Group Project Report of EMB-670.

1 (International Business)
On
Challenges of Bangladesh’s Transition to Middle Income Country

Submitted To: Professor Dr. Abdur Rob Khan

Submitted By: Group-8

Name: MS Washib Khan

ID: 2035455690
Name: Md. Asifur Rahman
ID: 2035484690
Name: Mohammad Abdullah Al Mamun
ID: 2035462690
Name: Asharful Ahsan
ID: 2035475690
Introduction

After decades of strong growth, Bangladesh is seeking to move to the next level of prosperity. The apparel
industry, other exports, and overseas labor all offer challenges and opportunities in reaching this goal.

Graduation from the Least Developed Country (LDC) to Developing Country status is a milestone in
Bangladesh’s development history, and it improved the country’s image in global platform. In the UN
system, the country ranking system is as Poor, LDC, Developing and Developed. According to the World
Bank, however, the classifications are LDC (Bangladesh entered this group in the 1972-75 period), Lower
Middle-Income Country (LMIC), Upper Middle-Income Country (UMIC), and Developed Country. These
rankings are made on different criteria’s such as Per Capita Income, Human Development Assets Index and
Economic Vulnerability Index (population size, national disaster incidence and handling).1

After successfully achieving the Millennium Development Goals (MDGs), Bangladesh was included in the
LMIC group which was confirmed back in 2018. The next requirement has been met, and the UN Economic
and Social Council (ECOSOC) made their recommendation in June 2021. This is going to be endorsed by
the UN General Assembly in September 2021. Due to the global pandemic, however, the normal three-year
period of transition will be extended by two years and formal graduation to the status of a Developing
Country will be in 2026. Bangladesh currently aims to enter the UMIC group in 2031, and the ultimate
ambition is to reach Developed Country status by 2041.1

After 1975, Bangladesh moved forward with proper foreign assistance in its early years, increase in
agricultural productivity, permitting the use of surplus labor for industries and services, gradual move
towards a market economy in the areas of infrastructure development and promotion of services, promoting
the emergence of entrepreneurial spirit (such as the growth of the RMG sector), and human development
measures (food security, health, education, and moving towards reducing gender disparity).

Some Comparative Benefits of being LDC

• Bangladesh enjoys 12% preferential margin on its export to the EU Countries which provides a
considerable price advantage over other countries in exports.
• Budget Capital for LDCs’ from regular budget of UN, ILO etc.
• Technology Transfer to the LDC under rules of TRIPS (Trade-Related Aspects of Intellectual
Property Rights)
• Help from LDC fund constituted under UNFCC (United Nations Framework on Climate Change)
to solve the effect of climate change.
• Support under EIF (Enhance Integrated Framework) to enforce the capacity of ministry of
commerce with a view to mainstreaming global trade with national development plan.
• Enjoyment of transitional period up to 2033 regarding patent provisions especially for
pharmaceutical sector.
• Different types of scholarships and fellowships for the citizens of LDC’s.
• Travelling rebates for the representatives of LDCs participating in conference or summit organized
by UN or its bodies.
Instant Challenges of Graduation

Trade is a key tool of development that has led to globalization and Industrialization. However, after
graduating to a Developing Country, Bangladesh will have to face some challenges in this area. For
instance, Bangladesh can no longer enjoy duty-free and quota-free export and will face duties and reduced
benefits of export to countries in the European Union (EU). Rules regarding trade-related intellectual
property rights (TRIPS) may also be stiffened by importers of goods from Bangladesh. Terms of foreign
aid may become harder, and subsidy and cash incentives to exports may not be acceptable by some
importing countries. Sometime in the past, Bangladesh was an “International Development Association
(IDA) only” country, and Bangladesh was also borrowing from the World Bank on harder terms. After
graduation, the benefits Bangladesh enjoys of being an IDA only country will also be declined.

In the area of economic management, the mixed economic system will need to continue, with the public
sector at an “Commanding Heights” to develop infrastructure, implement dynamic projects, and strengthen
and expand the public-private system. This ratio will need to increase, and policy and investment reforms
will be required to make it easier to do business, as well as to focus on improving competitiveness, taking
into account competitive advantages such as wages and multiple quick investment proposals. should
increase the productivity of all sectors: agriculture, industry and services.

Through this, Bangladesh can attract quality foreign direct investment (FDI), along with growing private
investment, which has been at a stagnating level for the past few years.

