Context
As per the World Bank, more than 100 countries — including China, India, Brazil, and South Africa — face severe obstacles that could hinder their efforts to become high-income countries in the next few decades.
About
- It refers to a scenario wherein countries, after attaining a certain level of economic development and income, discover themselves stuck in a rut — not able to take the leap to becoming high-income nations.
- It takes place when a nation’s increase stalls after attaining a sure income degree, preventing it from transitioning to high-income repute.
- As countries grow wealthier, they often stumble upon a critical juncture — generally while their annual GDP per person reaches about 10% of the United States’ GDP per capita (that’s roughly equivalent to $8,000 today).
- It lies squarely in the middle of what the World Bank classifies as ‘middle-income’ nations, and manifests while these nations conflict to sustain rapid growth and innovation, leading to stagnation in their economic development.
Numbers
- As of 2023, India was labeled as a middle-income country, with an annual GDP per capita ranging from $1,136 to $13,845.
- The essential threshold for most countries is around 10% of annual U.S. GDP consistent with man or woman, presently equivalent to about $8,000.
- Since 1990, only 34 middle-income economies have efficiently transitioned to high-income reputation, regularly because of elements like EU integration or newfound oil reserves.
Global Economic Prosperity
- The battle for international economic prosperity in large part unfolds in middle-income countries. These countries, home to 75% of the world’s population, generate over 40% of global GDP.
- However, relying on outdated strategies won’t suffice. Countries must adapt, innovate, and overcome the challenges posed by the middle-income trap.
Vision and the Reality
- India envisions itself as an evolved economic system by 2047 — the centennial of its independence. However, the World Bank cautions that accomplishing this aim might be comparable to a miracle given historical patterns.
- Comparing India’s trajectory to that of South Korea, which converted from a middle-income to a high-income economic system in just 25 years, the record emphasises the need for revolutionary strategies.
- The World Bank study highlights that India should take 75 years to achieve a per capita income equivalent to a quarter of that in the United States if current trends persist.
Obstacles Faced through Middle-Income Countries
- Ageing Populations: Many middle-income nations grapple with rapidly growing older populations. This demographic shift poses enormous demanding situations for maintaining economic growth and maintaining social welfare systems.
- Rising Protectionism: In superior economies, protectionist rules are on the rise. These limitations to trade can hinder middle-income countries’ access to global markets and technological advancements.
- Energy Transition: As the world confronts climate exchange, transitioning to cleaner energy sources becomes imperative. Middle-income countries must balance economic growth with environmental sustainability.
Scale of the Challenge
- At the end of 2023, a staggering 108 countries had been labeled as middle-income. These countries are domestic to about six billion humans—constituting seventy five% of the worldwide population.
- Shockingly, two out of each three humans living in extreme poverty reside in those middle-income countries.
- Moreover, they generate over 40% of global GDP and contribute more than 60% of carbon emissions.
Way Forward: 3i Strategy
- To get away the middle-income entice, the World Bank proposes a practical ‘3i Strategy’:
- Investment (1i): Low-income countries ought to be conscious of the whole rules that encourage investment. Building infrastructure, improving training, and attracting foreign direct funding are crucial steps.
- Infusion (2i): As nations obtain lower-middle-income reputation, they need to diversify their techniques. This segment includes adopting technology from overseas and spreading them across the economic system. Innovation becomes vital.
- Innovation (3i): At the higher-middle-income stage, countries ought to include innovation. This manner fosters research and development, selling entrepreneurship, and developing an ecosystem that encourages creativity.
Source: The Hindu
UPSC Mains Practice Question
Q. Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (2020)