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What will it take for Bangladesh to become a Middle Income Country?

Zahid Hussain's picture

This is the fifth in a series of six posts about the recent report, Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth. The previous post looked at the numbers behind Bangladesh’s goal of middle income status by 2021. The next and last post will look at the way forward.

For Bangladesh, achieving its goal of middle income status by 2021 will require more than business-as-usual: the average annual GDP growth rate will have to rise from the current 6 percent to 7.5-8 percent, while sustaining remittance growth at 8 plus percent. Faster growth in turn will depend on four main factors: (i) increased investment, (ii) faster human capital accumulation, (iii) enhanced productivity growth, and (iv) increased outward orientation.

Increase investment by at least 5 percentage points of GDP. Investment is constrained by infrastructure, business environment, land, and skills. Analysis based on Investment Climate Assessment surveys highlights the role of infrastructure in triggering a virtuous cycle of growth: better infrastructure will improve productivity which in turn will make exports more competitive and attract FDI, thus leading to further increase in productivity. Expanded provision of infrastructure has to come with easing difficulties in doing business, increasing access to serviced land, and meeting skill shortages.

Build on achievements in human capital formation. Bangladesh has done well in increasing the stock of human capital, topping the list of Asian countries along with Vietnam by improving average years of schooling by 1.3 during 2000-10. Our analysis indicates that achieving the needed GDP growth rate will require further increases from the current 5.8 to 7.3 average years of schooling. In addition, relatively low returns to schooling point to the importance of improving quality of education. These will require addressing external and internal inefficiency as well as weaknesses in education management and finance.

Raise productivity growth from 0.5 percent to 2 per cent per annum. In the near and medium term, the expansion of Bangladesh’s economy will likely by spurred by relocation of labor-intensive production from fast-growing countries like China. While this in itself is unlikely to raise Total Factor Productivity (TFP) at the firm level, aggregate level TFP may still rise as resources move from low productivity sectors such as agriculture to high productivity sectors such as manufacturing, as well as through “leapfrogging” by learning from the experience of similar firms in other countries. Increase outward orientation by deepening and diversifying labor-embedded exports. Bangladesh’s accumulated experience in mass manufacturing, strategic location, and labor cost advantage suggest that it should be able to deepen and widen its export basket as well as destinations as it integrates better with the global economy. The country is well placed to expand manufacturing exports given its geographic proximity both to the world’s two most populous countries as well as other fast-growing economies.

Given its expanding labor force, Bangladesh needs to continue to deepen its presence in the global migrant labor market. If average remittance per worker from the estimated 13 percent of the working-age population currently employed abroad stagnates, the stock of migrants would have to grow by 8 percent per annum to achieve the desired increase in aggregate remittances needed to rapidly attain middle income status. Enhancement in the education and skill composition of migrants and remittance related public policies can play an important role in increasing average remittance per worker.

Becoming a Middle Income Country will not be meaningful unless it comes with greater inclusion. Income inequality in Bangladesh is still high, underpinned by unequal distribution of economic opportunities. The good news is that inclusivity of opportunity has largely improved in recent years. Further improvements will require stimulating employment and productivity growth by focusing on enhancing the human capacities of the poor. The employment challenge ahead for Bangladesh is to absorb higher numbers of new labor force entrants at rising levels of productivity. The demographic dividend could enable the factor accumulation needed for faster inter- and intra-sectoral reallocation of labor.

Beyond inclusion, the sustainability of growth is subject to challenges posed by climate change and poorly managed urbanization. Climate change will have both ex-post and ex-ante impacts on growth. While ex-post impacts on growth is unlikely to be large over the next decade, ex-ante actions by households to reduce their exposure to climate variability can lead to lower productivity and income growth. Better access to credit, safety nets, and better labor market opportunities can help reduce households’ need to take such sub-optimal actions. Urbanization offers opportunities for faster growth, but also poses risks if not managed properly. Faster growth can be sustained if the urban space is well connected, livable, and innovative, which can be achieved by focusing on infrastructure, institutions, and incentives.

A vast reform agenda lies ahead for Bangladesh. A renewed focus is needed on a few key policy actions that are important in every aspect to raise the GDP growth rate to 7.5-8 percent, and to make it more inclusive and sustainable. Improvements in infrastructure, a better business environment, and investment in human development are necessary across all fronts. Other studies too have pointed to these as central to the growth agenda; the multi-dimensional impact of achieving notable progress in all three will be far-reaching. Doing so will not be easy because of capacity and resource constraints, and the political economy surrounding reforms, but the payoffs from successful implementation could be substantial.