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Business & Entrepreneurship / GDP growth controversy: 'Potential Growth' enters the fray

« on: May 24, 2018, 01:14:50 PM »

The national media is agog with reports on the gross domestic product (GDP) growth rate. Gleaning from the reports there seem to be more sceptics than believers of the official growth figure — provisional estimate for fiscal year (FY) 2018. That Bangladesh economy should be growing at 7.0%+ annual rate is anathema to many, despite reference to this economy by global investment firms like JP Morgan calling it the "frontier five" on the basis of its growth rate and economically active population. Lest we forget, after all the growth drivers are accounted for, it is the vast army of economically active population, young in age, that could fuel growth acceleration — a demographic dividend to move Bangladesh from being just an impressive underdog.

The record shows that since the 1980s, average decadal growth has been rising, from 3.7% in 1980s to 6.8% during 2011-17.  During all these years structural reforms were never completely or wholeheartedly embraced. Yet the economy chugged along, with the glass always half full as it were, and produced higher average growth every decade by roughly one percentage point. The average growth target for FY2016-2020 under the Seventh Five-year Plan works out to 7.3%, and the economy appears to be on target thus far though questions remain whether the economy can attain the end-year growth of 8.0% in FY2020. If it does, that will produce an average growth of 7%+ for the 2011-20 decade. Sounds improbable. Is it?

Yet, after frequently acknowledging the Bangladesh surprise of stable and robust growth for the past two decades, credibility questions have recently dogged the Bangladesh Bureau of Statistics (BBS) computation of growth rates, primarily originating from one of our development partners. Very early on in the current FY the World Bank came up with a projection of 6.4% GDP growth for FY2018, well below the now "provisional" estimate of GDP growth of 7.65%, while others like International Monetary Fund (IMF) and Asian Development Bank (ADB) have recently concurred with an estimate of 7.0%. Curiously, growth projections grab headlines, larger is the wedge between projected growth (of international agencies) and the government target. Of late, there is a new macroeconomic indicator that has entered the fray, the economy's "potential growth", proffered by a multilateral capital donor agency which, according to press reports, maintains — on what basis not being clarified — that the economy's potential growth rate is 6.5%-6.6%. This notion of potential growth deserves some clarification.

The concept is not unknown in mainstream economic literature but mainly applied in the context of developed economies like the United States. Economists would like to know the difference between actual and potential growth of an economy in order to design policies that will stimulate growth to reach an economy's potential output. Analogous to this concept is the idea of actual and potential GDP, the difference being described as the "output gap". One approach is to describe potential GDP as the output of goods and services the economy can produce when its labour and capital resources are fully employed. In the US economy (where most economists make their living!), the simplest approach taken by economists is to regard an economy at 'full employment' to be producing potential GDP, full employment being ascribed to a rate of 4.0% unemployment (called frictional unemployment) or thereabouts. With current estimates of unemployment at 4.1% in US, the economy could be producing near potential output, though growth can then be fuelled by labour force growth, capital investment, and technological change (raising productivity of both capital and labour).

For a developing economy like Bangladesh, transposing the idea of potential growth that is relevant for developed economies raises a hornet's nest of problems. The notion of potential output and its growth gets extremely nebulous. Far too many unknowns will dog the issue to come to any resolution anytime soon. I am not aware of any development economist having reached any conclusion on the subject. For starters, the unemployment rate poses problems when we have to distinguish between open unemployment and under-employment. It is the latter that takes precedence in addressing the unemployment challenge in Bangladesh. Agriculture (rural economy) which now contributes only 15% to GDP has 42% of our labour force employed there — the vast majority of these would likely fall in the definition of under-employed.

Estimates of under-employment are around 20% of the country's labour force. Open unemployment in Bangladesh is estimated at 4.5% in the latest Labour Force Survey (LFS) of 2016. That would put potential GDP significantly above actual, when all labour is fully employed. Then again the full potential of labour cannot be realised without capital and technology being invested and put into service. What about productive capacities of our land? Have we reached full potential there? How about infrastructure? Generation capacity of electricity has crossed 13,000 MW but power shortages remain unavoidable due to lack of transmission and distribution capacities. Potential output could be much higher if generation capacity were fully utilised. Take human capacities that are under-utilised. If our education system were up to speed, productivity of our manpower could be much higher.  The list goes on. The bottom line is, for a developing economy like Bangladesh, the notion of potential output that can be easily defined and recognised is far more complex than what it is for a developed economy.

Only when you have a fair notion of potential output (GDP) we can consider applying the principle to potential growth of the economy. Can it be disputed that our economy has all the potential to reach double digit growth rate if the right policies were put in place, the labour force was better educated and skilled, the investment climate was transformed, infrastructure was adequate and fully functional, and corruption was minimal? That idea of potential output could be more appealing to some of us than a mere stipulation of what growth could be under prevailing conditions. In the absence of a scientifically defined benchmark, floating the idea of Bangladesh's potential growth is at best an elusive juggernaut adding more obfuscation than clarity.

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Business & Entrepreneurship / Air cargo and Bangladesh's export trade

« on: May 15, 2018, 03:49:20 PM »

After a two-year suspension of direct Dhaka-London air cargo flights, the UK government has lifted the ban on airfreight, following strenuous efforts made by the Bangladesh authorities to improve standards of aviation security at Hazrat Shahjalal International Airport (HSIA).

The cargo industry makes a significant contribution to the export-import community of the country, but over the years it has seen its ups and downs. The year 2016 in particular proved a turbulent period for the airfreight industry of Bangladesh. Following Australia and the UK, Germany became the third country to restrict direct cargo flights from Bangladesh, finding safety and security measures to be insufficient. A somewhat common security requirement while sending air cargo is screening the goods using bomb detection equipment before they are loaded onto the aircraft. Regrettably, none of this equipment was available at HSIA, one of the three international airports in Bangladesh and a hub for air cargo. Soon after the ban was imposed, German carrier Lufthansa was forced to leave up to 60 tons of garments in Dhaka, which gives a hint of the damage done to the industry. Exacerbating the situation, in early June 2017 the European Union (EU) declared HSIA a 'red zone'. This came as a major setback to textile exporters as the EU was responsible for over $15 billion worth of textile exports in the given year alone. With over 92,000tons of cargo carried by air every year to the euro region, this news was of extreme concern (Chart 1).

Despite prior warnings, Bangladesh was slow to respond to address the concerns raised. Following the consecutive bans, a British company, Redline Aviation Security Ltd, was given the responsibility of improving the system and training local staff. However, progress on advancing security at HSIA remained sub-par, which consequently started compromising the country's export competitiveness.

THE ECONOMICS OF AIR CARGO: In the face of significantly higher costs, the real question is, why are traders constantly resorting to airfreight services for their international shipping needs?

Choosing the right mode of shipment can indeed be tricky. Today, air cargo accounts for less than 1.0 per cent of world trade tonnage, and yet 35 per cent of the world's trade value is carried by air (Boeing World Air Cargo Forecast 2016-2017). While weight limitations, higher carbon emissions and a significantly hefty price tag place air cargo below sea transport, air cargo is critical to serve markets that demand speed and reliability for the transport of goods. High-value commodities such as electronic consumer goods, machinery, computing equipment, documents, pharmaceuticals and textiles account for the highest share of airborne trade tonnage versus its waterway counterparts. Seasonal shipments and products with shorter shelf lives - namely, cut flowers, fresh fruits and vegetables, meat, etc. - also make regular use of air-freight services. It is therefore safe to say that the use of airborne trade tonnage certainly has its own competitive advantages over containership tonnage.

Another major motivating factor for many traders is the issue of safety and security. Certain sensitive goods, such as medicines, drugs and documents that cannot travel any other way, must resort to airfreight facilities. Airfreight also allows exporters to track the status of their shipment at all times while it is in the air, thus making it more convenient for them if they have to deal with unexpected situations. In addition, the layover time for a cargo aircraft is very little. It can be as little as a few hours, unlike the layover time needed for shipping by sea: loading, unloading and inspection may take several days. The quicker transit time also means there is less need for local warehousing and stockpiling.

Accessibility is another major factor in demand for air cargo. Many countries are landlocked and do not have access to direct shipping. Although Bangladesh does not fall into this category, the use of airfreight has nevertheless been a priority. As surprising as it might seem, garment items form the bulk of the total quantity shipped by air in a year by Bangladesh to the EU. Nearly 85,000 tons of apparel items were shipped by air to the EU 28 in 2016, which made up approximately 95 per cent of the total air-freight sent from Bangladesh to the EU and 8.6 per cent of the country's total exports to the EU (Chart 2). This highlights the severity of the problem incurred by the ban described above.

