The definitions of middle-income (the "optics" of the thresholds, etc.) are in debate. Even if one really thinks of the development process, it is a continuum rather than an event that takes place in discrete "jumps" through thresholds. Therefore, we should not get too preoccupied with the "optics", but rather focus on the "mechanics" of dealing with the challenges that arise. The question to focus on is: what are the drivers of sustained high growth? Reviewing the literature on the international experience of middle income transitions reveal the answers to this question -- the "mechanics" of the middle-income transition challenge. The three key factors that determined the trajectory of countries that did or didn't breach the lower to upper middle income or upper middle to high income categories can be put down as: 1) better talent, 2) better products, and 3) better institutions.
BETTER TALENT "MECHANICS":Â As the middle income transition involves losing initial labour cost advantages, a country needs to go beyond. Better talent would mean higher productivity of labour- not just getting workers to work more but ensuring that those workers are getting better at what they do. Striving for higher productivity of labour is especially important for a country like Bangladesh whose demographic dividend is waning. Basic skills are adequate in a country's labour force if it is in the business of producing final goods - basic or light manufacturing. But in the middle income transition what matters is to shift from this to advanced skills and innovation, and knowledge-driven activities like design. Better talent would mean a stronger focus on higher education and training. When we look at countries like South Korea, Taiwan, Singapore and others that breached the middle income trap, these were key pillars of their success.
BETTER PRODUCTS "MECHANICS":Â The second element of 'better products' refers to producing innovation-driven products that are globally competitive and not easily imitated. It requires a combined focus on of Information Communication Technologies (ICTs) and Research and Development (R&D). When looking at countries in East Asia that successfully breached the middle income trap, they moved from 'importing and imitating' to innovating technologies of their own. A major part of this came from investment in what is called 'advanced infrastructure' like high-speed broadband and satellite connectivity, beyond the connective infrastructure like ports, roads, and railways. Governments in these countries also focused on investment in R&D (research and development) through a combination of investment directly in national R&D centres and fiscal incentives like tax breaks to stimulate innovation. Another element was strong Intellectual Property (IP) protection. During the middle income transition of East Asian economies, IP protection helped stimulate a lot of local innovation and even generate patents at the same rate as advanced economies.
BETTER INSTITUTIONS "MECHANICS": The third element is 'better institutions'. Some argue that in the early stages of development sophisticated institutions are not necessary. Policy formulation would be fairly simple; the development trajectory is less complex and more linear as the country develops steadily beyond being agriculture-based. But for sustained growth towards high income, a country needs to move beyond 'crude institutions' as they are no longer fit-for-purpose. In his work on how institutions matter for growth, Dani Rodrik notes that these new institutions- 'high quality institutions' - are required for high quality growth. Often, people assume that countries in East Asia, with strong state roles in the economy skipped through this process or decided to ignore them. But even countries like South Korea, Taiwan, Hong Kong and Singapore did battle the institutional challenges, overcame strong political and bureaucratic forces to unleash new waves of dynamism. We may think that concepts like 'good governance' and 'better dialogue between government and business' are just cosmetic 'feel good' factors, but as has been very clearly shown in countries that breached the middle income transition, these ideals mattered greatly to their core economic performance, especially in realising the potential of their private sectors.
TIME FOR EVERYONE TO FOCUS ON A KNOWN RECIPE:Â We must bear in mind that middle income challenges do not come by surprise. Looking at what countries like Korea did 15 years before they became high-income provide instructive lessons. But the recipe to tackle the challenge is not really an enigma. What is the recipe? Invest in higher levels of human capital, invest in advanced infrastructure, innovation and R&D, build institutions that promote dynamism and help unleash private sector potential. While the recipe may be clear, getting there requires work and focus. As is clear from other countries, it requires a long-term view of economic strategy. A strategy that keeps evolving as needs change and as we learn what is working and what is not. All of us must look at the 88 (out of 101) countries that hadn't been able to breach middle-income status as well as look at the experience of the 13 countries that did make it, to distil the key lessons. This is not just a task for a government, but rather all of us.
