Published: Wednesday, Jul 15, 2015
Posted : 15 Jul, 2015 00:00:00
Graduating from LDC status: Assessing Bangladesh's progress
Muhammad Shafiullah and Naureen Khan
Bangladesh was recently promoted as a lower middle income country (LMIC) from a low income country (LIC) classification by the World Bank. However, since 1975, Bangladesh has been classified as a least developed country (LDC) by the United Nations Committee for Development Policy (UN-CDP).
The LDCs are defined as “low-income countries which suffer from structural impediments to sustainable development”. This classification is based on three criteria which include: Gross National Income (GNI) per capita, Human Assets Index (HAI) and Economic Vulnerability Index (EVI).
The GNI is an indicator of the overall well-being of an economy. The HAI is a measure of the level of human capital consisting of four indicators: two on health and nutrition and two on education. The EVI measures the structural vulnerability of countries to exogenous economic and environmental shocks.
The UN reviews the LDC classification every three years and the next review is scheduled for the 2015-2018 period. Table 1 summarises Bangladesh’s recent performance in these indicators (as calculated by the UN) and the criteria set for graduation from an LDC classification. For successful graduation, a country has to satisfy, at least, two of the three criteria averaged over three years and be eligible for graduation in two consecutive rounds of review.
As of 2015, Bangladesh only meets the EVI criteria as its EVI has been reduced significantly from 2012 to 2015 and is below the required upper threshold. However, Bangladesh failed to meet the HAI and per capita GNI criteria as both indicators are below their minimum requirements. Hence, Bangladesh will remain an LDC in the current round of review in 2015-2018 as it does not meet the minimum two criteria required for graduation.
As an LDC, Bangladesh has some unique features. Typically, the LDCs are exporters of primary goods such as agricultural or mineral products. Bangladesh is not. Table 2 shows its position in relation to other LDCs in South/East Asia. In this group, Bangladesh is currently well ahead in terms of export revenue but positioned in the middle in terms of per capita GNI. It is one of the few LDCs where exports are dominated by manufacturing (92 per cent in 2010). At present, Bangladesh is the world’s second largest exporter of readymade garments (RMG), behind only China.
The UN-CDP will review Bangladesh’s development progress and performance in the graduation criteria between 2018 and 2021.Once graduated from an LDC, Bangladesh can stand alongside globally influential groups. If, however, it does not graduate during this round of review, it will still have the option to graduate or prepare a transition plan.
The option to graduate is important, as it will have severe ramifications for an LDC such as Bangladesh, which currently benefits from preferential treatment with regard to aid, concessionary loans, international trade and compliance with the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
Any loss in preferential treatment privileges will have significant repercussions on Bangladesh’s main foreign exchange earning sectors. But there is no option but to prepare for eventual elimination of various existing special and differential treatments.
Bangladesh currently struggles to finance infrastructure projects, ensure uninterrupted supply of energy, improve the quality of human capital, overcome the situation relating to dwindling investment in the private sector and broaden its narrow export base. Preparing for graduation out of the LDC category would include, among other things, (a) ensuring export production that is more competitive globally, and (b) reducing trade logistics costs so that Bangladesh’s position improves over time in several global rankings such as World Bank’s Trade Logistics Index, World Economic Forum’s Trade Enabling Index, and World Bank’s Ease of Doing Business Index.
With its current per capita GNI of US$1,080 and projected growth rates exceeding 6.0 per cent Bangladesh’s performance is likely to be above the minimum per capita GNI requirement for the 2018-2021 review. However, its confrontational politics by the major parties poses a threat to maintaining the 6.0 per cent growth rate momentum that the country has maintained over the years. It must ensure equitability of growth as inequality is found to rise in recent years, which may hamper sustainability of growth.
Bangladesh also has made substantial strides in improving the HAI over the years and is only about 2.0 percentage points short of meeting the graduation criterion. If current trends can be maintained, it will likely to meet this criterion in the 2018-2021 review. However, adult literacy, one of the four component indicators of the HAI, remains a challenge, as its adult literacy rate remains stubbornly stagnant.
As of 2015, Bangladesh meets the EVI criterion and is likely to meet this criterion in this review. Yet, inadequate adaptation to climate change may dramatically reverse the significant progress that Bangladesh has so far made in reducing economic vulnerability.
Despite such challenges, it is amply clear that Bangladesh is set to graduate from its LDC status after the 2018-2021 review by the UN-CDP, if its current trends in economic development are maintained or even improved. The reclassification of Bangladesh as an LMIC in 2015 by the World Bank provides renewed optimism that the country is well on track to graduate from being an LDC to becoming a fully-fledged middle income country by 2021.
[The article is prepared for FE-PRI Economic Analysis Unit (EAU), jointly by Muhammad Shafiullah, a Senior Economist at PRI (email@example.com), and Naureen Khan, a Senior Research Associate at PRI (firstname.lastname@example.org)]