Many renowned companies identify meeting strict deadlines as the primary reason for using airfreight services. While under normal circumstances a significant proportion of all cargo is transferred by sea, production delays, climate factors and inefficient handling at ports may all result in the bulk movement of goods through airfreight. Recently, many factories in Dhaka faced production delays as a result of a disrupted gas supply. As sea shipments take approximately 30-40 days to reach their destination, many textile companies had to resort to airfreight services as a faster alternative to ensure a timely delivery. In October 2017, Bangladesh sent a shipment of more than 70,000 tons of apparel by air to the EU. This clearly highlights the importance of air cargo to the country's apparel exporters in the face of emergencies and production delays.

THE COST IMPACT OF THE BAN: Despite their significantly higher cost, Bangladesh has been a leader in the region in terms of its use of airfreight services to the EU. While water shipment of goods to any European country generally costs around $800 or more for a 20-foot container, airfreight tends to cost more than $30,000to the same destination(for a payload of 17,000kg or above). However, the difference in cost depends heavily on the cargo shipped. As airplane capacity is typically limited by weight, the difference in price for sea freight and airfreight is less for light cargo than it is for heavy cargo.

According to local sources and data published by Freightos, a 27cbm crate travelling by air (the cubic capacity of a 20-foot container) is typically priced 11 to more than 20 times that of a crate using sea transport, making it an immensely expensive mode of carriage. This is not to mention the fact that the payload capacity of sea shipment will be much higher than that of the air counterpart, allowing it to carry more kilograms of goods for the same cubic capacity at a lower rate. 

Following the latest EU decision, the cost difference further increased, adding to the already inflated cost of export by air. Re-screening cargo, sent from HSIA, at a third country airport resulted in an approximate increase in the air cargo cost of up to $2.0 per kg. FedEx also announced an additional re-screening charge of $0.15 per kg on shipments heading from Bangladesh to any European country. With an increase in the air shipment of apparel to the EU from over 66 million kg in 2016 to over 85 million kg in 2017, the additional cost of using airfreight to export to the EU would be approximately $19 million or above. Thus, on top of the already hiked cost incurred on the air shipment of 88 million kg in 2017, exporters also had to pay an additional surcharge of millions of dollars for third country screening. In 2017, however, the supplementary cost of third country screening was comparatively lower than that of 2016. This was primarily the result of the significantly smaller flow of air shipment of apparel recorded in that year (approximately 3.0 million kg in 2017 compared with 19 million recorded in 2016). Despite the smaller flow, the year witnessed at least $3.0 million of surcharge, considering that the increase in cost was a minimum of $1.0 per kg. The ban, therefore, adds significantly to the airfreight cost, thus compromising the country's export competitiveness.

The cargo business of Bangladesh Biman has been a victim of the situation. In fiscal year 2016/17, the state-run carrier earned Tk 2.44 billion from its cargo business, in contrast with Tk 3.15 billion a year earlier. This points to the damage created by the ban. The situation could easily have been avoided had there been no security concerns regarding direct cargo flights from HSIA. In addition to the increased cost of third-party inspection, the cargo transit time also lengthened by a number of days, as a result of the added security checks and the re-routing of the cargo.

Irrespective of the increasing cost, Bangladesh's exports to the EU by air were relatively higher than those of India, Singapore, Sri Lanka and Thailand in 2016. What is surprising is that the use of airfreight has in fact been increasing in the past few years for the country, with apparel dominating the bulk. In 2016, almost 4.7 per cent (Chart 3) of Bangladesh's total exports were composed of air shipments to the EU. Despite the ban and consequently the rising cost, there was an 0.5 per cent increase in the use of airfreight in contrast with the previous year. This clearly highlights the increasing demand for airfreight services by the apparel exporters of the country.

However, Vietnam has been a leader in Asia in total airfreight exports to the EU since 2012, although this is not mainly for apparels. The country has been highly dependent on airfreight use for the export of computers, electronic products and components to the EU. In 2016, approximately 70 per cent of Vietnam's air shipments to the EU comprised electronic machinery and equipment. Vietnam, Malaysia and the Philippines were the only countries using airfreight services to the EU more than Bangladesh among the nations in Figure 3.

POLICY ISSUES: It is therefore quite evident that apparel and clothing accessories exports by air is on the rise for Bangladesh. Growth of 21 per cent was recorded in 2016, compared with 18 per cent in 2015 (Chart 4). This in a way also shows desperate attempts by exporters to meet delivery deadlines even in the face of higher transport costs that consequently affect their competitiveness. As long as security concerns at HSIA persist, costs will further pile up. Any issue in the domestic market - namely, gas or electricity supply issues, etc. - that increases the dependence of exporters on airfreight must therefore be identified and addressed. Given a situation where the dependence on airfreight cannot be curtailed, the concerned authorities should at least take the necessary steps to minimise the cost. While the neighbouring countries of India and Sri Lanka have already installed Morpho Explosives Detection Systems and Smiths Detection screening technology, respectively, it is astounding that a trade-focused country like Bangladesh lacked explosive tracking devices and other security measures before the issues were raised.

The good news is that, after years of dysfunctional security systems at HSIA, the alarms have finally had an effect. Hazrat Shahjalal International Airport has recently been equipped and upgraded with Explosives Detection System (EDS) and Explosive Trace Detector (ETD) machines to comply with the security standards of the EU and the UK. In addition, 37 dual-view X-ray machines have been installed at the airport and officials have received European standard training in cargo handling and operating the machines. Once the machines come into operation, it is believed that this will strengthen security features at the airport and ensure safe passage of passengers and goods throughout the world.

Although the UK has lifted the temporary suspension following significant progress made in meeting a number of important security conditions, the ban is still active on Bangladesh Biman, which needs to acquire the EU's third-country regulated agent certification before it is allowed to offer cargo services to the UK again. Bangladesh will now have to undergo three joint safety assessments in a year for uninterrupted flights between Dhaka and London.

The concerned authorities expect that, with time, Australia and the EU will restore trust in the security features at the airport and resume direct cargo transportation through HSIA. This will be a strong short-term measure in terms of addressing the increasing cost of air cargo. However, the task of strengthening export competitiveness by entirely mitigating the issues that would make unnecessary use of aircargo avoidable in the first place will remain a challenge.

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Business Administration / 'Uber-Pathao' ride-share's impact on Dhaka

« on: May 13, 2018, 02:59:55 PM »

App-based ride-share services, including Uber, Pathao and the like, are transforming Dhaka's transport sector. Ride-share operations have emerged mostly in Bangladesh's capital, although they are expanding. Dhaka has a massive consumer base, rising incomes and an increasing internet penetration rate. It is thus a fertile ground for sharing-economy services to flourish. Among the range of products in the sharing-economy, ride-share services have taken off in the past two years.

UNDERSTANDING RIDE-SHARE: In an Uber-Pathao business model, market players do not invest in any physical infrastructure (such as setting up factories or service centres) or traditional assets (such as cars or garages). Unlike conventional companies, they do not have any employees. The drivers are merely participants of an income-generating platform. The future of ride-share services will depend on how much their products cater to the local needs of consumers, taking into account the dynamics of the economy. Internationally, a private car is used only 4.0% of the time -averaging 50-60 rides a month. The rest of the time, the car stays unused. Ride-share changes this pattern by increasing the car's usage.

The frustrations of Dhaka consumers with CNG auto-rickshaws are widely known. The fact that ride-share provides a largely seamless door2door service is a blessing to many consumers. However, there is no doubt that Uber-Pathao is a 'middle-class urban solution', one that is yet to serve the larger masses. Ride-share services are also not a 'magic bullet' to resolves problems related to gridlock in the transport sector in Dhaka city.

UBER-PATHAO ON DHAKA'S ROADS: San Francisco-based Uber is one of the fastest-growing companies in the world, functioning in over 600 cities. And Uber's growth in Dhaka has been among the most rapid. What Uber basically presented was a way to take a proven product/technology that worked in the US and to get it up and running in a completely different setup. Uber is not alone in Bangladesh: there are at least eight ride-sharing services in the country's market. Each of these is trying to carve out its own niche. It is certain that more players, such as Indian giant Ola!, will be joining the market.

Arguably the most successful app-based ride-share service in Bangladesh is the indigenous Pathao. Pathao has been instrumental in spearheading the market along with Uber. It carved out its niche by focusing on motorbike services, launching itself with a catchy musical tag-line to Dhaka commuters: 'Beat the traffic'. It is modelled on similar, and successful, ride-hailing motorbike services in crowded emerging-market cities like Jakarta, Indonesia (Go-Jek), and Kigali, Rwanda (SafeMotos). Pathao has already taken an initial lead by capitalising on these companies' indigenous know-how.

In Bangladesh, there are two operational differences between ride-share bikes(Pathao) and cars(Uber) from the drivers' end. First, the cars are largely not owned by the drivers, whereas the bikes are. Second, most cars see more frequent usage than their biking counterparts.

