Challenges in Being An MIC Country: Current Situation of The Bangladesh Economy and Where It Lies in The MIC Ladder
Challenges in Being An MIC Country: Current Situation of The Bangladesh Economy and Where It Lies in The MIC Ladder
After a long period since its independence, rapid growth in the last decade enabled Bangladesh to reach
the lower middle-income country status in 2015. In 2018, Bangladesh fulfilled all three eligibility criteria
for graduation from the UN’s Least Developed Countries (LDC) list for the first time and is on track to
become a full-fledged Middle-Income Country by 2021. Bangladesh today is the 44th largest economy of
the world in terms of GDP and 32nd in term of purchasing power. It is in the right track to become a
middle-income country in 2021 and a developed one in 2041. But even with such outstanding progress
in the past few years, now lies the real challenge for Bangladesh, to move into a MIC country and keep
sustainable growth of GDP to achieve a Higher Middle-Income status. For a better understanding, we
will look into where Bangladesh lies in the pecking order of Middle Income countries and its current
economic state and compare it with other MIC countries before we head into the discussion of the
challenges that Bangladesh faces.
Current Situation of the Bangladesh Economy and where it lies in the MIC ladder
A nation’s economic status is mainly reflected by its Gross Domestic Product (GDP). (A comprehensive
breakdown of the GDP of Bangladesh has been shown in worksheet 1 in the excel file) From there we
can see that although Bangladesh laid its budding economic foundations through Agriculture, it has
slowly started to lean away from agriculture and delve deeper into more progressive sectors of the
economy. Mainly sectors in Industry and Service have enjoyed a prosperous rapid growth, with the
Service sector accounting for almost 55% of the total GDP of the country, and industry following behind
taking up about 30% of total GDP. Within the sectors of Industry, manufacturing leads the way in terms
of contribution towards the GDP, contributing about 20% of total GDP. The total contribution of
Manufacturing currently lies at almost 2.5 trillion taka and is the most significant aspect of the GDP of
Bangladesh. Aside from the Industry sector, the Service sector contributes more than half of the total
GDP of Bangladesh, with many subsectors such as Wholesale & Retail Trade, Transport, Community,
Social & Personal Services enjoying steady sustainable growth.
When compared to its fellow Middle-Income Countries however (Worksheet 4) Bangladesh lies near the
bottom of the ladder, with its nominal GDP one of the lowest in terms of US$ PPP. Purchasing power
parity (PPP) is an economic metric that allows the comparison of the purchasing power of various world
currencies to one another. It is a theoretical exchange rate that allows you to buy the same amount of
goods and services in every country. We have decided to make the comparison using US$ PPP as it
shows a more distinct outcome with an even playing field for all the countries in the list. Bangladesh
carrying a low GNI per capita in terms of US$ PPP is mainly due to the low value exchange rate of the
Bangladeshi Taka in comparison to the US dollar, and Bangladesh also has the highest inflation rate
among all the countries listed in the comparison. However, the GDP growth of Bangladesh shows
promising signs as Bangladesh boasts one of the highest GDP growth rates among the countries listed in
the comparison.
GNI per capita based on purchasing power parity (PPP)- PPP GNI is gross national income (GNI)
converted to international dollars using purchasing power parity rates. An international dollar has the
same purchasing power over GNI as a U.S. dollar has in the United States. GNI is the sum of value added
by all resident producers plus any product taxes (less subsidies) not included in the valuation of output
plus net receipts of primary income (compensation of employees and property income) from abroad.
GNI per capita is the dollar value of a country's final income in a year, divided by its population. The GNI
per capita of Bangladesh has been growing at a steady rate from the last decade, starting at just 2,520$
(PPP) in 2009 and growing to about 4,570$ (PPP) in 2018. Bangladesh broke into the land of middle
income countries and its GNI per capita, albeit being near the bottom of the ladder, shows promising
signs as it is just behind neighboring countries Pakistan and India, who boast a GNI per capita of 5,860$
and 7,680$(PPP), despite entering middle income status at a later time than both. But if we look at the
countries who have been middle income for a longer period of time, we can see that the dangers of
being a middle income country are quite daunting as countries such as Brazil and Thailand, who entered
middle income status decades ago, have still not been able to graduate from middle income status to
high income status. They have been stuck in the middle-income trap and cannot seem to find a way out.
Bangladesh, along with its neighboring countries, seem to be going in the exact same direction as Brazil
and Thailand.
