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Topics - fatema nusrat chowdhury

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Business Administration / Greater cooperation holds the key
« on: February 25, 2015, 03:30:46 PM »
SOUTH Asia has attracted global attention because it has experienced rapid gross domestic product (GDP) growth over the past 29 years, averaging nearly 6.0 per cent per annum. Yet, it faces many challenges. There are two faces of South Asia. The first South Asia is dynamic, growing rapidly, highly urbanised, and is benefiting from global integration. The second South Asia is largely agricultural, land locked, full of poverty, conflict, and lagging. The divergence between the two South Asia's is on the rise. Many policy and institutional constraints contribute to this dichotomy.

One important constraint is regional conflict that has made South Asia one of the least integrated regions of the world. While progress has been made in reducing trade barriers with the rest of the world, intra-regional trade is a mere 5.0 per cent of total official trade as compared with 45 per cent in East Asia. Capital flows through legal channels are negligible, transit arrangements are cumbersome and expensive, and the physical connectivity is limited and restrictive. Additionally, lack of effective cooperation has constrained progress on a range of public goods involving climate change, water management, HIV/AIDS and disaster management.

Indeed, in an environment of regional peace and better economic cooperation, the biggest gainers will likely be the poor. A careful look at South Asia's geography shows that the border areas tend to be generally underdeveloped due to poor connectivity, lack of investment and political neglect. Much of the focus typically is on military activities to secure the borders. In most cases, economic activities in border areas are constrained by poor connectivity with the regional growth centers and by lack of access to international trade outlets such as a sea port. In many cases, these barriers are artificial in the sense that these facilities are available in nearby bordering towns of other countries but access is prevented by border restrictions.

Importantly, South Asian countries often share a scarce common resource which encompasses several countries. The most well-known example is the water flow from the Himalayan mountain range that feeds the three mighty rivers -- the Indus, the Ganges and the Brahmaputra. These rivers are the life-line for an estimated 500 million people, mostly poor, in Bangladesh, India and Pakistan. Despite some progress on cross-border cooperation, notably the Indus Water Treaty between India and Pakistan in 1960 and the Ganges Treaty between Bangladesh and India in 1996, regional cooperation on water management is generally inadequate. There are major water management issues in South Asia concerning flood control, better sharing of water for irrigation and hydro-power, and the management of the Himalayan glacier melt to prevent water loss for the rivers that will greatly benefit from better regional cooperation.

Cooperation in South Asia's North-East sub-region: The north-east sub-region of South Asia encompasses the four countries of India, Bhutan, Nepal and Bangladesh. Both Bhutan and Nepal are landlocked. Presently, their main access to sea port is through Kolkata. India's North-East states (Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura) have borders along 98 per cent of their boundary surrounded by Bangladesh, Bhutan, China, Nepal and Myanmar. These states are linked to mainland India by only a narrow 27 kilometer Siliguri corridor. These states also use Kolkata as their nearest port. Three other Indian eastern states that belong to this sub-region are West Bengal, Bihar and the Uttar Pradesh (UP). West Bengal has a large border with Bangladesh and also shares a border with Bhutan, while Bihar and UP share borders with Nepal.

This entire region can be classified as low income area with large incidence of poverty and low social indicators, although parts of Bangladesh (notably Dhaka) and West Bengal (Kolkata) are richer than the other neighbourhoods of this sub-region. There are a number of constraints to development in this sub-region, many of which concern internal policies and governance of the respective countries and or states (of India). These constraints must be addressed, but alongside these national reforms more and better regional cooperation can make a substantial positive contribution.

The economic rationale for why cooperation is necessary to reduce poverty in this sub-region has been researched extensively. An analytical framework linking lagging regions, growth, poverty, inequality and regional cooperation has been developed in a recent research [Sadiq Ahmed and Ejaz Ghani "Making Cooperation Work for South Asia's Poor" in Sadiq Ahmed et. al. edited "Regional Cooperation for Poverty Reduction in South Asia - Beyond SAFTA", Sage: New Delhi 2010 (Forthcoming)].

The simple argument goes as follows: In addition to inequality at the personal income level, South Asia's development experience shows that there is a large gap between leading regions (high per capita income) and lagging regions (low per capita income). By and large poverty is high in the lagging regions as compared with leading regions. The spatial distribution of leading and lagging regions shows two characteristics: first, this income gap exists both within countries and between countries; and second most of the lagging regions are located around the border areas. A key reason why border regions tend to be lagging and poor is the lack of connectivity to regional growth centers due to poor physical and social infrastructure or policy restrictions. Therefore, a policy strategy to develop the lagging regions will require a focus on the border areas with a view to raising income and employment opportunities and reducing poverty.

A reduction the gap between lagging and leading regions (technically known in the economic literature as the "convergence problem") will also likely help reduce personal income inequality. In addition to domestic policy reforms, public investment and institutions, the lagging regions development strategy must allow much better connectivity to growth centers at the regional level by reducing policy and other constraints to goods and factor mobility.

Business Administration / Trade gap with India
« on: February 25, 2015, 03:30:25 PM »
BANGLADESH'S large and growing trade deficit with India is often used by critics as an indication of India's dominance in its relationship with Bangladesh, and by implication, serves as a rationale for why it is a bad idea to engage in more cooperation with India. What is amazing is that not just political opponents but also NGOs, business leaders and even some professional economists use this argument. Is this a valid concern? Should our trade gap with India matter?

To understand the underlying economic arguments, it is instructive to first look at the facts of Bangladesh's country/region-wise direction of trade. The table below shows that the largest trade deficit of Bangladesh is with China (US$3.8 billion), followed by India (US$2.8 billion), and the Middle East (US$2.4 billion). At the same time, Bangladesh has a huge trade surplus with Western Europe (US$5.8 billion) and the USA (US$2.9 billion). These numbers illustrate the following fundamental principle of global trade. A country should export to markets that fetch the highest price for its products and import from countries with the lowest price for their imported products. With 200 plus countries in the global market, it would be a rare coincidence that a country that fetches the maximum price for our exports is also the country that is the cheapest source for our imports. So, the concept of "balanced trade" with any specific country is not an economically meaningful concept.

Applying this logic to Bangladesh, it is hardly surprising that Bangladesh sends most of its exports (RMG) to the OECD countries where it gets the best price. Similarly, it is hardly surprising that China, followed by India and the Middle East, are the most important sources of our imports. These countries provide the cheapest sources for our industrial raw materials, food items and fuel. Given this, it is very natural that Bangladesh has huge trade surpluses with Western Europe and the USA while, at the same time, it has large deficits with China, India and the Middle East. Just as we celebrate our trade surpluses with Western Europe and USA, we should not decry our trade deficits with India, China or the Middle East.

Imagine what will happen if all countries start worrying about bilateral trade gaps and take preventive measures. Western Europe and the USA will then impose huge tariffs to prevent RMG exports from Bangladesh and close the gap, while Bangladesh will impose prohibitive tariffs on imports from China, India and the Middle East. The net result for Bangladesh (and for other countries) will be a huge loss of trade and corresponding welfare loss. Bangladesh will lose out on exports, both through high tariffs from Western Europe and the USA, as well as from much more costlier imports of industrial raw materials. Other countries will similarly lose.

Consider another important result from the table. There is a large trade gap in Bangladesh on aggregate (US$7.4 billion). Moreover, this trade gap has been growing. Again, this is not a surprising result. This overall trade gap is simply a reflection of the large and growing earnings from remittances. Indeed, the remittances have grown faster than the trade gap causing a surplus in Bangladesh's current account balance over the past four years or so. This surplus reached US$2.5 billion in FY 2008-2009, implying that we are not using all our available foreign resources for imports. So, if investment in infrastructure picks up, as is likely, ceteris paribus we will see a further increase in our trade gap.