The Uber-Pathao model has added a quality alternative in a previously option-stagnated transport arena. Dhaka is a metropolis with 18 million inhabitants. Experts estimate that on a given day there are only 5,000 buses, 40,000 CNG auto-rickshaws and 400,000 rickshaws (although rickshaws provide only trans-nodal services).There are not nearly enough seats to move people around. Therefore, there are plenty of gaps within the transport market for new participants fill the void.

THE IMPACT OF THE RIDE-SHARE SECTOR: The initial impact of ride-share is telling. The average cost of owning, running and maintaining a car in Bangladesh is estimated to be some Tk. 70,000 per month. This estimate takes into account the cost of insurance, taxes, registration, fuel, a chauffeur's wage, maintenance and the capital asset cost of buying the car (or a car loan as an alternative option). The capital cost is assumed for a period of five to eight years, after which maintenance costs start rising significantly. According to our estimates, a private car in Dhaka is used for an average of 80 trips per month.

On this account, an average car owner in Dhaka ends up spending around Tk 900/trip, whereas a ride-share car user spends some Tk 300/trip. In other words, a frequent ride-share user ends up saving threefold without losing the comfort of a car experience. A comparatively hassle-free ride-share bike user spends less than Tk 150/trip. Meanwhile, a CNG user spends some Tk 250/trip and enjoys none of the improved services (such as door2door pickup-drop-off) of a ride-share product. 

From a car/bike owner/driver's perspective, Uber-Pathao has brought about tangible positive benefits. A survey by the authors reveals that the gross income of a ride-share car owner is some Tk 60,000 a month. In comparison, a CNG auto-rickshaw owner earns an estimated Tk 45,000 a month. The average monthly income of a Dhaka resident is estimated at around Tk 30,000 a month, which is half of what an Uber car owner can earn.

A recent World Bank study reveals that the average speed in Dhaka is somewhere between 7.0 and 8.0 km/hour. An average car moves at some 12 km/hour. In comparison, a bike from a bike-share service like Pathao moves at some 16 km/hour. This means that a person taking Pathao can move significantly faster than people using most other transport facilities.

THE RIDE-SHARE MARKET DYNAMICS: There is no denying that app-based ride services are bringing some early benefits to the economy. Taking into consideration the average monthly income of different ride-share service providers and the estimated number of vehicles currently involved in the business, we can estimate the size of the ride-share market in Dhaka at some Tk. 22 billion (2,200 crore) a year. It seems the market is going to expand further.

Despite all the hype, though, we should not lose perspective. Ride-share merely takes up a significant share of the larger transport sector. It is so far just a competitor (occupying an estimated 23% of the market) in the private passenger motor vehicle-hailing services subsector - that is, alongside motor services like CNG and rental cars that can be privately hired to get around town. In short, ride-share is in its early stages. The sector has barely made a dent in the larger transport sector.

REGULATORY AND POLICY IMPLICATIONS : The existing regulations in Bangladesh do not allow the use of vehicles registered to private individuals for commercial purposes. The government has, however, quickly moved to resolve this problem by introducing its ride-sharing service policy. This will address some of the ambiguities in the system.

There is a need for a business-friendly and consumer-oriented regulatory framework, which should complement plans for the larger transport sector. The policy environment has so far been cordial towards the ride-share subsector -which is dynamic but also nascent, and thus needs policy nurturing. The subsector is also a tech-oriented transformative venture. If information and communication technology connectivity can be accelerated, such tech solutions can be adopted in other sectors also. This will surely boost the country's 'Digital Bangladesh' vision.

CALLING A SPADE A SPADE: Bike-share services in Bangladesh must be welcomed with caution. The rising fleet of two-wheelers is a cause for safety concern, with an alarming number of young people (and co-riders) vulnerable to road accidents. Experiences from South-East Asian countries suggest that two-wheelers can be unruly, causing chaos for other commuters and pedestrians. Meanwhile, in the past one year, the bike-share phenomenon has become enormously popular. Meanwhile, the sale of motorbikes in Bangladesh has rocketed, by an unprecedented 44%. These developments indicate that there will be more motorbikes being used at a higher frequency on the roads of Dhaka.

Ride-share services in Bangladesh essentially represent a modified taxi service. Ride-share will truly contribute to improving the traffic burden when the high occupancy vehicle (HOV) approach, or 'car-pooling', is introduced. Then there will be more passengers in the same vehicle, and this will reduce the number of cars on the street. HOVs have to be scaled up, otherwise their real impact will be non-transformative. Uber's product, Uber-Pool, in other countries is contributing marginally to this traffic-reduction equation.

In South America, ride-share services have been real and successful, and this is because of their large-scale use of high-frequency vehicles. These vehicles are pre-booked for monthly use (e.g. to go to the office). Ride-share has been similarly successful in China, where the domestic Didi solution has beaten Uber. Didi is a more innovative app that caters better to local needs. Such are the pure ride-share successes!

With all the essentials taken into consideration, there are few doubts that ride-share is here to stay. Ride-share is already transforming the transport sector, generating positive impacts in terms of creating jobs and expanding choices for consumers. Just like any new development, though, it is also raising legitimate questions pertaining to security and policy imperatives.

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Business Administration / Challenges posed by internal migration

« on: April 20, 2017, 02:19:48 PM »

With economic progress Bangladesh is witnessing the most rapid rate of urbanisation in decades. Much of this transformation is the result of internal rural-urban migration. The impetus comes from people in rural areas searching for a better life in the urban centres. This trend seems unstoppable. The emerging economic and social challenges are enormous and warrant priority policy attention.

Since independence, Bangladesh has experienced remarkable momentum in urbanisation. Between 1971 and 2011, the country's urban population increased from 7.9 million to about 31.2 million, registering a growth of nearly 400 per cent, according to World Bank.

Internal migration, of course, has been the most dominant component of this rapid growth. Relocation of the rural poor, particularly to large metropolitan areas have pushed the urban-rural growth differential to a sizeable 4.5 per cent in the last 37 years.

If this continues then the proportion of urban population may even increase to almost 60 per cent of the total population by 2050 and would still be growing. This suggests that over time the natural increase of rural population will be offset by net rural-urban migration leading Bangladesh towards urbanisation at a remarkable pace.

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Business Administration / Revision and rebasing of national accounts estimates

« on: April 20, 2017, 02:19:28 PM »

Gross Domestic Product (GDP) is the single most important indicator used to assess the health of an economy. Along with GDP, other macro-economic indicators such as Gross national income (GNI); Gross Domestic National Income (GDNI), Gross Fixed Capital Formation (GFCF) and national savings are measured to assess the performance of an economy. These indicators/estimates are produced by the national accounts wing within the National Statistical Office (NSO). Revising and rebasing (i.e. change of base year) of the national accounts estimates/aggregates is an essential and important task for measuring the actual movement of prices and volumes of the outputs of the economy from one period to another.

Revision and rebasing of NAS (national accounts statistics) is necessary at regular intervals. The United Nations Statistics Division (UNSD) has suggested five years interval for revision and rebasing of national accounts statistics. Revision of NAS is undertaken to address the following three reasons: (i) altering the coverage of the economic activities or mitigating data gaps; (ii) improving the methodological deficiencies; and (iii) addressing structural changes in the economy. The most important reason for revision of NAS is to capture updated coverage of all the economic activities based on available data from various censuses and surveys. It is found that within a reasonable interval, some new activities have emerged and some activities ceased to operate. These changes in coverage are captured in the revision process.

Rebasing of NAS, on the other hand, is related to changing or shifting the base year. The main aggregates of NAS are recorded both at current (i.e. market) and constant prices. A base year is used for compilation of constant price estimates and real growth rates. Base year should be a "normal" year (i.e. free from natural calamities, external economic shocks, normal production year etc) and as recent as possible. Rebasing of base year is simply to estimate all goods and services produced in the economy using newly set base-year prices instead of using old base year prices. In the rebasing exercise, a good number of deflators for various sectors and sub-sectors are needed to be updated or revised.

The Bangladesh Bureau of Statistics (BBS) has revised and rebased NAS of Bangladesh three times since independence. The first and the second round revision were carried out for 1984-85 and 1995-96 base years, which were implemented in 1993 and 2000 respectively. The third round revision and rebasing of national accounts was implemented in 2014 with 2005-06 as a base year. Usually, revision and rebasing exercises are done together. Figure 1 summarises some impacts of revision and rebasing implemented in 2014 on GDP. As a result of revision, per capita GDP and GNI have increased. Although, aggregate GDP growth remained the same after rebasing to 2005-06, the structure of economy has experienced considerable change.

