Bangladesh ‘sleepwalked’ into middle-income trap

Bangladesh, mired in data fog, has "sleepwalked" into the middle-income trap according to the white paper on the state of the country's economy.

The term refers to a situation where a country experiences rapid economic growth and moves from a low-income economy to middle-income status but then struggles to make the leap to high-income status.

"We said earlier that Bangladesh is at risk of falling into the middle-income trap. But it has already happened. We have tried to explain it with data in the white paper," Zahid Hussain, a key member of the white paper panel, said at a press conference on Monday, a day after the committee handed over the final report to Chief Adviser Prof Muhammad Yunus.

Addressing the same event, Debapriya Bhattacharya, who led the white paper panel, supported Hussain's claim.

A major reason was the practice of inflating official data, which meant the country did not have any idea about the path it was truly on

As for how the country had fallen into this trap, the white paper identified "stasis in structural reforms, reform reversals, institutional decadence, global adversities, and a growing gulf between the reality on the ground and the perceptions of policymakers".

Other factors that it mentioned were employment remaining concentrated in low-productivity agriculture and informal activities, ubiquitous resource misallocations, and the slipping competitiveness of the economy.

Another major reason was the practice of inflating official data, which meant the country did not have any idea about the path it was truly on.

For example, according to the white paper, Bangladesh's economic growth has been overstated since 1995.

The remarks were made at a time when Bangladesh's overall economy is facing significant challenges, exacerbated by persistent inflation and a banking sector crisis brought on by a massive amount of non-performing loans, poor governance, and a severe liquidity crunch.

Simultaneously, slow infrastructure development and inefficiencies plague the development industry while political unpredictability and low business confidence prevent investment from growing in the country.

Unemployment is also increasing, particularly among youth, as the economy fails to generate adequate quality employment opportunities.

These issues have pushed Bangladesh into the middle-income trap, according to industry insiders.

The World Bank defines the "middle-income trap" as a situation where middle-income countries face challenges to economic growth, innovation, and wage competition.

In the World Bank's 2024 World Development Report, the middle-income trap was described as a period of slow growth and a decline in productivity gains.

It is a situation where a country is unable to compete with low-wage countries and high-income countries, is prone to premature slowdowns in development, and relies on policies based on superficial measures of economic efficiency.

The multinational lender added that middle-income countries face geopolitical challenges, demographic challenges, environmental challenges, competition from low-wage countries, and competition from high-income countries.

According to the white paper panel, the only way to break free of this shackle is to increase the total factor productivity, which measures how much output can be produced from a certain amount of inputs, particularly labour productivity.

"Education and skill of the labour force are the key to enhancing labour productivity and sustaining higher growth," it said.

Zahid Hussain, a former lead economist at the World Bank's Dhaka office, said the big concern now is finding a way out of the trap.

"I think there are three exits. One is macroeconomic stability, the second is policy reform and the third is institutional accountability. There are no other exits."

According to experts and economic analysts, if Bangladesh falls into the middle-income trap, it will be unlikely to achieve its goal of becoming a developed nation by 2041.

At the end of 2023, there were 108 countries, including China, Brazil, Türkiye and India, stuck in the "middle-income trap", according to the World Bank. The countries are home to 6 billion people.