Does this mean we should not worry about the trade gap? The answer is yes. The variable we need to monitor is the current account balance and not the trade gap. If we have a large and growing current account deficit not matched by foreign aid and private capital flow, then we should take monetary, fiscal and exchange rate measures to correct this gap. If we have a large current surplus, then we have a huge positive balance on the services account, owing to inflow of income from factor and non-factor services, and it is most likely that we will have a large trade gap (unless we are rapidly accumulating foreign reserves).

However, all effort must stay focused on expanding exports at the global level, including India and China. Our tiny exports to China, India, Japan, Korea and the Middle East suggest that there may be scope for market expansion. However, this should be secured through export creation and not diversion. The barriers to exports are mostly within: incentive policies, trade logistics, and infrastructure constraints. These must be addressed. To the extent that further and better cooperation with India and other neighbours allows Bangladesh to ease the trade logistic and infrastructure constraints (e.g. through better connectivity and trade in power), this should be encouraged.

With rapid trade liberalisation, even in India, the global trade regime today, in non-agricultural commodities, is much more liberal than in the recent past. As a result, behind-the-border problems are a much bigger constraint on non-agricultural exports than trade restrictions in partner countries. Nevertheless, if trade partners, as well as India, are engaged in discriminatory trade practices, including non-tariff barriers, they need to be taken up at the highest level and resolved. These must be based on well-researched and documented facts rather than anecdotes and populist misperceptions.

Business Administration / Rising Tides
« on: February 25, 2015, 03:29:49 PM »
Despite solid development performance since independence, Bangladesh's per capita income at around $600 remains very low. Poverty has come down from over 70 percent in the early 1970s to around 40 percent in 2005. Yet this level is still very high and rural poverty is even higher at 44 percent.

A look at spatial distribution of development progress shows significant disparity between leading and lagging regions of Bangladesh. Notwithstanding progress in tackling natural disasters and establishing social safety nets, the poor in Bangladesh remain highly vulnerable to a range of internal and external shocks. The lagging regions are mostly border districts. The labour force is mainly engaged in low productivity agriculture; connectivity with growth centres is limited; human indicators are weak; and good jobs are scarce.

Development Constraints
To address these development challenges comprehensively, they need to be related to the key development constraints:

Low labour productivity: While the GDP share of agriculture has sharply declined from around 50 percent in the early 1970s to below 20 percent in 2009, employment share has fallen only marginally and remains at over 50 percent. Outside agriculture, employment is heavily concentrated in low productivity informal services.

Manufacturing sector's GDP share has increased from 11 percent in the early 1970s to 18 percent in 2009, but employment share has barely increased from around 7 percent to 10 percent over the same period. On the supply side, labour productivity is constrained by low skills.

To tackle the employment challenge effectively, policies will need to focus on both demand and supply sides of the labor markets. On the demand side, creating good jobs will require a rapid growth in manufacturing investment, output, and exports. On the supply side, government investment in education and training will be the key to improving labour skills.

Weak trade logistics: Research shows that trade logistic costs are a key determinant of export competitiveness. According to World Bank analysis, Bangladesh ranks 79 out of 155 countries in terms of the 2010 trade logistic index (LPI). This index is a combination of performance on six areas: customs, infrastructure, international shipments, logistic competence, tracking and tracing, and timeliness.
The 2010 ranking is an improvement in performance over 2007, yet this performance is much lower than the rankings achieved by competitors (China at 13, India at 47 and Vietnam at 53). Bangladesh scores particularly low on customs procedures and on infrastructure and logistic competence.

Infrastructure constraint: Energy crisis is already constraining growth by an estimated half percent of GDP. This constraint is rapidly growing in intensity and needs to be tackled on a crisis footing. To meet expected power demand of 6,600MW in 2010, installed capacity needs to grow to 8,000MW as compared with 5,200MW presently. This 30 percent shortage of power generating capacity (2,800 MW) will challenge policy.

Linked to this, the availability of primary fuel is a worrisome factor. Gas accounts for some 70 percent of primary fuel for commercial use. Rapid growth in demand for gas without commensurate expansion in supply has caused the emergence of excess demand for gas. Present shortfall in gas supply exceeds 10 percent leading to rationing.

Power outages are estimated to lower GDP by an estimated $1 billion per year. Electrification ratio expanded rapidly since the early 1990s, growing from 10 percent in 1994 to 37 percent in 2008. Yet, this is still amongst the lowest in the developing world. In the rural economy, low power connectivity is a serious constraint to non-farm sector growth and human development. Inadequate investment in primary fuel (gas, coal, and hydro-power) raises serious concerns about the severity of future energy constraint.

Water and climate change: Ganges-Brahmaputra-Meghna river basins are home to 530 million people. The water is shared between India, Nepal, Bangladesh, China, and Bhutan). Among the challenges for water management include: increased pressure on water resources from growing population; growing water pollution; increased vulnerability from climate change especially as the monsoon is expected to be more severe and less predictable; reduced dry-season flows; increased intensity and frequency of water related hazards; sea level rise and salt-intrusion.
Image2Countries acting alone cannot effectively address these risks.


Role of Geography
Resurgence of global interest in understanding growth dynamics shows that geography matters for growth. While Bangladesh decries its downstream location disadvantage emerging from the flow of international rivers, it does not celebrate its two major advantages: tremendous access to sea and being the gateway between Central/South Asia and East Asia.

Taking advantage of location: There are two distinct ways in which Bangladesh can take advantage of its geographic location. First, global evidence shows that countries with access to sea (ceteris paribus) do better than land-locked countries. By opening up existing ports and through further investment, Bangladesh can tap a dynamic source of revenues and economic growth. The true potential, for example, is illustrated by the development performance of internationally renowned sea ports like Rotterdam, Singapore, and Hong Kong.

The second source is Bangladesh's location as the "Asian Gateway" linking Central and South Asia with East Asia. Through better land, air, and sea connectivity Bangladesh can become an Asian commercial hub with immense development opportunities.

Border area development: Of the 30 border districts, some 29 districts are a part of the lagging regions in Bangladesh (the only exception is Jessore). Growth and investment in the lagging regions will benefit tremendously from reducing cross-border restrictions on trade, transport, and investment. Removal of these restrictions will also facilitate agglomeration economies and production sharing arrangements as in East Asia under Asean Plus 3.

Easing energy constraint: South Asia's North-East sub-region has tremendous untapped hydro-power potential (See Table 1). Through proper grid connectivity and transmission lines, the scope for power trade to relieve Bangladesh energy constraint is tremendous.

Water security and climate change: On the negative side, the location of Bangladesh makes it especially vulnerable to climate change and natural disasters as it lies at the bottom end of the flow of the three mighty rivers Ganges-Brahmaputra-Meghna. Importantly, all three rivers, especially the Ganges and the Brahmaputra, flow through upstream India.

Other countries that are also upstream and have an impact on water flows are China and Bhutan (Brahmaputra) and Nepal (Ganges). It is obvious from geography that the only viable solution to Bangladesh's water problems and vulnerability to climate change is through a cooperative solution with upstream neighbors (India, Nepal, Bhutan and China). Arguably, without water cooperation long-term solution to poverty reduction in Bangladesh is not possible.

Business Administration / The path-breaking summit like Bretton Woods.
« on: February 25, 2015, 03:29:07 PM »
President-elect of the USA, Barack Obama, manifestly cast a long shadow on the outcome of the just-concluded Washington summit of G20 developed and large emerging economies. He chose to sit out the meeting, sending, instead, his emissaries who were peripheral to his core transition team. Making the argument that there can be only one US President at a time, he conveyed the message to the leaders assembled that "our global economic crisis required a globally coordinated response". From what we have learnt of his temperament, he is not one to hastily jump into a firestorm without serious prior reflection.