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Business & Entrepreneurship / Towards a more caring society

« on: March 09, 2016, 09:59:07 AM »

BANGLADESH can take pride in showing the world how development is possible even in the face of heavy odds. Bangladesh ranks the world's fifth most vulnerable country in terms of risks of natural disasters. Excluding a few countries with a tiny population (less than two million) and the two city states of Hong Kong and Singapore, at 1,200 people per square kilometre Bangladesh is the most densely populated country in the world. In comparison, the population densities are 376 for India, 246 for Pakistan, 141 for China and 133 for Indonesia.  Despite these natural pressures, Bangladesh has accelerated from a less than $100 per capita income country in the early 1970s to more than $1,300 in 2015, thereby moving from a low-income economy to a lower-middle income economy. Life expectancy has gone up from 47 years in the early 1970s to 71 years now. Incidence of poverty has gone down from around 80 percent in the early 1970s to below 25 percent in 2015. These are remarkable achievements for a country facing such natural odds.

How has Bangladesh achieved these development successes in a fairly short period? There is a large body of literature that has looked into this question. My own research suggests the following major contributors:

i) Strong emphasis to agriculture and food production, leading to food self sufficiency and low prices of food grain in real terms;

ii)            Deft population management leading to an impressive reduction in total fertility rate;

iii)           Emphasis on private investment through sound macroeconomic management, economic liberalisation and the growth of the banking sector;

iv)           Policy support to the growth of the garment sector;

v)            Policy and public investment support to rural development;

vi)           Promotion of worker migration and remittance mobilisation.

The outlook today is that Bangladesh will continue to grow further and possibly at a more rapid rate than in the past. Bangladesh already achieved 6 percent plus GDP growth during the Sixth Five Year Plan. It now aspires to move to a 7 percent plus growth path. The major policy challenges to secure this growth path include increasing the investment rate from 28 percent of GDP now to 34 percent by FY2020; enhancing the skills base of the workforce; strengthening the investment climate for the private sector; improving the efficiency of the banking sector; reducing the anti-export bias of trade policy; sharply increasing the supply of energy at a reasonable cost; and addressing the transport bottleneck.

These are no mean challenges, but the good thing is that these are on the government's policy table and widely discussed in business and public forums. The issue that is less discussed with the intensity and resolve that it deserves concerns the equitable sharing of the benefits of development. This is mainly because of a complacency that Bangladesh has done very well in reducing poverty and improving human development, thereby fuelling a perception that all is well on the equity front.

There is no question that the contributors to development listed above were good for both growth and poverty reduction. The low initial conditions led to sharp improvements in poverty and human development. Much of the improvement in poverty came from private-sector driven growth in agriculture, garment and remittances. Public policies played a supportive role. Public spending on health, population management and education has been generally modest, hovering around 3 percent of GDP, but they were rightly focused on basic education, fertility reduction, child immunisation and control of mass diseases that help explain the progress with human indicators.

The equity challenge today is quite different. Poverty has fallen but this is measured in terms of a very modest poverty line. This is starkly illustrated when poverty is measured against the international poverty line used by the World Bank for international comparison of progress with poverty reduction. The World Bank uses $1.9/per day in 2011 purchasing power parity (PPP) terms for measuring extreme poverty and $3.1/per day for measuring moderate poverty.  Using these poverty lines for Bangladesh, in 2010 some 43 percent of the population consumed at below $1.9/per day (extreme poor) and some 76 percent of the population consumed at below $3.1/per day (moderate poor). The high sensitivity of poverty incidence to the choice of poverty lines is simply a reflection of the heavy concentration of population around the poverty line (the near poor). Comparable numbers are 22 percent and 58 percent for India; 11 percent and 27 percent for China; 16 percent and 46 percent for Indonesia and 3 percent and 14 percent for Vietnam. These suggest that poverty in Bangladesh remains a serious challenge and it will not go away soon.

Another dimension of the equity challenge is the quality of the workforce. There is no question that progress has been made in increasing enrollments in primary and secondary education. Retention and completion rates are also improving. Yet, the labour force survey of 2013 shows that some 21 percent of the workforce did not have any education; 29 percent had only primary education and only 6 percent had tertiary education. This profile of the workforce is not consistent with the skills requirements of a middle income economy. Importantly, without substantially upgrading the skills base of the workforce, the creation of employment in high-income jobs and the ability to lift the poor and near poor significantly above the international poverty lines will be near impossible. 

A third equity dimension is income inequality indicated by the distribution of income of the population. There are several ways of measuring inequality. The most commonly used measure in the economic literature is the gini coefficient. This is a summary measure of the gap between the actual income distribution and the hypothetical income distribution when income is equally divided (gini value of 0). The larger is the value of the gini coefficient away from zero, the higher is the income inequality. In popular discussions an often used measure is the gap between the income shares of the top 10th percentile of the population (richest 10 percent) and the bottom 10th percentile (poorest 10 percent). 

Available data suggests that the gini coefficient of income (expressed in percentage terms) increased from 36 percent in 1983-84 to 46 percent in 2010. This long term trend is a clear reflection of the growing income inequality in Bangladesh. When inequality is measured in terms of the gap in the relative income shares of the richest 10 percent versus the poorest 10 percent of the population, data shows that the gap has been widening noticeably. Thus, the richest 10 percent owned about 10 times more income than the poorest 10 percent in 1983-84. This gap widened to 18 times in 2010. This large and widening income gap suggests that the strategies and policies for improving the inclusiveness of growth need to be re-examined to ensure a better sharing of the benefits of rising average per capita income. This is important for both lowering inequality and also for lifting the poor and near poor to above the international poverty lines.

Bangladesh is not alone facing the rising income inequality. For example, there is evidence of rising income inequality in India and China. But there are many examples of middle income and high income countries where average income is much higher while income inequality is lower than in Bangladesh. So, rising per capita income is not inconsistent with lowering inequality.

The policy choices are an exercise in political economy. As a society Bangladesh must chose the development path they wish to follow: a path of rising income with lower income inequality; or a path of rising income with rising inequality. The first path is consistent with the definition of a caring society where human values and dignities are important. In this path, society as a whole does not want to leave a very large part of the population (76 percent presently in Bangladesh using the 2010 Household Income and Expenditure Survey data and international poverty line) at very low levels of consumption and income, while the fortunate few (top 10 percent) have the bulk of the income (36 percent). The second path says it is fine to let the gap between the rich and poor grow so long as the average income for both is growing and the incidence of poverty is falling. This is the present status quo path that may survive for a period but will almost certainly meet social and political roadblocks down the line.

I for one will vote for the first path.  Bangladesh must grow faster to attain upper middle income status in the next 25-30 years and higher income status after that. It has that development potential and there are certain sets of policy and institutional parameters that will make this possible. But this need not come at the expense of a caring social order where both the poor and the rich gain, but the poor gain at a faster pace to narrow the income gap with the rich. This path will make long-term development more socially and politically sustainable.

The experience of Korea, Japan, Western Europe, Australia and Canada all show that high per capita income and low income inequality can coexist. The key to this is redistributive fiscal policy. These countries have a fairly progressive and universal personal income tax system that raises substantial amount of resources from the rich population, which is then used for redistribution to the poor through public spending on health, education and social security. Bangladesh does not need to emulate the example of any one country or apply the same rates of taxation or redistribution, but it can learn from these experiences about how to design an effective redistributive fiscal policy.

At the heart of this fiscal strategy is the establishment and implementation of universal and progressive personal income taxation. Bangladesh raises only about 1.4 percent of GDP as personal income taxes.  The 2010 HIES shows that an estimated 35 percent of the national income is owned by the top 10 percent of the population. Even with an effective average income tax rate of 10 percent, total personal income tax collection should be around 3.5 percent of GDP. This suggests that a large number of rich escape the tax net.

Owing to low tax to GDP ratio overall (around 10 percent of GDP now) and other competing priorities, Bangladesh spends 1.7 percent of its GDP on education, 0.7 percent of GDP on health and 1.5 percent of GDP on social security. These low levels of spending on social and human development, among other factors, is a primary reason for the low skills base of the labour force and large concentration of people below the international poverty line. In addition to rapid GDP growth, fiscal policy must be sharpened to raise more revenues from the rich (the top 10 percent) and spend them on health, education and social protection to build up the human capital of the poor and the vulnerable and to provide them with minimum social security benefits.

The government alone cannot do it. Taxation is a tough challenge and compliance with tax laws requires both a strong administrative mechanism and willingness to pay. The willingness to pay by the rich is an important factor in the context of prevailing weak governance.  The rich in Bangladesh are able to escape the tax net because of their connection to the power base. The rich population should understand that a caring society -- where the needs of the poor are taken care of, where there are reasonably equal opportunities for growth of all citizens, and where the income gaps are not glaringly large -- is more stable over the longer term than one where the situation is the opposite.   

7

Business & Entrepreneurship / Green financing: Addressing environmental challenges and climate change

« on: March 09, 2016, 09:58:19 AM »

Throughout the 20th century, the tendency to exert a negative influence on ecology has reached a high level, resulting in a rapid increase in environmental pollution, greenhouse gases (GHG) emissions in the atmosphere leading to global warming and climate change. Climate experts estimate that global temperatures have risen 0.7oC since 1900 which could go up to 2oC by 2050.In Bangladesh, this is expected to cause rising sea-level, salinity intrusion, adverse upstream developments like drought and flooding, and severe land degradation.

