It would surprise many to learn that Bangladesh was once at par with countries such as Korea, Indonesia and Thailand in terms of gross domestic product (GDP). In 1970, this had been the case and the rapidly growing Malaysia only produced half of Bangladesh’s GDP. People who had been visiting countries such as Malaysia and Thailand for the last few decades will tell us how radical their change has been. The highly used buzz words seem to be ‘economic growth’ when people reflect on such countries.
‘Economic growth’ is a multidimensional concept. In its crude form, it can only imply a rise in real income per head of a country. However, its multi facets include not only a change in the economic front, but also in political, social and institutional frameworks of the country. This could mean a rise in the standard of education, health, income equality, environmental sustainability and political stability among many other things. The successful expansion of education has been a key factor in Korea’s industrialization in the last six decades.
Education affects economic growth both directly and indirectly. Directly, education leads to human development and technological progress, which helps accelerate economic growth. Indirectly, education contributes to institution building and social development, which again can positively influence economic growth. Now, under the current circumstances, why can’t the government of Bangladesh start construction of a thousand schools and hospitals with foreign aid tomorrow? This will increase human development and boost economic growth. Will this be a rational move? Unfortunately not and let us look at why.
To understand this, we need to look at how the government manages its budget. Broadly speaking, the government divides this into two parts: revenue/recurrent budget and development budget.
The proportion of the recurrent budget stays stable because this part constitutes the ‘reoccurring’ expenditures such as salaries and wages. However, the development budget tends to be relatively erratic as its size depends on factors such as project cycles, emergency spending during natural calamities, availability of foreign aid and so on.
Allocations from development budget will always fluctuate more than revenue spending, which mainly comprises salaries and allowances and has its own internal momentum. Now say the government starts a project to give special stipends to ethnic students. Initially this project will be funded from the development part of the budget. If this project proves to be a success, then the government would want to implement this stipend strategy year after year; but it will not be feasible to do so under the development budget as, in some years, it may not be able to accommodate this project due to increased need from other sectors. In this case, the project will have to be transferred under the recurrent budget.
Now assuming that the project costs Tk 10 crore a year, then every year, the recurrent budget has to churn an additional Tk 10 crore to run the project. Now if the government decides to build a thousand schools and hospitals with foreign aid, this will also mean recurring salaries for thousands of teachers, doctors and nurses year after year. If the recurrent budget cannot bear the expenses, then the construction of these buildings will be futile. In fact, the depreciation costs of these unused buildings will rise every year.
Increment in government revenue can break the barriers of this hard limitation. A wider tax net and an efficient tax collection method can eradicate these kinds of difficulties. While many may think that taking foreign loans to run these kinds of institutions would be justified in dire needs, it should also be taken into account that foreign loans entail interest payments. The resources used for interest payments could be used for other sectors to alleviate poverty. While the tax to GDP ratio has increased from 8.3 percent to 10.5 percent from fiscal 2003 to fiscal 2012, it is still much lower than Malaysia and Vietnam where the tax-GDP ratios are 15.3 percent and 23.1 percent respectively.
The proper use of rising government revenue is one of the instruments, which can break the constraints that hinder development, and facilitate economic growth.
Source: The Daily Star
