Bangladesh, once a bottomless basket case, has emerged as a remarkable success story in recent decades. Since gaining independence in 1971, Bangladesh has had strong economic growth and a decline in poverty despite high international unpredictability and frequent natural calamities. It has reached the threshold of a lower-middle income level in 2015. Between 2010 and 2023, real GDP grew by an average of 6.4% per year, supported by stable macroeconomic circumstances. Based on the international poverty line of $2.15 per day (using 2017 PPP), the poverty percentage decreased from 11.8 percent in 2010 to 5.0 percent in 2022. Similarly, based on the international poverty line of $3.65 per day (using 2017 PPP), moderate poverty decreased from 49.6 percent in 2010 to 30.0 percent in 2022. Additionally, human development results increased in several areas, including access to electricity, literacy rates, infant mortality, and stunting. This indicates rapid growth, which puts Bangladesh in the category of one of the fastest-growing economies in the world.

Despite these improvements, this impressive trajectory carries a hidden danger: the risk of falling into the “middle-income trap.” Though inequality has somewhat decreased in rural areas, it has increased in cities. As Bangladesh progresses toward upper-middle income, it encounters numerous short- and medium-term challenges. Bangladesh has encountered countless impediments to its economic expansion in the past decade. Real GDP growth decreased from 5.8 percent in FY23 to 5.2 percent in FY24, per estimates. The financial sector has become increasingly vulnerable, inflation has remained elevated, and pressure on the external sector has persisted. This article will examine Bangladesh’s specific risks in pursuing high-income status and explore the strategies that can propel the nation toward a more prosperous and equitable future.

Measuring the depth of the trap

Middle-income countries are home to three out of every four people—and nearly two-thirds of those who struggle in extreme poverty. Gill and Kharas’ 2007 World Bank paper An East Asian Renaissance: Ideas for Economic Growth introduced the “middle-income trap” (MIT) idea. In the next two or three decades, the 108 middle-income nations—whose per capita incomes range from US$1,136 to US$13,845—aspire to become high-income nations. The phrase “MIT” is frequently used to describe nations with rapid economic growth, allowing them to rise to middle-income countries. However, they have failed to eventually overtake developed nations and attain high-income status, instead becoming stuck in the middle-income range. However, in a 2010 sample of 167 economies, just nine had achieved high-income status in the preceding four decades. And over the last 34 years, only 34 economies have succeeded in breaking out of it.

The economics of creative destruction

It takes two transitions, not one, for middle-income nations to reach more developed economies. As they progress through middle-income status, most countries must adjust the balance of investment, infusion, and innovation, the three main drivers of economic growth. The first model involves combining investment and infusion to help countries, especially those with poor or medium incomes, concentrate on replicating and spreading contemporary technology. Second, innovation is incorporated into the mix of investment and infusion, allowing countries, especially those with upper-middle incomes, to concentrate on developing their domestic capacities to contribute to global technologies so that they can become innovators themselves. Why is it so hard to go from a middle-class to a high-class wage bracket? Changing from an economy driven by investments to one driven by innovations is not something countries can do simultaneously as they enter the middle-income bracket because innovation comes after the infusion of technology.

The transitions from 1i to 2i to 3i strategies are neither linear nor seamless. They necessitate a combination of economic, social, and political transformations that Karl Marx and other philosophers deemed unattainable under capitalism. This debate was transformed by Joseph Schumpeter’s 1942 treatise, Capitalism, Socialism, and Democracy, which explored the phenomenon of “creative destruction.” Schumpeterian concepts offer valuable insights. Societies that maintain equilibrium among the economic forces of creation, preservation, and destruction appear to achieve success more rapidly.

These growth theory advances help solve the world’s most challenging problem: How should the 108 middle-income countries with 75% of the world’s people, 60% of global emissions, and 40% of global output correct these imbalances while converging to advanced economies’ living standards?

The blueprint for escaping the trap

It would be a miracle if the current middle-income economies could achieve what Korea did in just 25 years, given the changes in the global economy since Korea was a middle-income economy. Furthermore, it would be extraordinary if they were to replicate the remarkable accomplishments of other prosperous nations, such as Poland and Chile. However, that is precisely the objective of governments in Bangladesh, Brazil, China, India, Indonesia, Mexico, Morocco, South Africa, Turkey, and Vietnam.

They must relinquish their long-standing preconceived notions regarding talent, energy, and enterprise to accomplish this. They must recognise the significance of dependable information in facilitating and expediting the structural transformations that are a part of any sustainable increase in incomes and living standards. A sequenced and progressively more sophisticated blend of policies will be necessary for them to implement, contingent upon their unique circumstances and the stage of development they have reached.

