Overcoming middle-income trap hinges on innovation

A lack of appropriate policy, infrastructure deficit, a shortage of skills, the absence of real-time data and uneven distribution of growth, all have got in the way of achieving two aspirational goals – uplifting Bangladesh to a higher middle income country by next 10 years and developed country by 2041, say economists and leaders of private entrepreneurs.

The government should now come up with policy support to spend more on innovation to increase productivity and reduce costs of products and services to overcome the tentative middle-income trap, they noted at a roundtable of the closing session of the Annual Development Conference on Friday.

The Bangladesh Institute of Development Studies (BIDS) organised the discussion titled "Turning Points in 2020s: Analytical and Policy Changes". Some 27 research papers and 13 keynotes were presented by economists from home and abroad at the three-day event that began on Wednesday.

But government policymakers and high officials denied possibilities of challenges from any trap on the way to becoming a higher income country.

They highlighted the government's initiatives to ensure alternative sources of funding for development and other reforms initiatives.

Sayed Akhtar Mahmood, former lead economist at the World Bank, said the goals of becoming a middle-income country by next 10 years and a higher income country by 2041 is highly aspirational.

Every country has such aspirations but a few of them succeed. Argentina became a middle-income country 100 years ago, but the country is now facing a middle-income trap, he noted.

Identifying a lack of investment in innovation as the major reason for such a trap, he said an investment in innovation, process and product development reduces cost and increases productivity.

The private sector is responsible for investment for innovation and the government is required to provide incentives in these fields, he added.

Reducing dependence on the readymade garment sector, he emphasised diversifying exports and identifying potential on the electronics sector. 

The government declared the "Made-in-Bangladesh" strategy in the last budget and provided some protection for the domestic market, the economist pointed out.

Some Bangladeshi factories are exporting a full unit of electronics goods, which is a matter of pride, and the industry has potential to export parts of electronic items.

Dr Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue, stressed regional trade and signing effective free trade agreements with potential countries to meet the challenges that will arise after the LDC graduation.

India imports products worth $411 billion per year, but Bangladesh's exports to the country amount to only $1.25 billion. China imports $2,000 billion worth of goods but less than $1 billion from Bangladesh, he also said.

The regional trade of Bangladesh was 10% of total exports a decade ago and the rate is still only 12%. The ratio is not sufficient to be beneficial from the upcoming Asian century, Dr Mustafizur noted.

Asif Saleh, executive director at Brac, said benefits of economic growth should reach the last mile of the country to uplift it to the next level of development.

Growth benefits are being distributed unequally owing to a lack of skills among the country's labour force, he also said, urging investments for health and education to upgrade the human capital.

Terming the first two decades after independence "lost decades" as the country had a highly protectionist trade policy that highlighted import substitutions, Zaidi Sattar, chairman at Policy Research Institute, advocated for more leveraging of trade to boost exports and GDP.

Bangladesh's GDP size increased by a remarkable level with per capita income, food production, external trade and others. But the economy started boosting in the 1990's when it became more liberal.

He also said the country's garment sector is generating about 85% of export earnings and the sector should not be underestimated in the name of export diversification.

Bangladesh is exporting only 6.5% of the global demand for apparels. Investors have potential to boost their earnings manifolds through grabbing a 20% or more share of the global demand, he noted.

While presenting a keynote at the event, eminent economist Dr Wahiduddin Mahmud urged attention on a more concrete pathway to attain two inspirational goals.

Rapid growth among developing countries rarely sustains. And, even if it sustains, uplifting the status of a country is not guaranteed owing to high inequality, he also said.

Terming the LDC graduation an immediate concern for Bangladesh, he stressed starting preparation regarding negation in the global economic order without the preferential treatment that the country has been enjoying.

State Minister for planning Dr Shamsul Alam at the event said the government has a commitment and concrete plan to achieve the middle-income status by 2021 and higher-income status by 2041.