Beside that Bangladesh must focus on several areas: the country must improve the quality of education by
modernizing higher education, linking education with production, focusing on skills.

Effects of Graduation from LDC on Some Specific Sectors & Industries

1. In our current annual budget, contribution of foreign assistance is 13%, But maximum assistance may
be reduced after being MIC.
Therefore, it is understandable that fund crisis may occurred in Bangladesh after the graduation from LDC.

2. After the graduation from LDC, Bangladesh will lose eligibility in getting LDC fund of UNFCC.

3. The loss of preferential market access especially in garments sector in terms of tariff margin and rules
of origin will be the main problem for Bangladesh after graduation. The total export will be reduced by
5.5% to 7.5% which is amount to two billion dollars.

4. There will be an adverse impact on pharmaceutical sector because of the effectiveness of patent
provision of TRIPS agreement after graduation; though Bangladesh will get the conversion period till 2033
to make herself for policy and technological homework.
The Middle-Income Trap

The concept of the middle-income challenge, more widely known as the middle-income trap, is based on
a well-known stylized fact. Low-income countries can grow quickly and graduate to middle income but
then find it tough to sustain rapid growth after they reach middle-income status. One group of countries
that struggled to move up from middle income to high income can be found in Latin America, which had
become a mainly middle-income region few years ago but has remained there ever since. Only few MICs
located mainly in East Asia, have successfully made the transition to high income status. Preferably, Korea
and other newly industrialized economies (NIEs) moved up from middle income to high income in a
quarter century. But these are exceptions only.

A historical justification for this Middle-Income Trap is the assumption that economic growth intrinsically
slows down when a country graduates from low to middle income. It is sometimes due to poor policies
rather than something intrinsic or inherent to the process of economic growth. After all, many Latin
American countries adopted a growth strategy based on import substitution as opposed to the export
promotion-based growth strategy favored by dynamic, fast-growing East Asian economies. Unsound fiscal
policies and excessive foreign borrowing culminated in the Latin American debt crisis, which crimped the
region’s growth.2

As countries near the global technology frontier, they must rise to the technology ladder and develop new
technologies themselves, rather than relying on cutting-edge technology imported from abroad to keep
continuing this development pace.

Now, we can conclude that loss incurred after the graduation from LDC will be less. Rather graduation
will brighten our image as a country in the international arena. But graduation should not be the limit for
Bangladesh as she has to face many more challenges like this “Middle-income Trap”.3 A research says,
out of 48 LDCs 29 are of low income, 18 including Bangladesh are of lower middle income, only one of
them is of high income and all graduating countries are still on middle income group.4 The persistence of
this tendency indicates their economic vulnerability. This is the result of infrastructural weakness and
inefficient human resource.4 To maintain a steady growth, nothing is alternative to proper and realistic
policy making, especially in industrial and macroeconomic sector. Encouragement in local and foreign
investment will guarantee the diversification of our export. Besides facilitating government in formulating
right policies, the dedicated Cabinet Division has to play the key role in creating efficient, corruption-free
and accountable institutions, capable of facing the challenges of 2024 and beyond. A complete and
integrated work plan on SDG targets 16.5 and 16.6 should be devised immediately to achieve this.5 Only
governance in every stratum of public service makes sure the people’s participation in every economic,
social and cultural activity of the state which will enable us to build our country as developed one.

Recommendation

In the future worldwide competition, competitive advantage can't be a static concept but a dynamic one.
Bangladeshi firms in RMG or other export industries need to recognize the truth that aggressive advantage
grows and is sustained through relentless improvement, innovation, and change. From its modern segment
of factor-driven competitive advantage, Bangladeshi firms will have to enter into investment and innovation
driven competitive advantage. Without such efforts, the present-day competitive benefit in labor-intensive
garment exports ought to nicely be lost in future. History and cross-country proof suggest that there are few
competitive advantages that cannot be copied. Take the case of S. Korea which trumped Japan in the
production of TV and digital products in a count number of years. So did Brazil over Italy in leather-based
shoes, and China-Vietnam is about to do so in non-leather sports activities footwear which means that
Bangladesh’s current leadership in garment exports can only be augmented and sustained over the long-
term only through relentless innovation, and improvement in the administration of labor, skills, technology,
and capital, extending its competitive gain to many greater products. The country will have to play a
tremendous but facilitating role in ensuring that the competitive advantage of our private corporations is
sustained over the long-term.

