Journey from middle to high income: How Bangladesh can win

Bangladesh had been well on track for a smooth graduation from LDC status in November 2026 until the Covid-19 pandemic interrupted the sustained high growth witnessed over the past decade and upset some other gains. As the country started recovering from the pandemic shocks, the Ukraine war came as a fresh blow, making it harder to balance the budget book for the next fiscal year and realign strategic plans for a higher growth trajectory.

Formulating the next budget, last but one before graduation year and with the next election expected at the year-end, is an unprecedented challenge in decades to take the economy to the pre-pandemic level with the government's weak financial capacity to boost social safety measures for low-income people hit hard by the twin shocks, pandemic and war. This is a herculean job, but not entirely impossible. What is needed most is a big push everywhere in the economy as shown by South Korea and Singapore and which can be examples for others. 

It took nearly 45 years for Bangladesh to become a lower middle income country rising from the ruins of the 1971 War of Liberation. The country is now on track for graduating from the least developed country status in 2026, five decades and a half into its independence. Bangladesh envisions to become an upper-middle-income country by 2031 and a high-income one by 2041. Bangladesh needs to maintain a GDP growth rate of over 8% as stipulated in the 8th Five-year Plan and increase its per capita income to around $13,000 from $2,824 now in less than two decades to reach the milestones.  

While chasing big dreams, Bangladesh also has to account for the ongoing debate among economists and development thinkers worldwide on how long a country may need to elevate itself to the next income level. There is no specific time frame, but the world's economic history shows the journey may be as long as over a century or as short as less than a decade depending on the ways taken. Asian countries, which reached high income levels from low income, took a shorter time than the European ones. And there are countries which are stuck at the same level for decades – a situation described as "middle-income trap."

Does such a trap really exist? If it does, then how could some countries skip or overcome it and others could not? Can Bangladesh avoid such a trap and proceed to its goal?       

There are examples that suggest Bangladesh can. Also, there is no dearth of examples that suggest the opposite. There are countries which are stuck in the trap set mostly by themselves. Malaysian Prime Minister Anwar Ibrahim has identified poor governance and corruption as among the factors that held back his country from emerging as a successful economic power despite having all potentials.

Malaysia became a lower middle income country in 1969 and took 27 years to become an upper middle income economy in 1996, and it remains there. But the story is different for South Korea, which became a lower-middle income country in the same year as Malaysia, graduated to the next stage within 19 years, and went on to high-income level in 1995 only in seven years.

We may or may not call it a trap but it is a bumpy ride and the task ahead is steep. It has been eight years since Bangladesh reached lower-middle income status in 2015 and the country aspires to be an upper-income economy in eight years from now and high-income in 18 years. How long will be the journey for Bangladesh depends on how prompt and specific the country will be about the actions required to move forward as fast as it hopes to.

We can look at countries which could make it happen for some cues.

How some countries succeeded

Japan: Doubling the income

Countries like Japan, South Korea and Singapore remain as prime examples to learn from and prepare for the race to emerge as a high income country.

The three Asian countries took different approaches to expedite economic development, increase people's income and rebalance social wealth by narrowing the rich-poor gap. They took various measures to promote education, trade, investment and innovation. 

Japan took an ambitious income-doubling plan aiming to increase average per capita income twofold in 10 years. It appeared to be a mission impossible for a country devastated by World War II. 

But the series of well-planned measures started producing dividends in 1960s, called the "Golden Sixties" of Japan. The economy rose from the ashes of war -- the gross national product doubled in only six years, and the average per capita income doubled in seven years.

In agriculture, the government raised the price of farm products and encouraged production efficiency. In industry, the government cut taxes and lowered interest rates to facilitate borrowing and reduce costs. In commerce, the authority pushed trade liberalisation and narrowed the salary gap. 

The Japanese government also heavily invested in infrastructure, communications and technology innovation. It also worked to balance urban and rural development.

South Korea: Developing the village

South Korea began the New Village Movement in 1970 to reduce the disparity in living standards between the urban and the rural areas.

The early stage of the movement focused on improving the basic living conditions and environment. Later projects concentrated on building rural infrastructure and increasing community income.

The country also heavily invested in education to develop human capital.

Encouraged by the success in rural areas, the movement spread through industrialised and urban areas as well, to become a nationwide modernisation movement.

Thanks to the decades-long movement, the income of South Korean farmers increased significantly, even surpassing that of city dwellers.

In the 1990s, South Korea's urbanisation rate had reached above 70%, the rural population had dropped from 80% of the total population to less than 10%.

Besides the New Village Movement, the South Korean government had also taken extra care of low-income people and under-privileged groups, weaving a social safety net to reduce absolute poverty.

