A critical overview of five decades of Bangladesh economy

| Updated: July 04, 2021 20:40:59

A critical overview of five decades of Bangladesh economy

Bangladesh has made some very remarkable strides in economic development over the last five decades enabling the country transiting from low income country to achieve the status of lower middle income country in 2015. The country is on track to leave the united Nations list of least developed countries in 2024.

Bangladesh is now considered one of the fastest growing economies in the world. Bangladesh has had an annual growth rate of Gross Domestic Product (GDP) over 6.0 per cent since 2011. According to the International Monetary Fund (IMF), GDP growth rate remained positive at 3.8 per cent in 2020 despite the  Covid-19 pandemic, and is expected to rise to 4.4 per cent in 2021 and 7.9 per cent in 2022.

The Bangladesh government's vision 2041 stipulates to eliminate extreme poverty and secure upper middle-income country status by 2031 and achieve the high income country  status by 2041. But the country faces serious infrastructural deficit and a highly concentrated basket of exports and a massive reliance on overseas remittances. An infrastructural deficit, in particular,  can pose a serious challenge in accelerating the growth prospects of the country.

Despite all the success stories, the major key development indicators provide a rather different picture. For example, foreign direct investment (FDI) remains low at about 1.0 per cent of GDP; remittances account for 5.6 per cent of GDP; the Gini coefficient (measure of income inequality) is 0.32; percentage income share of the richest 10 per cent  stands at 27 per cent while the bottom 40 per cent account for 21 per cent; working poor at PPP $3.20 a day (per cent of total population) constitutes  45 per cent;  percentage of population  in severe malnutritional poverty accounts for   17 per cent; 36 per cent of children under 5-yrs of age suffer from malnutrition causing severe to moderate stunting and underweight negatively impacting on the ability to achieve their full potential with the consequence on their educational achievement and productivity; youth unemployment remains at 12per cent; latest HDI ranking positions the country as  133rd ( out of 189 countries).

Therefore, it is important that all these issues are examined   within a much broader economic analytical framework by using appropriate theoretical perspectives to make an informed understanding of  the dynamics of Bangladesh's economic growth and development. To pursue this endeavour, this scribe has decided to do so by providing  an analytical review of the book written by  Professor Rashed Al Mahmud Titumir  entitled "Numbers and Narratives in Bangladesh's Economic Development,"  published this year by Palgrave Macmillan in Singapore (Page-271, ISBN: 978-981-16-0657-1).

Rashed Titumir is Professor of Economics in the Department of Development Studies at Dhaka University. His book undertakes  what the author describes as a reality check  on the current state of Bangladesh economy  based on three interrelated issues--  stability, transformability and sustainability keeping in view the country's intended journey to become a developed country. To put it simply, the author undertook an empirical investigation of whether sustained growth can and will continue to enable the country to achieve its goal to become a developed country by 2041. Also, the author examines how the growth trajectory has enabled the country to structurally transform in comparison with East Asian successful economies.

 Finally, whether there is  limit to growth or the growth trajectory can be sustainably maintained  for Bangladesh is also further analysed. In this context the author fails to mention and articulate in the context of Bangladesh the issues surrounding the "middle income trap" which appears to be a quite all pervasive experience for most middle income countries given that Bangladesh intends to become a developed country by 2041. In essence, as the title of the book implicitly suggests it is an endeavour to examine how the numbers provided by the authorities correspond to the reality on the ground. This can then further be used to project the future growth trajectory for the country.

THEORETICAL PERSPECTIVE: A great degree of pessimistic views were expressed about the economic future of Bangladesh at its birth in 1971 by many Western observers, notwithstanding the infamous comment attributed to Henry Kissinger. In fact,  even in the late 1960s,  a deep pessimism about Asian economic prospects  in general was voiced by the Swedish economist Gunnar Myrdal  in his 1968 book "Asian Drama: Asian Drama: An inquiry into the Poverty of Nations", published by Pantheon in New York in three volumes.

 This view was quite widespread at that time among most Western economists. In the half century plus time period since then, Asia has witnessed a profound transformation in terms of the economic progress of its nations and the living conditions of its people  including Bangladesh.

In fact, sustained growth in living standards in North American and European countries is an phenomenon for about one hundred plus years. So, there is nothing surprising about what has happened or is happening to Asian countries including Bangladesh. However, there was no underlying fundamental rationale  to describe Bangladesh as a "test case" for economic development as opined  by some Scandinavian economists. Historically, across a range of countries around the world including those of Europe, economic growth has taken hold at different points in time since the  mid nineteenth century. In Asia,  Japan since the end of the World War II,   South Korea since the 1970s, China very late 1970 and Bangladesh early 1990s.

National borders are the places where different political and economic institutions begin and end. It has long been conjectured that differences in these institutions are fundamental determinants of long run economic success-- an issue the author has  embraced in his analytical approach. Mancur Olson, indeed,  provided an outline why some countries do better than others in the context of how institutions help economic growth. His book titled "Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships" was published by Basic Books in New York. It would have been helpful to better understand the issue if the author (Titumir) could have provided a theoretical framework along the line Olson proposed.

