Faces middle-income trap challenges by over 100 countries, including India: World Bank

More than 100 countries including China, India, Brazil, and South Africa—face serious obstacles that could hinder their efforts to become high-income countries in the next few decades, according to a new World Bank study that provides the first comprehensive roadmap to enable developing countries to escape the “middle-income trap.”Drawing on lessons of the past 50 years, the World Development Report 2024 : The Middle Income Trap finds that as no countries grow wealthier, they usually hit a “trap” at about 10% of annual U.S. GDP per person—the equivalent of $8,000 today. That’s in the middle of the range of what the World Bank classifies as “middle-income” countries. Since 1990, only 34 middle-income economies have managed to shift to high-income status—and more than a third of them were either beneficiaries of integration into the European Union, or of previously undiscovered oil. In an interview with ET World Bank chief economist Indermit Gill and director of World Development Report Somik Lall talk about India’s prospects and its strengths. Edited Excerpts:

There is breakdown in consensus on globalisation and rise in geopolitical risks. How feasible is the 3i strategy and how does it play out for countries such as India?

Indermit S. Gill:

The stage at which India is is probably the most critical. It would have been easier if India had reached this stage 20- 30 years back. External environment has become harder for India now as compared with what it was 20 years back. Domestic environment, especially demography, is actually better today than it was 20 years back. India is domestically in some sense at its prime potential. Question is what are the policies that would then help India realize that potential.

Technology is becoming a big differentiator, but it is concentrated in a few hands….

Indermit S. Gill: India’s picture is mixed. It is better than some of the other countries for two reasons. One, there is reluctance to share technology. There is greater reluctance to help countries that are behind with new technologies if they’re seen as future threats in richer countries. But by the same token, if you look at India’s technology preparedness, it is somewhat ahead of its per capita income levels. India has done a really good job of what I call a horizontal policy of improving digitalization across the entire economy. That is a big asset. Its first plus is demography. The second plus is digitalization.

Somik V. Lall: In the 1970s, the US was probably the world leader. And now if you look at it, India and China are at par. Relative to its income per capita, India is far more technically sophisticated in terms of its patents and the importance of its patents and knowledge than for countries at that level of development. The question, we ask, is does this technical knowledge spillover into the economy. What we find is that there are many companies and many firms who are productive, who could grow, use the technologies, yet they don’t do so. In fact, if you were to look at the US, if a firm that survives from its birth and it’s 40 years old, it’s about 8 to 10 times the size when it was formed. And in India, it’s less than twice. The fact is, even if you have these technologies out there, Indian companies just don’t have the dynamism to be able to absorb them. And that’s because of a variety of reasons — kind of love for small firms, vilification of large companies. This whole business dynamism is very important for the Indian economy to be able to take advantage of these technologies and improve its economic performance.

India has set itself the goal of becoming a developed nation by 2047. In terms of policy mix, do you see it’s on the right course or is there a need for some course correction?

Indermit S. Gill:

A lot of the debates in India have become vertical debates. Should India do manufacturing or should it do services? And, that would naturally raise a question about 50% of the labour force, which is in agriculture, then shouldn’t it also do agribusiness? Thinking vertically is, I think, the wrong way to go about it. If you look at India’s manufacturing strategy, you can debate whether or not it has had a successful industrial policy. If you look at India’s success on the services side, you can debate how much of that was because of policy and how much of that was because of other things like the private sector dynamism and so on. I think what is less debatable is that as a matter of policy, India did a really good job on digitalization. I think as a matter of policy, I think that it is fairly uncontested that India is doing much better now on infrastructure than it was in the past. I think we could even go back and say India’s demographic transition has become much more favourable for growth and development. If you look at these vertical policies you don’t see too many successes, but if you think of horizontal policies, you see many successes. Swachh Bharat for example, we consider it a success. I would sort of think about it and say what is the horizontal policy that I think that is the need of the moment in some sense. I think it has to do with what one could broadly call education. India is at a stage where it must massively increase the availability of skills for its enterprises. There are sort of two ways in which it has to do it. One is it has to take the same attitude that it did towards infrastructure, towards digitalization and apply that same mission mentality to the education part. And that means improving the quality of secondary education. That means improving the quality of higher education. That means connecting universities with both enterprises at home and other universities abroad. There have been some successes, but we need to scale those. If you want to bring in technologies from abroad and diffuse them across the economy, you have to have high levels of skills. And you have to allow businesses a lot of economic freedom so that they can innovate and change their technologies and so on. I would steer the debate away from should we do manufacturing? Should we do services? Should we do agriculture? We have to do all of them. We are huge.

