Consistent high economic growth must to skirt middle income trap

Jehangir Hossain

Jehangir Hussain

Bangladesh needs to achieve consistent high economic growth rate to skirt the middle income trap, think economists.

It’s remarkable that Bangladesh six years before its 50th anniversary of independence Bangladesh  made the middle-income transition from lower income country (LIC)in 2015.

It was no mean achievement for the country  to cross the World Bank threshold of Gross National Income (GNI), that’s Gross Domestic Product+ net receipts from abroad of compensation of employees+ property income+ next taxes, less subsidies on production per capita of $1,025, according to the WB’s Atlas Method.

Middle income graduation was a recognition of Bangladesh’s impressive track record in terms of consistent rise in the average per capita income over the past years.

The middle income graduation will also hopefully generate dividends in the form of branding of the country, in its credit rating standing, which in turn generates positive externalities through enhanced foreign direct investment (FDI) and inward resource flows.

But middle income graduation would mean that Bangladesh has now made a transition from beneficiary of grant and highly concessional loans to a blend country, eligible for a combination of concessional and non-concessional loans.

In the new context, Bangladesh would no more be exclusively eligible to get the World Bank’s soft term loans, provided through the global lender’s International Development Agency (IDA) window, for which the terms are relatively flexible with an annual interest rate of about 0.75 per cent, maturity period of 30 to 40 years with 10 years’ grace period.

The interest rates for the newly negotiated loans,  extended by the World Bank or other multilateral or bilateral development partners including China and India and China are already going up.

In a few years Bangladesh will be graduating to a non-blend country. This transition will be accelerated particularly also in view of the recent rebasing and re-estimation of the country’s national accounts, according to which per capita GNI has increased from less than $2,300 to $2,554.

After this transition Bangladesh would be entitled to mostly non-concessional loans with more conditions and stringent terms.

It is quite relevant to note that until now Bangladesh’s external sector debt and debt service payments, as percentage of foreign exchange earnings, was quite impressive.

This was relatively low at about three per cent of the earnings from export of goods and services.

Bangladesh’s total outstanding public sector foreign debt currently now stands at $52.8 billion, or  about 14.9 per cent of the GDP, up from 11.9 per cent in fiscal 2015, a distinctive departure from many developing countries at similar levels of development.

In view of middle income graduation, debt servicing liability of Bangladesh is expected to go up significantly.

In the backdrop of Bangladesh’s growing developmental needs, including a rising demand for putting developing the infrastructure as sustainable development goals (SDG) require, Bangladesh’s borrowings are expected increase considerably over the coming years as it has  already risen.

In fiscal 2021-22, the amount of gross aid is projected to be more than $10.3 billion, which is much higher than $3.0 billion Bangladesh borrowed in fiscal 2015 and $2.2 billion in fiscal 2010.

The borrowing in 2021-22 was  about 43.0 per cent higher which means that with the rising interest rate and increasing foreign loans, the debt-servicing liabilities will also go up with the outstanding debts.

From this perspective and  the experience of many countries that made the transition from low income status, got stuck in a trap of slow economic GDP growth and slow growth of per capita income or ‘middle income trap’ the term coined by Indernit Gill and Homi Kharas in 2007 for countries that escaped poverty but were yet to achieve prosperity.

Indeed, many countries fell into the lower middle income trap having made the transition from low income country (LIC) to lower middle income country (LMIC) and upper middle income trap (UMIT) following the transition.

Several countries took 15 years to graduate from lower middle income country to upper middle income country and 23 years to cross the upper middle income country to high income country.

It would indeed be challenging for Bangladesh to attain its developmental ambition as articulated in the Vision 2041 which puts the target of achieving the upper middle income country status by 2041.

In going ahead Bangladesh needs to learn from the experiences of the countries which fell  into the middle income trap.

Here, the experience of South Korea and its successful transitions from LMIC to UMIC and from UMIC to HIC over a relatively short period of time is relevant for Bangladesh.

 In sharp contrast, Malaysia was struck in the middle income trap for 28 years the Philippines  for 34 years.

South Korea was able to increase its productivity significantly and persistently in the course of the journey with consistent rise in labour productivity along with domestic and foreign direct investments during the period.

Realising Bangladesh’s vision of transition from low income to upper middle income country  and ultimately to high income country would depend on building broad-based coalitions around a number of key drivers, inclusive politics and the democratisation of political parties,  effective devolution of power, promotion of reforms geared towards good governance and accountable, transparent administration, greater space for civil society and citizens’ voices, ) an empowered working class and enforceable trade union rights, women’s empowerment,  greater mobilisation of domestic resources, a productive private sector, effective public-private partnerships, development of skills and productive forces to cater to the needs of building supply-side capacities, moving up the value chain, by building production networks and through higher investment in technological upgrading and imparting of the skills required for the ‘new economy’ as against the ‘traditional economy’, strengthening regional and global integration of the economy.

Given Bangladesh’s track records, it should not be difficult to achieve the goal by this great nation.

jehangirh@yahoo.com