Opinion
India must go beyond economic efforts to dodge a middle-income trap
Summary
- World Bank economist Indermit Gill recently outlined how difficult escaping that trap is. While we must certainly allocate resources better, promote innovation and do various reforms, much hinges on public trust and originality.
As we come to the end of the year, I want to draw attention to a debate that ought to have received greater attention. In August, Indermit Gill, World Bank’s chief economist, shocked everyone by arguing that on current trends, it would take India 75 years to achieve a quarter of the United States’ per capita gross domestic product (GDP).
China would achieve this in just 10 years. Gill called for a new approach nd structural reforms for India to escape what he calls “the middle income trap" (a situation where growth slows down once per capita income is in the range of $1,100 to $13,000 per annum).
Also read: Mint Primer: Why the urban middle class has cut spending
No one can say if Gill’s prediction is accurate. While he has received criticism and brickbats for challenging the euphoric popular narrative, he actually deserves appreciation for offering a dose of negative feedback that can help us reflect on our economic policies.
There are useful recommendations in the latest World Development Report that Gill’s team has produced. Whether or not you believe in the existence of a middle-income trap, promoting competition, leveraging human capital and improving energy efficiency are sensible policy directions. India, like other middle-income countries, is likely to benefit from adopting them.
In an earlier work, Gill and his co-author Homi Kharas have inferred that middle-income countries grow when they have mechanisms for increasing investment in physical and human capital, incentives for innovation and institutions that can successfully carry out structural reforms. If we aspire to be a developed country by 2047, we should pay attention to these underlying factors.
One aspect of it is macroeconomic policy: about interest rate regimes, tax rates, financial sector regulations, digital public infrastructure, research and development (R&D) expenditure and so on. But there are other aspects that economists and technocrats tend to overlook: concerning society, attitudes and mindsets.
First, the policy flexibility that a middle-income country requires is constrained by the political space that its leaders have. India’s attempt to reform farm laws failed because that space did not exist and the government hadn’t tried to create it. People prefer to stay with a known devil if they do not sufficiently trust that the unknown god will arrive as promised.
According to opinion polls, a majority of Indians say they trust their government. However, we distrust politicians, public officials, and, more generally, each other. This means, as in the case of our revoked farm laws, we will not be able to attain a better equilibrium.
Policy reforms often involve addressing the misallocation of resources. For this, those who stand to lose out must trust the social mechanisms that will compensate them for their sacrifices. As this column has consistently argued over the year, building social capital must become a national priority.
Also read: Demographic delusion: Why do almost all of us identify as middle-class?
Second, the tendency to unthinkingly adopt socioeconomic narratives from rich Western countries could be distracting or counterproductive. Inequality, universal basic income and high taxes on the ‘rich’ are imported luxury beliefs that are unaffordable at Indian incomes.
As Gill and Kharas point out, for India, “the dangers for policymaking lie with lobbying and incumbency rather than with inequality itself. In fact, the degree of social tolerance for inequality is often linked with perceptions of future mobility. When the latter is high, then tolerance for inequality is also high and vice-versa."
Similarly, old-fashioned exhortations that one should work hard are disparaged on social media as being out of touch with today’s realities. Well, the reality is that labour productivity in India is one-tenth that of the US, a quarter that of China and Brazil, and lower than that of South Africa.
To be globally competitive, Indians will have to work harder and learn faster, even as policy changes improve education, skills and public services in the longer term.
Finally, a lot of countries became rich because they innovated first and set norms afterwards. Slave labour preceded human rights. Copying preceded patents. Empires preceded self-determination. Mercantilism came before multilateral free trade.
More recently, artificial intelligence startups swallowed all the content on the internet before the world woke up to data ownership rights. Ergo, it is unlikely that a country can become a world leader by following the rules set by incumbents.
China’s global leadership in electric vehicles and the broader climate transition offers useful lessons. Creating new engines of growth in sectors where technology is changing fast and where norms are not settled is risky but can be massively rewarding.
Also read: Crack the employment paradox to avoid a middle-income trap
Remember, it is firms that compete. The policy question then is how India can create companies that become global leaders in emerging sectors. Can we, for example, get there if domestic firms are protected from international competition? Meagre private investment in R&D, especially by India’s largest companies, tells us a story.
Tailpiece: India is one of the world’s big powers today, but many geopolitical strategists have yet to adopt a more confident approach to foreign policy. Many traps are those of the mind.
