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Bangladesh needs to skirt middle-income trap

Columns 2022-02-28, 9:44pm


Jehangir Hossain

Jehangir Hussain

Bangladesh needs to skirt the middle-income trap by making careful preparations to implement policies and programmes over an indefinite period of time.

Bangladesh is the lone country in South Asia, until now, that has bucked the trend by continually increasing the manufacturing share of GDP over the last two decades.

Economists, feel, given Bangladesh’s track record, it should not be impossible for it to skirt the middle income trap, a euphemism for economic stagnation.

But Bangladesh still 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 an efficient financial system.

Besides, open trade and investment will remain the key factor to foster innovation to achieve competitive advantage.

Economists say as there is no uniform policy prescriptions for avoiding the middle income trap, addressing the challenges posed by the middle income trap require different policies for different countries around but a number of commonalities stand on the way of becoming a high income country.

Middle income status can be considered as a signal for a successful trajectory to move the country ahead, but that will require accelerating productive investment and a complex set of skills development, fostering innovation and most importantly of institution development because institutions suited to growth and development differ at different stages of development.

The key issue for many countries looking to move ahead to achieve high income status would depend on their ability to generate the political will to make needed reforms, opposed by vested  interest groups as the reforms threaten their economic power.

New 3D manufacturing technology enabled the sports apparel company Adidas to re-shore its production from Vietnam to Germany, its home country. 

Least developed countries try to become middle income countries and many of them like Bangladesh became lower middle income countries in 2015 and now officially will graduate to become a developing country in 2026.

Now, Bangladesh is trying to become a high middle income country in 2031 and a developed country by 2041.

Only South Korea and Singapore succeeded in becoming high income countries but Malaysia, Argentina, Uruguay and South Africa are stuck in the upper middle income trap.

India and Indonesia seem have entered in the lower middle income trap.

Most of the countries trapped in the middle income trap are in Asia and South America.

By 2025, show estimates that 50 per cent of the world's population will live in Asian middle income countries many of which suffer from persistent pockets of poverty and are vulnerable to sudden income changes.

The term middle-income trap (MIT) includes countries that achieved rapid economic growth and quickly reached middle-income status, but then failed to catch up with the developed countries.

The middle income trap means growth stagnation due mainly to reform stagnation.

Low income countries also might get trapped into the low income trap also known as the ‘poverty trap’.

In a low income country it is difficult to escape poverty.

But poverty trap is not only the absence of economic means as it is created by a combination of factors including the lack of employment, access to education and health care.

It was in 2007, that the middle income trap was first mentioned in a World Bank study, ‘An East Asian Renaissance: Ideas for Economic Growth’.

According to the report medium-income countries have lower growth trends compared to both the rich and the poor countries.

Economists think that generally, at their initial stages of growth  countries kick off with agrarian base and from there on some of them,  over time,  transits to industrial economies with the help of the surpluses generated by the agriculture sector and then onto a predominantly services oriented economy.

Increased output contributes to  rising per capita income and the growth process enables a country to move from low income to lower middle income to upper middle income and finally to high income country.

Many economists expressed concerns over   premature de-industrialisation of developing economies where a growing services sector bypasses manufacturing sector with industrialization peaking at a relatively small share of GDP around 20 per cent or even below.

Such a transition path further distorts the long term structural adjustment process causing very slow growth to economic stagnation.

Economists agree that growth slowdowns are primarily productivity slowdowns.

Some growth models suggest that the existence of low productivity equilibrium in middle income countries is characterized by low shares of highly skilled workers in highly skilled activities.

Many countries also fail to put in place active policies for their firms to move their resources from protected domestic to globally competitive export sectors and to upgrade skills of workers working in those sectors.  

Growth performances of countries around the world by and large demonstrate that they remain in a specific income group for extended periods, some even might regress from a lower middle income country into a low income country if they fail to maintain the required level of growth momentum.

It’s not unusual for the developing countries to experience difficulties in their transition from the middle income to the high income bracket.

Out of 101 middle income countries in 1960, only 13 became high-income countries by 2019 based on per capita income relative to the US.  

The countries that got stuck in the middle income trap, say economists, have failed to catch up with developed economies like the US or Japan.

The Catch-Up Index (CUI) is one of the methods to measure this can be measured.

And according to the World Bank a country experiences the middle income trap if it stays within the range of about five per cent to 45 per cent of the US per capita income.

The concept of the middle income trap has gained currency in recent years as it is a very easy to interpret the concept in policy discussions for the common people.

Economists also feel that the middle income trap is an obstacle rather that a destiny that needs to be and can be overcome.

Arguments, put forward to explain the existence and persistence of the middle income trap include diminishing return to capital, exhaustion of cheap labour and imitation gains, poor quality of human capital, distorted incentives and misallocation of resources, lack of advanced infrastructure, capital and inadequate contract enforcement.

Middle income countries also find the transition  to the next level  challenging  also due to the institutional arrangements that helped them achieve the middle income status  created vested interests who benefit from the status quo and oppose the needed reforms.

Economists consider the middle income trap as a governance failure, with the inability to take realistic and achievable goals of growth and development.

New strategies may require for countries like Bangladesh rebalancing towards domestic demand while export orientation remains in place and levelling the playing field for all firms domestic or foreign.