Middle-Income Trap is muddling China from moving ahead with its economy. It’s more like a challenge keeping it in the rear end of the economy hustle. Regardless of this, it isn’t a rebuttal that they are up in the 2nd position. being the World’s largest economy with $17 trillion, roughly making 18% of the GDP globally.
What does Middle Income Trap mean?
It’s a situation in the development of the economy that puts the country in making a certain range of income but gets stuck there.
It’s a phenomenon where this economy is unable to keep up with other developed countries giving high value, due to raised wages of the manufactured goods that are being exported and ultimately has lost the competitive edge comparatively.
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Why does any Country get stuck in the Middle Income Trap?
It’s very important for the economies to surpass the low income to step on the middle income and from there on to the high income. But if they are stuck, it can be due to some possible reasons.
1. Demand for higher wages in labor-intensive sectors, be it “Manufacturing”
For the growth of an economy, it is very paramount to be invested in manufacturing sectors. And the laborers involved in this sector seek higher wages as the sector can aid in exporting the goods being manufactured.
2. Turns out that economic transformation is after an all-costlier affair
The competition is among the economies around the world and in order to sustain it, the sector has to be globally competitive and not domestically competitive to get the maximized output.
3. Policies currently aren’t elevated
The policies should give a conducive environment for business operations or manufacturing industries which may entice or attract many others to invest in particular countries because of the conducive environments. When the nation is attaining stronger economic growth, technological innovation becomes necessary.
The reforms must have an international agreement that looks into the long-term commitment. And when the progressive policies are not well structured, it might cause a deeper problem that is overlooked.
4. Other developed countries are in a fast pace
The developed or the developing nations are in a competitive race for the economy. So if they want to grow, they must out-pace other nations or be in line with them, for which sustaining the growth is essential and the middle-income countries might not be able to sustain their growth which is a reason why sustaining is quintessential.
What is China up to so far?
China’s economy has seen steady growth in recent years. According to reports, the country’s GDP grew by 6.5% in the last quarter of 2020 before the pandemic. However, this growth pattern has come with its challenges, including rising debts and a slowdown in exports. Despite these issues, the Chinese government has implemented various measures to stimulate the economy, including tax breaks and support for small businesses. Overall, China’s economy seems to be holding steady despite the global pandemic. And in the first quarter of 2023, it grew by 4.5% and is anticipated to reach 6% year on year in the second quarter.
China is moving with input-driven strategies and is popular for cheaper products as it keeps the production cost lower. But they can’t be doing it anymore and has to shift to lean more on technological innovation strategy.
There’s a conventional notion that lower-income economies progress with higher growth towards the middle income, whereas middle-income countries fall into stagnancy while moving towards higher income. But there are very few countries that have escaped from middle-income to higher-income easily.
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Where is India at the moment?
India doesn’t have to worry about the middle-income trap as it is at the lower middle-income level with GNI per capita being $2000. To reach $5 trillion by 2024, it must start expanding at least by 12% year on year.
There is no surprise that India has utilized advanced technologies in enabling the growth of the economy and it must continue to emerge with its best utilization as it moves forward.
It has to come up with a reform that has proper labor laws and flexible lands. India has failed in setting up a strong manufacturing sector that isn’t giving maximized output and only constituting to output of less than 17%.
India can be seen as a consumer-driven economy as it has become the most populated country in the world recently surpassing China, so this growing generation can contribute to the expansion. At the same time, there is no denying that unemployment is also high. And the country is working on increasing the employment of people.
To finance the private sector or infrastructure, the role of the financial sector is very crucial to evolve when it comes to sustainable development. The private sector should be able to raise money easily and that has been implemented such that raising bonds is no longer troublesome.
What’s in the end?
India will take its ride to reach the middle-income level sooner but a decade after China. Although the government has to put the banking sector into the proper structure, set up a new tax structure, and bring in more changes in the policies, the ride isn’t going to be easy but harder compared to the early birds of this race such as Japan, China, & South Korea.
But surely China has to figure out its way to move away from the middle-income trap and hit the high-income group, while literally being in the face off with the 1st largest economy of the World i.e. “The United States”.
