Escaping the middle-income trap: A study on a developing economy

The paper examines whether Bangladesh can escape the middle-income trap (MIT), a condition where nations remain stuck at middle-income levels without transitioning to high-income status. Although Bangladesh has achieved rapid growth, improvements in human development, and elevation to lower-middle-income status in 2015, significant challenges persist, including rising inequality, dependence on ready-made garments (RMG) and remittances, and vulnerability to external shocks like COVID-19 and the loss of preferential trade benefits after LDC graduation. Motivated by these concerns and a research gap specific to Bangladesh, the study addresses two research questions: RQ1: Can Bangladesh successfully break free from the lower middle-income trap? RQ2: Can Bangladesh successfully break free from the upper middle-income trap? The study underscores the importance of resolving MIT for economic growth, poverty reduction, and global competitiveness, with implications for policy and development strategy.

The literature presents diverse definitions and identification strategies for the middle-income trap. Definitions cluster into theoretical (focusing on political and institutional adjustments) and empirical (using measurable thresholds). Empirical approaches include absolute income thresholds, relative income thresholds (often relative to the United States), time thresholds (transition durations between income groups), and index-based methods (e.g., Catch-Up Index, ESCAPE Index). Prior studies identify many countries stuck in MIT (e.g., Malaysia, Brazil, Thailand, Mexico), citing challenges such as macroeconomic management, inequality, demographic shifts, insufficient infrastructure and institutional quality, and weak productivity growth. Successful escapees (e.g., Japan, Korea, Singapore, Spain) share features like stable macro-political conditions, investment in human capital and infrastructure, efficient markets, targeted industrial policies, TFP growth, structural shifts to industry, export orientation, and innovation. Determinants influencing MIT include demographics, diversification, financial market efficiency, infrastructure, innovation, institutional quality, and labor market effectiveness. For Bangladesh, the limited existing research discusses aid, governance, and structural drivers; however, no prior study forecasts timing for income transitions or tests MIT using time thresholds alongside multiple sustainability checks, which this study addresses.

The study employs a multi-method quantitative approach. 1) Number of Years Method (Felipe et al., 2012): A time-threshold approach identifies traps if a country remains in lower-middle-income for ≥28 years or upper-middle-income for ≥14 years. Using the equation t = ln(Ye/Yo)/ln(1+g), and specifically Eqn.3 from Felipe et al. (2012), the authors compute years to reach the next income group based on World Bank thresholds as of July 1, 2020 (UMIC: GNI/capita ≥ $4,046; HIC: ≥ $12,536). They use Bangladesh’s GDP per capita (current US$) in 2020 as Yo and average nominal GNI/capita growth (2011–2020) as g (9.69%). They also compute the minimum average GNI growth needed to evade traps within cutoff periods using Eqn.4. To test robustness, they consider alternative scenarios substituting GNI for GDP and using real instead of nominal growth rates. 2) Catch-up Growth Method (Carnovale, 2012): Tests sustained high growth by comparing Bangladesh’s per capita GNI growth with an advanced regional benchmark (Singapore) over four decades (1981–1990, 1991–2000, 2001–2010, 2011–2020). A country should grow faster than the frontier for at least three consecutive decades to qualify as sustained high-growth. Data: World Bank. 3) Growth Report Method (Carnovale, 2012): Identifies sustained high-growth cases maintaining ≥7% per capita GNI growth for ≥25 years in the post-WWII era. The study uses Bangladesh data from 1974–2020 (limited by data availability). 4) Growth Acceleration Method (Hausmann et al., 2005): Detects episodes where per capita GDP growth increases by ≥2 percentage points relative to a base period for at least eight consecutive years, with subsequent growth ≥3.5%. Data: World Development Indicators, 1971–2020. Calculations were conducted in Microsoft Excel 2019.

