The middle income trap is something most economists are familiar with. As global trade grows, the biggest beneficiaries of this are low-income low-wage countries that, for instance, start exporting textiles and other hand-made items. Over time, if they are lucky, and disciplined, MNCs will invest in them and, like China, they will produce assembly line electronics or, like India, top quality BPO operations. This, or a variation of it, is what takes countries from low income to middle income where, like middle age, if you?re not careful, the problem starts. Once prosperity comes to town, wages go up and, if this outstrips productivity, countries get uncompetitive and lose out to others?in this sense, the middle income trap is remarkably similar to the Dutch Disease, at least as far as its impact goes.
In the case of India, in sectors where there hasn?t been that much of a productivity hike, this process is clearly visible. Which is why it has lost out to countries like Bangladesh in the global textiles trade and even saw one class of BPOs relocate to the Philippines as local wages shot up. What has to be particularly galling, however, is that a recent OECD report on the outlook for Asia has a section on how long it will take various countries to become high income countries. That Malaysia will reach this milestone in 2020 is no surprise, nor is it that China will reach this level a few years later, in 2026. Thailand will reach rich income status in 2031, Indonesia in 2042 ? But how do you explain Vietnam becoming a high income country in 2058, a full year ahead of India? This is not even a country Indian businessmen will recognise as a competitor. Just goes to show what happens to countries whose leaders go to sleep at the wheel.