Combating climate change and environmental pollution are, without any doubt, issues that are at the front and centre of the global policy discourse, encapsulated in the COP21 declaration in Paris last December. They are intrinsically tied to politics, economics and other disciplines, making  them not only some of the most complex subject matters, but also issues that require the highest priority. By all accounts, Bangladesh remains one of the highly vulnerable nations to be affected by climate change and environmental pollution. There are specific sectors of Bangladesh that require intervention, namely, crops and fisheries, the textile and leather industry, brick manufacturing and exploration of renewable energy.

Keeping all these in mind, Bangladesh Bank (BB) has developed a Green Banking Policy in 2011.The Green Banking Policy is considered as one of the tools of ensuring sustainable development of the environment and securing the ecological system by minimising negative impacts of economic activities. Although the concept is relatively new, green banking is gaining momentum in Bangladesh at quite an impressive rate indicating a more effective and efficient use of resources in the future. The green financing component of banking is of particular interest.

GREEN FINANCING FACILITIES OFFERED BY BANGLADESH BANK: To promote green financing, BB has introduced three types of refinancing facility: BB Refinance Scheme, Asian Development Bank (ADB)-supported Refinance Scheme and Refinance Schemes funded by Shari'ah-based banks and financial institutions (FIs). The purpose of the refinancing schemes is to broaden the financing avenue for green products and to minimize the negative impacts of the economic activities. Currently, 45 banks and nine FIs have exposure to green finance and are required to meet the targets set by BB for direct green financing. From January 2016 onwards, the target will be 5.0% of the total loan disbursement of funded loan for all banks and FIs.

ALLOCATION OF GREEN FINANCE TO SPECIFIC SECTORS: RATIONALE AND DEVELOPMENTS: Environmental sustainability remains a challenge for Bangladesh. Energy production is still fundamentally dependent on non-renewable sources which are met with two drawbacks -- their rapid depletion and release of greenhouse gases into the atmosphere. To promote and foster the renewable energy development in Bangladesh, a dedicated Renewable Energy Policy was adopted in 2008. Ultimately, the reliance on renewable sources of energy will help contain emissions from exceeding the desired limit.

Contamination of soil and ground water through discharging of chemicals, deterioration of air quality through emissions by factories, brick kilns etc., are now becoming major concerns for the country. These are likely to have harmful effects on its agricultural products leading to long term effects on both health and well-being of the public.

Green financing: Addressing environmental challenges and climate change

Bricks are a fundamental construction material and the demand for bricks is soaring. The Department of Environment states that out of 6,886 kilns operating in the country, almost 45% of the kilns use older technologies which carry out huge amounts of carbon emissions and consume energy inefficiently. The government had formulated the Brick Making and Kiln Establishment (Control) Act 2013 which requires brick manufacturers to either shift to environmentally friendly technologies like Hybrid Hoffman Kilns, Zigzag and Tunnel kilns or relocate away from specific areas (e.g. residential and commercial areas, forests, agricultural lands etc) by July-August of the year, 2016.

The readymade garment (RMG) industry is the largest contributor to the exports of Bangladesh, comprising 80% of its total exports. A major environmental hazard present in textile industries is the discharge of untreated effluent to the environment, causing pollution of nearby soil and water. The leather and leather products industry is a promising export sector. The untreated toxic waste released every day from the Hazaribagh tanneries into the Buriganga River, are posing a serious threat to human and animal health. To mitigate the risks from the discharge of untreated water, effluent treatment plants (ETPs) are required. The Industrial Policy 2010 states that the government will take necessary measures for effective enforcement for proper running of ETPs and central effluent treatment plants (CETPs) in the industries.

Keeping this in mind, BB introduced a revolving refinance scheme for solar energy, biogas, and ETPs of Taka 200 crore in August 2009.

Significant progress has been made in the area of generating of renewable energy sources like solar power and bio-gas. Under the refinancing scheme of green banking, installation of solar panels can produce notable volumes of electricity with no further deterioration of the environment. In 2014, an amount of US$ 32.2 million (Table1) was utilised under the refinancing scheme of Solar Home System (SHS), benefiting thousands of families with the production capacity of more than 165,000 kilowatt-hour (kWh) a day. Around US$ 17.9 million was utilised in the same year for solar irrigation pumps. Such initiatives will facilitate financial sustainability required for installation of solar panels and will also allow consumption of solar energy in urban and rural areas for both household and business use. Bangladesh also has enormous potential for generating bio-mass electricity. In 2014, an amount of US$ 212.8 million (Table1) was utilised for biogas under the Refinance Scheme of BB in 2014.

BB Governor, Dr. Atiur Rahman, a strong advocate of renewable energy, believes biogas can provide a sustainable and environment friendly solution in reducing the demand-supply gap of energy in the country. The National Bank Ltd (NBL) is also offering loans for biogas projects in which priorities are given to areas that are not surrounded by gas networking. Trust Bank too plans to finance 5,000 biogas plants to boost green banking activities. Once the biogas plants are established, both rural and urban areas will benefit from meeting household requirements and commercial use though bio-gas production.

BB launched "Financing Brick Kiln Efficiency Improvement Project" with loans worth US$ 50 million provided by ADB for reducing greenhouse gas emissions. Upto September, 2015, USD 7.37 million was disbursed under this project.

Under the Green Banking Scheme, ETPs in 834 industrial units were installed as of June 2014. A total of three Export Processing Zones (EPZs) -- Dhaka EPZ, Chittagong EPZ and Comilla EPZ of Bangladesh Export Processing Zone Authority (BEPZA) -- have come under CETPs facilities.BB is set to create a $200 million fund called the 'Green Transformation Fund' to provide low-cost loans to textile and leather industries for switching to environment-friendly production.

As of now, there are 47 products under the refinancing scheme. Total investment under indirect green finance (projects with end of pipe effluent treatment) has been the highest amongst banks and FIs. Private commercial banks alone have allocated Taka 167,976 million in 2015 and utilised Taka 79,329.37 million of fund for the Green Financing in the quarter -- July-Sep 2015 (Table.2).

Green financing: Addressing environmental challenges and climate change

THE WAY FORWARD: Despite these developments, there are some issues that need to be addressed. Banks can only provide the funding but compliance and follow-up of fund utilisation needs to be done. The involvement of specific ministries, namely the Ministry of Environment, Ministry of Industries, Ministry of Land and Ministry of Water Resources, is extremely crucial in this regard. Though, Bangladesh has scope to produce renewable energy, it lacks adequate policy support and initiatives to do so. In order to build up a green economy, serious commitment is required from the concerned authorities. The green financing activities need to be aligned with the environmental policies and laws of the government.

The area of green financing is still a relatively new concept and needs to be explored extensively to generate significant benefits. In the future, areas of solid waste and liquid waste management of green financing which face under-investment, should be given priority as well. Specially, steps to clean the Buriganga river should be undertaken.

Out of all the FIs, private commercial banks disburse the highest amount of funds under green financing. Other banks should also be encouraged to increase their disbursements in order to generate significant benefits. Stakeholders, banks and FIs must work together to attain BB's targeted goals and the banks should be required to fully disclose and report their green financing activities.

Green financing initiatives of BB has been highly regarded as innovative approaches in central banking activities with the Governor receiving kudos from reputed financial publications abroad. Provided that the finance continues to be channelled in a transparent and environmentally friendly manner, Bangladesh can hope to overcome its environmental challenges and become one of the first green countries in the world.

8

MBA Discussion Forum / AIIB to boost Asian Infrastructure and Connectivity

« on: March 09, 2016, 09:57:23 AM »

Launched in Beijing last month, the Asian Infrastructure Investment Bank (AIIB) is the latest multilateral development bank (MDB), coming 15 years after the establishment of the European Bank for Reconstruction and Development (EBRD) in 1991 (Table 1). In a major departure from the past, this MDB has been established by developing countries for developing countries, unlike MDBs of the past which were set up by developed countries for developing countries. It starts with a solid foothold on the global financial landscape with an authorized capital base of $100 billion of which $50 billion is initially subscribed, much of it by China. Including Bangladesh, the 58 founding members now have as many as 21 European countries, but 75 per cent of the shareholding (voting distributed according to size of gross domestic product or GDP) has been reserved for Asian members thus giving it a predominantly Asian character in terms of ownership, in sharp contrast to the MDBs established in the previous century.

AIIB's website calls it the multilateral institution "for the 21st century". The bank's Chinese President, Jin Liqun, confirms that the bank will go into lending operation in the second quarter of 2016. Reportedly, AIIB already has a strong pipeline of viable projects, and is expected to lend $10-15 billion a year for the next five years.