Nevertheless, Obama has made it plain that he places the topmost priority on handling the economic crisis and, following his inauguration, he will do all it takes to see this crisis resolved and the health of the economy restored. Was this enough of a confidence builder that the markets and investors around the globe were looking for?

Calling a spade a spade, the G20 summit, by most accounts, did not live up to the high expectations that were raised going into the meeting.

First, it was no path-breaking summit like Bretton Woods.

Second, it did not come up with immediate solutions to the crisis but made commitments to an action plan to be rolled out in the next few months culminating in a decision-making summit in late April, when the Obama administration is well ensconced and decisions emerging from the US team can be counted on.

Third, some sharp cracks were evident in the thought process of the two dominant players - US and European Union (EU) - particularly on the issue of cross-border regulating authority. While agreeing to the need for greater monitoring and regulation of financial markets and instruments, the Bush team was reticent over the idea of global governance, preferring the continuation of national coverage of strengthened regulatory authorities. The Europeans were in favour of cross-border authority in light of the greater coupling of economies and financial markets under globalization. They were also more comfortable with the notion of greater public intervention in financial markets than exists today, something that is anathema to Bush who made perhaps the last of his impassioned defense of capitalism and pro-market principles. In the end, there appeared to be general agreement on broad principles, though not on specific actions.

On the plus side, there were a few notable developments.

First, it was a summit of G20, not G7 or G8. Thus it was a more inclusive global parley which clearly recognizes that a global economic crisis can no longer be contained by the unilateral albeit coordinated action of the developed countries alone. It recognized the pivotal role of large emerging economies like China, India and Brazil, amongst others, in lifting the global economy out of a deep recession. There was agreement on including these economies in the membership of an expanded Financial Stability Forum (FSF), a hitherto closed body made up of financial institutions and central banks of rich nations. The idea of giving large EMEs greater voting powers at the IMF was mooted without a clear decision emerging.

Second, the summit put to good use the lessons from the 1930s when beggar-thy-neighbor policies of protectionism helped to prolong the depression. This time around, there was unanimous agreement to stay away from any new protectionist move. They agreed not to raise any barriers to trade and investment for the next twelve months and to kick start the Doha Round of free trade talks and bring it to closure. Thus all but dead Doha Round gets a new lease of life!

Third, there was wide consensus on adopting economic stimulus packages across countries. It recognized the close integration and interdependence of economies in a globalized world order. USA or Europe alone could not stimulate the global economy out of recession. They needed the full participation of China, India and other large emerging economies to generate global demand for goods and services that has become the biggest casualty in the present crisis.

Rich economies one after another are slipping into recession. Japan has just joined the Eurozone countries and USA. Summit leaders therefore agreed to shore up growth in these economies. Indeed, the summit gave credence to a new idea of Global Keynesianism - globally coordinated economic stimulus.

That is easier said than done. As far as monetary stimulus is concerned, the central banks of G7 countries have responded with a near simultaneous reduction of interest rates to ease liquidity and credit in their markets with only modest success so far. Fiscal stimulus on the other hand is largely national. Tax cuts, increased public spending, and consequent larger budget deficits, are the domain of political governments. Each country faces a different degree of challenge in this area.

Americans are already alarmed at having to face a trillion dollar deficit this year thanks to the addition of a $700 billion bailout package to their existing deficit of over $300 billion. A fiscal stimulus in these conditions will result in a budget deficit of historic proportions nearing 8.0-10% of their $14 trillion GDP, while piling up another trillion dollar of public debt on top of the current amount of $10 trillion. Getting this past Congress under the new Obama administration would be no mean task. Barack Obama has already learnt about the high costs of such a fiscal stimulus but justifies them by saying that the costs of not acting now would impose severer pains on the American people.

As for the EU countries, it remains to be seen if there will be some adjustment to the fiscal deficit criteria for member countries should they pursue a fiscal stimulus package. Clearly, under the summit guidelines, this one criterion might have to be kept on hold for several new EU members.



A point hardly mentioned is that relating to the stability of financial markets with large infusion of public debt. While highly leveraged private debt was admittedly the root cause of the current crisis, the pursuit of a strategy (fiscal stimulus) that is likely to substantially augment public debt across countries will not contribute to economic instability in the long run is questionable at best. Perhaps the prevailing mindset in the current debate corresponds to the famous Keynesian doctrine: In the long run we are all dead.

Another subject that was brought to the table was the matter of global imbalance of savings and spending, a situation that partly contributed to the crisis. If allowed to persist, it would have the makings of another crisis, sooner or later. Some emerging market economies like China and Saudi Arabia were running persistent current account surpluses and accumulating huge reserves on the back of heavy spenders in US and Europe who are piling up debt. What policies could be adopted to make the Chinese spend more and save less while making Americans and Europeans do just the opposite? Quite predictably, no clear decision on this issue came out of the summit.

Finally, what was apparently not mooted but is of the utmost relevance is the subject of a global currency as an instrument of financial stability. The current crisis did create gyrations in currency markets though falling short of becoming a classical currency crisis, like the one experienced in East Asia in 1997. Instability in currency markets can be observed from the quick movements in and out of alternate reserve currencies. When the subprime crisis began to unfold, the dollar came under extreme pressure. Soon when the crisis engulfed European economies as well, there was a rush out of the pound sterling and Euro.

Nobel Laureate Professor Joseph Stiglitz has argued that such speculative movements between currencies - contributing to financial instability -- could be avoided if there is a global reserve currency. Again, the idea of a global currency could have been mooted in this summit but, minus Obama, even an action plan that examines such a radical prospect appeared unlikely.

To sum up, the G20 summit had all the trappings of an internationally coordinated response to a global economic crisis. In the absence of a US President-elect who holds many of the trump cards that could shape the future global economy, the summit ended as a high profile event with agreement on broad principles, but came short on specifics that could have had immediate impact on the global economy.

It is a great way to say good bye to an outgoing US President. With caviar and $300 bottle wines on the menu, George W. Bush, the lame-duck President of the United States, is playing host to the heads of 20 rich nations and emerging economies of the world at the summit which is under way this weekend in Washington.

Close observers now believe that not much thought went into the planning of this summit before it was called. It is almost like the hastily prepared $700 billion bailout package hashed by the US Treasury to shore up the US financial system which was on the brink of collapse. Its focus had to be changed twice already. First, it was targeted at the removal of bad assets with banks and financial institutions, which Paul Krugman described as "trash for cash". Then it changed focus and went for capitalisation of banks.

According to the latest development, Mr. Paulson, the US Treasury Secretary, has decided to address the problem of frozen credit markets instead.

Anyway, the pressure coming from the French President, Nicholas Sarkozy, and the British Prime Minister, Gordon Brown, was too great for President Bush not to act. What is clear is that, given the predicament in which the world economy is in, finding effective solutions for a sustainable global financial order will be no mean feat, one that would certainly require much more serious deliberations than what is on offer at the hurriedly called summit of heads of states.

The notion that this summit would become a Bretton Woods II is fading fast. President Bush would be happy if the summit laid the "foundations for reforms". At best, the hope is that they would at least agree on some basic guidelines on which to move the technical summits that are being planned down the road. Together with the follow up summits, something concrete and lasting might emerge.

The summit already started when this paper went to press. There is no denying that the stakes are high. But the first damper to the events is placed by the fact that there is a President-elect in the US who does not see eye to eye on fundamental economic issues with the current administration. Barack Obama has intelligently chosen to sit out the summit which will be attended by his chosen representatives who are only peripherally involved with his core transition team.

As such, come January 2009, the new administration might not be inclined to follow through on all the policy commitments of the Bush era, particularly on policies relating to resuscitating the US economy and the global economy with it. That makes it all the more likely that the European leaders, in particular, would rather wait for the follow-up meeting which the French President is already signaling to convene shortly after Obama's inauguration.

