Low economic diversification leads to middle-income trap

Economies with low diversification will face challenges in coming out of the middle-income trap, said the head of the Asian Development Bank Institute (ADBI) yesterday.

The issue of diversification of the economy came up at a session on “Opportunities for South Asia in a Fragmented World” at the 59th Annual Meeting of the Asian Development Bank (ADB) in Samarkand, Uzbekistan. The four-day event began yesterday.

Bangladesh became a lower-middle-income country in 2015, and analysts have raised concerns that the country, highly dependent on certain sectors, namely ready-made garments, may fall into the middle-income trap, a stage of economic development where countries lose their competitive edge -- often due to rising wages and stagnant productivity -- and struggle to transition from middle-income to high-income status.

At the event, Bambang Brodjonegoro, dean and CEO of ADBI -- the Tokyo-based think tank of the ADB -- said a combination of exports and manufacturing can be a way for countries to escape the middle-income trap.

“In the case of exports, the best markets will be around you, and good relations with neighbours can help you benefit,” he said.

Discussants said the global economic landscape is undergoing a significant transformation, shaped by geopolitical tensions, trade uncertainty, and rapid technological advancements.

Despite representing one-fifth of the world’s population, South Asia remains a modest participant in international commerce.

Subhashini Abeysinghe, research director of Verite Research in Sri Lanka, said it is the trust deficit and political commitment that are the binding constraints.

She said that building confidence among people that regional economic integration is beneficial can reduce the deficit.

“Building confidence requires integrity and accountability, ensuring transparency so that people can access information,” she added.

“Political actors change when citizens’ perception changes and the private sector feels positive.”

Li Kouqing, deputy director of the Central Asia Regional Economic Cooperation (CAREC) Institute, said South Asia has opportunities for supply chain reconfiguration, citing countries in Southeast Asia that benefited from this.

“The region also has opportunities to benefit from cost-effective green technologies, as the countries in this region face energy shortages. Ageing is a tough issue we have to address,” he added.

South Asia has a growing population, and it provides opportunities to benefit from the demographic dividend. The issue is to seize the opportunity, he stressed.

Discussants said cooperation in energy, transportation and digital infrastructure will be helpful in improving regional cooperation.

Hoe Yun Jeong, deputy director general, South Asia Department and country director for Bangladesh of ADB, said deeper regional connectivity really matters right now more than ever.

“Building up connectivity through cross-border corridors, energy and digital infrastructure, and components like trade facilitation, transparency and integrity, building financial resilience, trust and confidence building, and digitalisation can bring down costs and help countries remove bottlenecks and genuinely lead to productivity and competitiveness,” he said.

South Asia does not need to wait for the world to settle down. The case for stronger regional linkages across trade, finance, infrastructure and digital connectivity is already very compelling. The opportunities are real, he added.