to lower-income nations with cheaper labour. 

Causes of middle-income trap

The causes of the middle-income trap are multifaceted as they often include insufficient investment in research and development (R&D), a weak innovation ecosystem, inadequate focus on education and skills development, poor infrastructure, and institutional weaknesses like corruption and bureaucratic inefficiencies. 

“Too many of middle-income countries rely on outmoded strategies to become advanced economies. They depend just on investment for too long—or they switch prematurely to innovation. A fresh approach is needed: first focus on investment; then add an emphasis on infusion of new technologies from abroad; and, finally, adopt a three-pronged strategy that balances investment, infusion, and innovation. With growing demographic, ecological and geopolitical pressures, there is no room for error,” said Gill. 

Over-reliance on a narrow range of exports also makes economies vulnerable to global market fluctuations.

History of GDP per capita growth in Asia

Over the past few decades, Asia’s three major economies have made major strides in improving their GDP per capita. China's growth has been the most remarkable while India and Indonesia have also shown consistent growth but at a slower pace compared to China.

India 

India has experienced substantial economic growth since the liberalisation reforms of 1991. The reforms opened up the economy to foreign investment and reduced trade barriers, leading to increased industrialisation and service sector growth.

• 1991: GDP per capita was around $375.
• 2000: GDP per capita increased to approximately $450.
• 2010: GDP per capita rose to about $1,340.
• 2020: GDP per capita reached around $2,100.

India's growth has been driven by its services sector, particularly information technology and telecommunications. However, the country faces challenges such as high income inequality, a large informal sector, and underemployment.

China

China's economic transformation began with the reforms initiated by Deng Xiaoping in 1978. These reforms shifted China from a centrally planned economy to a more market-oriented one, leading to rapid industrialisation and urbanisation.

China's growth has been fuelled by manufacturing, export-led growth, and significant government investment in infrastructure. Despite this, China faces issues such as environmental degradation, an ageing population, and rising debt levels.

• 1978: GDP per capita was approximately $155.
• 2000: GDP per capita increased to about $959.
• 2010: GDP per capita surged to around $4,550.
• 2020: GDP per capita reached approximately $10,500.

Indonesia

Indonesia's economy has undergone major changes since the Asian financial crisis of 1997-1998. The country implemented various economic reforms to stabilise the economy and attract foreign investment.

• 1998: GDP per capita was around $474.
• 2000: GDP per capita recovered to about $780.
• 2010: GDP per capita increased to approximately $3,050.
• 2020: GDP per capita reached around $4,000.

Indonesia's growth has been supported by its abundant natural resources, a growing manufacturing sector, and a burgeoning middle class. However, it faces challenges such as infrastructure deficits, corruption, and economic inequality.

Examples of high-income transitions in Asia

Despite growth stagnation in larger economies with higher populations, there are examples from smaller economies which transitioned from middle-income to higher-income categories with strategic focus and the right investments. 

Since 1990, only 34 middle-income economies have transitioned to high-income status, with more than a third benefiting from European Union integration or previously undiscovered oil resources, according to the World Bank.

South Korea

South Korea transitioned from a middle-income to a high-income country within a few decades with the help of substantial investment in education and technology, export-oriented industrialisation, and strong government-business collaboration. 

Between 1960 and 1990, South Korea's GDP per capita grew from around $158 to over $6,600 as the country focused on developing heavy industries like steel and shipbuilding, later transitioning to high-tech industries such as electronics and automobiles. 

South Korea's GDP per capita reached approximately $32,000 in 2020.

Singapore

Singapore also made a successful transition through strategic planning and strong governance. From 1965 to 1990, Singapore's GDP per capita increased from $516 to nearly $12,000 as the government planned and executed business-friendly rules, invested heavily in education and skills development, and established itself as a global financial hub. 

By 2020, Singapore's GDP per capita had soared to over $59,000. 

Talking about the way out form the middle-income trap, Somik V Lall, Director of the 2024 World Development Report, said, “The road ahead won’t be easy, but it’s possible for countries to make progress even in today’s challenging conditions.” 

“Success will depend on how well societies balance the forces of creation, preservation, and destruction. Countries that try to spare their citizenry the pains associated with reforms and openness will miss out on the gains that come from sustained growth,” added Lall.