There is a clear divergence of views between the US position and that of the Europeans on the issue of what reforms are absolutely necessary. The US Treasury - and the IMF with it -- has taken the view that existing shortcomings of the financial sector need to be fixed and there is no need for a Bretton Woods type overhaul of the system. Contributions from China, Saudi Arabia and gulf oil-exporting countries are being sought to bolster IMF's $250 billion reserves.

For the global economy, the moment of truth is here. The old financial architecture has crumbled like a house of cards. The global system of trade and payments, set up in 1944 at Bretton Woods, may also need some facelift, if not a major overhaul.

Events unfolding around the world in the past few weeks are making a second Bretton Woods almost a foregone conclusion. Thanks to the latest financial crisis, there appears to be a growing convergence on the need for a new global economic order with the realization that the old order, having served well for over 60 years, is in need of substantial repair. World leaders also agree that this is no time for unilateralism. As such, we have seen a remarkably coordinated set of policy actions adopted across countries and regions focused on restoring confidence in the financial system and getting the wheels of banking and finance moving.

There are three simultaneous developments that need to be put in proper perspective.

First, a global conference of Group of Twenty (G20) leaders has been called in Washington on November 15. The European Union (EU) leaders have already met in Brussels to chart out a common position at the Washington summit. But questions are being raised about the effectiveness of a lame duck US President to provide the kind of leadership that will be necessary to forge agreements on contentious issues of which there will be many.

Second, there is no clarity as yet regarding the role to be played by the US President-elect, Barrack Obama, who has wasted no time to rally his team of experts to get on top of the economic agenda on which he is now placing the highest priority. The question that comes to mind is that if the Bush government's policies of unbridled deregulation of financial markets are at the root of the present catastrophe, can it be relied on for a solution? Does the problem at hand allow the world to wait for a new US President to take office in January?

Third, there is the Stiglitz factor or, what might be termed as the US Treasury versus leading experts. The President of the UN General Assembly has summoned a panel of experts, headed by Nobel Laureate economist Professor Joseph Stiglitz, to study the crisis and come up with recommendations. As we know, Stiglitz and the latest Nobel Laureate economist, Paul Krugman, have been bitter critiques of the Bush policy of laissez faire in financial markets.

This raises the big question about who should be in charge of shaping a new global economic order, should that become necessary: the UN body with 192 member countries, or the G20 leading nations of the world who are assembling in Washington shortly. Here, quite apart from the issue of inclusiveness, there is the matter of forging decisions that can be carried through across the globe. A process under UN auspices could lead to the kind of impasse we have seen at the Doha Round under World Trade Organisation (WTO). Decision by consensus of all members -- as is the case in WTO -- could be a long time coming, or not at all. On the other hand, it seems a smaller group of twenty leading economies that includes India, China and Brazil, could be managed better for critical decisions. Bretton Woods I had brought together leaders of 22 western nations. But, insists Stiglitz, a global crisis requires global response, arguing that the UN body is the fit place for the next Bretton Woods.

Thus cracks seem to be appearing between the US Treasury and leading experts on the crisis. But it is the former that is driving the process of the Washington summit. For one, the US Treasury has been accused by some of ineptitude in, first, letting the crisis brew for over a year, and then coming up with a hastily prepared $700 billion package. The bailout package first took the wrong approach of buying out bad assets of banks, instead of providing capital infusion, which is what the European governments did, only then to be dittoed by Washington. I would hazard a guess that Professor Stiglitz, for all his expert insights on the current crisis, might be left out of the panel that will formulate the new global financial architecture. That would be a pity. I hope I am proved wrong.

Be that as it may, the evolving scenario is one of moving towards global financial reforms the shape of which is likely to be fleshed out in the days to come. There is clear agreement that everything will have to be done now to prevent the recurrence of such a global catastrophe in the future. Interestingly, Canada is the one country that is unwilling to go along with the notion of broad-based changes to the existing system. Rather, they would like to see current shortcomings of the regulatory regime to be addressed. This is not surprising as the International Monetary Fund (IMF) projects Canada to be the only Organisation for Economic Cooperation & Development (OECD) country to escape a recession in 2009, with a modest growth.

Business Administration / Is Bretton Woods II in the offing?
« on: February 25, 2015, 03:27:42 PM »
In 1995, a 25-year old mathematics graduate of Cambridge University devised a method of insuring against loan defaults - later named credit default swaps (CDS) -- that, within a decade, became the financial derivative of choice for banking and financial institutions around the world, particularly in USA and Europe. Banks, investment houses, and insurance companies, reaped rich rewards from holding copious amounts of CDS which served as insurance cover for US mortgage-backed securities that were packaged and sold around the globe.

In addition to CDS, the world's financial markets saw the growth of exotic financial instruments such as collateralized debt obligations (CDOs), and collateralized loan obligations (CLOs), all being some form of derivatives of securitized home-mortgage loans. Warren Buffet, the world's most astute investor, described these esoteric financial instruments as nothing short of financial weapons of mass destruction (WMDs). The problem is that these instruments held sway over much of the developed world's financial sector, except Japan. The going was great as long as US homeowners continued to pay their mortgage.

Until they didn't. In 2007, the housing bubble burst, giving rise to the sub-prime crisis. The rest is history.

All said and done, we are facing the worst economic crisis since the Great Depression (GD). A valid question before us is: how did a sub-prime mortgage failure in the US housing market trigger a financial meltdown of global scale? Analysts blame CDS as the principal catalyst of the crisis. As of September 2008, the face value of total CDS outstanding was estimated by the International Swaps and Derivatives Association (ISDA) at nearly $55 trillion. That was more than world GDP of $53 trillion. Almost half of this was held by institutions in Europe. CDS worth $13 trillion was held by the top 25 US banks, which included Bank of America, Citibank, JP Morgan Chase and Wachovia, as reported by the US Comptroller of Currency. Even a leading bank in the United Arab Emirates was left holding CDS in the amount of $2.0 billion. The problem is that the entire derivatives market was unregulated, and under-capitalized. One thing became clear. Financial globalization had taken deep roots, but regulation was weak to nil.

It takes an economic crisis of major proportions to shake things up and bring systemic change. The clear consensus now is that the global financial system cannot be left to its own devices any more. Governments now own or control big chunks of the financial system. If it was a failure of regulatory oversight, then they have all the levers of power to set things right.

That brings us to the forthcoming economic summit in Washington. The US President, George W. Bush, in the twilight of his tenure, has succeeded in convincing global leaders to come to a summit in Washington in November. This could be the first of a series of summits. The goal would be to thrash out the rubric of a more functional and lasting financial architecture by drawing lessons from the present crisis. Given the remarkably coordinated and coherent set of policy actions the world witnessed in the past few weeks from both sides of the Atlantic, it would not be far-fetched to surmise that perhaps something like a Bretton Woods II might be in the offing for the financial markets. Suffice it to say that Bretton Woods I, convened in 1944, long after the Great Depression, aimed to prevent a repeat of GD. It gave the world a new economic order that lasted for over 60 years, while generating enormous wealth and prosperity for a large part of the globe. Is it still relevant for the globalized economies of the 21st century?

If at all, this would be Bretton Woods II with a lot of difference.

Business Administration / World economy on the brink: How secure are we?
« on: February 25, 2015, 03:27:12 PM »
In the past week, stock markets around the world have been roiled by a massive crisis of confidence. New York's Dow Jones Industrials fell 17 per cent for the week, its sharpest weekly decline since 1987. Other leading indexes of Europe: FTSE (London), DAX (Frankfurt), CAC (Paris), and even those of Asia: Nikkei (Tokyo), Hang Seng (Hong Kong), Kospi (Korea), have followed suit. For the year 2008, the Dow Jones index is down 36% losing $8.3 trillion of market value. What started as a subprime mortgage crisis in the USA has now gone global and engulfed all the G-7 countries and more.

