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Consumption fuels economic growth

Sima Rani Dey and Md Monirul Islam | Published: May 08, 2019 20:58:54


Generally, consumption refers to the use of goods and services by households while consumption expenditure is the purchase of goods and services for use by households. Consumption contributes to the growth of an economy as it creates demand of the goods and services. To satisfy this demand, people spend money, which is then added to the economy of the country. To mitigate the consumption demand, consumers as labour forces work to earn wages. Also to satisfy the demand of consumers, producers run their businesses, contributing to economic growth. Thus, consumption becomes pivotal to economic growth.

Bangladesh is a market-based emerging economy with a large population. This population dividend helps to create massive demand for consumption. This is also the reason why the economy is hardly affected by external shocks, such as rise in prices of fuel and other items globally.

However, internal shocks lead to inflation. Most notably, taking into account the consumption tendencies, some fraudulent traders hoard goods ahead of Ramadan and festive times, resulting in spikes in the prices of essentials. Inflation has also occurred following announcements of increments for government employees, rise in transport fares, increase in local fuel prices etc.

This inflation is highly detrimental for any economy including Bangladesh as it causes devaluation of money and loss of purchasing power for consumers. So, in a sense, inflation indirectly affects the wheel of the economy by slowing down domestic consumption of essentials.

On the other hand, less demand from consumers discourages supply from the producer's side. This can discourage productivity. The month of Ramadan, in this case, may be the notable example of consumption expenditure in Bangladesh. In this month, the inflationary pressure on essential goods remains high due to the increase in domestic consumption.

In this backdrop, a study was conducted by Bangladesh Institute of Governance and Management (BIGM), Dhaka in 2018 to investigate the relationship between aggregate consumption expenditure and economic growth of Bangladesh by using time series data over the years 1980-2016. The study employed an Auto Regressive Distributive Lag (ARDL) economic technique by choosing the best possible lag for the two models.

The study results revealed that statistically significant association exists between consumption expenditure and gross domestic product (GDP) in the context of Bangladesh. In addition, internal dummy (1988's flood and 1998's flood) exhibits negative impact on GDP but the external dummy (2008's recession) was not significant at all in any models.

The study found that GDP and consumption expenditure have the most elastic impact on each other in the long run. And a 1 per cent increase in real GDP could lead to an increase in the consumption expenditure by 0.76 per cent. Also, a 1 per cent increase in consumption expenditure could increase GDP by 0.57 per cent. According to the Granger non-causality tests, consumption expenditure has the unidirectional causal relationship with GDP. On the other hand, bidirectional causality also exists between consumption expenditure and capital investment. The causality results connote that consumption expenditure encourages GDP growth. In fact, consumption expenditure leads to an increase in investment as well.

Considering technology constraint and consumption pattern, in general, the government should consider monetary and fiscal policy that is consumption enhancing. Since the domestic market is quite large and the economy is demand-driven, a jump in domestic consumption can boost overall production. Besides, fiscal and monetary policy inducing consumption will have a positive impact on growth in the context of Bangladesh. Demand enhancing growth can help technological innovation and domestic industrialisation through the development of the consumption based industry.

The long run curve of Bangladesh is relatively flatter. This provides an opportunity to apply consumption enhancing policy, while keeping a watchful eye on the value of money and budget deficit.

 

Sima Rani Dey is Assistant Professor at Bangladesh Institute of Governance and Management (BIGM).

simabd330@gmail.com

Md. Monirul Islam is Assistant Professor at Bangladesh Institute of Governance and Management (BIGM).

monirul.islam@bigm.edu.bd

 

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