In a surprising move which might confound poverty pundits AIIB did not make poverty reduction the centrepiece of its objectives. Instead it made investment in infrastructure and connectivity the primary goal of its operation. That is a smart move for Asia, the fastest growing region of the world and hungry for copious amounts of investment in infrastructure, with an equally massive resource gap.
A 2010 Asian Development Bank (ADB) study estimated an $8.0 trillion infrastructure financing gap across Asia during 2010-20. Asian countries will need $730 billion annually over the next decade to meet their demand for infrastructure investment with Bangladesh's requirement, according to the Seventh Five Year Plan, at $9-10 billion annually. Globally, MDBs lent only $40 billion to infrastructure projects in 2013 with only 30 per cent of World Bank lending portfolio going to infrastructure.
The greatest demand for infrastructure investment across Asia may initially be in the energy, transport, and water/urban sectors. However, the bank is open to investments across all infrastructure sub sectors. It takes little to imagine that when infrastructure gaps serve as binding constraint to growth in many developing countries of Asia, there is wide consensus that easing that gap will be the best way to have the greatest impact on poverty reduction. That appears to be the simple economic rationale of AIIB lending operations. The underlying principle is indisputable: should developing economies of Asia get what is needed for their own infrastructure development, the benefits would go beyond borders. The world economy will benefit from infrastructure being developed in emerging market countries as it can be used in global and regional trade, creating jobs and income.
At a time when central banks have been practising quantitative easing (QE) in monetary policy and driving down interest rates, private commercial capital though cheap is not forthcoming into much needed infrastructure projects which typically have long gestation periods. Also, with most Western countries experiencing economic slowdowns, and the current global finance order (based on Bretton Woods system) sets too many limits on funding in developing countries, AIIB could indeed serve as a new funding source for the Asia Pacific region.
AIIB founders recognise the potential for high growth in Asian economies whose governments, though eager to invest in hard infrastructure such as roads, railways, harbours, electricity, and telecommunications, find themselves strapped with limited financial capacity to generate adequate resources in the short-to- medium term. Hence, AIIB's emphasis on trade, regional economic cooperation, and connectivity, to sustain high growth rates in the future, by facilitating more investment opportunities and closer connectivity among Asian countries.
In 1941, Fortune Magazine founder Henry Luce described the 20th Century as an American century, predicting that by 2041 the 21st Century will be Asia's. Indeed there is now a clear recognition of Asia's growing importance in the international arena, yet the region faces severe infrastructure deficit often resulting in stunted growth performance. That is why the Asian-led AIIB represents a new, distinctively Asian development tool, bringing regional know-how and expertise to the problem of matching the supply of infrastructure to specific regional needs, while adding to the pool of multilateral resources. However, AIIB management makes it clear that its resources will complement those of existing MDBs as it plans to be involved in co-financing schemes in the case of many large projects.
Make no mistake, the AIIB is a China-led multilateral institution headquartered in Beijing with China having predominant voting power. China tried but failed to get traction on reform initiatives that would have given it more voice and weight in the Bretton Woods system. So it should come as no surprise when the AIIB might be seen to promote some Chinese agenda, one of which that has been cited by analysts is China's broader regional development strategy embodied in the Belt and Road Initiative (BRI).
To be fair, the AIIB will be one of several sources of financing for the BRI which is a massive infrastructure scheme of global import and economic ramifications. In keeping with the goals of AIIB, the BRI aspires to develop connectivity and cooperation among countries in Asia, Africa, and Europe through an elaborate network of land and sea infrastructure known as the Silk Road Economic Belt and the Maritime Silk Road. Preliminary estimates by The Asia Foundation suggest that the BRI could benefit 63 per cent of the global population and contribute $2.1 trillion to global GDP.
Finally, as infrastructure investment tends to be energy intensive, AIIB seeks to break new grounds as a development bank in order to bring a truly new model of development finance that helps lead the global transition to smart and efficient infrastructure development. It does not intend to ignore dealing with climate change and the environment to ensure that investing in infrastructure does not contribute to aggravating the problem of global warming that is already afflicting many regions of Asia. In fostering Asia's development in the 21st century, this MDB appears committed to furthering the global agenda for sustainable development as envisaged under the UN post-2015 Sustainable Development Goals.

9

MBA Discussion Forum / How to maximise digital dividend?

« on: March 09, 2016, 09:56:36 AM »

The world is currently undergoing a digital revolution.  This revolution has already yielded significant economic and social benefits globally in the form of higher economic growth, expanded opportunities, and improved service delivery; it has the further potential of ushering in what technologists call "the third industrial revolution." However, these digital dividends have so far been unevenly distributed across the world. For digital technologies to benefit everyone everywhere, it requires closing the existing digital divide. In its annual flagship publication, the World Development Report 2016, the World Bank dwelled on the topic of digital dividend. It suggests that to maximise digital dividends, it is not sufficient to adopt digitisation, it needs to be supported by a trifecta of appropriate regulations, education, and institutions.

It is heartening to see that Bangladesh has a well-articulated digital strategy, known as "Digital Bangladesh" which envisages a modern, knowledge-based society driven by new information and communication technology (ICT).  This strategy, as the Seventh Five Year Plan of the country posits, will ensure an efficient delivery of government services and help create employment and alleviate poverty. In addition, it will help promote democracy and human rights, ensure transparency and accountability --in short, it will foster an inclusive society.

These are, no doubt, laudable aspirational goals. However, talking the talk is not the same as walking the walk. How has the country really fared by the available metric of digital progress?

The available statistics suggest that in recent years the country has indeed made significant progress in ICT adoption.  It now has about 130 million mobile subscribers and 43 million Internet subscribers.  In other words, more than 80 per cent of the population is currently connected by mobile and about 27 per cent by Internet. Though these numbers are impressive, they still fall short of the global averages. A recent report by the United Nations International Telecommunication Union (ITU) notes that there are now 3.2 billion people online, representing about 44 per cent of the global population, and 7.1 billion mobile-cellular subscribers, which is about 95 per cent  of the global population.  This means that despite considerable investments in the sector - as well as enthusiastic embrace of the new technology by people -the country has not kept pace with the unfolding global ICT revolution.

The ITU also compiles an ICT Development Index (IDI) to gauge the state of ICT development across countries. As usual, like in many other areas, Asia remains a continent of extremes in terms of the IDI index: while some Asian countries- such as Korea, Hong Kong, and Japan-are the leaders in the world, it also includes some of the laggards.

Of the 167 countries ranked by ITU, Bangladesh ranked 144 and was classified as one of the least connected societies, below all Asian countries except for war-ravaged Afghanistan. Bangladesh also ranked below such countries as Laos (138), Nepal (134), Cambodia (130), and even the otherwise hermetic state of Myanmar (142).  This suggests that even though Bangladesh has made some strides in ICT development, its progress has not kept pace with the brisk pace of many of its Asian neighbours.

Though access is important, it is not the only thing that matters for digital dividend.  An important factor is regulation. The kerfuffle that followed the government's recent ban of Facebook, Viber and WhatsApp had brought to the fore a set of vulnerabilities of the current digital policy. These restrictions, which reflected a top-down, knee-jerk reaction to a security concern, were ineffective - as people quickly figured out the easy and obvious technological fix. Yet, it nonetheless tarnished the image of Bangladesh as an illiberal political regime.

Though the government security concerns were understandable, its effort at redress was informed neither by a sophisticated understanding of the technology nor by the recent experiences of other countries. As most of these messaging apps and data in mobile devices are encrypted end to end, efforts at accessing and prying into them are nothing but a fool's errand.  Thus far, Western technology companies have not relented even to the pressures of powerful governments such as the United States. In a "60 Minutes" interview, Apple's Chief Executive Tim Cook recently defended their policy of phone encryption for protecting individual privacy and safeguarding proprietary data.

Similarly, the government's vigorous campaign for registering all SIM cards are likely to prove futile for enhancing national security. Many governments in the world such as Canada, the Czech Republic, New Zealand, Romania, and the United Kingdom had earlier considered the merits of mandating prepaid SIM registration but subsequently concluded against introducing it. On the other hand, Mexico, in the midst of a bitter drug war, ended up repealing registration three years after enactment, as it failed to produce results. In short, recent experiences suggest that in most instances, having the least regulation is possibly the best regulation in the digital domain.

Beside regulation, institutions have a critical bearing on ICT developments. Recent international ratings of institutions suggest that the country has experienced a degree of deterioration in the quality of its economic and political institutions.  The Index of Economic Freedom, the annual ratings of economic freedom published by The Wall Street Journal and the Heritage Foundation, ranked Bangladesh 137 out of 178 countries in its 2016 publication.  Of concern were the declines in the areas of business, labour freedom, and of corruption. Similarly, Freedom House, an independent watchdog organisation, assesses democracy and political freedom across the world. In its 2016 assessment, Bangladesh was ranked partially free, with deteriorating political freedom.   

