In economics, a ‘low-income trap’ is a situation where a country’s income remains constantly low and shows no sign of convergence (or catch up) to developed countries. This is quite surprising because according to the celebrated economic growth model of Robert Solow, a noble laureate in economics, poor countries will grow relatively faster than developed economics and eventually catch up to these economies through capital accumulation.
To be sure, Solow’s prediction was not completely wrong. Some (east) Asian economies such as Japan and Singapore did grow rapidly for several decades and eventually converge with advanced country per capita income. Sadly, the same did not happen with Bangladesh, which is the topic of this article. The chart below shows Bangladesh’s real per capita income relative to its major trading partners. In 2010, Bangladesh traded (exports plus imports) more goods with these ten countries than any other countries in the world. For any given year, the relative income levels are calculated by dividing Bangladesh’s real income per capita by the same quantity of its trading partners.
As we can see, the chart speaks for itself. Bangladesh is stuck in a ‘low-income trap’, where its relative per capita income is falling or stagnant at low level. Despite the steady and strong GDP growth of nearly 6 percent per year on average, Bangladesh has not grown at a rate faster than its major trading partners. Thus Bangladesh remained stuck in the ‘low-income trap’ and shows no sign of convergence to higher income levels.
In 2010, Bangladesh’s per capita income was below 5% of France, Germany, Japan, Singapore, the UK and the US income levels. Clearly, Solow’s prediction did not materialize for Bangladesh. Bangladesh still has a long way to go to catch up and converge to the levels seen in developed economies. Even positioning itself into a middle-income country will be a huge challenge for Bangladesh. We are a lot poorer today than China, India and Malaysia than we used to be. Though, the one bright spot for Bangladesh has been the impressive progress in the human development indicators, especially when compared to India.
Why Bangladesh has not able to grow faster than the frontier nations to achieve convergence is a subject of scientific research. Perhaps we can agree that we need better institutions, smarter industrial policies and a stable, pro-growth political establishment. Given how much Bangladesh lags behind her trading partners means that the size of the pie has to grow. But this will require a national effort involving the whole community.