Bangladesh Economy- Problems & Prospects- Part II

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Bangladesh Economy- Problems & Prospects- Part II
« on: May 20, 2012, 03:20:18 PM »

Early last year the center-left combine formed a government with overwhelming majority in Parliament with an ambitious agenda and promises to be fulfilled. But Prime Minister Sheikh Hasina’s government so far has not been successful to bring down price of essentials, except for few essentials, within the purchasing capacity of the common men and to alleviate poverty. World Bank had estimated that the price hike, partly due to rise in international price of rice but mostly due to oligopolistic behavior of syndicates craving for abnormal profit, has added four million Bangladeshis to the poor class. Inability of the government to intervene forcefully in the market lest market forces are distorted has resulted in poor and middle class Bangladeshis to live a life that they should not have to live. It is encouraging that of late the present Bangladesh government appears determined to intervene in the market to destroy syndicates who have stolen from the people massive amounts of money by artificially raising price of commodities.

It is generally recognized that "for a capitalist system to evolve in an effective developmental sense, it must have two hands and not one: an invisible hand that is implicit in the price mechanism and a visible hand that is explicitly managed by the government". Reduction and eventual eradication of poverty would be a greater challenge for the government given the fact that 40% of the people live below the poverty level. According to a World Bank official Bangladesh will, need 8% growth rate at a row for 20 years to reduce poverty to 15% from its present level. Additionally no country can become a middle income country with the level of increasing income disparity between the rich and the poor.

Bangladesh could consider adopting Professor Joseph Schumpeter’s "creative destruction" meaning replacing old ways with new innovative measures that would increase wealth of nations. But since capitalism both influences and is influenced by political and sociological factors and since markets due to externalities or imperfections do not reach perfect equilibrium based on demand and supply state interventions in both regulatory and enforceable forms would be necessary for countries like ours. No longer can we leave the lives of millions of people to be guided by the profit making motive of some people. It is not suggested that we resurrect centrally planned socialism dismissed by Alan Greenspan, among others, as inefficient and unable to create wealth and raise living standard of the people but to have in place an amalgam of social equity and efficiency of the market that some would call market socialism.


Regardless of the economic system followed by the new government the pledges and the statements made by Ministers make it abundantly clear that this government unlike the previous one would not be servile to the wealthy and would try to bring about an egalitarian system in the distribution of national wealth. Prior to the Wage Board's announcement of its recommended minimum wage, the rate had remained unchanged at Tk950 for more than 12 years. Although the government may allow up to three years for the new wage to be implemented, and inevitably there will be compliance issues as manufacturers drag their feet, it seems politically untenable for wages to remain at their current levels given the unprecedented industrial unrest. In response to the Wage Board's initial draft recommendation of a minimum wage of TK 604 to be increased to Tk1, 800 after eight months, the BGMEA feared that over 50 per cent of factories would be ruined within a short time.

While this claim is no doubt an exaggeration, the capacity of Bangladesh's textile industry to absorb a significant wage hike as margins become tighter is a key question which hangs over the future of the industry. Bangladesh's textile sector is concentrated in export processing zones in Dhaka and Chittagong. These zones, which are administered by the Bangladesh Export Processing Zone Authority, aim to offer "a congenial investment climate, free from cumbersome procedures". They offer a range of incentives to potential investors including 10 year tax holidays, duty free import of capital goods, raw materials and building materials, exemptions on income tax on salaries paid to foreign nationals for three years and dividend tax exemptions for the period of the tax holiday. All goods produced in the zones can be exported duty free, in addition to which Bangladesh benefits from the Generalized System of Preferences in European and Japanese markets and is also endowed with Most Favored Nation status from the United States. Furthermore, Bangladesh imposes no ceiling on investment in the EPZs and allows full repatriation of profits. The formation of labor unions within the EPZs is prohibited as are strikes.

Bangladesh exports significant amounts of garments and knitwear to the EU market. Bangladesh also has significant jute, leather pharmaceutical, and ceramics industries. Bangladesh has been a lead in Western efforts to end the use of child labor in garment factories. In1995, the BGMEA, ILO, and UNICEF signed a memorandum of understanding on the elimination of child labor in the garment sector. Implementation of this agreement began in 1995, and by the end of 1999, child labor in the garment trade virtually had been eliminated. The labor-intensive process of ship breaking for scrap has developed to the point where it now meets most of Bangladesh's domestic steel needs. Other industries include sugar, tea, leather goods, newsprint, pharmaceutical, and fertilizer production.