Basically, countries that are unable to compete with either Low-wage Economies or Highly Skilled
Advanced Economies dwindle in the Middle-Income Trap. The possible causes that lead to a country
being stuck in the middle-income trap are stated below-
Rising labor costs & wages- The surplus of supply of labor decreases and costs increase as a
country becomes middle income. Gains in productivity growth slow down, causing a slowdown
in labor migration. The population of the country and lack of human capital also plays a huge
role in this factor.
Failure to invest in human capital- Usually for countries just entering middle income status,
early growth tends to be input-driven rather than productivity-driven. Short term appeal of
rapid growth often puts countries off from investing further in human capital. As a result, the
long-term economic future of the country remains unstable. Failure to invest in human capital
often brings about a lack of innovation and production of sophisticated technology in the future.
Poor quality of human capital acts as a constraint on the ability to absorb more advanced
foreign technologies and on the expansion of innovation activities, thereby preventing the
productivity growth that may allow a country to sustain high levels of economic growth.
Lack of innovation- Innovation creates goods and services of high value and more appeal in
world markets. A lack of progression in technology and innovation often leads to a stagnation in
the country’s economy.
Institutional Failures and Social Capital weaknesses- Institutions and infrastructure may not
support an adaptive and creative economy and society. Resistance to change often leads to a
lack of investment in crucial sectors which help a country’s economy to adapt. Social capital may
not support sustained growth especially in knowledge sectors. Individuals with potential ability
to be highly productive in innovation activities end up working in sectors that are less beneficial
in terms of growth, simply due to higher wages or lack of uncertainty within those sectors.
Exhaustion of Cheap Labor and Imitation Gains- Factors and advantages that generate high
growth during an initial phase of rapid development: low-cost labor and imitation of foreign
technology, disappear when middle and upper-middle-income levels are reached, thereby
requiring new sources of growth to maintain sustained increases in per capita income. During an
initial phase, low-income countries can compete in international markets by producing labor-
intensive, low-cost products using technologies imported from abroad. These countries can
achieve large productivity gains at first through a reallocation of labor from low-productivity
agriculture to higher-productivity manufacturing. Because producers of nontraded goods must
compete with exporters for labor, they need to pay attractive wages. At the same time, the
chance of well-paid work in manufacturing creates an incentive for workers to move to cities
and invest in education. However, once these countries reach middle-income levels, the pool of
underemployed rural workers shrinks and wages begin to rise, thereby eroding competitiveness.
Productivity growth from sectoral reallocation and technology catch-up are eventually
exhausted, while rising wages make labor-intensive exports less competitive on world markets,
at the time when other low-income countries initiate a phase of rapid growth.
Income Inequality- Greater income inequality is a price to pay for rapid growth in the early
stages of economic development. As low-income countries develop, with production shifting
from agriculture to industry, income gaps between the top and the bottom income groups tend
to increase. After reaching a middle-income stage, mass education and continued
industrialization combine to foster reductions in income inequality. However, persistence in
inequality during the middle-income stage may act as a constraining factor on growth; a key
reason for that is that it may prevent individuals with low assets from acquiring skills, due to
their inability to raise collateral and secure loans to finance advanced education. One of the
reasons why Brazil, which had a growth rate comparable to South Korea until the 1980s, was
unable to transition into an innovation-based economy is a high degree of income inequality
that persisted throughout its developmental years.
Maintaining Macro-Economic Stability- Fast growing countries usually suffer from high inflation,
as is the case with Bangladesh as well. Credit bubbles can develop as speculative investments
take hold. Balancing inflation while sustaining economic growth is the key to maintaining macro-
economic stability.
All of these factors contribute towards a country spiraling down into the middle-income trap. A lot of
these factors also pose as challenges that Bangladesh faces as well in moving to a middle-income
country.
Political Instability and lack of proper governance - The political scene during the last few
decades has been full of turmoil. Free media, rule of law, transparency of all government
decisions, accountability of the government to the mass people and independent judiciary,
Peaceful co-existence, tolerance and mutual respect are the basic elements of democracy. And
these are also essential for ensuring a booming economy.
Disparity of Wealth- The widening disparity between rich and poor within the country is an
alarming feature that middle-income countries have to tackle. According to Bangladesh
Economic Association (BEA), 50 percent people are landless, while 6.2 percent families own 40
percent of the total land in the country. It is also mentionable that corruption has been
widespread in the country. Combating corruption is necessary for stimulating economic growth
and social development.