The Tony Blair Institute for Global Change, a UK-based think tank, cited three factors that contributed to South Korea's rapid success: a well-planned and consistent government policy combined with effective implementation; conditional support to companies that ensured the reduction of the rent-seeking approach; and an effective channelling of public resources together with an early transition towards innovation including a focus on short-cycle technology-based sectors.

Singapore: Investing in education

Separated from Malaysia in 1965, Singapore adopted a talent hunt programme. It underlined the idea that the key factor of success was education.

From the 1980s on, the Singaporean government selected the area of education as an investment in its people, thus putting a lot of emphasis on the development of human resources.

Statistics show that education funds accounted for at least 12% of the annual state budget, and can be as high as 35%, the second-highest in the city state's yearly expenditure.

Primary, secondary and tertiary education is mostly supported by the state. The government puts equal emphasis on basic education, advanced education and vocational training. It also encourages the students' creative and critical thinking, and allows autonomous schools to design their own curriculum.

Through higher education and vocational training, Singaporeans become more skillful and professional, their job opportunities and income increased subsequently. These people have gradually become the hardcore of the Singapore society's middle class.

The Singaporean government also offers preferential policies and good treatment to attract foreign professionals to work and live in Singapore. Together domestic and overseas professionals continuously contribute their wisdom and skills to Singapore's economy.

With the support of a stable and mainstream middle class, the three countries successfully advanced to high-income societies. In their journeys, zero tolerance against corruption was one of the major hallmarks.

Why others could not

Many promising economies remained stuck at the middle-income bracket for the last half century. Of 101 middle-income economies in 1960, only 13 became high-income by 2008, according to the World Bank flagship report "China 2030" published a decade ago.

Has the situation changed much?

A report of The Economist Intelligence Unit says 23 countries which were middle-income in 1960 now qualify as high-income ones, making unexpected progress in the past difficult decade. New graduates are Bahrain, Oman and Saudi Arabia in the Gulf, six European Union members --Croatia, Cyprus, Hungary, Malta, Poland and Slovenia. Though African Island nation Seychelles also touched the line, two others in the region, Equatorial Guinea and Mauritius, which were considered high-income in 2008, have fallen back.

The Netherlands and Ecuador are among the states stuck at the same level for decades.

Stories of Argentina, Brazil, Malaysia, Thailand and Philippines are there as well to warn countries aspiring to become high income, not to get derailed and get stuck in the middle-income trap after the fire for reform measures gets cool.

A research by the Tony Blair Institute for Global Change identifies reasons that make the journey to the next phase harder for some countries. These are: lack of structural transformation and weak industrial policies; lack of human-capital development and innovation; and poor governance, weak institutions and an extractive political economy.

It analyses why some Latin American nations have failed to make the transition from middle-income to high-income status. Citing Brazil as an example, it says the country had been predicted in the 1960s to achieve a level of growth that would ultimately have led to it reaching the high-income level. However, poor levels of investment, low take-up of tertiary education, political instability and high inflation have all worked to leave Brazil mired in the middle-income trap for more than half a century.

The study also analyses why Ghana and Kenya could not move forward much from the lower-middle-income status despite relatively high economic growth over the past decade and potentials to become regional hubs. "Their current growth is not geared towards economic transformation, and there are signs that both countries are at a high risk of remaining trapped at the middle-income level," it says, referring to their low productivity in agriculture and narrow export base concentrated on natural resources and processed agri-products.

Moreover, the level of their human capital development remains low and most jobs are in low-productive service sectors such as wholesale and retail, it adds.

The study also brackets Bangladesh along with some peers that are either in the middle-income trap or at risk of being trapped.

It reads: The experiences of Malaysia, Brazil, Tunisia, Morocco, Bangladesh and Vietnam highlight that economic growth is not enough to enable countries to move up the income ladder. It is essential to have a commitment to industrialisation, to strengthen the rule of law and to move away from an extractive political economy, and this must be set against the backdrop of political stability and equality.

In addition, the level of investment in both human-capital development and innovation is a significant variable in determining countries' development paths and in explaining their middle-income trap, according to the Tony Blair Institute's study report released in March last year.

Where Bangladesh stands

Low investment in human capital may frustrate Pakistan's ambition to be an upper middle income country by 2047, a hundred years from its independence, The Dawn newspaper reports, quoting a World Bank report.

Pakistan's Human Capital Index value stands at 0.41, among the world's lowest and the Covid-19 pandemic, followed by severe flooding last year, dealt a further blow to the country's education.

Though a bit higher than Pakistan, the HCI value of Bangladesh at 0.46 is lower than the South Asian average and even that of Nepal. Educationists in Bangladesh also repeatedly expressed grave concern over the pandemic-induced learning loss of children and demanded higher allocation in education, research and training to build human capital for the future.