The Bangladesh government continues to court foreign investment, particularly in private power generation and gas exploration and production, as well as in other sectors such as cellular telephony, textiles, and pharmaceuticals. In 1989 it established a Board of Investment to simplify approval and start-up procedures for foreign investors, although in practice the board has done little to increase investment. The government created the BEPZA to manage the various export processing zones. The government has given the private sector permission to build and operate competing EPZs-initial construction on a Korean EPZ started in 1999. In June 1999, the AFL-CIO petitioned the U.S. Government to deny Bangladesh access to U.S. markets under the GSP, citing the country's failure to meet promises made in 1992 to allow freedom of association in EPZs. Although the economy has improved in the 1990s, Bangladesh still suffers in the area of foreign trade in South Asia region.

Despite major impediments to growth like the inefficiency of state owned enterprises, a rapidly growing labor force that cannot be absorbed by agriculture, inadequate power supplies, and slow implementation of economic reforms, Bangladesh has made some headway improving the climate for foreign investor and liberalizing the capital market; for example, it has negotiated with foreign firms for oil and gas exploration, better countrywide distribution of cooking gas, and the construction of natural gas pipeline and power stations. Progress on other economic reforms has been halting because of opposition from the bureaucracy, public sector unions, and other vested interest groups. The severe floods of 1998 increased the country's reliance on large-scale foreign aid. So far the East Asian Financial Crisis has not had major impact on the economy. Foreign aid has seen a decline but economists see this as a good sign for self-reliance.


The global financial crisis has triggered a serious slowdown in world economic growth. Enterprises have stopped hiring and many are lying off workers in considerable numbers. According to ILO Global Employment Trends of January 2009(44) an estimated 6.0 per cent of the world’s workers were not working but looking for a job, up from 5.7 per cent in 2007. Experience shows that the longer people stay out of work the more their "employability" deteriorates, making it progressively harder to get back into work. This is especially worrying for young workers who may get trapped into a lifetime of weak attachment to the labor market alternating between low paid insecure work and outright unemployment. In many developing countries well over half of the workforce is employed in conditions that fall short of decent work, and breaking out of such situations is at the core of the global development challenge set out in the Millennium Declaration and its poverty-reducing goals. By the end of 2008 working poverty, vulnerable employment and unemployment were beginning to rise as the effects of the slowdown spread. In 2008, global financial markets experienced their worst crisis since the 1930s. The crisis was triggered by the collapse of the housing bubble in the United States, although the actual causes go deeper.

In the United States and other developed countries there were credit excesses in residential mortgages, commercial mortgages, credit cards, auto loans and student loans. And there were excesses in the securitized products that converted these debts into toxic financial derivatives; in financing for leveraged buyouts and in the dangerous credit default swap market. The World Bank in its Global Economic Prospects report had forecast the global economy would expand a mere 0.9 per cent in 2009 and world trade volume would fall for the first time in 26 years by 2.1 per cent. Overall, the outlook for economic activity weakened through 2008 and became evident through declines in GDP for many advanced economies and official recession announcements. As consumer confidence dwindled, the purchasing of goods and services declined with households cutting spending in further deteriorating conditions. Business investment and industrial production also worsened as revenues fell and credit markets seized. Inter-bank lending continued to be stalled and whilst some national interest rates have declined to near record lows, these lower rates have not been transmitted to producers and consumers who found it difficult to spend as they feared further job reductions. To compound the situation, banks have been hesitant to offer loans to consumers, seeing an additional risk with unemployment on the rise.

In response to the crisis, a mobilization of trillions of dollars occurred with governments and Central banks intervening in some cases and others relying on support from the International Monetary Fund (IMF). Global leaders met at an extraordinary G-20 summit in Washington on 15 November 2008 to discuss the economic crisis. The leaders agreed on common principles to guide financial market reform through: strengthening transparency and accountability; enhancing sound regulation; promoting integrity in financial markets; reinforcing international cooperation; and reforming international financial institutions. In October 2007, the IMF projected global economic growth for 2008 at 4.8 per cent, but by October 2008 this rate had been adjusted downward to 3.9 per cent, which was further adjusted downward to 3.8 per cent in November 2008. The overall downward adjustment affected all regions in the world except Latin America and the Caribbean and the Middle East. The global number of unemployed youth increased to 76 million, and the youth unemployment rate has increased by 0.4 percentage points in 2008. Given the current economic downturn, the youth labor market situation is all the more worrisome in view of the lack of progress in addressing youth labor market issues during more prosperous years.