Over-reliance on the garments sector- Bangladesh is the world's second largest apparel
exporter of western fashion brands. In 2016, Bangladesh held second place in producing
garments just after China. The textile industry and clothing industries provide the single sources
of growth in Bangladesh economy and principle source of foreign exchange earnings. In the
fiscal year 2016-2017, the readymade garments industry generated USD 28.14 billion which was
80.7 per cent of the total export earnings and 12.36 per cent of the GDP. However, due to
becoming a middle-income country, wages and labor costs will soon start to rise, and so will
prices on exports, which may lead to disinterest from the world market when turning to
Bangladesh for its garments needs. Bangladesh needs to not put all of its eggs in the basket of
the garments sector and invest in other key areas such as infrastructure, technology and
education. Redirecting its over dependency on the garments sector towards other progressive
sectors is a challenge that Bangladesh will have to face in the coming years.
Lack of proper Education and utilization- Children's primary education is almost free in
Bangladesh. 26,930 primary schools have nationalization. 13 million students obtained
scholarships via mobile phone. Dropout rate after primary school was 20 per cent in 2017.
Computer labs and multimedia were provided in 31,131 schools. Life expectancy of the people
of Bangladesh has been increased to 72 years and child mortality rate has been decreased to 2
per cent. Although these are all positive signs, there remains a lack of transition from primary
and secondary level education to higher education. Bangladesh's overall Gross Enrollment Rate
(GER) of 16 percent in tertiary education is much lower than that of neighboring countries India
(27 percent) and Sri Lanka (19 percent). Higher education is much needed to create a culture
based around innovation, adaptiveness and technology. Technology and innovation are what
makes the difference for middle-income countries hoping to break out of the middle-income
trap, and for Bangladesh, higher education is what will bring forth the new wave of modern
innovators and creators in technology.
Hindrance to export- According to the Export Promotion Bureau (EPB), Bangladesh earned
$34.83 from exports in the fiscal year 2016-17. Of the amount, the RMG sector alone earned
$28.15bn which accounts for over 80 per cent of total exports, followed by several other
products including agricultural products, frozen food, jute and jute goods, and leather. Due to
narrow export basket and infrastructure bottlenecks, Bangladesh is losing their competitiveness
to some countries such as India, Vietnam and Pakistan. The country will face heightened
competition in readymade garment (RMG) export and therefore, sustaining the current high
export growth will be an uphill challenge in the coming years. Due to being a middle-income
country, the interest rates on loans from various countries and international agencies will rise.
Grace periods will be shortened or will be unavailable. The period for paying back loans will be
reduced. These will push up foreign loan related costs. The export market might shrink to some
extent and there could be risks, particularly with new products. For the old products, the cost
for entering export market will rise. All sorts of duty facilities may end, and new conditions may
be added in the export market.
Deterrents to Investment- Investment is a key component for a middle-income country to move
past its financial barriers. Private investment which typically accounts for about 75 per cent of
total investment has been stagnating for last few years. Industry experts say that the deterrents
that discourage investors include-
1) Time-consuming bureaucracy
2) Poor socio-economic and physical infrastructure
3) Unreliable energy supply
4) Corruption
5) Low labor productivity
6) Undeveloped money and capital markets
7) High cost of doing business
8) Complicated tax-system
9) Frequent changes in policies on import duties for raw materials, equipment and machinery
10) Delays in decision making
Poverty Alleviation- Growth comes hand in hand with poverty alleviation. For Bangladesh, the
most success in lowering the poverty rate came during periods of strong growth. Most notably,
the poverty rate fell by a remarkable 9 percentage points over 2000-2005, a period over which
GDP grew at just under 6% a year. But poverty still remains a grueling epidemic for a large part
of the population. In order to alleviate poverty, employment creation and solid growth of labor-
intensive manufacturing activity remains a challenge that Bangladesh will have to continue to
tackle throughout its middle-income years.
Lack of access to advanced infrastructure- Modern day infrastructure can be classified into two
types: 1) basic infrastructure, which consists of roads, electricity, and basic telecommunications
and 2) advanced infrastructure, which consists of advanced information and communication
technologies (ICTs) in general, and high-speed communication networks in particular. Access to
broadband facilitates the buildup of domestic and international knowledge networks, thereby
promoting dissemination and research as well as innovation and growth. Broadband networks
also provide a platform that other sectors can leverage to develop other platforms such as
distant education and tele-medicine, and enable the development of digital content, all of which
increases productivity. Bangladesh has one of the largest amounts of internet usage in all of
Asia, with its internet penetration rate growing rapidly in the last decade. Bangladesh has to
focus on service sector through information and communications technology. Access to
advanced infrastructure not only promotes higher knowledge, but also increases economic
activity within private and public sectors and allows for better R&D. Only sustaining internet
penetration will not be enough as Bangladesh will have to move towards faster and more
advanced connection networks in order to strengthen its hold as a middle-income country
Employment creation & integration- Bangladesh must create adequate jobs for its unemployed
population to defeat poverty and move to the next stage of being a developed country. Over 2
million labor forces join Bangladesh job market every year. New job opportunities should be
created for them so that they can also contribute to the economy. Aside from newer and more
diverse jobs assigned with regards to compatibility of the people, Bangladesh will also have to
integrate female workers into more diverse job sectors other than solely garments.
