There is no easy escape from the middle-income trap
Bank of India reported last week. China has seen an even steeper fall as the country turns inward. In a recent blog co-authored by Gill and M.
Ayhan Kose, they observed: “Global trade is expected to grow less than 2% this year—not even half the annual average that prevailed in the 2000s. At the end of 2022, the total volume of global FDI inflows was down by almost 40% from the 2007 peak." By contrast, in the first seven years of the 2000s ahead of the great financial crisis, trade grew by more than 10%. But the problems are still wider.
As Gill put it in a tweet this month: “Too much public debt. Too little private investment. And the slowest recovery in global trade in the past five decades." Private investment is not proving much help in providing the financing needed by developing countries for green transitions.
They also have higher foreign and fiscal debt than before. In a telling moment, Indonesia, one of the countries seeking to escape the middle-income trap, was forced last week to hike its benchmark rate to 6% to keep in step with the Fed’s higher rates, even though its inflation rate at 2.3% is at the bottom end of its central bank’s target band. The reason it did so was that the rupiah was under pressure, despite having, along with China, the highest real interest rates compared with our Asian peers.
India now has public debt at 83% of GDP and combined fiscal debt (states and Centre) in double digits, among the highest fiscal deficits in Asia. No wonder even leading contenders in the growth stakes such as China, India and Turkey now look as if they are stuck in a middle-income trap. Turkey’s revolving door of finance ministers over the past few years resembled a soap opera.
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