Highlighting the government's perspective plan, he said double digit economic growth is projected by next 10 years.

The eighth Five Year Plan, the perspective plan, Delta Plan 2100, National Social Security Strategy and other policies are adopted by the government to ensure desired sustainable and inclusive growth.  

Ahmed Kaikaus, principal secretary to the prime minister, said predictions of economists seldom come true as, according to him, most of the projections are based on flawed methodologies.

Mentioning that the Bangladesh Bureau of Statistics (BBS) had identified 10 poorest upazilas where the rate of poverty was found to be higher – up to 80%, he said the Prime Minister's Office (PMO) sent a team to take proper initiatives to reduce poverty in those areas but they found that the poverty rate was much lower than what the BBS claimed. 

"The government emphasises the foreign direct investment (FDI) to meet future challenges. It is creating an environment for every entity to realise their own potential," he said. 

Dr Mashiur Rahman, economic affairs adviser to the prime minister, said Bangladesh was enjoying stable growth in GDP and per capita income with relatively more equitable distribution among people compared with countries with the same level of growth.

Mentioning that the rate of employment generation in the country was lower compared to investments over the years, he stressed moving towards higher-technology industries as the country is facing a dearth of land. 

Jashim Uddin, president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) told the event that the private sector requires more support in terms of policy and infrastructure development.

He, however, mentioned that the government is implementing a good number of mega projects to facilitate trade and attract investment. The private sector is also working to develop infrastructure in the Public Private Partnership (PPP) method.

Planning Secretary Pradip Ranjan Chakraborty said there were no threats or traps on the way to elevate the country to the next stage of development.

The ongoing eight fast track mega projects will help the economy get a growth momentum, he mentioned, adding the government had brought a set of reforms in the administration to overcome all types of traps.

Finance Secretary Abdur Rouf Talukder said as the tax-to-GDP ratio of Bangladesh is lowest among the developing countries, the government is trying to manage alternative sources of funding to implement the development programme.

He found two challenges in the economy for the current and next fiscal year – subsidy and inflation.

The government has a provision of subsidy to the tune of 1.7% of the GDP while 1% of the GDP for fertilizer, gas, and electricity, he said.

One kilogram of urea fertiliser is selling forTk30 at the retail level, although the government is purchasing it at Tk100 a kg, he noted, adding these three sectors – fertiliser, gas, and power – would require about 2% of the GDP in the current fiscal year.

He also said the US economy is currently facing the highest inflation in the last 31 years, while manufacturing inflation in India is 12.5%. That is why, inflation in Bangladesh is likely to go up in the upcoming months, he added.

Fazle Kabir, governor of the Bangladesh Bank, said inflation in Bangladesh is highly dependent on prices of food products, as food places the highest weight of the consumer price index.

Food prices are on the rise in the global market, which implies that the rate of inflation would increase further, he added.

He also said the government was trying to buy a significant amount of rice as the country saw a bumper yield of Boro paddy this year.

The government has a target to increase the food stock to a level from where it can manage the inflation pressure, he added.  

Responding to a question he said managing non-performing loans (NPLs) is a very short-time target. The gross NPL in the country's financial sector was 8.18% of the total outstanding loans on the last day of October.

NPL rate is lower in private-sector banks as the main goal of such banks is to maximise profit, he pointed out, adding specialised banks are formulated to provide special types of services with special goals, which is why the NPL rate is high – over 10% – in such banks. He, however, said no bank should have any NPL.

Barrister Nihad Kabir, president of the Metropolitan Chamber of Commerce and Industry, said Bangladesh would face many problems in terms of policies and data to meet the status of an upper middle-income and higher-income country.

The private sector does not have sufficient access to data and has no capacity to analyse the data being provided by the government, she claimed.

She also observed that the ternary industry has been relocated from Hazaribagh to Savar but it did not bring any fundamental change. "The River Buriganga has got relief from pollution in exchange for pollution in the River Dhaleshwari."