Bangladesh Economy Should Be More Open to Escape Middle-Income Trap
Middle-income trap refers to the economic stagnation many countries face when they fail to transition from a middle-income to a high-income economy. Bangladesh, with its remarkable progress in poverty reduction and steady GDP growth, risks falling into this trap without structural reforms and greater openness.
Diversifying exports beyond garments, attracting foreign investment, and fostering innovation are crucial to unlocking its economic potential. By reducing trade barriers, enhancing ease of doing business, and prioritizing technology-driven sectors, Bangladesh can escape stagnation and join the ranks of high-income nations. A more open economy is key to achieving sustainable growth and long-term prosperity.
Middle-Income Trap
Bangladesh has made significant strides in economic development, yet it risks stagnating in the middle-income trap unless bold reforms are undertaken. This phenomenon occurs when countries fail to transition from labor-intensive growth to high-value innovation-driven economies.
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Table of Contents
1. Enhancing Export Diversification
Reliance on the Ready-Made Garments (RMG) sector contributes over 80% of Bangladesh’s export earnings. To avoid the middle-income trap, diversification into high-tech and value-added industries is essential. For instance, Vietnam’s success in electronics exports, now constituting 30% of its GDP, offers a model.
Bangladesh should target sectors like pharmaceuticals and IT services, which currently account for only 1.5% of exports. Policies encouraging investment in research, technology, and skills training are vital. Moreover, expanding trade agreements beyond traditional markets can foster new export opportunities, aiding in a smoother transition to a high-income economy.
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2. Improving Workforce Productivity
Low productivity remains a barrier to escaping the middle-income trap. Bangladesh’s labor productivity is $5,760 per worker annually, far below Malaysia’s $26,000 during its transition phase. Investment in technical education and vocational training is critical to boosting skills. The current enrollment in technical programs stands at 14%, compared to the global average of 36%.
Expanding digital literacy and industry-specific training will enable workers to contribute to high-value sectors like manufacturing automation and software development. This focus on skill enhancement aligns with the demands of global investors, ensuring sustained economic growth.
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3. Attracting Foreign Direct Investment (FDI)
FDI inflows in Bangladesh totaled $2.61 billion in 2023, a modest figure compared to Vietnam’s $15.9 billion. Limited infrastructure and bureaucratic hurdles deter foreign investors, perpetuating the middle-income trap. To attract FDI, Bangladesh must streamline regulations, reduce corruption, and develop special economic zones (SEZs).
Successful examples, like India’s SEZs generating $112 billion in exports, highlight the potential impact. Additionally, focusing on technology transfers and partnerships can drive innovation, improving competitiveness in global markets. Increased FDI will diversify revenue streams and create new opportunities, aiding the leap toward high-income status.
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4. Strengthening Financial Inclusion
Bangladesh has made progress in financial inclusion, with 56% of adults having access to financial services, but gaps remain. Limited credit access for small and medium enterprises (SMEs) exacerbates the middle-income trap. SMEs contribute 25% to GDP but receive only 16% of bank credit. Expanding microfinance initiatives and introducing digital banking solutions can bridge these gaps.
Neighboring India’s success with its Jan Dhan Yojana scheme, adding over 460 million new bank accounts, demonstrates the transformative impact of financial inclusivity. Enhanced access to finance will empower entrepreneurs, stimulate innovation, and foster economic growth.
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5. Investing in Infrastructure
Inadequate infrastructure is a key constraint keeping Bangladesh in the middle-income trap. The World Bank estimates that poor infrastructure costs Bangladesh 4-5% of GDP annually. Electricity generation has improved, reaching 25,000 MW in 2023, but supply remains unreliable in rural areas.
Improved logistics, including port facilities, are also crucial; the Chittagong port’s container handling time is 10 days, compared to Singapore’s 1-2 days. Strategic investments in energy, transport, and digital infrastructure can enhance productivity, reduce costs, and attract global businesses, driving the economy toward a high-income trajectory.
6. Fostering Innovation and Technology Adoption
Innovation is a cornerstone for escaping the middle-income trap. Bangladesh spends only 0.5% of its GDP on research and development (R&D), far below South Korea’s 4.5%. Encouraging collaboration between universities and industries can drive technological advancements. For example, China’s investments in R&D fueled its shift from a manufacturing hub to a leader in AI and green technologies.
Bangladesh should provide tax incentives for R&D and create innovation hubs to nurture startups. Embracing automation, artificial intelligence, and clean energy technologies will enhance efficiency and competitiveness in the global market.
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7. Strengthening Governance and Policy Reforms
Governance challenges and policy inefficiencies hinder Bangladesh’s economic potential and exacerbate the middle-income trap. Transparency International ranks Bangladesh 147th out of 180 countries in corruption perception. Regulatory reforms are needed to enhance ease of doing business; currently, Bangladesh ranks 168th globally.
Simplifying tax codes, reducing bureaucratic red tape, and ensuring judicial independence will foster a stable business environment. For instance, Malaysia’s robust legal framework during its developmental phase attracted significant foreign investments. Stronger governance will enable effective policy implementation, supporting Bangladesh’s aspirations to become a high-income nation.
Bottom Line
Bangladesh’s journey to escape the middle-income trap requires decisive action and comprehensive reforms. By diversifying exports, enhancing workforce productivity, attracting FDI, fostering innovation, and addressing infrastructure and governance challenges, the country can pave the way for sustained economic growth. With a strategic focus on these areas, Bangladesh can avoid stagnation and achieve its vision of becoming a prosperous high-income economy.