VISION 2021: The Bangladesh Prime Minister has introduced a reform Programme called the New Economic Model (Vision 2021). Firstly, what is needed for Bangladesh to advance from the least developed to the middle-income category is a greater national commitment to innovate on its own. The economy has to innovate and use labour and capital more productively. That requires an entirely different way of doing business. Instead of just assembling products designed by others, with imported technology, companies must invest more heavily in R&D on their own and employ highly educated and skilled workers to turn those investments into new products and profits. It is a very, very hard shift to achieve.
Secondly, the government should improve the quality of education at all levels. According to endogenous growth theorists such as Lucas (1988) and Romer (1986; 1990), education or knowledge is one of the essential inputs for long-term economic growth since it provides positive externalities that can offset the diminishing returns effect of other inputs, i.e., capital and labour. Practically, the availability of education or knowledge provides more resourceful human capital with better productivity. As productivity increases, the cost of producing an additional unit becomes relatively cheaper, thus improving competitiveness in the market.
Thirdly, infrastructure investment should become one of the primary focuses of the government's policy. Bangladesh's economic strategy to become a middle-income economy by the year 2021 is strongly supported by the Economic Transformation Programme, Strategic Reform Initiatives, and Government Transformation Programme. Both public and private investments through the Economic Transformation Programme are expected to accelerate in the future, as the implementation of large infrastructure and investment projects gather momentum and are funded by government-linked companies.
Fourthly, we have to allow more foreign-owned firms - particularly in the services sector - to gain from network externalities and collateral benefits of foreign direct investment to stimulate further growth, and promoting venture capital investments for small domestic start-up firms seeking to scale to global markets.
But this process of structural reform can be tricky: can be slow and complex, or fast and easy, depending on the ownership of the Programme, implementation capabilities, and a macroeconomic stance that provides fiscal and political space to implement the Programme. Finally, there are four important factors that have to be emphasised and expedited to achieve a middle income nation.
1. Innovation through the New Economic Model in which the economy has to innovate via more productive labour and capital. This quality of human capital can be achieved through quality education.
2. Ability to move up the value chain through infrastructure investment via Economic Transformation Programme, Strategic Reform Initiatives, and Government Transformation Programme in education and trainings. Primary, secondary and tertiary in Bangladesh need to be promoted because it can trigger innovations that can be beneficial to economic development. The education policy-makers know that industries needs students with strong analytical and problem-solving capabilities, a good command of English and effective social networking skills.
3. Presence of strong core physical infrastructure through major revamp of development corridors in Bangladesh and implementation of large infrastructure and investment projects that gather momentum. Both Public and Private investments through the Economic Transformation Programme are expected to accelerate in the future. The implementation of these infrastructure and investment projects would gather momentum and their spillovers will be very crucial to the economic development of Bangladesh.
4. Reasonably flexible and transparent business climate by allowing more foreign-owned firms - particularly in the services sector - to gain from network externalities and collateral benefits of foreign direct investment to stimulate further growth, and promoting venture capital investments for small domestic startup firms seeking to scale to global markets. In particular, providing access to learning and training opportunities to build social entrepreneurs and product innovations. Bangladesh should also utilise the market space provided by internet and communication technologies to foster business innovations for the global economy. The New Economic Model and Economic Transformation Programme that are being currently implemented in Bangladesh would sufficiently address all of the above for Bangladesh to achieve a middle income nation.
Dr, Jamaluddin Ahmed FCA, is General Secretary of Bangladesh Economic Association, Chairman of Emerging Credit Rating Limited and Past President of ICAB (2010).
 jamal@emergingrating.com
Middle-income status: The recipe to tackle the challenge
Jamaluddin Ahmed concluding a two-part article on \'Bangladesh: Graduating to middle-income status\' | Published: February 26, 2015 00:00:00 | Updated: November 30, 2024 06:01:00
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