World Bank’s ‘The Middle Income Trap’ is a timely wakeup call for all nations

We need to examine and look at our grand plans of becoming Viksit Bharath by 2047. We have to come out the middle income trap, which can be achieved by making use of the large underutilized potential that exists

In what is surely a must-read by the whole lot for the sheer relevance it holds to the world, the World Bank group released its ‘World Development Report 2024’ with special focus on ‘The Middle Income Trap’.

As a report, this is especially useful for all countries that are currently in the middle income group and are desirous of upgrading themselves to developed economy with a per capita income on par or perhaps more than the present high income nations.

Each such developing economy has planned for achieving a higher income status within the next two or three decades.

In a word of caution, the report makes it abundantly clear that the journey is not as easy as it may sound on paper. To drive home the point, it reveals that since 1990, only 34 middle income economies have succeeded in their efforts and accomplished the feat.

As for the remaining 108 nations, they are still stuck in ‘the middle income’ trap as of 2023-end. It is not that they did not ring in changes but they invariably fell short on one parameter or the other. The report points out that since 1970, the median income per capita of middle income countries has never risen above 10 per cent of the US level.

It makes for an interesting reading and also educative to know about what helped only a very few countries to cross the middle income trap and reach the level of high income countries and what prevented the others from succeeding despite the best of endeavours and planning.

We are all aware that current drivers of growth alone would not suffice and the same should be supplemented with new drivers of growth in order to keep with the changing times and prevailing market conditions.

On their own, historical success factors alone will not lead to the desired goals as it is imperative that new factors that have immense potential for growth are duly addressed. They include incorporating advanced technologies, productive use of capital and labour, focus on innovation, research and development, new global patents and trademarks, new skilling and specialisations, building capabilities, talents, higher entry of new players and entrepreneurs, exit of inefficient and capital draining enterprises, higher levels of savings and investment, more liberal ease of doing business and facilitating domestic and foreign investment on a greater scale and optimal utilisation of domestic resources.

The World Bank group’s report has called it the ‘3! Strategy" namely the 1! Strategy for low income countries, 2! Investment+ infusion for lower middle income countries and 3! Strategy of Investment + Infusion + Innovation (Triple I) for the upper middle income countries.

It is therefore necessary for the aspiring countries to go in for massive investments and bigger expansions into newer and productive areas, while existing players needs to get competition with new equal capable players who are equipped with either innovated or borrowed advanced technologies that lead to efficiency, higher productivity, quality products of global reach, encourage skilled and specialised work force to get opportunities for new creation, new innovations and high potential growth of global scale, infusion of new thinking, new action plans and strategies. Even as these are essential, it is paramount that old and proven inefficient enterprises are done away with to free capital as simply preservation without much value addition and nil or lower contribution to profitability and value creation may lead to value destruction.

The report says “merit must be rewarded and vested interests must be disciplined. There must be a mechanism to discipline incumbents through competition regimes that encourage new entrants without coddling small and medium enterprises or vilifying big corporates. Secondly, there must be proper allocation of skilled talent as it is necessary to reward merit and conserve and promote talent. As the world is faced with climate change, this crisis has to be capitalised with greater attention to energy efficiency and emissions intensity.”

The transition from low income to middle income and from middle income to high income countries are to be planned and executed with the ‘Triple I’ strategy. However, success depends on how all stakeholders will promote, nourish and enhance forces of creation and preservation and give a thought to possible destruction factors.

The current global condition of geo-political tensions, lower growth, high debt, lesser capital buffer, fragmentation and environmental challenges make the transition from one level of income to another harder in the years ahead. The report opines that “to become advanced economies despite these headwinds , middle income countries will have to produce miracles”.

As we ponder the report and its relevance in the Indian context, we need to examine and look at our grand plans of becoming Viksit Bharath by 2047. We have to come out the middle income trap, which can be achieved by making use of the large underutilized potential that exists. Towards this, we need to step up our investment coupled with infusion of technology to create new value drivers and become supplier of homegrown technology both for domestic and global markets. India can eventually become value driver with our very own innovators. New ideas, facilitators and horizons of value are to be created to boost productivity and greater output efficiency.

The current special emphasis on startups, fintech, ecommerce hubs, specialised skilling , higher entrepreneurs in traditional and sunrise areas, higher investment in large capacity building in alternative energy are the steps in the right direction. MSMEs are one of the biggest contributors to our GDP and exports and the recently proposed eight measures are timely steps. MSMEs need to adopt technology, newer skills, new innovation and they have to become global leaders using the ‘Triple I’ strategy.

The active and purpose-driven involvement of every stakeholder is essential to achieve Viksit Bharath by 2047.

(The author is former Chairman & Managing Director of Indian Overseas Bank)