PERISCOPE

Work hard and one day you will be rich and prosperous. This may seem like the ideal motto for lower-income countries who aspire to attain high-income status. But apparently this does not hold true in their case. The road to riches is somewhat tortuous and ridden with ‘traps’.

Most of the lower-income countries follow a straightforward strategy to become middle-income countries. That is by exploiting the cheap labor force. If we follow the miraculous development of Vietnam and Bangladesh we will find this pattern. Both the countries are transitioning from an agrarian economy to an industrial one. Both of their exports are heavily dependent on the RMG sector, the basis of which has been their cheap and semi-skilled labor. And both them have enjoyed enviable growth over a sustained period. However, as they get richer the wages of the labor will rise in tandem. Consequently, production costs will go up. The net result is that they will lose their competitive edge to other poorer countries. On top of this, as they start to develop they begin to lose the benefits of easier trading terms and conditions that were granted to them by the World Trade Organization (WTO) thereby making it even harder to forge ahead. The economic model which brought millions of people out of poverty will no longer work and their impressive growth rate will eventually stagnate. This phenomenon is called the middle-income trap.

So the question is how to get out of this trap? What can countries like Bangladesh and Vietnam do? Well, there is no straightforward answer. There is no specific model to become a high-income country. But if we look into the systems of the rich countries we will see that they have one thing in common- Multi-National Companies (MNC). All the developed countries have MNCs that are owned by those countries. Multinationals create wealth beyond the border of a nation. For example – Bangladesh produces RMG products from raw materials imported from China. Those RMG products will be sold to H&M. Everyone will win in this supply chain. But the lion’s share of the profit will go to H&M, which is based in a rich country. Rich-developed countries profit out of intellectual properties, brand values, and high-value manufacturing products.

Thus, if countries like Bangladesh and Vietnam want to escape the middle-income trap they must focus on some key features of the rich countries –
1. Tech capital (innovation)
2. Human capital (education)
3. Institutional capital (world-class institutions)

There will be other external factors as well, but these key factors are crucial for any country that wants to avoid the trap and join the big boys’ league.

Abdullah Salman Ashik