Within the above context the author appears to argue that the interplay between politics and economics or more precisely the interplay between political and economic institutions has not in general been taken into account in analysing Bangladesh's economic growth trajectory. Such a lack of understanding generally led to describe  Bangladesh's  economic success as a "development surprise"; "development paradox" or "development conundrum" despite the lack of good governance. It appears implicitly the author has accepted institutions as some sort of inputs in a production function, but in reality socio-political compromises established in some historical context determine how an economy functions.

In this context one can follow through  James Buchanan's public choice theory. Buchanan rejects the idea that participants in the political domain such as public officials (i.e. elected public representatives) and public servants have some altruistic motives such as common good rising above their own self-interest. Instead, they are guided by their self-interests. Then there are a large number of other interest group who also want to advance their interests. Buchanan provides us with a framework how to undertake the economic study on non-market decision making or to put it simply the application of economics to politics. Lionel Orchard and Hugh Streeton discussed the issue in article "Public Choice" published in Cambridge Journal of Economics in May, 1997.

Titumir then further argues that high growth rates over time has been used to justify growth without functioning institutions. Such a logic has naturally led to make an  assertion of the primacy of economic growth over an inclusive government. The author further argues that such claims are not validated by theoretical underpinning or empirical results. As such only a critical scrutiny can challenge these claims by examining the political and economic dynamics by focusing on the pattern of growth in the last decade.

The concept of institutional complementarity plays an important role  in the comparative study of economic growth.  But such a view has been criticised for being too static and too functionalistic unable to explain institutional change. Therefore, a theory of institutional change is needed to understand the interplay between institutions and growth. 

The author then raises two very pertinent questions - (i) do GDP figures of Bangladesh corroborate with national income accounting; and (ii) whether growth is transformative and environmentally sustainable given the factors upon which growth is reliant. Then the author makes an observation that available macroeconomic indicators such as saving, consumption and the balance of payments suggest that official data on the GDP growth rate are inflated.

Therefore, a traditional economic analytical  approach to look into Bangladesh's economic growth could have  helped to further validate the arguments presented in the book.  That requires to undertake  economic growth accounting  and that may necessitate to look through the neo-classical growth framework, in particular of Solow model. Robert M Solow outlined the model in the article titled "A Contribution to the Theory of Growth" in the Quarterly Journal of Economics in February, 1956 [ 76 (1), 65-94].  Also, economic development accounting can use the logic of Solow's growth accounting. To see the link, one has to refer to the production function of Cobb-Douglas type. Charles W Cobb and Paul H Douglas illustrate the function in their article titled "A Theory of Production" in American Economic Review (18, supplement;, 139-165) in 1928. Within this framework total factor productivity (TFP) induces capital accumulation K, hence what is attributed to K, might more naturally be attributed to L in a country like Bangladesh.

That is because in a country like Bangladesh with highly labour intensive production process, labour (L) share in TFP is significantly much higher than K. That clearly indicates the enormous surplus being extracted from labour to build the country's capital stock as reflected in the declining wage share in GDP. According to the International Labour Organisation (ILO) labour income share as a percentage of  Bangladesh GDP declined from 45.1 per cent in 2008 to 42.2 per cent in 2017.  Paul Samuelson in his article titled "Paul Douglas's Measurement of Production Function and Marginal Productivities" in the Journal of Political Economy in  October, 1979, [87 (5) Part 1, 923-939] indeed argued that an aggregate production function ( i.e. the C-D production function) may be no more than the outcome of an  income distribution identity.

REVIEW OF THE BOOK: The book, "Numbers and Narratives in Bangladesh's Economic Development," is divided into eight chapters covering agriculture, manufacturing, finance, education, health and also delving into poverty and inequality and a concluding chapter.

The author in the first chapter provides an overview of the growth trajectory fuelled by consumption on the demand side and the increased flow of  labour including female labour to the urban sector on the supply side. But it is political settlement that set the direction of policy development and implementation, thus creating a rent seeking economy which the author identifies as the major bottleneck for economic progress.

He further argues that significant economic growth has not resulted in any significant change in the quality of life -- I presume  he meant for the majority of people. Also, he termed economic growth achieved in Bangladesh as jobless growth as reflected in higher concentration of jobs in the informal sector. Now the pandemic has further worsened the employment situation. He also raises the questions on the reliability published data on growth, poverty, inflation and other economic indicators.

The second chapter provides a critical overview of the agriculture sector which contributed 12.68 per cent to GDP but 38.58 per cent to employment in 2019. Such an incongruity between the sector's contribution to GDP and employment, as the author points out, is due to a slower pace of structural transformation in production method  used in agriculture requiring more labour. This is also an indication of low labour productivity in the sector.