- Number of Years Method (nominal growth, baseline): Using average nominal GNI/capita growth of 9.69% (2011–2020), Bangladesh would: • Reach upper-middle-income in 7.7853 years (~8 years), implying total LMIC duration ~13 years (5 years already as LMIC + ~8 more), below the 28-year trap threshold. • Reach high-income in 20.0081 years (~20 years). Given ~8 years to UMIC, the UMIC-to-HIC span is ~12 years, below the 14-year trap threshold. • Minimum average GNI/capita growth needed to evade LMIC trap within 28 years: 2.53%. - Alternative scenarios (Table 3): • Using GNI instead of GDP in Eqn.3: UMIC in 7.5614 years; HIC in 19.7842 years (little change). • Using real instead of nominal growth: UMIC in 45.3974 years; HIC in 116.6708 years. • Using both GNI and real growth: UMIC in 44.0919 years; HIC in 115.3653 years. These reveal strong sensitivity to using real vs. nominal growth rates. - Catch-up Growth Method: Bangladesh’s average per capita GNI growth exceeded Singapore’s only in 2011–2020; it lagged in the prior three decades. Thus, it does not meet the criterion of sustained high growth over at least three successive decades. - Growth Report Method: From 1974–2020, Bangladesh recorded nominal and real GNI/capita growth ranging roughly between -15% to 33% (nominal) and -49% to 13% (real). It had negative growth in 6 (nominal) and 22 (real) years. It achieved ≥7% growth in 23 (nominal) and 3 (real) years out of 47, failing the ≥25-year sustained ≥7% criterion. - Growth Acceleration Method: Nominal per capita GDP growth shows an acceleration episode during 2005–2012 (≥2 percentage point increase sustained for eight years), with post-acceleration growth (2013–2020) between 6.1% and 14%, exceeding the 3.5% threshold. However, results are inconsistent when using real GDP/capita growth. Overall: Timing estimates indicate potential escape from both LMIC and UMIC traps by 2029 and 2041 if 9.69% nominal GNI/capita growth is sustained, but sustainability checks yield mixed evidence, casting doubt on maintaining such growth.

The time-threshold analysis answers the research questions affirmatively under the assumption that Bangladesh sustains its recent nominal per capita GNI growth (9.69%): it could transition to upper-middle-income by 2029 and to high-income by 2041, staying within the respective cutoff durations and thereby avoiding both lower- and upper-middle-income traps. However, growth sustainability is uncertain. Catch-up and Growth Report methods do not classify Bangladesh as a sustained high-growth case, while Growth Acceleration finds at least one acceleration episode using nominal metrics, with inconsistencies when using real metrics. Maintaining ~9.69% nominal per capita income growth is challenging due to potential shocks (pandemics, natural disasters, economic downturns, political unrest) and structural transitions required as wages rise and competition intensifies from both low-wage and high-innovation economies. The discussion underscores policy implications: to sustain growth and avoid MIT, Bangladesh should strengthen macroeconomic management, invest in human capital and infrastructure, diversify beyond RMG, promote innovation and productivity, expand export sophistication, and deepen global integration via FTAs, FDI, and GVC participation. These measures align with lessons from successful escapees and are crucial for translating projected timelines into realized transitions.

The study projects that Bangladesh can escape the lower-middle-income trap by 2029 and reach high-income status by 2041, contingent on sustaining an average nominal per capita GNI growth rate of 9.69%. While this aligns with national development aspirations (e.g., Vision 2041), the sustainability assessments provide mixed signals: Catch-up and Growth Report methods raise doubts, whereas the Growth Acceleration method (nominal) is supportive. Given uncertainties and the complexity of shifting from resource-driven to productivity-driven growth, Bangladesh must prioritize policies that bolster productivity, diversification, innovation, and resilience to external shocks. Future research should broaden methods (including relative thresholds and index-based approaches), incorporate qualitative insights from policymakers and experts, extend cross-country comparisons, and develop frameworks tailored to Bangladesh’s structural characteristics.

- Conceptual ambiguity: Lack of consensus on a unified MIT definition limits comparability across studies. - Data scope: Reliance on post-1971 data for Bangladesh precludes full post-WWII coverage; per capita GNI/GDP datasets before 1974 are unavailable. - Temporal coverage: Economic data extend only to June 2020, limiting capture of COVID-19 impacts on growth trajectories. - Methodological sensitivity: Results vary significantly between nominal and real growth measures and between GDP vs. GNI bases. - Single-country focus: Findings may not generalize; cross-country analyses are needed. - External methods: The applied quantitative frameworks were developed for broad contexts and may not fully reflect Bangladesh’s unique structural features; tailored methodological development is warranted.