ASEAN’s Middle-Income Trap and Lessons for India
Context: ASEAN’s struggle with the middle-income trap is highly relevant today as global supply chains shift under US–China tensions, protectionist tariffs, and technological disruptions.
What is the middle-income trap?
- The middle-income trap refers to a situation where economies that have achieved middle-income status fail to transition into high-income economies, experiencing prolonged stagnation.
- According to the World Bank (2012), such economies cannot sustain productivity growth because they rely on low-cost labour and foreign technology without upgrading to innovation-driven growth.
How does it affect ASEAN economies?
ASEAN economies like Malaysia, Thailand, and the Philippines have remained in the middle-income category for decades.
- Economic Stagnation: Growth slows once cheap labour and resource-driven expansion exhaust their potential.
- Weak Domestic Champions: Unlike South Korea (Samsung, Hyundai) or Taiwan (TSMC), ASEAN relied excessively on foreign MNCs for integration into global value chains, leaving little scope for indigenous innovation.
- Geopolitical Risks: US tariff policies and a weakening export-led global economy undermine ASEAN’s reliance on external demand.
This has led to widening inequalities and vulnerability to shocks, evident during COVID-19, when tourism- and export-dependent ASEAN economies suffered deep recessions.
What factors are responsible?
- Weak Institutions: As Acemoglu and Robinson argue in Why Nations Fail, “extractive institutions” concentrate power in elites, resisting innovation. Similar challenges exist in India where land, labour, and judicial bottlenecks slow industrial growth (Economic Survey 2020–21).
- Dependence on MNCs: ASEAN hosts foreign firms but lacks home-grown technological champions. India too depends heavily on FDI in electronics and defence but lags in building global players in semiconductors or EV batteries.
- Inequality and Weak Domestic Demand: ASEAN’s urban–rural divide curtails mass consumption. India also faces a similar challenge — NSSO data shows rural distress limits domestic demand expansion.
- Governance Gaps: Corruption, political patronage, and weak intellectual property protection discourage innovation in ASEAN; India too struggles with regulatory uncertainty.
What measures can help escape the trap?
- Strengthen Innovation Ecosystems: ASEAN must deepen university–industry linkages, enforce IPR, and encourage R&D. India’s Atal Innovation Mission and PLI schemes offer useful models.
- Strategic FDI Management: Ensure technology transfer clauses in FDI agreements. India’s telecom and defence offset policies show partial success but need stricter monitoring.
- Inclusive Growth: Reducing inequality broadens domestic markets. ASEAN requires bridging the rural–urban divide; India’s focus on PM-KISAN, MGNREGA and rural infrastructure plays a similar role.
- Regional Integration: ASEAN can act as a ‘domestic’ market of 680 million people by removing non-tariff barriers. India’s challenge lies in deeper intra-South Asian integration, currently one of the least integrated regions globally (World Bank, 2022).
- Institutional Reforms: Transparent, merit-based governance and credible state capacity are prerequisites. India too must improve contract enforcement and ease of doing business.
What broader lessons emerge?
ASEAN’s struggle highlights that industrial upgrading, institutional reforms, and inclusive growth are mutually reinforcing. For India, avoiding a similar trap requires:
- Building domestic champions in sunrise sectors (semiconductors, green tech).
- Expanding middle-class purchasing power by reducing inequality.
- Enhancing regional and global competitiveness through innovation-driven strategies.
As the Economic Survey 2021–22 stressed, “innovation and inclusive development, not low-cost labour, will determine the future of emerging economies.”