Even though one does not need to take these rankings and assessments religiously, one thing that leaps out of the data is-everything is not hunky-dory in Bangladesh as far as economic and political institutions are concerned. However, this need not to be so.

To unleash the enormous potential of the new technology, access to the technology is necessary but not sufficient; access must be supported by appropriate regulations, education, and institutions, areas where there is plenty of scope for improvement in the country.

10

BBA Discussion Forum / Creating an investment-friendly policy ecosystem in Bangladesh

« on: March 09, 2016, 09:55:47 AM »

Bangladesh is among selected least developed countries (LDCs) where the pace of gross domestic product (GDP) growth accelerated, poverty dropped sharply and inequality fell since 2000.  Prudent macroeconomic management, characterized by low fiscal deficit, contained inflation, balance of payments (BoP) surpluses, and a very comfortable reserve position served as the solid foundation for the continued strong growth.

Average growth of 6.0% since 2005 has been sustained, notwithstanding global recession, political disturbances, commodity price shocks and natural disasters. Manufacturing sector has been the largest single contributor to growth. Its share in GDP has risen from 10% in 1980 to 18% in 2015.
Growth has been broad-based with demographic dividend resulting in population growth reduction and human development improvement. Net new jobs of 13.8 million has been added during the period, 2003 - 2013, with women's employment up by 7.0 million (to 16.8 million in 2013).

BANGLADESH AT A CROSSROADS: Bangladesh aims to become higher-middle-income ($4126 - $12735 in constant 2015 prices) and high income (over $12735 in 2015 prices) by 2041. To reach the 2041 targeted income level, Bangladesh's per capita income needs to grow by at least 13% per annum in dollar terms, compared with the targeted Seventh Five Year Plan growth rate of 8.0% in dollar terms.

The task will be extremely challenging in view of the fact that, over the last three decades, the average annual per capita GDP of China, world's best performing economy, grew by 11.5%. Realization of 7th Plan objectives will be the first critical step in that direction.

Realization of the 7th Five Year Plan Targets: The major objective is to spur growth to 8.0% and reach investment level of 34% by fiscal year (FY)20. Private investment is expected to reach 26.6% of GDP from the current level of 22% of GDP. Foreign direct investment (FDI) is expected to reach 3.0% of GDP ($9.9 billion) from 1% ($1.7 billion) in FY15.

Export target is expected to rise from $31 billion to $54 billion in FY20, which is in line with the targeted doubling of exports by 2021. Share of manufacturing in GDP is expected to grow further to 25%.

STATE OF INVESTMENT IS A MATTER OF CONCERN: Despite the government's planned objective to move to a higher growth trajectory (up to 8.0%) under the Sixth Five Year Plan (FY11-15), Bangladesh's growth performance remained range bound at more than 6.0% level, primarily because it experienced only a modest increase in gross domestic investment. Between FY06 and FY14, gross investment has only risen from 26% to 28.7% of GDP, mostly from public investment (from 4.5% to 6.9% of GDP).

Private investment, accounting for 77% of total investment, will be vital to growth but remained stagnant in relation to GDP at 20%-22% of GDP.

HIGH COST OF TRADE: It takes 28 days to export (costing $1281) and 33 days to import (costing $1515), in contrast to six and four days respectively, for the best performers.

The key drivers of investment are:

* Energy

* Connectivity and logistics

* Regional and global integration

* An efficient and financially strong financial system

* Access to serviced land for setting up industries

11

BBA Discussion Forum / Providing the much-needed impetus to FDI

« on: March 09, 2016, 09:55:06 AM »

Bangladesh's economy is at an inflection point, ready to move to a higher growth trajectory. But it is falling short of a critical ingredient -- foreign direct investment (FDI). FDI is recognized as a catalyst for economic progress of developing countries like Bangladesh. This is because FDI is a stable and lasting form of capital inflow, unlike portfolio investment (hot capital) that ebbs and flows in and out of our equity market. FDI enables a developing country to attain higher rates of economic growth by increasing its capacity to acquire more financial resources in the form of capital infusion, thus bridging its savings-investment gap. FDI also facilitates the transfer of modern management approaches, advanced technologies and production techniques from developed countries.

 Most importantly for Bangladesh, FDI instills skill development of the labour force, and creates significant employment opportunities by linking domestic manufacturing with vast global markets, infusing knowledge and skills about product standards, patterns of consumer demand, and international rules of trade.  If the quantum of FDI is significant, it can make a substantial contribution to the nation's output or its gross domestic product (GDP) through job creation, exports, and income generation. Since Bangladesh is aiming to reach the 8.0% GDP growth trajectory in the medium term, one of its main policy focuses should be to create a favourable investment climate that is conducive to attract and welcome the inflow of FDI within the country.

12

Business Administration / A catalyst for investments: Prospects and challenges

« on: March 09, 2016, 09:53:58 AM »

A typical SEZ has the following attributes: (a) geographically delimited area; (b) single management authority; (c) eligibility of benefits based upon physical location within the zone; and (d) separate customs area and streamlined regulations and procedures. Through SEZs, governments aim to develop and diversify exports while maintaining protective barriers, to create jobs, and to pilot new policies and approaches (e.g., in customs, legal, labour, and public- private partnership or PPP aspects). The other major advantage is opportunity to streamline regulatory processes and providing efficient 'one-stop' services as well as ensuring compliance with all regulatory requirements like labour, environment, building code, work place safety etc. It is important for countries with poor infrastructure and limited land access, as it provides on-site infrastructure (like fully serviced sites with purpose-built facilities for sale or lease) aimed at enhancing the competitiveness of manufacturers and service providers. SEZs are also intended to realize agglomeration benefits; i.e., the benefits that firms in related industries obtain by locating near each other or 'agglomerating'. Agglomeration benefits arise from economies of scale and network effects, resulting in lowering the costs of production of firms through competing multiple suppliers, greater specialization and improved division of labour. OTHER COUNTRIES HAVE BENEFITTED:  Special Economic Zones (SEZs) have helped many countries in overcoming business environment -- and investment climate-related constraints. SEZs were established by China to serve as "demonstration areas" for policy reforms and to encourage foreign investment. The very well-known Shenzhen SEZ provides a snapshot of the impact of the SEZs on China's economic development. More than two decades of growth has transformed Shenzhen from a small fishing village to a thriving urban metropolis, and in 2003 it had an export value of $48 billion per year, $30 billion in FDI stock, and 3.0 million people directly employed. This all happened because of right policy, good business and regulatory environment. Past experiences, from countries that have successfully implemented SEZs, suggest that maximizing the benefits of such zones depends on the degree to which they are integrated with their host economies and the overall trade and investment reform agenda. In particular, when zones are designed to pilot legal and regulatory reforms within a planned policy framework, they are more likely to reach their objectives. The success of zones is also critically linked to how they are developed, managed, regulated, and where they are located. Management of zones is enhanced when they are operated on a cost-recovery rather than a subsidized basis, and are market-oriented and customer-focused. This aspect is likely to be more effective if private sector groups on a commercial basis undertake zone development and operation. Another major factor contributing to the outcome of the zone programme is the autonomy and effectiveness of the body charged with regulating zone operations. WHY SEZS FOR BANGLADESH: A key challenge for Bangladesh has been lack of adequate levels of private investments including FDI because of poor business environment as measured by different global indices.  Bangladesh persistently ranks among the lowest in key performance measures, such as the World Bank's Ease of Doing Business ranking and the Global Competitiveness Index, suggesting that investors are facing serious constraints.  Bangladesh's 'hard' infrastructure, necessary for triggering higher private investments, is also severely lacking, as exhibited by Table 1. Added to all these is the challenge of getting access to land for setting up of an industry. As a result of such a challenging investment climate, Bangladesh's average net FDI level of less than 1.0% of gross domestic product (GDP) is the lowest among the regional competitors .

Getting the business environment and infrastructure challenges fully corrected can be time consuming, so setting up of economic zones can be a way to move forward.  For developing countries like Bangladesh, setting up of Economic Zones (that includes SEZs, Export Processing Zones or EPZs, etc.) has both policy and infrastructure rationale. On the policy side, it includes measures meant to boost investment competitiveness and reduce business entry and operating costs, which can be a useful tool as part of an overall economic growth strategy to enhance industry competitiveness and attract investments including FDI. On the infrastructure side it can plan on providing the right type of infrastructure within a limited serviced land area, thereby also reducing challenge of access to land, thus maximizing on economies of scale. Bangladesh has quite a long experience in setting up economic zones through the EPZs in different parts of the country, exclusively to promote exports. A big part of the FDI in manufacturing sector is located in the EPZs.  While Bangladesh has been successful in developing and maintaining EPZs since the 1980s under the Bangladesh Export Processing Zone Authority (BEPZA), the limitations of the EPZ model in creating spillovers to the domestic economy soon became apparent. Taking lessons from China and other successful East Asian countries, the government enacted the Bangladesh Special Economic Zones Act in 2010. Under this Act, the government has also set up a new institution, the Bangladesh Economic Zones Authority (BEZA). The expectation is that under the new SEZ paradigm, with a regulatory authority in place, there will be quick implementation of new Zones so that local firms can also harness spillover impact from FDI. To overcome many of the deficiencies of good business environment and also to make necessary infrastructure and serviced land available to potential investors, it is imperative that Bangladesh rapidly establishes the identified SEZs based on good feasibility studies. Bangladesh can use these SEZs to pilot regulatory/institutional reforms that improve business environment and reduce infrastructural bottlenecks, thereby acting as a catalyst for domestic and foreign investments to take advantage of the opportunity that the global manufacturing landscape is providing. Such zones could, thus, potentially bring in FDI that could help link Bangladesh to the global value chains and in the process diversify its export base. Nevertheless, over long term the focus should be to learn from SEZ experience and improve the investment climate and regulatory oversight throughout the country.

