24 May 2020

Middle-Income Trap2 min read

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  • The Economic Survey 2018 (volume I) makes a theoretical examination of India facing a Late Convergence Stall and the risk of falling into the Middle-Income Trap.
  • To understand the Middle Income Trap, classification of countries by the World Bank in terms of Per-Capita Income is to be understood.
  • The World Bank is classifying countries in terms of per capita income.
  • Low-income countries are those with a per capita income lower than $1005.
  • The second category is the middle-income group with a per capita income varying from $1006 to $ 12235. This group is the largest one with nearly 81 countries.
  • Countries with a PCI of $12236 and above are classified as higher-income economies.

What is the Middle Income Trap?

  • The “middle-income trap” is the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels (of per capita income) and failing to graduate into the ranks of high-income countries.
  • Coined in 2006 by World Bank economists Indermit Gill and Homi Kharas, the term refers to a sustained economic slowdown following a period of strong growth.

Reasons for this situation in India

  • The economic reforms that India unleashed in 1991 led to a period of strong growth lifting millions out of poverty and increasing the size of the economy by almost nine times in about 30 years.
  • However, unlike China and other prosperous East Asian nations, there was no mass shift from farm to factories.
  • India failed to create a robust manufacturing sector, which today accounts for less than 17% of the economic output.
  • Service led economic growth→ jobless growth→ India’s economic growth has been powered by investments in the services sector, which could only create a few million high-skilled jobs, thereby forcing a staggering 81% of the workforce to be employed in the informal sector.
  • The Asian Development Bank has found that unequal income distribution
  • India has very low levels of human capital growth for an ambitious and fast-growing major economy. The World Bank ranked India at a lowly 115th out of 157 countries in its Global Human Capital Index rankings released last year.

Solutions:

  • Attracting more investments in infrastructure development
  • implementing land and labor reforms
  • investments in human capital formation
  • provision of better social security to people


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