In a recent visit to Bangladesh, the World Bank’s leadership urged the country to take concrete steps to avoid falling into the so-called “middle-income trap”. Similar concerns have been raised by economists in local think tanks such as the Centre for Policy Dialogue (CPD). No doubt, this matter is increasingly coming to the forefront as Bangladesh is now all set to graduate from the Least Developed Country status.
Does the middle-income trap even matter if a country’s GDP growth is just enough to “technically” stay out of the trap, but the economy suffers from rampant inequality?
The concept of a “middle-income trap” is usually credited to Indermit Gill, now chief economist at the World Bank, and Homi Kharas from the Brookings Institution. They argued that rapid transition from low-income to middle-income country status which is often driven by cheap labour and export-driven economic models, is likely to be followed by prolonged low growth rates. Their intuition is simple. As wages rise, these “newly minted” middle-income nations suffer from reduced competitiveness in producing labour-intensive goods (e.g., garments) because their wages are now too high relative to other low-income countries, nor can they compete with high-income nations that have far greater levels of technology and innovation. As a result, these economies experience sustained growth slowdowns and rising informal economies. The economic struggles of countries in Latin America are often cited as proof of the middle-income trap.
