Regional Income Dynamics in Bangladesh: The Road to a Balanced Development is in the Middle

Abstract

Bangladesh’s remarkable achievements in economic and social progress put itself in a position that would have been unthinkable until a few decades ago. But did the improvement in development outcomes accrue equally to all areas in the country? We tackle this question by analyzing district-level income per capita constructed from the 2000 and 2016 rounds of the Household Income and Expenditure Survey. Estimating models based on the standard neoclassical theory of economic convergence built to take into account the impact of natural disasters, we find essentially no evidence of convergence. This implies the persistence of income differentials among Bangladesh’s 64 districts. To check for the possibility of multiple steady states, we estimated models with a three-club structure based on the year 2000 income percentiles. The results now support the hypothesis of convergence within the group of middle-income districts, with a speed of 1.6% per annum (half-life 43 years)—close to Barro’s “2% iron law”. A remarkable finding is the positive and significant effect of education on this club's steady state income level. Overall, these results are consistent with the notion of a rising middle class in Bangladesh in recent years. We also explore latent club structures using automatic algorithms, but we do not find any further evidence of convergence. The key policy implication of our study is that, to ensure a balanced regional development, it would be, at a minimum, necessary to enact policies extending the convergence process to the club of the poorer districts as well.