TIME magazine called it "the complete unraveling of the world's financial system". Needless to say, we are in the midst of an economic crisis of unprecedented scale. And the crisis is still unfolding. We have not seen the end game yet. What is clear is that the origin of the problem lies in the developed countries of Europe and America. Are the leaders and finance ministers in those countries doing enough of the right stuff to put the world financial markets back on track? They have an opportunity this weekend as the World Bank-IMF meetings get under way in Washington.

As we now know, it all started with the burst of the housing bubble in the US resulting in widespread default that landed many high-flying financial institutions into bankruptcy. Apparently, these institutions, including Wall Street icons like Lehman Brothers, Bear Sterns, Merryl Lynch were loaded with mortgage-backed securities which lost value precipitously. With depleted assets in both banks and financial institutions, capital shortfalls became endemic. A crisis of confidence among banks led to inter-bank credit squeeze that soon extended to consumers and businesses. Asset prices sank even further. The crisis that was brought about by accumulation of "over-leveraged" debt seemed to aggravate via "deleveraging". The financial markets have cried out for infusion of capital to break the vicious circle. The problem at hand is unprecedented. Its solution will have to be unprecedented as well.

The past few days have witnessed a flurry of activities in Washington and European capitals. The global financial system was under severe strain, and swift action was called for. One thing seems clear in the various actions that have been taken. Conservatives and liberals on both sides of the Atlantic have wasted no time to shed their dogmatic positions on what to do with the capitalist market system. The world has been better served by their realization that this was not the time for dithering, but swift and determined action by all. Prognosis and post-facto analysis could be done later.

In the US, House Republicans, who are fundamentally opposed to any intervention in the financial markets, had to bite the bullet and give in to a historic scheme of what might be described as "pseudo nationalization of Wall Street". The $700 billion emergency bailout package was finally signed off by President George Bush, though, for the time being, it did not do much to stabilize equity markets in the US or around the world. In a similar move, the British Prime Minister Gordon Brown went a bit further and signed off a straight-jacket infusion of £50 billion of capital into UK banks. Around Europe, governments stepped forward to guarantee the savings of depositors to prevent run on banks. To inject liquidity into the financial markets, what appeared unprecedented was a coordinated move by central banks of the US, the UK, the ECB, and others to cut interest rates by 0.5 percent. Even China and Korea chimed in. In a surprising move, the Government of Iceland fell short of declaring that their whole economy was bankrupt and sought a $5.0 billion loan from Russia.

For good or bad, recent events in the financial markets around the globe tell us that financial globalization has taken deep roots. In consequence, we see equity and financial markets gyrate in unison, with good and bad times shared across borders. It takes little time for a national problem to go global. So, to fix the problem requires globally managed coordination of actions. Unilateral action under these circumstances is unlikely to bear fruit.

In Bangladesh, the question in our mind should be whether our savings and investment in the country are secure under these circumstances. Is our financial sector under sound regulation so as to fend off any onslaught from abroad? How integrated are we with the global economy?

Back in 1997, when the Asian financial crisis battered the economies of Thailand, Malaysia, Indonesia, Korea and Taiwan, Bangladesh remained largely immune to that crisis because of one principal barrier: absence of capital account convertibility, which precluded free movement of capital in and out of the financial system. There was no question of "hot money" going in and out of Bangladesh. That situation has not changed to this day, as the capital account of the balance of payments remains non-convertible. Our financial sector is not exposed to those infamous CDOs (collateralized debt obligations) which became the bane of the Euro-American financial sectors. So an onslaught on our financial system seems unlikely. As Asian stock markets tank in tandem with those in US and Europe, Bangladesh stocks might react, in sympathy, rather than because of market integration. Unlike China, which surprisingly kept a fifth of its US currency holdings in mortgage-backed securities held by Fannie Mae and Freddie Mac - two mortgage giants in US that were recently taken over by US Treasury - we trust theBangladesh Bank holds its $5.5 billion dollar reserves almost entirely in cash and safe US Treasury securities. Likewise, it is believed that the roughly $500 million of foreign currency holdings of our private banks are not held in any speculative assets abroad. If there are any doubts, this would be the time for BB to scrutinize the quality of these holdings.

Business Administration / Recovery under strain
« on: February 25, 2015, 03:24:38 PM »
Reflections on the State of 2014 Economy

The yearlong calm that we experienced during 2014 has been ruptured by recent events that put a damper on the long awaited recovery. In the fiscal year 2014-15 the economy was expected to grow at a respectable pace though not nearly as high as the planned 7.3 per cent for the current fiscal year. What is most worrisome is that investment appears to have become one of the casualties in this predicament. Needless to say, political stability is a sine quo non of private investment.

Another disappointment so far has been the export sector whose performance is entirely driven by the readymade garment sector. This happened when many analysts hoped that the Rana Plaza episode and hartals were behind us. Non-RMG exports have been and continue to be laggards, except footwear exports, with the result that our export basket continues to become even more concentrated on one product. The hope is, according to industry insiders, garment exports will see a pick up in the first half of 2015. The next few months will show if that will materialize.

Then again, there is the pick up in imports of the first quarter (July-Sept) of FY2015. Capital machinery imports are up 53% signalling an uptick in investment while intermediate goods imports are also up a respectable 15%. Is this a favourable sign of an investment turnaround?

The recent sharp fall in the price of petroleum since June 2014 could mean significant terms of trade gain for Bangladesh which could free up foreign exchange resources for other essential imports. But without an import rebound this bonanza will remain untapped.

The global outlook for 2015 gives mixed signals for the Bangladesh economy. The strongest rebound in growth came from the United States, the aftermath of the economic crisis continues to haunt the euro area, and growth in Japan is and will remain modest. Growth elsewhere, including in other Asian advanced economies, Canada, and the United Kingdom, is projected to be solid. Global trade, according to IMF, is projected to pick up ahead of GDP as the global recovery strengthens as trade growth typically outstrips output growth in an expanding global economy. Given a weak recovery next year, the difference between trade and GDP growth is projected to remain below recent pre-crisis averages. Nevertheless, a 5% projected trade growth is expected to provide the tailwinds necessary to give Bangladesh exports the needed shot in the arm in 2015.

As compared to FY2013, the higher expected GDP growth in FY2014 is mainly due to higher growth in Agriculture, Construction, Education, Health and Social Works. With the current state of political tension, and hoping it will taper out by the end of this fiscal year, the projected growth rate (PRI estimates) in keeping with the rebased GDP for FY2015 stands at around 6.4%.

The FY2015 budget has set a very ambitious 7.3 per cent growth target. Given an average incremental capital output ratio (ICOR) of 4.5 for FY2012-14, achieving this would require the total investment to GDP ratio to rise by over 5 percentage points-from 28.7 per cent in FY2014 to 33.8 per cent (new 2005/06 base). If the ICOR and GDI ratio are to be accepted, then the targeted growth rate of 7.3% appears to be highly implausible as the GDI ratio cannot be raised by 5% in a year.

The inherent strength of the economy lies in its macroeconomic balance. The economy continues to have sound macroeconomic fundamentals needed for a take-off into higher growth trajectory. Sound macroeconomic management for prolonged period has yielded (a) higher average growth every decade, (b) low volatility of growth rate, (c) sustainable fiscal deficits through prudent expenditure management in the face of low revenue yields, (d) low internal and external public debt, and (e) stable balance of payments and exchange rates leading to accumulation of comfortable foreign exchange reserves, to name a few.

The less said about the financial sector the better. There are major problems in financial intermediation stemming from deep-rooted ailments in the banking sector - scams, insider lending and non-performing loans, predominantly in state-owned banks. The equity market which remains shallow has been only marginally helpful during 2014 in mobilizing investible resources for fast-growing manufacturing and service sectors.

