Middle-income Trap: What’s the solution for Bangladesh?

Bangladesh’s performances in many areas of the economy are truly amazing.

The socio-economic condition in Bangladesh has earned plaudits around the world. The poverty rate along with the child and maternal mortality rate has significantly been reduced. Among South Asian economies, Bangladesh has shown remarkable economic growth. The contribution of industries and the service sector to the country’s GDP is praiseworthy signalling that the economy is set to become one of the largest in the world. Bangladesh is now the world’s 35th largest economy with a GDP of $ 460 billion. The country is estimated to become the 24th largest by the first half of 2030s. The world’s prevailing orecarious situation might have been a key barrier to becoming the 24th largest economy one within the stipulated time frame.

Since 2011, Bangladesh’s economy has been consistently growing at over 6.0 per cent. As a result of its growth momentum, Bangladesh is currently being taken into consideration as the fastest-growing economies in the world. Even though, during the coronavirus pandemic in 2020 GDP growth rate in Bangladesh was recorded at 3.8 per cent. In seeing positive growth in GDP during the pandemic period, the International Monetary Fund (IMF) highly appreciated. Actually, eye-catching economic growth helped Bangladesh in respect of transforming its status from a low-income country to a lower-middle-income country in 2015. Against the backdrop of economic growth success, a good number of mechanisms at the policy level worked better. Now, the government’s vision is to turn Bangladesh into a higher-middle-income country by 2031 and a high-income country by 2041.

Though having success stories behind significant economic growth, Bangladesh did not bring revolution in many areas that are essential to be sustained economically. According to media reports, foreign direct investment (FDI) remains low at about 1.0 per cent of GDP, foreign remittance accounts for 5.6 per cent of GDP, and the Gini coefficient (a measure of income inequality) is 0.32 ( highly alarming). Youth unemployment remains at 12 per cent. Besides, Macroeconomic instability has already been experienced by the IMF management. In view of IMF visiting team, restructuring of monetary and fiscal frameworks are crucial for Bangladesh.

Despite a lot of limitations, Bangladesh is going to graduate as a developing country in 2026 as per the recommendation made by the UN Economic and Social Council. The recommendation came following the progression in GNI per capita, the Human Assets Index (HAI) and the Economic Vulnerability Index (EVI). According to the Bangladesh Bureau of Statistics ( BBS), per capita income reached $ 2,793 in FY 2022. The growth trend of per capita income is gradually increasing as a result of rising income sources.

Bangladesh achieved the status of a lower-middle-income country in 2015. The recognition came from the World Bank. According to the World Bank, a country exceeding a per capita income of $ 1,085 is categorized as a lower-middle-income country. If per capita income is exceeded $ 4,255, the concerned country will be termed as an upper-middle-income country. As per the World Bank, with a view to becoming a developed country, per capita income must be exceeded $ 13,205. According to FY 2022, per capita income in Bangladesh reached $ 2,793. In light of the current per capita income in Bangladesh, the country falls into the category of a lower-middle-income country. Unfortunately, the world’s countries belonging to the lower-middle-income category hardly became developed nations. Growth stagnant is the main reason for not turning them into developed nations. They experienced a middle-income trap situation. According to the World Bank study paper, out of 101 middle-income countries in 1960, approximately 13 became high-income by 2008 based on per capita income level

The ‘Middle-income Trap’ refers to a situation whereby a middle-income country is not able to transition to a high-income country due to rising costs and declining competitiveness. The middle-income trap is a narrative of growth stagnation that reflects current and long-standing anxieties about slow economic growth. The world evidence suggested that many low-income economies developed rapidly and millions of people have been lifted out of poverty within the shortest possible time. At one stage, the countries, that showed significant growth, could not achieve the status of high-income countries.

Very recently, Bangladesh has come under the close observation of famed global lenders. The global lenders are of the view that Bangladesh may fall into the middle-income trap. The assessment made by them came following current economic vulnerabilities. The required issues concerning innovation, investment and diversifying the export basket can help Bangladesh in avoiding the middle-income trap. Right now, Bangladesh has to act on probable challenges arising from LDC graduation. Looking for new markets for exporting products through Free or Preferential trade agreements has become timely demand.

Recently, Professor David Hume of Manchester University and Professor Yaseu-Sabaka of Japan presented two keynotes in Dhaka. They said that Bangladesh should grow awareness in avoiding the middle-income trap situation. In their presentation, they showed that the countries that are in middle-income countries, their physical capital is 55.5 per cent, labour-force participation is 21.9 per cent, human capital 12.8 per cent and productivity contribution is 9.8 per cent. But, the countries belonging to high-income countries have 50 per cent participation from physical capital, 10.3 per cent from labour, 11.4 per cent from human capital and 28.3 per cent from productivity.

In view of the scenario, it can be said that Bangladesh has to go a long way regarding reforming economic policies. If the policy remains traditional, there is hardly any possibility to see significant growth.

If the current growth momentum continues, there is no risk of falling into the middle-income trap situation. According to a study, if the country grows at 6.0 per cent, it will take another 26 years to achieve $ 13,205 in per capita income.

So, Bangladesh must pay heed to global lenders- the IMF, the World Bank, and the Asian Development Bank- in respect of reforming economic policy. Their suggestion will definitely help.

The writer is an economic affairs analyst. He can be reached at [email protected]