India, the middle-income trap, and the Four Horsemen

Go easy with the apocalyptic metaphors…

Tell that to the Chief Economic Adviser Arvind Subramanian: it’s a metaphor he invokes in the Economic Survey .

Does he prophesy an Indian economic apocalypse?

Not at all, but he makes a nuanced point — and he has good news as well as bad news to convey. Which do you want first?

Hit me with the good news.

The good news is that India dodged the ‘middle-income trap’. In fact, the ‘trap’ did not manifest itself at all.

That’s great, but what’s the ‘middle-income trap’?

It’s an economic theory, which postulates that erstwhile low-income countries, including India, may graduate into the ‘middle-income’ tier, but will find themselves unable to move higher up owing to a failure to build institutional, human, and technological capital. On the other hand, they will be squeezed from below by more intense competition from lower-cost competitors in manufacturing and other sectors, and will be stuck in a Trishanku limbo-land, the theory holds.

And the theory failed in the real world?

Citing research findings, the Survey establishes that there may be no such thing as a ‘middle-income trap’. The economic ‘convergence’ between poorer countries that were “catching-up” with more developed economies has broadened and even accelerated since the mid-1980s. Between 1960 and 1980, only 43.7 per cent of countries (of a sample size of 112) grew faster than the US (the “frontier economy”) and they outpaced the US by 1.4 per cent. Between 1980 and 2017, those numbers grew to 68.6 per cent (out of a larger sample size: 153 countries), which outperformed the US by 1.7 per cent.

How did India fare?

In 1960, India was a low-income country with a per capita income (in 2011 purchasing power parity terms) of $1,033, equivalent to about 6 per cent of US per capita income at that time. In 2008, it attained ‘lower middle-income status’ with a per capita income of $6,538, equivalent to 12 per cent of the US. If India’s per capita income grows at 6.5 per cent a year, the country can reach upper-middle income status by the mid-to-late 2020s. But…

Here comes the bad news…

Yes, and it has to do with the global financial crisis of 2008.

But aren’t its malefic effects behind us?

You wish. World economic growth fell from 4.3 per cent in the ten-year period before 2008 to 2.9 per cent in the decade after. In the case of lower-middle income countries (where India belongs), growth fell from 4.9 per cent to 4.2 per cent. The Survey reasons that underlying these slowdowns are some developments that could damage growth over the long term and slow the process of ‘convergence’ between richer and poorer economies.

What might these be?

The Survey calls them the Four Horsemen. These are (a) the backlash against free trade in developed economies, which shrinks the space for developing economies to export their way to growth; (b) thwarted structural transformation, where resources shift from informal, low-productivity sectors to ones that are only marginally less informal/more productive; (c) human capital regression, induced by technological prowess, which refers to automation, coupled with the failure to provide even basic education need for structural transformation; and (d) agricultural stress induced by climate change.

Bottomline?

As a late ‘converger’, India faces considerably stronger growth headwinds than many other countries. It’s never too late to do the right things. But if we don’t do them, there’s apocalypse ahead.

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