TIOL - COB( WEB) - 932
AUGUST 08, 2024

By Shailendra Kumar, Founder Editor

NOTWITHSTANDING a large umbrella of complex global problems such as back-breaking global debt, climate change-driven catastrophes, and rapid fragmentation of the global economy, an intense race for rapid economic growth is underway in both the Global North and the Global South countries. The Global North is skittish about sustaining their posh living standards on a long-term basis! The Global South, lumbered with gargantuan-sized population and abject poverty, has been toiling hard to shore up their GDPs per capita. Against the lengthening silhouette of Olympian sprint for growth and development, the World Bank's latest report has cautioned against the 'middle-income-trap' for as many as 108 countries whose annual GDP per capita ranges between USD 1136 to USD 13845. The World Bank Report underscores that these countries are home to over 600 Crore people - about 75% of the global population, and two out of three living in penury. They account for 40% of global GDP and 60% of carbon emissions. What poses much bigger problems for the present political leaders than their predecessors in sidestepping the middle-income-trap are the energy transition; soaring mountain of external debt; ageing population and the rising protectionist 'Wall of China'!

While prescribing a time-tested recipe to fight shy of the middle-income-trap, the World Bank has noted that as countries grow wealthier, they often slam into a trap at USD 8000 per capita income. This happens to be the middle of the range of what the multilateral bank classifies as 'middle-income' countries. Since 1990, when the engine of globalisation gathered impressive momentum, only 34 middle-income countries have succeeded in changing gear to high-income lane. About one-third of such economies benefited either of integration into EU, or of discovery of fossil fuels. Analysing the present trends of growth, the Chief Economist for the WB quips that it would take China 10 years; Indonesia 70 years, and India 75 years to reach a level which would be only about 25% of the American per capita income! So, what is the sure-fire growth strategy? The WB has laid out a "3i strategy" which would open the gate to high-income category. And the '3i' stands for investment, infusion, and innovation. While releasing the Report, the Chief Economist, Indermit Gill, commented that though the war for global economic prosperity is going to be won or lost in the middle-income countries but too many of these economies depend just on investment for too long, or they switch prematurely to innovation! He called for infusion of new technologies from abroad, and finally, adopt a three-pronged strategy that harmonises investment, infusion, and innovation! And each phase entails a different policy-mix for success, he advocated.

The report also cites a few examples to underscore the relevance and efficacy of the recipe prescribed. Tut-tutting about South Korea, it states that in 1960, its per capita income was barely USD 1200. And it was USD 33000 by the end of 2023. South Korea began with a policy-mix to lift public investment and woo private investment. Later, it encouraged adoption of foreign technologies and advanced production processes. And Korean companies responded in a big way. Samsung, which used to be a noodle-maker, obtained licenced technologies from the Japanese Sanyo and NEC. Its success generated demand for engineers and other skilled professionals. The Korean Education Ministry responded by earmarking special budgets for universities to spawn new skill-sets needed by domestic firms. Today, Samsung is a global giant in its own right. Poland also followed the same path to raise productivity with technologies infused from Western economies. Chile in Latin America also did the same. In fact, it did something bizarre - imported Norwegian salmon farming technologies and adapted the same to local conditions, making Chile a leading exporter of salmon today!

About India, the Report observes that it needs 'infusion', or the import of a wide array of foreign technologies, which ought to be then widely diffused, along with a skilled workforce. Inefficient state-run and even privately-run companies must be replaced by new firms in the economy, which must not be dominated by a few large enterprises! Going by these yardsticks, it is bad news for India as some of its strategic sectors are strangulatedly dominated by a few large enterprises. The message wrapped in such a caution by the WB report is that too many large enterprises tend to stifle innovation and diffusion of technologies cutting across micro and medium enterprises. The Report also talks about how Tata Group imported computers for its offices when it was allowed only against export obligations, and later began exporting software services by incorporating TCS. A good example of notable innovation! The Chief Economist also praised India's Aadhaar-enabled public digital infrastructure as a shining example of innovation. Indeed, there are may other sumptuous examples of innovations in India such as UPI, drone-based applications in many sectors like agriculture and services and now, AI-based production methods. Though India has been a keen importer of foreign technologies and their infusion is visible at industrial-scale but the regulatory environment for foreign investments need to improve a few notches up! One of the key areas which India needs to focus on is the fast-paced resolution of disputes between the State or State agencies vs foreign investors. The second one is the missing clarity in many provisions of the GST law. Too frequent tinkering of provisions imbued with a revenue bias tends to blanch the investment cycle! All efforts need to be made to stop it from turning pallid!

The real risk, the WB report underlines, is that the mid-sized countries tend to get old much before they get rich! China is a prominent example of such a risk. Although China has done exceedingly well in terms of economic growth and its per capita income has also jumped above USD 13000 but it still does not qualify as a developed or rich country. Incidentally, the Beijing establishment continues to avail a panoply of concessions earmarked for the middle-income economies. As per a large section of economists, a high-income country is the one whose per capita income is between USD 25K to USD 30K. If it is so, it is highly improbable that Chinese economy-in-retreat would be able to scale that height! It has gone past its pole-vaulting phase! More than the declining economic health, what is likely to be a major drag for its economy is going to be its rapidly sliding fertility rate and the ageing population. Its productive workforce has been shrinking since 2011. The future scenario does not look promising even for other middle-income economies like India, Brazil, Indonesia, Saudi Arabia, Turkey, South Africa and Nigeria. Though PM Modi has been aiming at high-income bracket by 2047 but the most likely size of India's GDP is pegged at USD 23 trillion, which means a per capita income ranging between USD 14K to USD 18K. Secondly, in all likelihood, the WB or most economists would be lifting the threshold for higher-income bracket as the GDP of rich countries would also be growing concomitantly. At present, per capita income of the USA is USD 66000; for the UK 46,000; for Germany 49,000 and for France USD 45000. In the next two decades, their per capita income would averaging above USD 60,000.

Another major gauntlet which I visualise as a serious bump for the middle-income countries aspiring to become high-income economies, is going to be the external debt. A good number of Global South economies are under severe fiscal strain to service their debts. A facepalm moment for many! Secondly, since multilateral agencies have been tardy in sanctioning fresh grants as per their Paris Club framework, they have taken loans from 'vulture' countries like China on extortive conditions, and are now finding it too gnarly to service the interest burden. A good recent example is Kenya which has been going through political tumults because of its efforts to raise extra tax revenue to service its debt. As per the latest data, 75% of its annual revenue goes towards servicing its external debt. In fact, for 75 poorest countries - half of them are in Africa, their interest liabilities have quadrupled in the past decades. In the current fiscal, they need to pay through their noses about USD 185 billion - roughly 7.5% of their combined GDP! COVID-19 has broken the spinal cord of their fiscal health. As per the WB, in 38% of economies eligible for development aid, their GDP is lower than it was before the pandemic - a case of reversal in development! Briefly, economic instability and fiscal profligacy - an achetypal characteristic of autocracies and even unbaked democracies - tend to throttle innovations which the WB emphasises in its report as the one which generates 'escape velocity' for an economy to jump from a particular income bracket to a higher income bracket! Given the fact that the global trade may avalanche into 'grizzly' geopolitical crisis, I do not see even half-a-dozen of economies making it to the high-income bracket by 2050 unlike the 1990s when most countries reaped the global peace dividend post-Cold War! The global economy needs to brace up for the 'debt earthquake-in-the-making'! Indeed, we are living in an economic bubble! Phew, the future per capita income of most Global South countries is hanging by the fingernails! Plus ça change!