13

Business Administration / Performance and prospects of Islamic banking in BD

« on: March 09, 2016, 09:53:04 AM »

Globally, Islamic finance has experienced rapid expansion over the past decade, growing at more than 10% annually. Today, Shari'ah-compliant financial assets are estimated at approximately US$2.0 trillion, covering bank and non-bank financial institutions, capital markets, money markets and insurance. A report by the International Monetary Fund (IMF) (2015) observes that out of all the sectors, the banking sector dominates Islamic finance sector making up about 80% of Islamic finance in 2013 followed by the Sukuk (Shari'ah-compliant bonds) market which accounts for 15% of the Islamic finance industry assets. Islamic banking assets have grown at a compound annual growth rate of 20.4% between 2007 and 2013. Islamic capital markets have also developed significantly over the past decade in terms of sophistication and size. Figure.1 shows the top 11 countries in terms of Islamic banking holding 54.8% of the global total Islamic banking assets (excluding Iran) in the first half of year 2014. Based on Islamic Financial Services Board (IFSB)'s report, Islamic banking assets in the Middle East and North Africa (MENA) countries (excluding the Gulf Cooperation council or GCC) make up 40% of total global Islamic banking assets, followed by the GCC (38%) and Asia (15%). Many European countries like the United Kingdom, Denmark, France, Switzerland and Luxembourg have also adopted Islamic finance.THE PRINCIPLES OF ISLAMIC BANKING: Broadly speaking, Islamic banking is a banking system where financial resources are mobilised and invested in accordance with principles of Islamic Shari'ah. Islamic finance is strictly equity-based and asset-backed. There are various concepts which underlie the functions of Islamic banking and sets it apart from conventional banking. The first and most important principle is that the charging and the receiving of interest (Riba) is strictly prohibited. However, there have been some doubts expressed by Islamic economic scholars as to whether the interest rates charged by modern financial institutions are equivalent to the Shari'ah concept of Riba. Another principle includes the sharing of profits and losses of an investment by both fund-providers and investors based on their capital share and effort. In contrast to conventional finance, there is no guaranteed rate of return. Finally, investors should be fully aware and conscious of the business to be invested in, its policies, the products it produces, the services it provides, and the impact that these have on society and the environment. One must work for profits, and simply lending money to someone who needs it does not count as work.

Performance and prospects of Islamic banking in BD

Under Islamic law, money must not be allowed to create more money. Any contract undertaken where 'Gharar' exists is null and void. Gharar is the ambiguity and uncertainty surrounding a contractual relationship, to the extent that it might provide an unfair advantage to one of the parties of a contract over the other. This ethical approach to banking avoids transactions involving usury, speculation, gambling, or industries contrary to Islamic values. Gharar also promotes risk sharing, connects the financial sector with the real economy, and emphasizes financial inclusion and social welfare.

DEVELOPMENTS AND PERFORMANCE OF ISLAMIC BANKING IN BANGLADESH: The Islamic banking industry has been playing a crucial role since its establishment in 1983, in mobilising deposits and financing key sectors of the economy in Bangladesh. The current status of the Islamic banking industry in Bangladesh is shown in Table 1.

14

Get Finance in your Business / Re: What is the difference between a donation and a sponsorship?

« on: February 25, 2015, 03:43:25 PM »

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15

Business Administration / Is global economic recovery losing steam?

« on: February 25, 2015, 03:38:45 PM »

The elites of the financial world gathered in Washington last week

for the annual meetings of International Monetary Fund (IMF) and World Bank, They heard some sobering news from the hosts about prospects of the world economy in the short- to medium-term. Indeed, it has become a pattern: the widely watched IMF's World Economic Outlook starts with an optimistic projection at the beginning of the year, following up with downgrades to global growth, every quarter thereafter. Whereas in April 2074, IMF appeared bullish and expected the global economic recovery to be sustained, albeit with some downside risks, the final quarterly update of October 2014 has put a damper on those predictions.

Christine Lagarde, IMF's erudite boss, has even coined a new expression to describe the state of the global economy and its outlook, "the new mediocre". That sounds like a definite downgrade from the predictions of leading thinkers on the global economy who were describing the current state of affairs as "the new normal", i.e. a state of play when the world economy, and, particularly, the advanced economies, are expected to grow at sub-optimal rates while emerging market economies would drive global growth higher.

Going by their perceptions, the global economy could only sustain the momentum of recovery on the back of Asian and emerging market economies which showed greater dynamism and future potential than, for instance, economies of Europe. Perhaps there is some dent in that outlook as revealed by the latest quarterly update of World Economic Outlook (WEO).

GLOBAL ECONOMIC AND GEOPOLITICAL UNCERTAINTIES: The state of geopolitics and the economic recovery are interlinked. In 2Ot4, geopolitics has taken a turn for the worse. Rising tensions between Russia and the West have the potential of upsetting the cart of European recovery,

In the Middle East, the Arab Spring has morphed into a continuum of discordant forces rising in several countries, among which of course are Syria, Iraq, Libya, and Yemen, The Ghaza episode showed that the Palestinian problem remains a powder keg ready to erupt and derail the inconclusive peace process.

Brazil's presidential election this month will determine whether the country makes progress toward a new, more sustainable growth model or becomes more deeply mired in a largely exhausted economic strategy that is heading nowhere.

Thus, in a recent round up of the global economy, Mohamed El-Erian of New York University sees global markets encumbered by uncertainty in several areas, not just geopolitical tensions.

China's appetite for investment in properties and infrastructure appears to be cooling leading some analysts to predict that the economy's honeymoon with 7.0-8.0 per cent growth was probably coming to an end.

Abenomics in Japan is showing results, but the Japanese economy has been too long and too deep in the zero growth environment to become a significant player anytime soon. With monetary easing and fiscal expansion in place, much depends on Prime Minister Abe's ability to get structural reforms - the "third arrow" -- moving in Japan to spur growth.

India is yet to come out of its quagmire of growth slowdown. Investors, domestic and foreign, are counting on Premier Modi to deliver on his election promise of economic resurgence in order to regain the lost growth momentum.

With the exception of Germany, European economies are still reeling under the burden of debt, high unemployment, and slow growth, to have any meaningful impact on global economic recovery.

Whatever little movement that is expected in the world economy is likely to come from the US economy which has shown modest dynamism in the past year, creating jobs at a steady pace and bringing unemployment down. According to leading macroeconomist, Martin Feldstein, the US economy is expected to register its best growth rate since the crisis of 2008. So the US economy remains the only hope for a global recovery to keep up a positive momentum.

WHAT KIND OF RECOVERY IS THIS? Recent events have shown that recessions cause pain and misery even in the richest of economies. The Great Recession of 2008-09 saw US unemployment inching close to 10% in 2009 before starting to taper off. UK, Germany, and France also experienced protracted unemployment rates of 8.0-10%. Spain, Portugal, and Italy saw youth unemployment shoot up to 25-50%, in some areas. Greece was and still is a battered economy on many fronts. No wonder, the focus of the recovery in all these countries was on job creation.

Touted as the worst economic crisis since the Great Depression, analysts were quick to point out that the damage inflicted on economies was deep-rooted and the recovery would be hard and slow. The good news was that the “green shoots" of recovery started appearing by the close of 2009, from the shores of China-Japan, to Wall Street and beyond. The widely watched IMF's WEO, in its October 2009 issue, concluded that the global recession was ending.

Unique as the crisis was, it was highly likely that the recovery would have unique features as well. Because of policy uncertainties, concerns were raised by leading macroeconomists about the nature of the recovery.

First, it was unlikely to be a robust V-shaped recovery which happens when counter-cyclical policies – tax incentives and public spending expansion - are most effective; recessions in normal business cycles end this way.

Second, the prospect of a gradual U-shaped recovery was suggested by analysts who felt that circumstances were not conducive for counter-cyclical policies to be effective (e.g. when jobless rates are stubborn).