India is now the 5th largest economy and is going to become the third largest economy. But that’s not the goal that the government has set for itself. That’s not the goal that Indians have for themselves. The goal is Viksit Bharat. The goal is to get to high income by 2047.In that case, you’re not talking about these enclaves that are doing well. You have to have the whole economy doing well and for the whole country to do well, you have to think about horizontal policies, not vertical.

Does a country like India have that much time before it begins to age?

Indermit S. Gill:

What is India’ s choice? Is there a faster strategy than that? I think what the World Development Report says is that there isn’t a faster strategy. This is the fastest way to go.

The report talks about microenterprises dominating the firms’ size distribution in India.

Somik V. Lall: We looked carefully at firms of all sizes. We often think in economic policy terms that large firms are bad. Small firms are good. What we show is that firms of every size have the potential to add value. It is the processes or the policies that limit value creation that slow down growth, because if a productive firm is adding value, they probably want to hire more people. If they hire more people, they also want to hire managers, more capital so they get more and more sophisticated and they move on. And firms that are not doing well, they sort of leave the market. And yet what we find in about 100 countries around the world, there are explicit or implicit barriers for productive firms to grow. These could be taxation. These could be enforced. They could be mandated with social benefits. With all kinds of limits good firms are prevented from growing and in many countries, including what we see historically in India, there have been incentives for small firms. So I think that’s one of the key drivers of growth and In fact we make a strong case that you shouldn’t distinguish firms by this size. You should think about firms by the value they’re adding, the jobs they’re creating, the kind of sophistication they’re bringing into the economy. In fact, that’s a really important point because what it’s doing is allocating resources more efficiently in the economy,

AI, Access to tech, climate change transition, so how do you deal with these two challenges while we move up?

Somik V. Lall:

Let’s start first with the climate transition. The big thing for countries like India is to grow faster. Because what we show is that countries that grow become more resilient, the people get better off, and they can adapt better. At the same time, when we think about climate mitigation, India has done a lot in terms of energy efficiency.

Indermit S. Gill: When it comes to the climate part I think India and others are succeeding in making the debate a much more sensible one. The sensible way to think about this debate is you have to have affordable and reliable energy because without that you can’t develop. The second one is you have to make sure that your local environment is clean, because otherwise you pay too much of a cost in terms of health in terms of mortality and so on. The third part of course has to be about the climate, a global climate. I think each of these three legs should be given equal importance in a country like India. I think you have some real win-win strategies here and one of the things that is a win-win is energy efficiency. I think that India’s policy goal is to cut the energy intensity of output. And by the way, India’ s already starting to succeed on that. So it’s not like India’s failing on that India is already starting to succeed.

What is your outlook on global interest rates?

Indermit S. Gill:

I had earlier said that when we looked at the previous episodes of monetary tightening that it takes longer than what people were saying. It takes 4-5 years and not 2-3 years, maybe even longer. I think now I saw something from the Fund: we expect interest rates to remain higher for even longer. The good thing about all this stuff is that India is a bit of an outlier, India and Indonesia. If you look at all this, you find there are two or three economies that have done rather well despite this. Two of them are India and Indonesia, the third one is actually the US. The US has done well because of business dynamism combined with essentially a continued fiscal stimulus. To some extent Russia has also done well but because of the war. Outside of that, it’s mainly soft. I would actually think that global economic prospects are not going to be India’s friend, but domestic economic prospects are India’s friend right now.