The political turmoil that plagued the country in FY2014 adversely affected business sentiment and confidence, in addition to affecting consumer confidence. Revenue collection became a casualty. This was clearly reflected in the revenue performance for the year which slowed down considerably, both for domestic-based and import-based taxes. There was a huge shortfall in revenue from targets. Almost 80% of the shortfall came from domestic based taxes, which reflects the slowdown in economic activity and the decline in consumer and business confidence. The NBR revenue growth target has been set at a modest 13.7% in FY2015 which seems to be a prudent move considering the poor revenue performance in FY2014.

The political instability in the country affected official development assistance as well. Slowdown in project implementation adversely affected the inflow of foreign funds into the country. In FY2015, the government seems confident in its fiscal management abilities and has set the budget deficit target at 5% of GDP, despite a seemingly modest revenue target. It is expected that the inflow of foreign financing of the budget deficit would be about 1.8% of GDP in FY2015, which may materialize if the political situation in the country remains stable.

Inflation is moderating, but much slower than one would like. Food inflation, which is more responsive to international price movements, remains stubbornly high though non-food inflation has declined significantly in response to monetary tightening directed towards achieving an annual inflation rate of 6.5% for FY2015. Despite efforts by the Bangladesh Bank, private credit growth, stifled by political uncertainty, barely rose from its lows of 11% throughout the year.

With a view to keeping inflation under control, the central bank has continued its tempered monetary policy stance which is in part the result of restrained growth of private credit, the larger component of domestic credit. It still seems highly unlikely that the private credit growth target of 16.5% by end December can be met.

The Taka-US Dollar nominal exchange rate remained stable in the second half of FY2014 but BB's interventions in the foreign exchange market have not prevented the loss of external competitiveness as the Real Effective Exchange Rate (REER) index showed signs of appreciation due to the protracted higher domestic inflation compared to that of major trading partners, such as EU, North America, China, and India.

Overall exports might have suffered due to a number of reasons: (a) modest appreciation of the Taka, (b) lagged effect from the political turmoil of last year, (c) the image crisis suffered by RMG exports following the Rana Plaza collapse and Tazreen fire incidents, (d) the hike in labour wages, and (e) cancellation of orders by buyers from firms operating in shared buildings (30% of RMG firms operate in shared buildings). There is speculation that some buyers did switch to alternative RMG producing countries like Vietnam and India due to the non-compliance with safety standards by many Bangladeshi firms.

The current account balance of Bangladesh has been positive for most of the years since 2001 due to the superior performance of exports and significant inflow of remittances. A positive balance however also signifies under-investment in an economy like Bangladesh which needs to invest heavily on building human capital and infrastructure.

The improved performance in FY2014 of foreign exchange reserve developments, standing at USD 22 billion as of end 2014, may be attributed to the positive impact of recently announced 6-month monetary policy statement, improved remittance inflows, increase in export as well as a decline in imports (over the past year).

However, reserve buildup is not without its associated costs: First, return on foreign exchange reserves is generally much lower than return on domestic assets in developing countries, and, in case of Bangladesh, it is estimated at less than 1%. Second, a rapid reserve buildup also complicates monetary management for the central bank, as in the case of Bangladesh, for every dollar increase in reserves, Bangladesh Bank injects more than Tk. 77 of high powered money into the banking system. When reserves accumulate at a faster pace than envisaged under the monetary programme underpinning the Monetary Policy Statement (MPS) of Bangladesh Bank, both reserve money and broad money would tend to exceed their targets established under the MPS. This would lead to tensions in monetary management and can potentially undermine the inflationary target of the central bank and the government. Fortunately, monetary expansion was curbed by the slack in private credit growth despite sufficient liquidity.

On the trade policy front, the two main policy changes coming from the FY2015 budget were (a) reduction of supplementary duties on over 700 products or tariff lines, and (b) reduction of input duties for selected locally produced consumer products and medicines. These notable tariff and para-tariff adjustments had the effect of reducing protection on a wide range of domestically produced consumer goods. Simultaneously, a number of high profile sectors were identified for protection support (raising profitability and protection levels) primarily by scaling down customs duty on inputs which are basic raw materials and intermediate goods. These sectors include Alopethic and Ayurvedic medicines, poultry and livestock industry, paper, ceramics, furniture, plastic, baby diaper, and electrical goods.

The problem here lies with granting discriminatory effective protection levels to different industries or products as a result of a protection policy relying on non-uniform tariffs. Consequently, these discriminatory tariff adjustments become subject to lobbying by particular business quarters making it difficult for policy makers to come to a judicious assignment across all sectors.

In terms of FTAs, the challenge for Bangladesh lies in gearing up its economic diplomacy in order not to be left out of some of the emerging mega trade and investment partnerships such as RCEP (Regional Comprehensive Economic Partnership), TPP (Trans Pacific Partnership), and a few other notable ones. Because, just as China will lose out when TTIP (Trans Atlantic Trade and Investment Partnership) and TPP are functional, Bangladesh will lose by being left out of the free trade and investment arrangements that will be exclusive to members of the mega partnerships. However, properly positioning itself for a possible FTA deal with ASEAN+ and under the larger umbrella of FTAAP (Free Trade Agreement of Asia and the Pacific) sometime in the future would remain an option for Bangladesh to pursue.

South Asian countries should take up long-term and sound policy measures instead of short-term steps popular among political parties to counter food price shocks, experts said yesterday.

The observations came at the launch of the book “Managing Food Price Inflation in South Asia” at Policy Research Institute of Bangladesh (PRI) in the city.

PRI Vice Chairman Sadiq Ahmed and World Bank Senior Agriculture Economist Hans GP Jansen wrote the book.

Mashiur Rahman, economic adviser to the prime minister, said the government's response in the past, irrespective of parties in power, was to address only immediate problems.

“One of the reasons was that the government's resources were not only limited in terms of money but also in knowledge to take long-term policies or programmes. Secondly, any political government is receptive to immediate problems, as it can consider implementing a policy only if it can win the next polls.”

“Elections being very unpredictable sometimes, one tends to work towards shaping election results to suit own aspirations rather than working to achieve long-term results pertaining to the economic policies,” he said.

Rahman said the government has introduced open-market sales of staples on a large scale and food ration to government employees to help them absorb the price shocks.

The policymaker urged the development partners to provide assistance where it is required. “Our major donors have turned away from providing adequate resources for irrigation, water resources management, agriculture and power,” he said.

“The government has been lobbying for a long time with the donors for providing adequate resources in the critical sectors. Unless investment resources go down to where they should go you are unlikely to help the development of the country,” the adviser said.

PRI Chairman Zaidi Sattar, while presiding over the event, said prices of essentials are showing signs of resurgence, as has been evident in 2007-08 in Bangladesh. “Prices of commodities from food grains to petroleum to industrial raw materials have since gone up 20-25 percent.”

“This will create an adverse impact on the region, as South Asia has one of the biggest concentrations of poor people.”

He cautioned the government against price hikes, which could be critical in the next few months and that sound policies will be required to address the situation.

Former finance minister M Syeduzzaman said programmes to address the food crisis should be country-specific. He also lambasted development partners for failing to honour words of promises they made to help the poor countries.

Sadiq Ahmed said food price inflation is not a one-off phenomenon rather it has been a long-term challenge. “But most South Asian countries have resorted to short-term solutions to face food crisis challenges like reducing burden on the poor for immediate political gains.”

“They did not take steps to address the issue as a fundamental challenge. They took the challenge as a one-off event and tended to relax when food prices eased down globally.”

“But these are recurrent factors, which have to be met through long-term policies,” said Ahmed.

Jansen said most food prices have not returned to the 2006 levels, especially in the domestic market of any country. “Most South Asian countries are facing higher surge in prices of commodities due to price hike in global market coupled with serious droughts in countries such as Afghanistan.”