Fluidity of Business- Poor infrastructure makes it difficult to transport goods across the country.
About 92% of Bangladesh's seaborne trade is done through the Chittagong port. Due to
congestion, and inadequate infrastructure, the container ships have to wait long at the port. As
a result, the companies concerned have raised the container fare of Chittagong-bound cargo
vessels. It takes around 15-20 days for unloading goods at the port. Lingering problems at
Chittagong seaport had been causing serious adverse impact on the country's trade and
commerce and raised the cost of doing business. Starting business in Bangladesh is difficult,
particularly because the initial spending on getting license and permits is very high. Constant
changes in regulations also affect major areas in the life cycle of a business: starting a business,
dealing with construction permits, getting electricity, registering property, getting credit,
protecting minority investors, paying taxes, trading across borders, enforcing contracts and
resolving insolvency. Those factors, combined with high levels of corruption, make Bangladesh
one of the hardest places in the world to conduct business.
The training wheels are off- With the graduation of Bangladesh into a middle-income country, it
will face some challenges of losing preferential market accesses to world market, official
development aid, special treatment under WTO and increased contribution to International
organizations as well as withdrawal of technical co-operation and other assistances. Though
Bangladesh has a solid record of managing public debt payments, there is a risk that foreign
debt of Bangladesh may increase because of phasing out of concessional facilities which
Bangladesh enjoyed as an LDC.
Recommendations
Raising the quality and accessibility of education - Develop an educated and motivated
workforce by investing in education & training sectors within the country
Programs related to social development, including health and education, should be the core
area of development policy along with social safety net programs to address the alleviation of
poverty.
Structural risks like high poverty and equality, low human capital and weak economic
governance have to be tackled effectively and minimized to a reasonable level.
Diversifying workforce and boosting youth employment- Adequate Job opportunities must be
created since 2 million labor forces join the job market every year and skilled job opportunities
will be provided in ICT, medical, business and social sectors. Utilizing the youth population of
Bangladesh, which makes up about 30% of the entire population and creating more youth
employment regimes and opportunities is needed for a thriving economy.
Raising the wages of working poor without losing international competitiveness.
Structural opportunities like natural resources, domestic resources, agricultural productivity and
youthful population should be explored and non-structural opportunities as flow of remittances,
use of ICT, regional integration and searching of emerging development partners need to be
explored.
Leveraging and advancing Remittance- Remittance plays a key role in increasing our foreign
reserves. It also contributes in improving social and economic indicators like nutrition, living
conditions and housing, education, health care, poverty reduction, social securities and
investment activities of the recipient households. Remittance comprises almost 11% of our GDP
and is one of the major driving forces of the economy but unfortunately, it does not get the
attention required to produce even more output. As technology improves throughout the world
and automation for jobs increases, so does the need for skilled labor, and unskilled labor is left
overlooked and unneeded. According to the Bureau of Manpower, Employment and Training
(BMET), most of the Bangladeshi workers who migrate are unskilled or semi-skilled people. If
these people were properly trained and skilled workers such as electricians, drivers, nurses,
plumbers or professionals like doctors, engineers, IT specialists, lawyers then it would have a
further impact on our foreign exchange earnings. A linkage between the current education
system and the job market is a necessity for the current needs of the economic climate. We
need to include vocational courses, Information and Communications Technology (ICT)-based
education from junior level (class 6) to higher secondary (class 12) and accordingly syllabuses
should be updated reflecting the market demand so that they can hold advantageous positions
for job in local and foreign market. High costs of migration due to recruitment fees and charges
by intermediaries make opportunities highly skewed in favor of people in higher-income groups.
Continued government oversight of the overseas recruitment process is needed to make sure
Bangladeshi remittance earners get better opportunities and subsequently, offer more
contribution.
Subsidies to Innovation- Traditionally, government subsidies to R&D are justified in terms of a
divergence between private and social marginal returns. They help to prop up wages in the
innovation sector and reduce the inherent degree of uncertainty associated with the returns to
innovation, temporary public subsidies can also help to mitigate the misallocation of talent.