Until 2007, developing economies saw a continuation of the downward trends in working poverty and vulnerable employment witnessed in recent years. Estimates of the proportion of the employed that are working but also fall below an accepted poverty line (the working poor) show a major break with estimates in previous years following the revision of poverty estimates by the World Bank. On the basis of new research and information from household surveys, the threshold for extreme poverty has been revised to USD 1.25 a day, while the threshold for poverty has remained at USD 2 a day. On the basis of the new poverty estimates, the share of working poor (USD 1.25 a day) in total employment is estimated at 20.6 per cent in 2007, a decrease of 12.1 percentage points over 1997. In 2008, the World Bank released new poverty estimate. Covering 116 countries and spanning the period 1981 to 2005. The new threshold for extreme poverty is now set at USD 1.25 a day in 2005 prices, which is the average threshold for the poorest 15 countries. The new estimates show that 1.4 billion people in developing countries are living in extreme poverty (950 million on previous estimates). However, the World Bank shows that the rate of decrease in the poverty rate between1981 and 2005 remains about the same, at 1 percentage point per year for the developing world as a whole.


Taking a broader measure of poverty, 2.6 billion people consume less than USD 2 a day in 2005 prices. This number of people has remained relatively unchanged since 1981 although it is now a lower proportion of the population. The new estimates do not yet reflect the increase in food prices since 2005. The share of vulnerable employment in total employment is highest in South Asia, Sub-Saharan Africa, South-East Asia and the Pacific, and East Asia. In all these regions the majority of workers do not enjoy the possible security that wage and salary jobs could provide. Taking into account that a wage and salary job in poor regions may still not ensure all the components of a decent job, it becomes understandable that only a minority of working people have a job that is well paid, respects their fundamental rights and ensures some security in case of job loss. Similar to other Asian regions, economic growth in recent years has resulted in impressive reductions in working poverty in South Asia. However, poverty levels in South Asia remain much higher than in South-East Asia and East Asia. Extreme working poverty decreased from 57.2 per cent in 1997 to 47.1 per cent in 2007. Most of the change occurred during 2002-2007.

The share of vulnerable employment, also on a downward trend, remains very high (77.5 per cent in 2007). Employment-to-population rates have traditionally been very low in South Asia because of the low labor force participation of women. Women continue to be an untapped potential in the region, as in 2008 only one out of three women of working age were recorded as working. During1998-2008, this share even slightly decreased, as did the male employment-to-population ratio. Both decreases are caused by a considerable downward trend in youth employment. In response to the financial crisis and dwindling access to funding, many companies in an increasing number of countries has taken action to reduce operating costs including postponement of investment and reductions of the size of the workforce. In turn, consumers who have become uncertain about their livelihoods or who have joined the ranks of the unemployed or the working poor have been left with little choice but to curtail spending, thus adding to the downward spiral of economic activity.

The economic weight and market size of the Developed Economies and European Union, and the global linkages of the financial sector, means that the crisis has had a major impact on other parts of the world. The labor market outlook for 2009 dependent on the effectiveness of coordinated government measure had to wait for the time it would take for the global economy to find a path toward sustainable and socially equitable growth Based on current labor market trends it was assessed that the global unemployment rate might rise to 6.1 per cent in 2009, and 198 million people will be unemployed. This is an increase of 18 million over the estimated number of unemployed in 2007. The IMF had forecast announced in December 2008 that it is likely to revise its global forecast that global economic growth in 2009 was likely to fall below the 2.2 per cent.

