By Anjan Roy
“Middle income trap” is not an uncommon phenomenon in development experience of nations and countries. While some countries make a promising start, they tend to stagnate after a certain point. They fail to graduate from moderately devoid countries to developed countries with high per capita income.
The middle income trap was recognised and examined by a galaxy of development economists. Many suggestions have been made. Somehow, despite these prognostications and advises the phenomenon keeps recurring. This year’s World Development Report — WDR — tries to ex-examine this well known phenomenon in economic growth and seeks to suggest ways of tackling this problem. WDR 2024 advises on ways to break this syndrome and help the middle income countries keep growing.
The World Development Report 2024 has suggested a clear path for policy priorities. This can be termed a “3i’s strategy”. The three “i’s” constitute investment, infusion and innovation. This is what the report states after posing a critical question: “Is growth in middle-income countries different from that in countries at other income levels?” The answer is “Yes.”
The Report suggests: “Successful middle-income countries will have to engineer two successive transitions to develop economic structures that can eventually sustain high-income levels.” What are these transitions. According to the report the first transition consists of a moving from a sole strategy of investment led growth to dual strategy of investment and “infusion” of new technologies from abroad and diffuse these in the domestic scene. That is, from 1i to 2i.
At the next stage middle income countries will have to “switch to a 3i strategy, which entails paying more attention to innovation—a process more applicable to upper-middle-income countries.” These transitions however entail some painful processes in between. Innovation, particularly, inflicts pains on the economy and involves readjustments which are often fought bitterly by sections of vested interests and incumbents.
WDR 2024 has suggested a new way of tackling the slackening pace of growth in economies which have been able to break free from abject poverty and underdevelopment. The suggest taking use of economic crises to come out of the middle income countries growth stagnation. Crises can become useful tools for another well known phenomenon — Creative Destruction. The idea of creative destruction was first suggested by legendary economist, Joseph Schumpeter.
The predicament of middle income economies is outlined in the report succinctly: “Because middle-income countries need to recalibrate their mix of investment, infusion, and innovation, crises can become a necessary evil because they provide the momentum to weaken the status quo.”
An economy grows fetters and structural rigidities favouring incumbent economic players against new entrants. Existing farm and companies hinder competition and kills off new entrants and thus strangulate new initiatives and more efficient production processes. What is important is to break down the factors which inhibit the new entrepreneurs and their more efficient production processes. With hindsight, the development path of the Indian economy appears to have followed, broadly speaking, a similar path, more strikingly in the later years since economic reforms.
What immediately comes to mind is the changing profiles of Indian entrepreneurial class. Why is India growing and able to adapt to the frontiers of global technological developments. How is India able to nurture its entrepreneurial class — the key input for sustained and fast development of an economy.
If we examine the list of leading industrial houses at the time of Independence and compare it with those of say, 1960, there would have been little changes. Most of the leading houses of late 1940s were akin to those of early sixties. Came the crisis of late 1960s, when India had faced an economic recession. This has witnessed many of the major firms fall behind. These were related by newer group of smaller and leaner companies of a fresh crop of promoters.
But the real change came from late 1980s to the crisis period of 1991-92. Two factors were primarily responsible. The opening up of the Indian economy set in motion by Rajiv Gandhi during his short stint as prime minister. Many of the critical imports were liberalised, including imports of cheaper computers.
The important factor was the opening of key sectors of the economy to the private sector, including the telecommunications industry. Opening up of telecoms industry and the price efficiency reached in the sector through fierce competition among the new entrants paved the way for the then emerging Information Technology industry. The relative opening up followed by the economic crisis of 1991-92, resulting in sweeping changes in the regulatory structures, helped bring in new entrepreneurs, both Indian and foreign into the Indian industrial landscape.
Freer foreign direct investment rules brought about an altogether new paradigm in the automobile sector, among the most prominent change stories. Old automobiles companies, owned by two of the country’s most hallowed industrial houses, disappeared in the face of influx of new technology and players.
Secondly, the Department of Telecommunications which hitherto exclusively provided telephone and telecommunications infrastructure in the countries was relegated into oblivion. Its place was usurped by new fledging private sector service providers. The prices had dropped and the IT industry could flourish.
Today, if we compare the leading industrial houses with that of 1950s, we will find little of commonality. Most of the leading houses of 1950s have disappeared and they have been replaced by new crops of techno-entrepreneurs. The billionaire and barons of today are a new crop. Of course, exceptions are there like the House of Tatas, among the few. Middle-income countries face critical needs: growth, decarbonization, and energy security. Solutions will require decoupling emissions from a growing economy while extending affordable, secure energy to all firms, WDR adds.
The future prospect for the Indian economy will critically lie in this process of regeneration and discarding the old and inefficient. How do we ensure this unhindered? The answer will lie in government policy not meddling too much in preserving existing structures and protecting inefficient players in the name of say protecting employment. Let employment generation come through new entrants and new industries. (IPA Service)
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