Avoiding the 'middle-income trap', if any

Many states are establishing their long-term development targets and some have set the target to be developed in less than 15 years. Economists, who are typically inclined to critically evaluate every such policy, may quickly argue that many of these targets—such as achieving "developed state" status by 2036 or reaching a specific economic size by 2047—appear mathematically challenging, especially in light of historical trends. Interestingly, some economists do come up with math supporting the targets too.?

Yet, it would be overly simplistic to assume that policymakers have not carefully considered the feasibility of these goals. This reminds me of a quote by Les Brown:

"Shoot for the moon. Even if you miss it, you will land among the stars."

This quote perfectly captures the essence of ambitious goal-setting. Regardless of whether we actually achieve the set target, even we manage to accelerate development progress, especially more than the business-as-usual scenario, the vision setting exercise would have met its purpose.?

In the latest World Development Report, the World Bank expressed scepticism about middle-income countries successfully transitioning to high-income status. The drivers that enabled economies to move from low-income to middle-income status might lose momentum, and will need to be supplemented or replaced with new policies. The transition is problematic when industrial progress in middle-income economies were largely—supported by subsidies and policy incentives—without fostering true competitiveness across sectors.

An agile industrial policy is essential to navigate this transition. Attention would be need on traditional industries which continue to be supported by subsidies and incentives, but have not moved up the competitive ladder. Protectionist measures work in the same way. Pressure groups can push to extend these supports well beyond their intended lifespan, preventing necessary adjustments. Transitioning to high-income status will require a nimble industrial policy, one that avoids permanent state support and instead fosters new, dynamic firms that can build the state’s long-term productive capacity.

Many middle-income economies, in their pursuit of employment opportunities, have focused on building low-skill manufacturing sectors, with higher-value activities like design and marketing taking place elsewhere, often in high-income countries. However, the leap to high-income status requires moving up the value chain, producing high-value goods and services where the output of each worker generates significantly greater value. This might involve advancing to the production of capital goods, such as machinery, which are typically imported from high-income countries.

States in India, much like middle-income countries elsewhere, must avoid the "middle-income trap." This will require not only promoting labor-intensive manufacturing, but also developing local capacity to produce high-value, complex products. Improving the quality of secondary and tertiary education is no longer optional. States cannot afford to wait until they have fully developed labor-intensive manufacturing sectors before boosting high-value/complex goods’ production. Over the next 20-25 years, the working-age population is expected to grow, which means the number of people contributing to the economy ("heads earning") will outpace those dependent on it ("heads eating"). Additionally, in an increasingly digital world, technology and knowledge will flow faster than ever before so learning curve could be steep. We should make the best of the opportunity lying ahead.

[Views are personal.]?