Reforms needed to avoid the middle-income trap

“Bangladesh faces structural challenges to ensure a modern industrialization and service sector, more equitable distribution and a climate-resilient economy.”

For all the latest news, follow the Daily Star’s Google News channel.

Bangladesh could struggle to avoid the middle-income trap and become a high-income country if it cannot implement the second generation of policy reforms and focus on quality macroeconomic management, Mustafizur said. Rahman, eminent researcher at the Center for Policy Dialogue.

After years of steady economic growth and social gains, Bangladesh is expected to become a developing country in 2026. It moved from the low-income country category to a lower middle-income country in 2015 after meeting the World Bank.

Dual graduation involves the second generation of challenges, Rahman said.

“Countries that failed to address the challenges properly fell into the middle-income trap, while those that addressed the challenges appropriately became high-income countries.”

“Bangladesh faces structural challenges to ensure a modern industrialization and service sector, more equitable distribution and a climate-resilient economy.”

The transition will pose challenges in terms of macroeconomic management, diversification of the economy, overcoming structural weaknesses, increasing productivity, combining skills and productivity, and technology transfer.

The graduation of LDCs will have impacts in four areas: market access; relationship with foreign partners; obligation; and compliance. And Bangladesh is graduating at a time when compliance and rights will become major prerequisites for market access, according to Rahman.

“We will have to put the basic structures in place. We already know what we will have to do. We must carry out reforms to generate more revenue at the national level and restructure the incentives for the development of entrepreneurship.”

Another important achievement for Bangladesh is that it has transformed from a mainly aid-recipient country to a trading nation.

Today, Bangladesh must make another transition: from a competitiveness mainly based on preferences to a competitiveness based on skills and productivity.

It’s easier said than done.

“In order to move towards skill-driven competitiveness and productivity, we need to combine skills and technology and adapt the education system to that,” said the former professor from the University of Dhaka.

Rahman, who did his master’s degree in economics at Kharkov State University in Ukraine and his doctorate in development economics at Moscow State University in Russia during the Soviet Union era, called to encourage the vocational training system.

“We need to revise and reorient incentive structures so that entrepreneurs adopt technology-driven and innovation-driven practices.”

He suggested that the government negotiate bilateral free trade agreements and comprehensive economic partnership agreements with trading partners, taking into consideration that the country will lose duty-free market access after LDC graduation.

Bangladesh is setting up economic zones in the hope of attracting a lot of foreign direct investment.

“Our workforce needs to be equipped with the right skill set so that it can meet the demand of construction businesses in economic zones.”

Rahman believes domestic resource mobilization is crucial for Bangladesh to raise the country’s revenue-to-GDP ratio from the current 9%.

“We need to pay attention to this area so that we can have fiscal space.”

Indeed, he argues, if there is fiscal space when a country experiences global and nature-induced shocks, it will be able to weather the temporary challenges.

“But if an economy can’t absorb temporary shocks, it can’t wait for good times. So that resilience can be generated by greater mobilization of domestic resources.”

Income distribution is also important for Bangladesh.

“If there is a better system of income distribution, countries can cope better with shocks. But if there is high income inequality, the government cannot control the situation through safety net programs or cash support”.

Rahman thinks every developing country has a lesson to learn from the Sri Lankan crisis, as it teaches the importance of export diversification.

The advantage that Bangladesh enjoys is that its main export product, ready-to-wear, is a necessary good, sad Rahman.

“It’s not something like the tourism industry that could be shut down because of a crisis like the coronavirus pandemic. But we have to be careful about intra- and extra-apparel diversification to reduce risk.”

Bangladesh should also focus on shipping services and strive to expand non-cotton markets as well as the export of leather, footwear and pharmaceuticals, IT services and process outsourcing sectors. commercial.

Bangladesh has undertaken numerous projects financed by bilateral lenders such as China, India and Russia alongside multilateral lenders over the past decade, raising concerns about debt risks.

“Of course, we need the projects we are implementing now. If our financial and economic rate of return is justified, that’s good,” Rahman said.

“We must calculate the risks well so that one fine morning we do not discover that the accumulated risks are a reality.”

He added that infrastructure projects should be implemented with good governance to avoid over-capitalization, an issue that has caused problems in Sri Lanka.

As the country has become a middle-income nation, the cost of borrowing is rising. Bangladesh has already become a blend country from the IDA-only country.

As a blend country, Bangladesh receives both concessional and non-concessional loans, compared to concessional loans given to countries under the World Bank’s International Development Association (IDA).

“So our strategy needs to be prepared, taking into account the transition, as the burden of conditional and market-based lending would pile up,” Rahman said.

He says that if infrastructure is not put in place in a cost-effective way, producers, consumers and exporters will all have to pay more to benefit from the services.

“We have seen them in countries that have fallen into the trap.”

In case of major deviation, corruption and embezzlement of money, the result will not meet expectations, even if the project costs and debt service will be there.

“That’s the debt trap formula. In order to avoid that, we need good governance,” Rahman said.

According to the analyst, the importance of policy-making based on data and evidence continues to grow.

“If we are complacent and our decision-making is not based on evidence and data, the quality of our macroeconomic management will suffer.”

“Bangladesh is a $425 billion economy. It’s not easy to manage,” he said, urging the government to build institutional capacity and use digital technologies to manage the economy.

Rahman says about 15 economic zones should have been operational at that time.

“We are in such a competitive environment that if we fall behind, investors will go to other destinations like Indonesia, Vietnam and India.”

Comments are closed.