Economy trapped in investment stagnation

A symptom often observed in many underdeveloped economies is when per capita income stalls at a stable equilibrium point. Although this income can meet the basic needs of living, it doesn't allow for savings or investments. Even if there is some surplus income, only a small portion flows into net investment channels. As capital resources such as factories, machinery, land, buildings, and natural resources grow, the population increases at an equal rate, so the amount of capital equipment or production inputs per worker does not increase. If the growth in per capita income is considered an indicator of economic growth, it can be said that these economies experience no growth. Such economies are said to be trapped in a ''low-level equilibrium trap.''

Seventy years ago, American economist Richard R Nelson presented the above theory to explain why underdeveloped or low-income countries often remain trapped in a long-standing cycle of poverty and stagnation. He suggested that a slight increase in per capita income might lead to a rise in birth rates or a decrease in death rates, causing the population growth rate to surpass the growth rate of total national income or capital formation, thus pulling down per capita income back to the previous minimum equilibrium level. This way, an economy gets trapped, and escaping becomes difficult.

Recently, an analysis from the Power and Participation Research Centre (PPRC), a private research organisation, has suggested that Bangladesh's economy has fallen into a similar structural trap. Although this analysis does not refer specifically to Nelson's ''low-level equilibrium trap,'' it mentions three types of traps. The first is the tendency to rely on debt or break savings to cope with the family's financial distress. The second is the stagnation in investment leading to reduced GDP growth, and the third is the trap of political-administrative governance.

The interconnected nature of these three traps has plunged the economy into a deep crisis. According to the organisation, a significant portion of the country's population, about 31 million people, is facing severe economic challenges. This class is in a ''fragile middle-class'' position, which can easily fall back into the poverty cycle. The rates of moderate and extreme poverty in the country have increased to 27. 9 per cent and 9. 35 per cent, respectively. Half of the families are struggling to meet regular medical expenses due to chronic illness, depleting their savings, and getting trapped in debt.

Coupled with these symptoms is investment stagnation. As investments in both the public and private sectors have dropped, international organisations have significantly lowered their forecast for Bangladesh’s GDP growth. According to their estimates, the growth rate might fall to between 3 and 3.4 per cent. Government data also show the overall investment-to-GDP ratio in Bangladesh decreasing to 27.93 per cent in the 2025-26 fiscal year from 28.54 per cent the previous year.

Due to this dismal investment rate, GDP growth has also declined. The government targets a 6.5 per cent GDP growth rate in the 2026-27 fiscal year, but the IMF forecasts it to be only 3.2 per cent, marking the lowest growth rate in the last 38 years.

PPRC’s survey found that along with rising poverty rates, the general population is suffering from employment uncertainty, high inflation, and debt pressure. For several consecutive years, inflation has hovered around 10 per cent. Consequently, people's real income has been severely affected. The IMF believes that annual average inflation in Bangladesh will reach around 11 per cent in the current fiscal year, which would be the highest in the last 16 years. The annual average inflation in the 2010-11 fiscal year was 10.92 per cent.

Another concern of PPRC is the governance trap. Sustainable development is consistently hindered due to structural weaknesses in political and governance systems. Weak revenue collection, heavy reliance on debt, political influence, and extreme inefficiency in government spending have led to the wastage of state resources.

Our tax-to-GDP ratio is struggling to rise from between 6 and 7 per cent, leaving the government without enough revenue to spend on development, education, health, and social security. Thus, the government has to seek help from various donor organisations to meet budget expenses. Repayment of these loans later creates a shortage that requires taking more loans. In other words, we are constantly getting entangled in the debt trap instead of increasing revenue collection capacity.

Although Bangladesh is among the countries with a low tax-to-GDP ratio, there are other countries globally with an even lower ratio, such as Libya, Iraq, the United Arab Emirates, and Bahrain, oil-rich nations in the Arab and Middle Eastern regions. Because these countries' primary revenue comes from oil sales rather than the taxes of their citizens.

Sudan, Yemen, and Ethiopia also have a lower tax-to-GDP ratio than ours. Sudan has gold and oil, and Yemen also has oil. However, due to economic mismanagement, administrative weaknesses, wars, etc. , these countries' tax-to-GDP ratios are also lower than Bangladesh’s. But this comparison should not suggest that the Arab countries' situation is worse than ours. PPRC's survey also expresses concern over Bangladesh's administrative inefficiencies regarding tax management.

Whether referred to as Nelson's ''low-level equilibrium trap'' or PPRC's ''structural trap,'' Bangladesh’s current investment stagnation, rising poverty, declining GDP, and political-administrative weaknesses confirm the existence of both types of traps. PPRC has advised the government to acknowledge this reality because ignoring the disease never leads to its cure. To escape these traps, Nelson provided several suggestions. Given that the benefits of small investments are not realised under population growth pressure, ensuring the visible positive role of investments through extensive investments or a ''big push,'' attracting foreign direct investment, increasing productivity by applying modern and effective production methods, increasing employment compared to population growth to raise income growth rates, and encouraging savings and investment tendencies through social, political, and institutional reforms are essential. Among these reforms, it is possible to increase the efficiency and collection of revenue administration.

Similarly, to break free from economic traps, PPRC suggests ensuring economic democracy and fair competition for all, establishing agriculture product processing, the pharmaceutical industry, light engineering, renewable energy supply systems, information technology, transportation-supply services, and care services as new growth drivers, enhancing technical skills and digital knowledge through quality education, providing opportunities for small businesses to grow into large and export-oriented establishments, and creating transparent, time-bound, digitally integrated rapid and accountable administration for public services.

Notably, although some of these initiatives are long-term, in the short term, the most noteworthy strategy is to enhance people's incomes to increase purchasing power. Therefore, this should be given the highest priority. This should be combined with determined and effective efforts to increase investment instead of empty promises, providing opportunities to escape these traps.

*Faruq Mainuddin is a writer and banker
fmainuddin@hotmail. com
*Opinions expressed here are the author's own.

#This article, originally published in Prothom Alo print and online editions, has been rewritten in English by Rabiul Islam