The 1i approach is an option for low-income countries solely concerned with policies intended to stimulate investment. Once they achieve lower-middle-income status, they must transition to a 2i policy combination, which includes investment and infusion. Countries must transition back to the three i’s: investment, infusion, and innovation, at the upper-middle-income level. Middle-income countries will require progressively greater economic freedom, open and informed debates, and frequent political fortitude to alter stubborn institutions and long-standing arrangements.

1i Strategy for LOW-INCOME countries (Investment)

• Raise both local and international investment by making the investment climate more favourable. Enhance learning outcomes and widen core skills as an investment in human capital. Boost funding for the development of new access and grid networks. Get private investment and maintain fair competition by reworking regulatory frameworks.

2i strategy for LOWER-MIDDLE-INCOME countries(Investment + Infusion)

• Integrate into internationally competitive marketplaces to discipline market leaders. Diffuse worldwide technology with fluctuating product markets and variables. Encourage commercial dynamism by rewarding companies that generate value.
• Enforce discipline among elites by ensuring equitable chances for women, minorities, and marginalised groups. Enhance the distribution of talent to tasks. Establish connections between local and globally renowned universities. Facilitate the emigration of educated professionals whose competencies are undervalued in regional markets.
• Enforce discipline among state-owned enterprises by strengthening budgetary limits. Utilise multinational coalitions to persuade advanced economies to relax protections for domestic incumbents. Facilitate the implementation of energy-efficient techniques. Improve economic efficiency by incorporating environmental costs into energy pricing

3i strategy for UPPER-MIDDLE-INCOME countries (Investment + Infusion +Innovation)

• Enhance capital markets and broaden equity funding. Improve antitrust regulation and competition authorities. Moreover, Safeguard intellectual property rights.
• Enhance domestic collaborations between industry and academia. Enhance initiatives to engage with the diaspora in developed economies. Augment economic and political liberties.
• Minimise the capital cost for low-carbon energy by mitigating risks associated with technology, markets, and legislation. Enhance international financing for long-term investments.

Achieving equilibrium among the three forces

Maintaining equilibrium among the three forces In this perspective, middle-income countries encounter comparable obstacles in attempts to balance the three forces:

• In numerous middle-income countries, creation—the primary driver of economic growth—is a fragile force. Small firms are consistently entering a variety of markets, but the majority of them do not create or disrupt, and large incumbents are sluggish to develop new products and processes. Growth periods are also periods of creation, which results in structural change.
• The dominant force in middle-income countries is preservation, the arch-antagonist of creation. The same market leaders who could facilitate the rapid integration of global knowledge into middle-income countries are frequently impeding the process. Whether through market power and collusion, the capture of policies and regulations, or the establishment of education systems and labor markets that prioritize socioeconomic status over talent or merit, incumbent firms and elites frequently succeed in maintaining the status quo.
• Market power and government influence in middle-income nations hinder destruction, which removes outdated institutions and frees up misallocated resources to enable creation. A growing economy that needs new capital, labor, and energy markets must separate from inefficient ones. Weak institutions and policies impede creative destruction by maintaining outdated arrangements. This opposition tends to deteriorate in economic, political, or ecological crises. Crises force governments to act, creating a reform window.

Finding the ideal balance

In middle-income nations, finding the ideal balance is hampered by an imbalance between creation, preservation, and destruction forces. The powers of preservation prevent destruction, the forces of conservation are powerful, and the forces of creation are weak. Therefore, middle-income nations need to balance these factors. That implies

Disciplining existing big corporations to weaken the forces of preservation

Strengthening the forces of creation by rewarding merit-based actions that contribute to the efficient use of talent, capital, and energy and benefit overall well-being.

Capitalising crises to facilitate the dismantling of obsolete policies and institutions that are challenging to remove during periods of economic prosperity.

Applying these principles enables middle-income countries to consistently adjust their investment, infusion, and innovation strategies, ensuring sustained economic growth.

Reference:

World Bank. 2024. World Development Report 2024: The Middle-Income Trap.

An East Asian Renaissance. (2007). An East Asian Renaissance. https://doi.org/10.1596/978-0-8213-6747-6

Glawe, L., & Wagner, H. (2016). The middle-income trap: Definitions, theories and countries concerned – A literature survey. Comparative Economic Studies, 58(4), 507–538. https://doi.org/10.1057/S41294-016-0014-0/TABLES/7