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Arithmetic of Bangladesh's middle income aspiration
By- Zahid Hussain
The Financial Express, 31 December 2012
Bangladesh’s development progress has followed a path both theory and international
experience would make one expect. Starting from a low income level, growth initially tends to
accelerate through capital accumulation in a market economy. This is what happened in
Bangladesh during the four decades since its inception in 1971. The recent Economist article
rightly said ‘Bangladesh has become a model of what can be done’. Progress achieved so far
provide a credible basis for aspiring to be a middle income nation by 2021 when Bangladesh
celebrates the golden jubilee as an independent nation.
Would it take more than just maintaining recent growth rates to achieve MIC status? It is
important to be clear about how middle-income status is defined. It is based on nominal Gross
National Income measured in Atlas dollars, not real Gross Domestic Product. Economies are
divided according to 2012 GNI per capita, calculated using the World Bank Atlas method. The
income thresholds are: low income — US$1,025 or less; lower middle income — US$1,026 to
US$4035; upper middle income — US$4036 to US$12,475; and high income — US$12,476 or
more.
At current prices, Bangladesh’s per capita GNI would have to exceed US$1,025 to reach the
lowest end of “low middle income” status. Nominal Atlas GNI per capita will need to grow at a
sustained 2.1% and nominal Atlas total GDP will need to grow at 3.5% per annum from now
onwards for Bangladesh to barely make it to the middle-income threshold by 2021. Given
Bangladesh’s past growth achievements, this may appear like a cake walk. However, it is
misleading because the income thresholds are most often revised upwards to allow for
international inflation. For instance, the lowest MIC threshold increased by 35.6% — from
US$756 per capita in 2000 to US$1,025 per capita in 2012. If this is repeated in the next ten
years, the minimum MIC threshold is likely to rise to above US$1,310 Atlas GNI per capita by
2021. It is more reasonable to use this as a basis for assessing the prospect of reaching MIC
status by 2021 than the prevailing threshold.
Both GDP growth and remittances will play an important role in reaching MIC status. Growing
remittances have driven a wedge between GNI and GDP in Bangladesh. The difference between
Atlas GNI per capita and Atlas GDP per capita in Bangladesh grew from US$22 in fiscal 2004
to US$77 in fiscal 2012, largely due to growth in remittances. Hence, both GDP growth and
remittance growth will have to play a key role in achieving middle-income status. If the share of
remittances in GNI remains constant at its current 9% level, GDP per capita will have to grow at
5.2% and total GDP at 6.6%. This required GDP growth rate is sensitive to assumptions about
the share of remittances in GNI. If the share of remittances declines to 5%, per capita GDP
would have to grow by 5.6% and total GDP by 7.0%.
If current growth rates fall short of the required rate, then the growth rates in future need to be
higher to make up the difference. How much Bangladesh will need to grow tomorrow to reach
middle income status in 2021 depends on how much it is able to achieve today. It is a moving
target. For instance, if GDP growth falls one percentage point short of the required 6.6% growth
in fiscal 2013, then GDP will have to grow at 6.7% per annum in the remaining years. If again it
falls short by 1 percentage point in fiscal 2014, then the required growth rate rises to 6.8%. If
performance falls short of the target by 1 percentage point for five consecutive years, the
required growth rate during the remaining years rises to 7.3%.
If Bangladesh aims to do better than reaching just the lowest MIC threshold, then GDP growth
would need to accelerate even more. As noted above, the definition of a middle-income country
straddles a wide range. Bangladesh could aim to do slightly better than just reaching the lowest
MIC threshold if it is to reach around US$1,450 per capita from the existing US$851 per capita.
Is this achievable by 2021? That would require per capita Atlas GDP to grow by 6.3%. But the
required total GDP growth rises to 7.6% if the share of remittances were to remain constant at
9%. The required GDP growth rate rises to 8.0% if the share of remittances declines to 5%.
What is the required remittance growth rate? Keeping remittance share constant at 9% of GNI
implies remittance will need to grow by about 8% per annum to achieve the $1450 target. While
annual remittance growth averaged 18.5% in last eight years, about two-third of this came from
growth in the stock of migrants which may not be easy to sustain year after year. A combination
of growth in remittance per worker and the number of migrants could, however, sustain 8%
annual remittance growth in next eight years.
The author is Senior Economist, World Bank, Dhaka. Email: [email protected]