Contract Enforcement and Protection of Property Rights- Poor contract enforcement and lack
of protection of property rights (especially intellectual rights) are key weaknesses in developing
countries in general, and middle-income countries in particular. These weaknesses tend to
weaken confidence and may have an adverse effect on all aspects of economy activity. but they
may be particularly detrimental to innovation activities. Contract enforcement requires that a
legal system incorporates effective mechanisms of law enforcement, namely, an impartial
judicial system, whereas securing intellectual property rights requires not only to develop new
legislation but also to raise awareness of existing laws. Bangladesh needs to step up its contract
enforcement and protection of property and intellectual rights in order to strengthen innovation
activities which eventually lead to a boost in overall economic activity.
Promoting advanced infrastructure- Thankfully, Bangladesh has already made headway in this
regard with the Government taking up large scale projects (such as metro-rail). In order for
Bangladesh to thrive in technology and innovation, there must be enough “high IQ” individuals
involved in R&D; but if productivity in that sector is low, because access to advanced
infrastructure is limited, wages will also be low–implying that few people will choose to invest in
the advanced skills needed to operate in that sector. A sufficiently large increase in investment
in advanced infrastructure can go a long way in not only promoting growth, but also escaping
from the clutches of the middle-income trap.
Integration with global markets through which internationally competitive Bangladeshi firms
would be plugged into global supply chains as well as improving access to finance.
Creation of dynamic and diverse urban centers which allow the pressure to be taken off relying
solely on Dhaka, deepening financial sector and external trade reforms.
Balancing policies to focus on neglected structural areas
Conclusion
Bangladesh has come a long way since its inception in a very short span of time. It has transformed itself
from a country that is dependent on aid to a country focused on trade. And with the help of strong long-
term policies, future visions and proper utilization of its massive raw workforce, it has been able to
break many of the barriers that hindered its growth. But now is not the time to put the foot off the
pedal, quite the contrary in fact, these next few years will be the make or break scenario for the
economic growth of Bangladesh. If it is able to keep its sustained growth while also alleviating poverty,
Bangladesh will have the opportunity of moving into a High Middle- Income Country by 2031 and a High-
Income country by 2050. However, with the current Covid-19 pandemic and other uncertainty regarding
the future of the world market and economies, Bangladesh sees itself in the eye of a storm. All of its
growth efforts might prove in vain if the Bangladesh Government does not take the right precautionary
measures and steps in the right direction. Without proper planning and carefully thought out policies for
future sustainable economic growth, what were supposed to be the golden years for the economy of
Bangladesh may very well end up in unstable turmoil. In order to avoid that, focus must be given on
proper planning, financial policies, advanced structural development, innovation, education and youth
employment. The population of Bangladesh may be weighing it down in the current ladder of economic
growth, but it can also be the driving force of an emerging competitive economic entity that will prosper
for ages to come.
Executive Summary
Despite being riddled with natural, geographical, political and economic turmoil ever since its years of
inception almost 50 years ago, Bangladesh has managed to pull itself up from the depths of uncertainty
to a growing economic force in this short span of time. An overpopulated country festering with poverty
and lack of education has come leaps and bounds to where it stands today. It reduced poverty from 44.2
percent in 1991 to 14.8 percent in 2016/17. And due to sustained economic growth, Bangladesh has
become a Middle-Income Country in 2015 after passing 42 years of being a least developed country. The
Committee for Development of the United Nations gave its recognition in 2018 and Bangladesh aims to
keep this status as well as further develop to eradicate poverty and hunger by 2021 and claim a spot as a
High Middle-Income Country. This report aims to take a look at the current economic situation of
Bangladesh, its standing as a Middle-Income Country and the implications that the status of being
Middle- Income Country bears for Bangladesh, along with the challenges and opportunities that come
with this status. The report also holds some recommendations for Bangladesh in keeping their sustained
growth intact and to move in the right direction to not only redeem its Middle-Income status, but to
progress even further up the ladder of economic growth. Bangladesh has laid the bricks of foundation
properly over the years, now is the time for a massive transition period that comes along with the status
of being a Middle-Income Country, and we hope this report is a proper representation of everything that
entails this transition and how it can overcome it and move to greater heights to one day become a
powerful force in the world economy.
Links- https://journals.sagepub.com/doi/pdf/10.1177/097491011100300302
https://www.observerbd.com/details.php?id=133892
https://www.worldbank.org/en/country/bangladesh/overview#1
http://www.bbs.gov.bd/
https://www.thedailystar.net/news-detail-9705
http://www.bmet.gov.bd/
https://tradingeconomics.com/bangladesh/gni-per-capita-ppp-us-dollar-wb-data.html
https://data.worldbank.org/