In the coming decades, as Bangladesh graduates out of its LDC repute into a Middle-Income Country
(MIC), beneath global guidelines of the recreation (WTO compliant), it would be challenging to shelter
uncompetitive corporations or industries due to the fact in maintaining step with global competitors
Bangladesh will have moved in the direction of higher change openness making exports and home sales
equally profitable. To create employment for some 1.5-2 million entrants to the job market, jobs in massive
and SME enterprises will have to be linked as an awful lot to the economy’s external quarter as to its
domestic market, recognizing that factories of the future will be small and bendy as a substitute than giant
and rigid, and located shut to the quit customer.6

To address future challenges and make certain competitiveness, a harmonious public-private endeavor has
to strengthen in Bangladesh in the following precedence tasks:

• Easing infrastructure constraints and quality of the workforce

• Investing in R&D to promote innovation

• Improving the enterprise climate and decreasing the fees of doing business.

• Mobilizing the giant quantities of financing wanted for bodily and social infrastructure, Including via non-
public investments and public-private partnerships

• Ensuring environmental sustainability and climate resilience

• A liberalized funding coverage regime, which affords scope for global firms to have an unlimited stake in
the neighborhood firm.

• Joint ventures with established actors within the GVC will permit the diffusion of technology

• Availability of professional labor at an aggressive price, motivating the overseas investors to take part in
joint ventures with local players.

• Bangladesh must force to free trade agreements such as "Vietnam and the European Union" and make
better and more efficient use of economic and export processing zones.

• The authorities have a vital function to play in kick-starting GVCs in non-RMG export sectors. Various
guide policies (e.g., lower priced credit, tax waivers, and generous transfer pricing rules) can be devised
that can skip cutting-edge WTO ‘rules of the game’, as WTO regulations have yet to seize up with the fast
boom of exchange in value-added (GVC).

Conclusion

Graduation to a greater stage of improvement is the cherished dream of all LDCs. No country wishes to
stay an LDC and lift the tag for eternity. Bangladesh is no exception. In fact, the Bangladesh authorities has
already been preparing the people to include the new status. It has disseminated the facts of graduation as
a landmark in the country’s development process. However, it will want a continuation of economic,
technical and technological assist from companions at least for some time in the near future.

As the biggest LDC in phrases of the size of economy, Bangladesh is likely to face challenges more than
the others as it embarks on a new journey. Luckily the management of the country sailed through the rough
waters efficiently every time. When the US discontinued the Generalized System of Preferences amenities
to its garments merchandise several years ago, many pundits envisioned that the whole zone would collapse.
On the contrary, the sector has made such an amazing development that it is now second to China in
exporting readymade clothes in the world.7

Bangladesh has to stand on its toes sooner or later anyway. Sooner or later, it has to comply with extra
stringent guidelines of origin, face challenging opposition in exports and comply with a stricter IP regime.
However, Bangladesh prepares itself to address these challenges on its own. It can hope that the WTO
membership, would realize this integral and aid the extension of LDC-specific ISMs to Bangladesh and to
other graduated LDCs for some time, as proposed in the submission.8

Finally, the most essential pre-conditions for continuing the highway of growth and development will be
political stability, macroeconomic stability, annual reviews of the performance of the Eighth Five-Year
Plan and sustainable growth plan with more employment options.

References

1. https://www.thestatesman.com/opinion/challenges-ahead-bangladesh-1502977466.html

2. https://www.tandfonline.com/doi/full/10.1080/1540496X.2018.1451052

3. Gill, Indermit S; Kharas, Homi 2015, " The Middle-Income Trap Turns Te”, Policy

Research Working Paper, World bank Group

4. The Least Development Country Report 2016 (chapter 4), UNCTAD

5. Agenor, Piere- Rhard, Caught in The Middle? The Economics of Middle-Income Traps, Journal of
Economic Survey.2016

6. Bangladesh Planning Commission, General Economics Division (GED). Dhaka: Ministry of Planning.
Retrieved from www.plancom.gov.bd

7. Rahman, M. M. (2021, July 22nd). Bangladesh’s Graduation: Challenges and Imperatives to Continued
International Support Measures. Retrieved from National University of Singapore:
8. https://www.isas.nus.edu.sg/papers/bangladeshs-graduation-challenges-and-imperatives-to-continued-
international-support-measures/