The author recognises that the green revolution has brought in some technological progress in crop production, but nothing much  has happened after that in terms of technological progress.  The author also points out other major impediments that the sector faces to realise its potential such as declining productivity along with increased land fragmentation, soil degradation, rising costs of production. Also, environmental and productivity consequences of fertiliser use are highlighted.

 He suggests a diverse crop basket for increasing farm income.  Technological progress has been identified as a source that can reverse the declining trend in agricultural productivity. It is also pointed out that the long supply chain with multiple intermediaries involved in the process  contribute to  rising food prices while farm gate prices remain low. The issues raised in this chapter would help policy  development for a more productive and  greener agriculture in the country.

The author focuses on the manufacturing sector in the third chapter. He argues that the sector remains largely  geared towards export expansion but heavily relies on only one industry-- RMG to achieve the objective instead of targeting a huge domestic market of about 170 million people. Also, the RMG industry is heavily reliant on imported inputs and fiscal support. The fragility  of dependence on one dominant industry for export expansion has been exposed during the pandemic.

 At the same time micro, small and medium enterprises have failed to receive sufficient incentives from the government or help from financial institutions. The sector is marked by low wages and also failed to generate sufficient employment opportunities. He argues that a more diversified manufacturing base is needed and to support that endeavour investment in education and training is also needed.

In this context it can be argued that the incentive structure  that is in place now for the manufacturing sector  enables firms and politicians to pursue strategies that are "individually first-best" but collectively suboptimal.

Fourth chapter of the book deals with banking and finance, rather banking more precisely. The banking industry in Bangladesh has a long history of debt default, a situation that has been  getting worse over time. Such a situation requires continuous recapitalisation to keep the banks afloat. The stress created in the banking sector easily flows on to the capital market and vice versa. To remedy the situation, major regulatory reforms are suggested which implies the existence of systemic problems in the existing regulatory regime which the author did not explore in the book.

Fifth and sixth chapters deal with education and health care respectively. Both are considered as merit goods  in economics. A merit good is a good which when consumed provides external benefits or more precisely the consumption of a merit good generates positive externality, therefore there is a market failure. The market failure is caused by a divergence between marginal private benefit (MPB) and marginal social benefit ( MSB). Therefore, to eliminate this market failure and to provide the market with the socially optimum level of output, the government must intervene to correct the difference between MPB and MSB. Furthermore, if externalities are not taken into account, as is likely to be the case in Bangladesh, and if merit goods are supplied exclusively by the free market, then there will be under-supply resulting in net welfare loss.

The author recognises that although Bangladesh has made remarkable strides in primary enrolment, there are higher rates of drop out at later stages. The education system has failed in creating skilled labour force and the quality of higher education is considered not at a desirable level. This observation has further been reinforced by the recent publication of the ranking of universities around the world. The author recommends policy reform to revamp the education system without outlining what those policy reforms could be, except suggesting increased budget allocation. It is generally recognised that the problems facing the education sector go beyond just money.

The author has correctly pin-pointed that the dualistic health care system has resulted in unequal access to health care in general and in rural and urban areas in particular. To remedy the  situation a universal health care system is recommended with adequate budgetary allocation  (current health spending account for 2.4 per cent of GDP).

Overall the author critically examined the inadequacies both in the education and health care system. The author could have further strengthened his argument in favour of the public provision of education at all levels and a universal health care system using the merit good argument.

In chapter seven, the author argues that reduction in poverty level has slowed down in recent years. Covid-19 has added a rise in poverty levels. Income inequality has also been on the rise  as well as decreasing return on labour relative to that of capital has further aggravated the income inequality situation in the country. In fact, as mentioned earlier, labour income as a share of GDP has shown a declining trend between 2008 and 2017'

 So,  the benefits of economic growth mostly appear to be trickled up rather than trickled down as reflected in income distribution. The author suggests a four pronged approach to address the worsening poverty and inequality situation-- provision of public goods; redistributive actions; micro-financial interventions and structural reform.

 The concluding chapter provides a summarised version of the chapters discussed earlier but also makes some observations on political settlement with reference to the current political environment in the country and ways to move forward to achieve the goals of an egalitarian society.

At a broader level the book has brought to the level of comprehension, but not to the point of resolution or synthesis of the issues surrounding the current economic situation facing the country. The book also did not deal with the role of the bureaucratic state apparatus in the overall design and implementation of development policies and their implementation, especially their role in public investment and procurement in general and the provision of public goods in particular.

The book carries the long tradition of academic discourse in economic development with a fair degree of reliance on political economy perspective. The book remains a reference point for further debate on the issues surrounding economic growth and  developments in Bangladesh since the independence  of the country in 1971.  The book could be a useful reading to stimulate discussions in both undergraduate and post-graduate levels on   economic development  of Bangladesh at universities in Bangladesh. It also remains an important reading for all those who are interested in a critical evaluation of the interplay of political and economic forces in the country in shaping its growth trajectory  since the independence.

Muhammad Mahmood is an economic and political analyst.

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