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Bangladesh trapped in middle income status

Published : Sunday, 26 January, 2025 at 12:00 AM  Count : 728
MS Siddiqui
Bangladesh sleepwalked into the middle-income trap according to the white paper on the state of the country's economy prepared by a committee formed by the interim government.In the World Bank's 2024 World Development Report, the middle-income trap was described as a period of slow growth and a decline in productivity gains.It has alsodefined the "middle-income trap" as a situation where middle-income countries face challenges to economic growth, innovation, and wage competition.

The concept of middle-income trap has been mainly used to describe countries that suffer from a sharp drop in economic dynamism after a successful transition from lowincome to middle-income status, preventing them from moving to a higher income level (Gill & Kharas, 2007).

According to experts and economic analysts, Bangladesh will be unlikely to achieve its goal of becoming a developed nation by 2041 due to the fall in the middle-income trap.The white paper identified the reasons for fall into this trap-"stasis in structural reforms, reform reversals, institutional decadence, global adversities, and a growing gulf between the reality on the ground and the perceptions of policymakers".

The reasons for falling into traps differ from one region to another.However, several common traits, concerning variations in economic anddemographic structures, such as levels of value added in industry or populationdependency ratios, human capital and innovation endowments, and institutionalquality among regions, influence the probability of falling into a trap.

The country is prone to premature slowdown in development and relies on policies based on superficial measures of economic efficiency.Such a country may find itself unable to compete with either low-wage countries that dominate labour intensive industries or high-income countries that dominate innovative, hightechnology industries.Over the last 30 years, widespread trade liberalization, the reduction in maritime transportation costs, and the rise in digital connectivity have increased the globalization of production and the number of producers competing in domestic and international markets. For example, Bangladesh still in 'research' whether Free Trade Agreement is feasible or not but all the competing countries have FTA with individual countries and joined multi-national trade blocks and enjoying competitive advantage over Bangladesh.Bangladesh is one of the restricted markets and protected itself with high customs tariffs and various bureaucratic controls causing cost of products higher than other competitors. The result is slow growth and less potential for rising living standards for more people.

The symptoms of middle-income traps are visible in both rural and urban areas. In rural economy, as the rural labor force shrinks and wages rise, the factor accumulation that once propelled high growth eventually loses strength. The labour forces are moving to urban area for higher paid job. 

In the urban areas, the wages rises, and country is suffering from reduced competitiveness in producing labor-intensive goods (say, garments) because wages are now high relative to other low-income countries (Africa), nor can Bangladesh compete with high-income nations that have far greater levels of technology and innovation. As a result, Bangladesh is experiencing sustained growth slowdowns and rising informal economies. 

The recent white paper observed that "Bangladesh has remained stuck in garments, remittances and conventional services unable to compete with either low-wage African countries that dominate mature industries or upper middle and high-income countries that dominate innovative, high technology industries. It almost looks like a textbook case of a low middle income growth trap".

In Bangladesh, the tax-GDP ratio is among the lowest in the world, which naturally constrains private investment. Bangladesh allocation of money in Budget for education is lowest among the neighboring countries. Several sectors such as information and technology, finance, real estate, and even garments suffer from lack of skilled human capital. Foreign workers are hired to fill the void. Many studies suggest that these foreign workers remit approximately USD 6 billion back to their home country every year. 

The education sector fails to educate the domestic labour force with the appropriate skill standard. Other factors that it mentioned were employment remaining concentrated in low-productivity agriculture and informal activitiesand the slipping competitiveness of the economy.The government has extended highest subsidy to RMG sector to make it competitive in the global market. The low cost and non-brand RMG are no more feasible for Bangladesh.

The statistical data of different indices have been inflated and growth rate of GDP and others has been calculated on the wrong data. According to the white paper, Bangladesh's economic growth has been overstated since 1995.

Bangladesh ranks 106th among the 133 economies featured in the Global Innovation Index 2024. An insufficient development of domestic innovation capabilities is at the heart of the middle income trap. The current globalization context provides a challenging context for middle income countries to narrow the capabilities gap, because they have less time to do so, with more players competing in the innovation space and technological innovation changing faster. 

Moving from factor-driven to innovation-driven growth has always been the key challenge for middle income countries. Yet it is only in the last few years that analysts have raised the specter of middle income countries actually becoming trapped.A comprehensive innovation-focused strategy with strategic active policies is the only way to escape the middle-income trap.

The global scenario is very dismal, only a few like South Korea and Singapore have managed to gain the status as high income countries while countries like Malaysia, Argentina, Uruguay and South Africa have become stuck  in the  upper middle income trap. Overall, most of the middle income trapped countries are in Asia and Latin America.The World Bank's China 2030 report (2013) highlights that of the 101 economies classified as 'middle-income' in 1960 only 13 had become 'high-income' by 2008. 

It is a governance failure, an inability to take realistically achievable goals of growth and development.There is no uniform policy prescription for avoiding the middle-income trap. Therefore, addressing the challenges posed by the middle-incometrap will require different policies for different countries around the world but underneath there are a number of commonalities standing in the way of becoming a high-income country.

But Bangladesh remains a capital scarce country. To face the challenges of emerging manufacturing technologies, Bangladesh will have to boost the productivity of its abundant labour force with investment in productivity enhancing skills development, efficient infrastructure, machinery and technology supported by a well-functioning and efficient financial system. Also, openness in trade and investment will remain the key instruments to foster innovation to achieve competitive advantage.In addition to higher budgetary allocations, effective education will require a complete reform of the sector.Bangladesh should be a much more open economy to escape the middle-income trap, said Indermit S Gill, chief economist of the World Bank Group in Dhaka on 7th December 2024.  

The writer is a  Former Non-Government Adviser, Bangladesh Competition Commission, Legal Economist & CEO, Bangla Chemical



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