Finally, if unemployment rate is projected in each country as the rate in 2008 plus the largest change in unemployment since 1991 in the Developed Economies and the European Union and half of the largest increase in economies in other regions then the worst impact on the unemployment rate would repeat itself simultaneously in all developed economies. The rationale for taking half of the worst impact in economies in other regions is that in developing economies the main impact of the current crisis is not necessarily reflected in the unemployment rate. The impact as captured in the vulnerable employment rate and changes in working poverty may be equally important. According to the third scenario, the global unemployment rate would rise to 7.1 per cent, an increase by 1.4 percentage points over 2007, but in some of the developing economies the unemployment rate would reach unprecedented levels in the third scenario. In view of the large decent work deficits among the employed in developing economies, assessment of the potential impact of the economic crisis necessitates scenarios using additional indicators beyond the unemployment rate, in particular indicators for working poverty and vulnerable employment.

The reason is that many of the poor cannot survive without working. Unemployment is "unaffordable" for them given that they often have no savings and cannot fall back on social security. A large proportion of workers in developing economies can only react in one way when economic situation deteriorates and the cost of living rises: they have to work even more and/or they have to pick up any work available, independent of the conditions of this work. So while part of the crisis may be reflected in the unemployment rate, we are also likely to see more people taking up any type of employment, and a rise in the number of people joining the ranks of the working poor and vulnerable employment in developing economies. It is difficult to accurately estimate the quantitative impact on the vulnerable workers and the working poor at this point in time, as data at the country level are hardly available. However, given our understanding of labor markets, a negative impact on vulnerable employment and working poverty seems realistic for at least two reasons: 1) people who lose their wage and salaried employment will join the ranks of the vulnerably employed, having to work as own-account workers and unpaid contributing family workers; 2) new entrants into labor markets will have fewer chances to find decent and productive work in wage and salaried jobs and will also join the ranks of the vulnerably employed.

Given the detailed employment scenario in the ILO report it is difficult to visualize clearly the prospect of overseas employment of Bangladeshis. Remittance of Bangladeshis from abroad is the mainstay of our external economy as more than a quarter comes from expatriates living in the developed countries and the rest from the Arab countries who now have not escaped the adverse effects of global meltdown coupled with less than $100 per barrel from more than $150 they used to get earlier. This loss of petro dollar earning will have serious effect on the construction industry in the Arab world where many Bangladeshis were employed. Lost jobs for Bangladeshis has many facets-they will be unable to repay the loans taken to get visa for these jobs, expected sustenance by their families from overseas earning will not be there any more, and they will add to the burden of the society till such time they can get a job, a difficult proposition, or can become gainfully self-employed.

In the background of this difficult global employment situation, consequent upon the global meltdown that was described by Joseph Stiglitz as "the fall of the Wall Street is for market fundamentalism what the fall of Berlin Wall was for Communism", Bangladesh government has correctly taken an integrated policy of poverty reduction, solution of unemployment problem, and to provide a meaning to the life of the people of Bangladesh. Awami League manifesto describes the need for employment generation in the agriculture sector, provision for training and loans for self-employment, sub-contracting system between small and big/medium scale industries successfully achieved in Japan and South Korea. And special training for the labor to be sent abroad. Considering the fact those 28 million remains unemployed the Manifesto aims at decreasing the number to 24 million by 2013 and 15 million by 2021. These are achievable goals considering the facts that global meltdown will not remain a long term feature but may be a cyclical phenomenon furthered by greed and lack of oversight by the regulators in the euphoria of unbridled capitalism.

This argument is not being made to reinstall socialism that failed to provide answers to development aspirations of the poor who were the primary victims of capitalism unbound but to provide an egalitarian system advocated by Joseph Stiglitz and Paul Krugman who felt that, even in the case of the US, the majority of the people did not get the reward of development in consonance with the advancement of the economy. Security of states from non-state actors with transnational links and/or aggrieved people can lead to restlessness among the working population and enthuse pseudo-religious leaders to recruit disaffected and marginalized section of the society in their evil quest for opposing modernization and harking them to take the world to six century Saudi Arabia adorned not even with the "facilities" of the medieval age. If the three legs of modernity rested on the discovery of the "new world", the Renaissance and the Reformation it was basically a victory of superiority of modern values over pre-modern, primitive and traditional mores that used to regulate the lives of the people


