Why In News?
Despite strong GDP growth, India risks a middle-income trap due to weak job creation, stagnant wages, low private investment, and slow innovation transition.
What is the Middle-Income Trap?
The Middle Income Trap is an economic situation where a developing country grows until it reaches a middle level of income, but then fails to advance further into a high-income, developed economy.
The World Bank introduced this term in 2007. It describes nations whose gross national product per capita stalls in the middle-income range.
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The World Bank defines middle-income economies as those with a Gross National Income (GNI) per capita between $1,146 and $14,005 (subdivided into lower-middle and upper-middle income); nations above $14,005 are classified as high-income economies.
Over the past 34 years, out of 108 middle-income countries studied by the World Bank (World Development Report 2024), only 34 economies (such as South Korea, Chile, Poland, and Singapore) have successfully transitioned into high-income status.
Why Do Countries Enter the Middle-Income Trap?
Loss of Low-Cost Competitive Advantage: As wages rise during early growth, the economy loses its cost competitiveness in low-skilled, labor-intensive exports to poorer, low-income nations.
Lack of Innovation to Compete with Advanced Economies: Domestic industrial base lacks the advanced technology, patents, and engineering skills required to compete with advanced nations in high-value goods.
Stagnant Total Factor Productivity (TFP): Growth remains dependent on adding more labor and physical machinery rather than improving systemic efficiency, operational workflows, and indigenous technological innovation
Severe Human Capital Deficits: Inadequate public spending on primary healthcare, malnutrition reduction, and foundational schooling produces a workforce ill-equipped for complex modern industries.
Institutional Rigidity and Rent-Seeking: Incumbent domestic business conglomerates lobby for protectionism, creating regulatory barriers that stifle competitive start-ups and prevent creative destruction.