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

The middle-income trap (MIT) describes the stagnation of nations at middle-income levels, hindering their transition to high-income economies. While there is no universally accepted definition of MIT, various interpretations exist, including those based on fixed income thresholds, relative income levels, time thresholds, and indices. Bangladesh, despite remarkable economic growth since its transition to lower-middle-income status, faces challenges that could impede further progress. This study addresses the critical question of whether Bangladesh can successfully navigate these challenges to escape both the lower-middle and upper-middle-income traps. The research aims to answer two key questions: 1) Can Bangladesh break free from the lower-middle-income trap? 2) Can Bangladesh break free from the upper-middle-income trap? The answers are crucial for policymakers and economists in Bangladesh and other developing nations facing similar hurdles, enabling informed strategies to mitigate the risk of falling into the MIT. The study's unique contribution lies in its combination of a time threshold method with three other quantitative approaches to assess the sustainability of Bangladesh's growth, thus providing a more comprehensive analysis than prior research.

The concept of the middle-income trap (MIT) has attracted significant attention, with various definitions proposed by researchers. Theoretical definitions focus on required political and institutional adaptations, while empirical definitions use income thresholds (absolute or relative to developed nations) or time spent in a particular income bracket. Several studies have identified countries trapped in MIT, often in the Middle East, East Asia, North Africa, and Latin America, citing factors like unfavorable demographics, lack of economic diversification, unproductive financial markets, insufficient infrastructure, and incompetent institutions. In contrast, successful escapees like Japan, South Korea, and Singapore demonstrated the importance of macroeconomic stability, investment in human capital, efficient markets, and focused industrial policies. However, the MIT concept faces criticism for insufficient empirical evidence and the potential for unsustainable policy-making driven by an obsession with income growth. Previous studies on Bangladesh's MIT risk are limited, prompting this research to fill the gap by forecasting Bangladesh's timeline for income transition and its likelihood of encountering the trap. This study differs by incorporating three quantitative approaches to assess the sustainability of Bangladesh's growth in conjunction with the time threshold method.

This study employs a multifaceted quantitative approach to assess Bangladesh's likelihood of escaping the middle-income trap. The primary method is the "Number of Years Method" proposed by Felipe et al. (2012), a time threshold approach that determines the probability of a nation being trapped in the lower-middle or upper-middle-income brackets based on the years spent in each category. This method uses the equation: Time required = ln(Minimum GNI/Current GNI) / ln(1+Average Growth Rate). This provides a timeframe for transition to the next income level, which is compared to pre-defined threshold values (28 years for lower-middle-income trap, 14 years for upper-middle-income trap) to identify the trap possibility. To evaluate the sustainability of the income growth assumed by this method, the study further incorporates three additional quantitative approaches. The Catch-up Growth method, developed by Carnovale (2012), compares Bangladesh's per capita GNI growth rates over four decades with those of Singapore, a successful high-income economy in Asia, to assess sustained high-growth capability. The Growth Report method, also from Carnovale (2012), classifies sustained high-growth economies as those maintaining a 7% or higher growth rate in per capita GNI for at least 25 years. Lastly, the Growth Acceleration method (Hausmann et al., 2005) identifies economies with at least one period of growth acceleration (a minimum 2% increase in per capita GDP growth sustained for 8 consecutive years) followed by a post-acceleration growth rate of at least 3.5%. Data from sources like The World Bank are utilized, with calculations performed using Microsoft Excel 2019.

Applying the "Number of Years Method," the study finds that Bangladesh could escape the lower-middle-income trap by 2029 and the upper-middle-income trap by 2041, contingent upon maintaining a 9.69% per capita GNI growth rate (the average rate from 2011-2020). However, the analysis revealed contrasting results when considering other scenarios in the calculations. The scenarios examined involve the use of GNI rather than GDP, and real growth rates instead of nominal growth rates. The use of real rates significantly increased the estimated time needed for transition. This highlights the inherent limitations of relying solely on historical growth rates to predict future trajectories. The Catch-up Growth method shows that Bangladesh exceeded Singapore's GNI growth only in the last decade (2011-2020), indicating a lack of consistent sustained growth surpassing that of a high-income benchmark economy. The Growth Report method shows Bangladesh failing to maintain a 7% growth rate for 25 years. The Growth Acceleration method, however, suggests sustained growth potential based on nominal GDP/capita growth but presents a contrasting view when using real GDP/capita growth rates. This inconsistency between methods raises questions about the reliability of past growth data to predict future economic prospects and highlights the complexities of assessing sustainable growth in a developing economy like Bangladesh.

The findings present a nuanced picture of Bangladesh's prospects for escaping the middle-income trap. While the initial projection using the Number of Years Method suggests a likely escape from both traps, the contrasting results from the other three methods highlight the complexities and uncertainties involved. The inconsistency between the methods underscores the challenges in relying solely on historical growth rates and the need for a more nuanced understanding of the factors driving sustainable growth. The necessity of shifting from resource-driven growth strategies to those which work at high-income levels cannot be underestimated, as noted by several other research efforts. This transition necessitates robust macroeconomic management, control of inflation, equitable income distribution, industrialization and export-oriented economic activities. The study emphasizes the importance of identifying drivers of sustainable income growth and emphasizes the need for policymakers to develop appropriate and timely policies that support sustainable economic growth, diversify the economy, and prepare for the challenges of graduating from the LDC category, including the potential loss of preferential trade benefits.

This study's analysis of Bangladesh's potential for escaping the middle-income trap offers valuable insights for policymakers and economists. While the time threshold method suggests a potential escape, the inconsistencies highlighted by other methods underscore the need for careful consideration of factors driving sustainable economic development. Future research should explore a wider array of factors, including qualitative perspectives and methods accounting for the unique context of Bangladesh's economy to enhance the predictive capability for escaping the middle-income trap. Policymakers should focus on strategies for achieving sustainable growth and diversification to achieve the target of becoming a high-income country by 2041.

The study has several limitations. First, the reliance on quantitative methods and historical data might not fully capture the complexities of Bangladesh's economic reality. The methods used, developed by international researchers, might not fully reflect Bangladesh’s unique economic dynamics. Future research should incorporate qualitative data to offer a more holistic understanding. Second, the data used only covers the period until June 2020, not accounting for the full impact of the COVID-19 pandemic. Finally, the study focuses solely on Bangladesh, limiting generalizability to other countries. Future studies could expand this work through comparative analysis across multiple nations and utilize more sophisticated econometric methods.