Development economists generally concur that the inflow of foreign direct investment (FDI) can play a vital role in the growth dynamics of developing economies. It is generally accepted that the inflow of FDI in developing countries can help fill at least three "development gaps" – first, the "investment gap" by providing capital for domestic investment; secondly, the "foreign exchange gap" by providing foreign currency through initial investments and subsequent export earnings made possible by the initial investments; and finally, the "tax revenue gap" by generating tax revenues through additional economic activities (Smith, 1997). The FDI inflow can also create many other benefits for recipient economies. For example, FDI can help generate domestic investment in matching funds, increase local market competition, create modern job opportunities, increase global market access for locally produced export commodities, facilitate transfer of managerial skills and technological knowledge from developed countries, etc. -- all of which should ultimately contribute to economic growth in host countries. Recognizing the manifold benefits of FDI, developing countries have generally eased restrictions on the inflow of foreign capital since the early 1980s.

Furthermore, the end of the Cold War in the early 1990s brought about a new political era that not only witnessed the end of the foreign aid programs sponsored by the erstwhile Soviet Union in socialist LDCs (less developing countries), but also diminished strategic alliances between the US and the pro-US developing nations resulting in a sizable reduction in the US-sponsored foreign aid programs. The new political reality forced many LDCs to vigorously seek out alternative sources of foreign private capital. As a result, the annual FDI inflow to developing countries has increased manifold from $23 billion (0.7% of their combined GDP) in 1990 to about $211 billion (2.6% of combined GDP) in 2004 (World Bank, 2006).The vital role played by FDI in the growth dynamics of developing countries has created considerable research interest among development economists. Consequently, a sizeable empirical literature has evolved on the determinants of FDI. These studies have identified a number of variables, such as market size, economic openness, financial liberalization, rate of return, quality of infrastructure, human capital, political instability, etc. as key determinants of FDI. However, due to non-availability of reliable and consistent set of quantitative data on investment climate, the literature has generally excluded the domestic investment climate in recipient countries as a determinant of FDI.


External assistance has played a vital role in the economic development of Bangladesh, assisting in bridging the internal gap (savings-investment gap) and external gap (export-import gap). The costs, risks and maturity structure related to external debt management analysis are important. The cost of external debt is low as the most of the foreign loans received are through the concessional window of IDA, ADBand Japan. The structure of maturity of the external debt of Bangladesh is composed of medium and long-term debt with an average grace period of 10 years and a repayment period of 20 years. With the shrinkage of share of grant aid in the external aid package in recent years, the volume of external borrowings is increasing which has resulted in a progressive increase of per capita debt obligation which stood at US$ 139.9 in 2006. From 1972 to 30 June 2006, a total of about US$ 53.93 billion of foreign assistance was committed of which about US $ 44.83billion of aid was disbursed. 44.74 percent of the disbursed aid was grants and 55.26 percent was loans. In 2007, Bangladesh received $1631 million as foreign economic assistance of which $1040 was loan while the amount of grant was $590, almost half of the amount received as loan. Aid is received from both multilateral and bilateral sources. The multilateral sources include World Bank (WB), Asian Development Bank (ADB), United Nations Development Programs (UNDP) and other UN organizations. The bilateral donors include individual countries.

Since independence, Bangladesh has received highest amount of bilateral aid from Japan in terms of cumulative disbursement followed by USA. International Development Association (IDA) is the largest amongst the multilateral development institutions followed by the Asian Development Bank. IDA contributed 26.68% of the total aid disbursed between 2001-2007, followed by ADB

Common agendas of International Financial Institutions (IFIs) are:-

• Dismantling public institutions and public enterprises that deprives people but give immense authority to big business

• Removing all supports and protection for local industries and agriculture by liberalizing imports

• Supporting export oriented activities to meet the needs of western market by supplying cheap product at the expense of economy and environment

• Withdrawing state’s responsibility of providing basic services such as health care and education for the people

• Raising prices of fuel, gas, electricity, raising fees of education and healthcare to create good business opportunities of the global companies.

It should be noted that the agenda looks more akin to market fundamentalism and Washington Consensus, severely criticized by Nobel Laureate Joseph Stiglitz, and condemned by most developing countries as unsuitable to meet their needs in the light of global meltdown.