He said the price shock in 2007-08 was driven by factors such as policy failures, financial speculation and supply-side constraints. “In 2010-11, supply-side constraints such as extreme weather conditions are active, demand growth is outrunning supplies and there are also policy failures evident.”

Allocation of public investments and sound policies are essential for increasing farm productivity, said Jansen.

Director General of Bangladesh Institute of Development Studies MK Mujeri said the impact of food price rise is most evident on poor people as they spend most of their earnings on food.

PRI Executive Director Ahsan H Mansur said: “The prices of food items would go up globally whether we like it or not. So the prices at domestic level have to be realigned at national level as well as with global prices.”

He urged the policymakers to engage in dialogue with India for ensuring minimum adequate supplies.

Economist Rizwanul Islam said agricultural productivity has to be increased to counter food crisis. “Stocks of food are extremely important, so there must be both local and global efforts for building food stocks for any country.”

Business Administration / Development onus is not on lenders
« on: February 25, 2015, 03:23:07 PM »
Global lenders such as World Bank and International Monetary Fund should not be blamed for a country's failure to adjust their policies to get benefit, said a former central bank governor yesterday.

"The World Bank and International Monetary Fund have not always done bad things only. The success of their guidelines depends on how we deal with them," former Bangladesh Bank governor Salehuddin Ahmed said.

The former governor was speaking at a book launching ceremony in the conference room of Policy Research Institute of Bangladesh (PRI) in Dhaka.

"Many of their advices may have failed, but it does not mean that they were ineffective," he said.

Mashiur Rahman, economic adviser to the prime minister, unveiled the book “Unnayaner Arthaneeti” written by Dr Rizwanul Islam, former special adviser of International Labour Organisation (ILO). The book was published by University Press Ltd.

Ahmed said Bangladesh must carefully handle the growing young population and offer them employment. "Many countries have failed to do this, while some have dealt with the issue and were benefited."

Developing countries have gained very little from globalisation, as all the people could not take advantage of the phenomenon within a country, Islam wrote in his book.

"Globalisation is not a bad thing. We cannot progress by bypassing it. The benefit of it should be distributed equally," he said.

He wrote: "The investment in Bangladesh's agriculture sector has to be increased even if the country aspires to become an industrialised nation. Besides, the number of export-oriented industries has to be increased, as we tend to rely on a handful of sectors."

The book also features issues like development theories, poverty, economic growth, agriculture, food security, employment and income equality.

SR Osmani, professor of Development Economics, University of Ulster, UK, said the benefit of globalisation is not being equally distributed. "We have to find out whether the international political system or a country's domestic policies are responsible."

"The same applies to Bangladesh. When we talk about globalisation, we only call for changes in the global political structure and do not focus on internal policies," he said.

Economist Wahiduddin Mahmud, former finance minister M Syeduzzaman, Director General of Bangladesh Institute of Development Studies MK Mujeri, PRI Chairman Zaidi Sattar and its Executive Director Ahsan H Mansur spoke on the occasion.

Economic growth and poverty reduction through creation of more employment opportunities are important for balanced development, said speakers at a function in the capital Saturday.

The function was held to mark the launching of a book titled, "Unnayaner Arthaneeti", (Development Economics) written by former special adviser (employment sector) to the Geneva-based International Labour Organisation (ILO), Dr Rizwanul Islam, in the conference room of the Policy Research Institute (PRI) at Banani in the city.

Adviser to the Prime Minister on Economic Affairs Dr Mashiur Rahman was present at the ceremony as the chief guest while Prof of Economics Department of Dhaka University (DU) Wahiduddin Mahmud was the guest of honour.

PRI Chairman Dr Zaidi Sattar delivered the address of welcome while Executive Director of the organisation Dr Ahsan H Mansur gave the vote of thanks.

Terming the book very useful and time befitting, the speakers commended the writer's efforts for focussing on the importance of employment creation for poverty alleviation through economic development in his book.

The 220-page book having chapters highlights the significance of agriculture and industrialisation in the process of development. It has also noted some success stories of development in some Asian countries.

Dr Rizwanul Islam said, "It is essential to create jobs for economic growth and poverty reduction while the role of agriculture is very important in reducing poverty and for food security."

He said many people around the globe are yet to reap the fruits of globalisation.

He said that in his book he mentioned the roles and histories of the International Monetary Fund (IMF) and the World Bank (WB). He has also discussed growth, employment and poverty reduction scenarios in Bangladesh.

Director General (DG) of Bangladesh Institute of Development Studies (BIDS) Dr Mustafa K Mujeri said the writer in his book has cited the results of his research works with broad discussions of information that is easily understandable to the readers.

Prof of Development Economics, University of Ulster, the United Kingdom (UK) Dr SR Osmani said the writer has accurately presented different issues in his book an with excellent combination of subject matters, theories and related information.

Former governor of Bangladesh Bank (BB) Dr Salehuddin Ahmed termed the book very important and expressed the view that it can be a textbook for higher secondary and degree level students.

Member of the Trustee Board of the Centre for Policy Dialogue (CPD) M Syduzzaman said this is a very useful book written in Bangla.

Dr Mashiur Rahman said, "I think those who read economics or conduct research on the subject can be benefited much from the book," he said.

Managing Director of the University Press Limited (UPL) Mohiuddin Ahmed, Lead Strategist of International Fund for Agriculture Development (IFAD), Rome, Atiqur Rahman and Assistant Professor of Department of Development Studies of Dhaka University (DU) Shuchita Sharmin were present at the function.

Business Administration / Tracking inflation in South Asia
« on: February 25, 2015, 03:21:44 PM »
In the preface of Managing Food Price Inflation in South Asia, Sadiq Ahmed, vice chairman of the Policy Research Institute, and Hans GP Jansen, senior agriculture economist for the World Bank's South Asia, say the immediate concern of political economy in the region has been to 'stabilise domestic food prices and lower inflation'. This concern is easy to see when one looks at the adverse consequences for poverty reduction. Here is more on the book that compiles articles from 12 contributors.


The surge in global commodity prices during 2004-08 presented a tremendous development challenge to South Asian countries. On a net basis, South Asia is estimated to have suffered a cumulative income loss equivalent to some 9.6 percent of GDP between January 2003 and April 2008. Although much of the income loss resulted from the hike in energy prices, the surge in food prices created a tremendous adverse social impact in South Asia, although India was largely able to limit this increase through a combination of timely interventions using stock management and public food distribution. Net food importing countries like Afghanistan, Sri Lanka and Bangladesh suffered the most from the food price crisis.

The adverse effect of the rise in global commodity prices on macroeconomic balances has been substantial. South Asian countries have seen a sharp increase in fiscal deficits and a worsening in the balance of payments. The rate of inflation surged and for the first time in South Asia's history all countries simultaneously experienced double digit inflation rates, with 20 plus rates in Afghanistan, Pakistan and Sri Lanka. In all countries, the immediate political economy concern was to stabilise domestic food prices and lower inflation in order to limit poverty increases. The share of food consumption in total consumption is extremely high in South Asia, averaging nearly 50 percent as compared to 17 percent in USA. It is even higher for the poor who are also mostly net food buyers and as a result have been hurt most by the increase in food prices.

While much of the immediate policy focus has been on food price stabilisation, especially for wheat and rice, the implications of the various policies used for short-term price stabilisation for longer-term supply response, growth, economic efficiency and fiscal sustainability have not always been analysed or thought through. South Asian countries have also intervened to put in place various safety net programmes to protect the poor. The efficiency and effectiveness of these schemes in terms of outcomes and consistency with fiscal sustainability in an environment of external shocks and tight fiscal space vary significantly across individual countries.

