14 days ago

Fast-tracking measures to avoid middle-income trap

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Bangladesh crossed the threshold of a lower middle-income economy in 2015 when its per capita income exceeded US$1085. Now it is striving to gain the status of a middle-income country (MIC) by 2026 and envisioning to become an upper or higher middle-income country (HMIC) by 2031. But there is a potential roadblock of what is termed 'Middle-Income Trap (MIT)' ahead. It happens when the economy is no longer able to compete internationally in standardised, labour-intensive goods due to rising wages compounded by low productivity and failure to compete in higher valued-added goods on a broader scale.  As a result, growth slows down, wages fall and the informal economy begins to develop. Evidently, it is the lack of necessary domestic innovation capabilities that creates the condition for MIT. 

Many countries in Latin America, Asia and Africa could not make it to the higher middle-income level, even after gaining the status of MIC for decades. So, to avoid being caught up in the quagmire of MIT, the government will be required to take early measures which include improving human capital through developing skill, adopting the green development option, reducing loan dependence in building infrastructures with an emphasis on digital ones, increasing tax-GDP ratio and attaining higher efficiency. At the same time, efforts should be on to draw both domestic and foreign investment on a greater scale, adopt appropriate fiscal policy to enhance supply-side capacity and diversify exports. Also, strengthening of institutions and emphasising good governance are important prerequisites for this.

All these recommendations came from a recent seminar organised by the Asian Development Bank (ADB) to mark its 50th anniversary of engagement with Bangladesh. That the MIT is a reality is recognised in a World Bank report that, of the 101 MICs in 1960, only 13 countries achieved higher income status by 2008. So far, only 21 countries could manage to reach the status of HMICs. These countries include 17 island and city states as well as Chile, Uruguay, Oman and South Korea. Even India has remained an MIC for many years. Against this backdrop, to avoid the condition of MIT, some local and international experts who spoke at the said seminar suggested investing more in sectors including light engineering, leather, jute, IT-enabled goods and services and agro-processing. Supporting these sectors will also help diversify product base and reduce the country's overdependence on the garment for export.  Alongside these steps, promotion of the cottage, micro, small and medium scale enterprises will be required to create jobs for both skilled and unskilled men and women with a view to narrowing income disparity. 

In fact, the country's current growth is basically driven by low wages, cheap labour and basic technology. But it will not be feasible in the longer term when it will come to competing with productivity-driven economies operating in a highly competitive marketplace. So, developing skill to achieve higher productivity will be the primary condition for survival in that market environment. Thankfully, the government has already taken up initiatives financed by ADB such as 'Skills for Employment Investment Program' and 'National Skill Development Authority' towards raising efficiency of human capital. But the still greater challenge before Bangladesh is its extreme climate-vulnerability. So, green growth should take the centre stage in all the government's development initiatives. In fine, the government should fast-track the required policy reforms and  meet the development  gaps early towards achieving higher income level avoiding the middle-income trap. The sooner it is done the better.

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