Despite a globally-lauded success in mass Covid vaccination drive, the pandemic laid bare the inherent weakness in Bangladesh's overall public healthcare system, underlining the need for higher spending in the health sector to improve quality of service at a lower cost.

Poor investment in education and health still remain major hurdles to lessen the disparity between rich and poor and to build a skilled workforce for the economy.

Administration is not as efficient as required for faster growth. Institutional constraints remain a major challenge. Financial system is marred by a bad culture.

Some reforms were made in the past yielding good results, but many reforms lost their way, worsening the situation in the financial sector.

The ADB Institute, in its study "Transition from low-income growth to high income growth: is there a middle income trap?", says cross-country growth regressions confirm that growth in middle-income countries is positively associated with industrialisation, openness, and equality.

"Becoming 'trapped' in some middle income level is not inevitable. However, this finding does not mean that countries do not become trapped at a middle income level," the 2017 study says, noting that transitioning from middle income to high income is hard.

Middle-income countries seek policies that can help them achieve strong and sustained growth and eventually help them join the league of high-income countries. Yet finding a set of appropriate pro-growth policies is a complicated task, particularly given the uniqueness of every country's institutional constraints.

One of the original theorists behind the middle-income trap describes it using an analogy from golf: "Not everyone falls into a 'trap,' but everyone's play is influenced by the presence of traps. Successful economies avoid falling into traps or escape rapidly, while unsuccessful (or unlucky) economies can get stuck for many years.

How to avoid the middle income trap?

Economists present evidence that suggests consistently high economic growth rate is crucial to avoiding the "middle income trap." This is borne out by the experience of South Korea which was able to make two successful transitions from lower-middle income country to upper-middle income country and from upper-middle income country to high-income country over a relatively short period of time.

The alarm bell is now ringing louder than ever, calling for sweeping troubleshooting measures for the financial system of Bangladesh to stay on track to chase the big dreams of becoming an upper-middle and high-income country by 2031 and 2041 respectively.

Numerous hurdles and challenges remain as landmines on her path to reach the dreams. Yet, all the mines can carefully be deactivated if there is a strong will to free the financial system from the clutches of bad elements through enforcing game changing measures.

But before anything, the Bangladesh economy must overcome the current economic woes caused by both internal and external reasons.

The need for reform was never felt so urgently as it has never experienced such a difficult time in recent decades.

Before the pandemic struck the blow, the economy was growing remarkably for the last one decade despite various anomalies, mismanagement and grafts in the financial system particularly in the banking sector. It was a mixed decade of economic growth and some major financial scams.

This time around things are different.

The twin shocks of the pandemic and the war exposed the vulnerability of the economy leaving Bangladesh struggling to recover with surging default loans and pressure on balance of payment forcing the country to impose restrictions on import to keep a healthy forex reserve for rainy days.

Bangladesh has also undertaken a massive rural development scheme coined "Amar Gram Amar Shohor," but the progress has so far been limited to some pilot initiatives.

Economists and business leaders across the board have long been urging the authorities for reforms to improve governance and quality in the financial system. Reforms were on the agenda sometimes, but not on the priority list.

Now in a time of urgent need when Bangladesh is taking emergency loans from the International Monetary Fund and urging the World Bank for more funds, they have reminded her of the most wanted thing: reforms in the financial system.

In separate recent visits IMF and WB top officials have urged Bangladesh to go for sweeping reforms in fiscal policy to banking system and financial institutions, from central bank to tax administration.

Much needs to be done to improve social sectors including health and education as public investment in human capital is much lower than what it should be. Low public investment keeps quality health and education beyond the reach of average people.

Discrimination is very high in education and health sectors, senior economist Prof Rehman Sobhan points out, recommending that the government take necessary steps in the budget to ensure quality in public education and health sectors.

Economist Dr Binayak Sen has also called for budgetary measures to reduce rich-poor gap and improve human resources and nutrition indicators.

These are the issues Bangladesh needs to take care of as it looks to reach the next phase of development.

Things have become even harder as the World Bank's more stringent definition, put in its "China 2030" chart, says exceeding GDP per person at $13,200 won't be enough, it will have to be at purchasing-power parity of between 5% and 43% of America's, according to The Economist article.

Bangladesh economy needs to return to the pre-pandemic level growth which was an average of 7% for several years, even crossing 8% in the year before Covid-19 struck.

The country seeks to graduate from LDC status in 2026 and dreams to become an upper-middle income country in the next five years. If a successful graduation from lower-middle income to upper-middle income is possible, Bangladesh will need to do everything to escape the middle-income trap that countries like Brazil and Argentina are languishing in for years.

It's a herculean task, and time is short.