To understand the implications of the food crisis for South Asia a conference was organised in November 2008 in Dhaka. The main objective of the conference was to provide a forum for exchanging experiences and analysis to help policymakers to position themselves on how to respond effectively to be global price crises over the longer term. Representatives from six South Asian countries -- Afghanistan, Bangladesh, India, Nepal, Pakistan and Sri Lanka -- participated in the conference on November 15-16, 2008. Bangladesh as the host country participated with full strength including high level policymakers, political representatives, academics, business, media and the donor community. In addition, experts from the World Bank and International Food Policy Research Institute participated in the conference as resource persons. The conference was jointly sponsored by the World Bank Institute, the South Asia Region of the World Bank and the Bangladesh Power and Participation Research Centre (PPRC). The latter served as the local host for the conference.

The papers included in the book reflect what was presented at the conference by the authors from the region. The book is divided into two parts. Part I provides the regional context of the key issues in managing food prices in South Asia. The first chapter by Sadiq Ahmed provides the macroeconomic context of the food price inflation challenge and implications for policy reforms. The second chapter by Tara Vishwanath and Umar Serajuddin discusses the poverty impact of rising food prices. Chapter 3, written by Mansoora Rashid and Celine Ferre, lays out the issues in designing sound safety net programs in South Asian countries based on experiences within the region and elsewhere. Chapters 4-9 contain six country studies prepared by local scholars. Part 2 also provides an epilogue that cautions against the unrealistic optimism that a decline in food prices implies an end to the global food management problems and the related policy agenda.

Besides the book, the World Bank performed additional analyses of what was happening during the food crisis and potential solutions. The resulting sector report includes an analysis of the potential of regional cooperation to mitigate price increases; and a simulation of the extent to which reactions of consumers and producers to price increases may dampen the negative poverty impact. Important conclusions are that regional cooperation will need to go beyond SAFTA to impact food prices, and that continuing public investments are needed to enable producers to benefit from higher food prices.

The analyses of the book and the sector report are now again becoming increasingly relevant. Global food and commodity prices are on the upswing once more. Food price inflation has surged in all South Asian economics and poses similar challenges for poverty reduction and human welfare as earlier. The relapse of food price increases suggest that the unfinished policy agenda needs to be carefully reviewed and actions taken on a more sustainable basis than simply to try to ward off the immediate political risks associated with rising food prices.

Business Administration / Diversify trade with the US
« on: February 25, 2015, 03:21:14 PM »
The US should allow a duty-free, quota-free facility to the least developed countries in addition to giving the facility to the developed countries like the EU-27, Japan and Canada.

Trade facilitation is stronger than aid, said Dr Sadiq Ahmed, vice-chairman of Policy Research Institute (PRI), in an exclusive interview with The Daily Star yesterday.

He said the developed countries should facilitate trade rather than disbursing aid to the least developed countries (LDCs).

The average duty for the entry of goods from the LDCs to the US is more than 15 percent, which is too high for sustainable export growth.

The US has the right to fix higher duties to protect their own industries, but it is too high for some countries.

He said Bangladesh has been trying to get a duty-free facility to the US for several years now, but it was not allowed by the US government. However, Bangladesh should move along with the other LDCs to pass the bill, he added.

The US can either permit the duty-free access or bring the slab down to at least 10 percent for trade facilitation for the LDCs, said Ahmed, who served as World Bank director for nearly three decades in Washington.

The US is currently the single largest importer of Bangladeshi garment items -- 26 percent of total RMG exported last year.

He said Bangladesh should also not always pursue getting privileges in trade, but diversify its products from the ready-made garment (RMG) products.

“Bangladesh should not spend all its energy in lobbying a duty-free and quota-free access to the US market.”

“We should rather try to increase our export to the US market. Trade surplus with the US in fiscal 2010-11 was six billion dollars, which includes $4.5 billion in RMG export and $1.5 billion as remittance,” he added.

“We must try to increase the figure to 10 billion by diversifying the exportable products,” he said.

Suggesting export diversification, Ahmed said Bangladesh can allow foreign direct investment (FDI) in high-end garment and textile products as the country is mainly strong in the basic garment segment.

Moreover, Bangladesh can manufacture spare parts and technical gadgets for bigger companies, he said.

For example, world famous computer DELL and APLLE have manufacturing plants in China, the largest apparel supplying country.

To attract more FDI, Bangladesh needs to improve the power situation and infrastructure.

The government should also ease policies, lower the tariff structure and the tax and customs systems to attract greater FDI in the country. The private sector also has a role to play for more FDI, he said.

“Bangladesh should fight to create an investment friendly environment. Trade facilitation is necessary to create trade.”

If the government does not sign the Trade and Investment Framework Agreement (TIFA) with the US, it should improve other sectors, like reducing child labour, giving proper benefits to the workers, removing trade barriers and improving the infrastructures, he added.

“All these efforts may create an investment friendly environment, where FDI inflow might increase,” he said.

Business Administration / Transit dissected
« on: February 25, 2015, 03:20:46 PM »
Bangladesh should look for long-term benefits in allowing transit facilities to India and other neighboring countries, rather than eyeing short-term gains for economic development, an expert said.

“It's a major endeavour and it will help modernise Bangladesh over the longer term,” said Dr Sadiq Ahmed, vice chairman of think-tank Policy Research Institute of Bangladesh (PRI).

“Along with transit, traffic and people will come. Our whole country will be internally and regionally connected. Port services will be boosted. Tourism will pick up. So the multiplier effect of the transit is large,” he told The Daily Star in an exclusive interview.

India and Bangladesh have been discussing the issue of transit for long. The issue has revived of late, as New Delhi wants to reach out its eastern states through Bangladesh.

The issue of transit is supposed to be on top of the agenda when Indian Prime Minister Manmohan Singh visits Bangladesh next month.

The issue has apparently divided Bangladesh politically, as critics of transit think Bangladesh will lose more whereas India will achieve more.

But Ahmed said: “We should approach the issue of transit from the perspective of how it is helpful to Bangladesh. What India is getting is totally a different thing. There is ample evidence that Bangladesh will gain from transit. To me that is the critical issue. If India, or other neighbours, happens to gain more, then that should not be the reason to deny transit access. That is a negative approach.”

Ahmed is leading the economic analysis of a government team that is analysing various technical issues of transit, the economics of transit and how economic development is related to transit.

“As a citizen of a poor country, in my mind, this is all about modernising Bangladesh,” said Ahmed, who also taught economics at Dhaka University in 1974.

He said the government-sponsored committee working on the transit issue is a good one and is looking at transit as a multilateral issue, not a bilateral issue.

“Benefits will be maximised if we can include other countries. Even we have to look beyond the south Asian sub-region and include China and Myanmar. I would like to think of it as an instrument of development and open access to other countries. Similarly, Bangladesh must have access to India, Nepal and Bhutan. It must be a uniform policy.”

He said the background work done for the transit agreement for the sub-region of Bangladesh, Bhutan, India and Nepal is quite substantial. “For the first time, the government is adopting a comprehensive approach. The technical team working on the transit issue is conducting a rich and detailed analysis. This work provides a strong analytical basis for conducting negotiations on the various transit related protocol agreements.”

Ahmed, who held several top positions in the World Bank before taking early retirement in 2009 to work on Bangladesh development issues, does not believe that there is any scope for political fallout if Bangladesh offers transit to India. “The whole concept that we are giving away our country to India is totally negative. Transit is a hugely important instrument for development of Bangladesh. It is similar to the export of services and not just to India but to other neighbours. ”

He said Bangladesh should not eye short-term gains out of transit. “We have to go for the long-term gains.”

“There should not be too much focus on only transit fees, as the tariff is only a small part of the whole picture. The real picture is much bigger. Transit will really be a tool for economic development. It helps us exploit our comparative advantages provided by nature in terms of open access to sea and as the gateway between South and East Asia.”

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