There has been a significant change in the composition of aid to Bangladesh over the years. The key features demonstrate the fact that the share of grants has been decreasing steadily over the past few decades. The share of grants which was 89 percent in 1971/73 has reduced to only 31.9 percent in 2006. The declining volume of grants resulted in a larger share of loans in the total aid package. Bilateral aid has shown a declining trend whereas multilateral aid has increased positively over the years. Bilateral aid that was 75.4 percent of total aid in 1973/78 has declined to about 43.8 percent in 2005. Multilateral aid, on the other hand, has grown from 24.6 percent to about 56.2 percent in 2005. The flow of food aid and commodity aid has shown a declining trend while project aid has increased sharply from 1.3 percent of total aid in 1971-72 to 93.8 percent in 2006.


To achieve a significant growth, adequate savings for investment and sufficient foreign exchange to buy capital goods is essential. Development assistance or foreign aid can serve as a supplement when either domestic savings or necessary foreign exchange for the development is lacking. It has become quite essential for the least developed countries. Statistics shows that in recent years, ODA from countries belonging to the Development Assistance Committee (DAC) has been decreasing, both in real value and as share of the GNI of donor countries. It dropped from US$1.24 billion (0.28% of GNI) in 1996 to US$1.02 billion (0.22% of GNI) in 2001. ODA to the least developed countries also fell from 0.06% of donors’ GNI in 1996 to 0.05% in 2001. This is far from the target of 0.7 and 0.15%, respectively; set as the MDG requirements for these indicators.

The effect of declining trend of ODA was also reflected in foreign aid disbursement in Bangladesh. In2003-04, Bangladesh received US$954 million of foreign aid, which was US$1,577 million in the fiscal 2002-03, registering negative growth of 39.5%. However, due to the lower capacity of utilizing aid in the context of lowering trend of aid commitment, Bangladesh has the experience of about US$5.4 billion aid in the pipeline from 1971-72 to 1 July, 2002. In addition, our foreign aid structure has experienced a remarkable change after independence. In 1972-73, project aid was only about 15% out of total foreign aid, which rose to 86.8% in 2001-02. But this aid proved ineffective in our development. During 2003-04, only 82% of the total project aid was utilized in the ADP. Though market expansion, GDP growth have been argued as a positive result of foreign aid, no survey or analysis has been conducted figuring out the net result or effect of this aid so far.

A research identifying the beneficiaries of the foreign aid shows that about 80% of the total foreign aid goes back to the foreign countries in the form of import payment and payments to foreign consultants, 15% goes to the local importers, indenters and bureaucrats (Sobhan,1992). However, foreign aid has played an insignificant role to stimulate growth in the context of scarcity of savings and investment in Bangladesh. It has been observed that when the domestic savings of the country declined or stagnated, the flow of foreign aid also declined and remained a marginal proportion of GDP. Since foreign aid does not add significantly to total national savings and rather shows a diminishing trend, it is not likely to promote growth in Bangladesh (CPD, 2005).


While in this age of globalization it is neither possible nor desirable for developing countries to act alone discarding Professor Ziauddin Sardar’s caustic remark of globalization as another form of colonialism and accepting the advantages propagated by Thomas Friedman in his Flat Earth theory that immense possibilities have been opened up for all countries through easy connectivity facilitated by technological advancement. It would be inadvisable for Bangladesh to remain a captive of Indo-Pak political discord for that captivity can only arrest our national growth and regional economic progress. One has to recognize that India of 1947 and India of today are vastly different, courted by the West, incorporation as a member of G-20, exception made by the US through conclusion of nuclear agreement though India refuses to be a signatory of the NPT,

Western keenness to enter the vast Indian market with an ever increasing property owning middle class capable of buying durable goods, a population more numerous that speaks English than those whose mother tongue is English, a potential economic and military power house that subscribes to democracy and liberalism more akin to the Western culture. Prime Minister Sheikh Hasina’s visit to India, first as PM, is not only to signal our determination for integrated regional development under the existing constraints but also to dissolve the fog of mistrust that enveloped our relations since 1975. At the same time Bangladesh is not oblivious of the presently more economically successful China, authoritarian and intolerant of dissent and that, some think, could be a potential adversary to the US in future. Our nirvana however lies not in choosing sides but having good relations with all to promote our national interests. Bangladesh Prime Minister’s most recent visit to China is a reflection of that policy.

Bangladesh’s economic advancement demands of us that efforts be directed towards regional integration and close cooperation with the rest of the world.


The author is a former Secretary and Ambassador of Bangladesh.