The middle-income trap syndrome and Bangladesh

There was a time when in the economic literature the term "low-level equilibrium trap" was a widely discussed issue. That was in the 1940s, when the majority of the countries were low-income and used to be referred to as "underdeveloped countries". In 1943, a noted economist, Rosenstein-Rodan in his "big push theory" of economic development held that an economy gets stuck in a low-level equilibrium trap because its agents cannot coordinate their actions. Time has changed and in the recent past, the discussion has moved to what is termed as the "middle-income trap". During the last three decades, many of the developing countries have done well enough to escape low-income levels, reduce poverty and to do well in human development. Their transition to the middle-income levels raised the expectation that they would soon get out of the middle-income levels and be part of the high-income club. But that expectation has been abysmally low and countries continued to remain in a "middle-income trap", a term referring to a situation where a country experiences rapid income growth and moves from the low-income category to the middle-income status, but then struggles to make the leap to the high-income status.

From an economic point of view, economies are generally categorised into low-income, middle-income and high-income countries. Among the middle-income countries, there are lower middle-income and higher middle-income countries. For the fiscal 2024-25, the World Bank has defined a low-income country as an economy with a per capita income of less than $1,145; a lower-middle-income country with a per capita income between $1,146 and $4,515; a higher middle-income country with a per capita income between $4,516 and $14,005 and a high-income country with a per capita income of more than $14,005.

Today, more than 100 countries are currently stuck in the middle-income trap, including major developing economies like Brazil, China, India, and Turkey. The ambition of many of the middle-income countries is to reach the high-income status within the next two or three decades. However, when assessed against this goal, their record is not so encouraging. Thus, since the 1990s, only 34 middle-income economies have attained high-income status. Together, they account for less than 250 million people, equalling the population of Pakistan. Middle-income countries – home to 6 billion people – are in a race against time. The middle-income trap, sometimes also referred to as the middle-income curse, is a challenge that many middle-income countries face in trying to become high-income countries. In fact, the experiences of many middle-income countries indicate that after reaching a per capita income of $8,000, they have lost the momentum to surge ahead and are stuck at the middle-income level.

Some factors that make it difficult to escape the middle-income trap include: high debt incurred by developing countries. For example, last year, the world's developing countries paid a record high $1.4 trillion to service their debts, of which more than $96 billion was due to the poorest countries of the world. Second is the ageing population. Currently, about 16% of the global population are elderly and two-thirds of them live in the developing world. For various reasons, this sometimes acts as a drag for the middle-income countries in their push towards the high-income status. Third, protectionism on the part of the advanced countries acts as a push-back factor to the middle-income countries in their intended transition to high-income countries. There are tariff and non-tariff barriers against the middle-income countries. Fourth, some middle-income countries are heavily dependent on natural resources. And finally, sluggish growth in many middle-income countries, for example, Thailand, acts as a deterrent against the move towards the high-income status. With rising debt and aging populations at home, growing protectionism in advanced economies, and escalating pressures to speed up the energy transition, today's middle-income countries are facing growing headwinds.

It has been argued that to escape the middle-income trap, the relevant countries need to undergo two-step transitions: the first step is to form a strategy of accelerating investment to a strategy that stresses both investment and infusion, which implies importing technologies from abroad and diffusing them within the country. The second transition is to switch to a strategy that adds innovation to the mix of investment and infusion. Within the middle-income categories, depending on their own circumstances, countries need to adopt a sequenced and progressively more sophisticated mix of policies. For example, the priorities of lower-middle-income countries should be to expand the policy mix of investment and infusion and the focus of the upper-middle-income countries should be on a combined package of investment, infusion and innovation.

Evidence shows that countries, which have escaped the middle-income trap have encouraged enterprise by disciplining powerful incumbents; developed talent by rewarding merit; and capitalised on crises to alter policies and institutions as required. These countries have also provided progressively greater economic freedom, ever more open and informed debates, and – ever more frequently – the political courage to change stubborn institutions and long-standing arrangements.

In 2015, Bangladesh moved from the low-income category to the lower middle-income category. And as early as the middle of that decade, the country "sleepwalked" into the middle-income trap. Six symptoms have been identified that have pushed the country into this trap – a reverse relationship between production and employment, or a "jobless growth"; sluggishness of or a decline in the manufacturing sector; inadequate contribution of the export sector to country's gross domestic product (GDP); sluggishness in private investment, inadequacy of public investment in such sectors as health and education; and absence of good governance. The absence of structural reforms – reform reversals, institutional decadence, global adversities, and a growing gulf between the reality on the ground and the perceptions of policymakers added to the peril. Other important factors are employment remaining concentrated in low-productivity agriculture and informal activities, ubiquitous resource misallocations, and the slipping competitiveness of the economy. One critical factor has been the practice of inflating official data, which meant the country did not have any idea about the path it was truly on. For example, it has been alleged that Bangladesh's economic growth has been overstated since the middle of the 1990s.

The middle-income trap for Bangladesh has become an increasing concern as currently the economy is facing a series of serious challenges ranging from sluggishness of economic growth, persistent inflation, crisis in the banking sector, low private investments, high unemployment, particularly among the youth. The country has to explore the exit route out of the trap, which must include structural changes, policy and institutional reforms. Without working on those exits, Bangladesh may continue to remain in the middle-income trap.

Dr Selim Jahan is a former Director of the Human Development Report Office and Poverty Division at UNDP