Avoiding the Middle-Income Country Trap Challenges and Opportunities for Bangladesh
A major challenge in development is that developing and emerging market economies fall into the Middle-Income Country Trap (MIT). That term refers to the empirical observation of the slowdown of productivity growth of middle-income countries when they approach higher income per capita levels. Consequently, relatively few higher middle-income countries have been able to cross over and become high-income economies. Hence, countries such as Argentina, Malaysia, Turkey, and others have been marking time for decades at the doorstep of higher-income economies without becoming one. Some even reverse, go backward, and become poorer.
Most of the research literature defines higher-income economies as relative to the United States, as done in the diagram below. Approximately 40% of the U.S.’s per capita income, or USD 25,000 to USD 30,000, is the threshold for becoming a high-income country.
As the Chart 1 shows, in the 48 years between 1960 and 2008, only 15 middle-income countries (in the middle of the top row) managed to become high-income countries measured by the increase in their income relative to the United States in purchasing power parity dollars2. Looking at the middle cell below the top cell – labelled Middle-Income ‘trap’ – one can find many countries with a similar position in 1960 as these successful 15 that could not grow into a high-income economy.
The middle-income trap has persisted. In the last few years until 2019, several upper-middle-income countries such as Argentina, Brazil, Kazakhstan, Turkey, Venezuela, and Equatorial Guinea have made U-turns: their per capita income declined not only relative to the U.S. but also absolutely.
Where is Bangladesh in this chart? There is no reliable data for Bangladesh in 1960 in PPP dollars. Given that in 1960, Bangladesh was at approximately the same per capita income as the People’s Republic of China, and Bangladesh’s per capita income in PPP dollars is available for 2022, we locate that as the green dot below and slightly left of China. By this measure, Bangladesh has started its middle-income journey.