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Bangladesh is now considered one of the most remarkable economic success stories in Asia. A country soon after its birth in 1971 was described as an "international basket case" by Ural Alexis Johnson, the former US Under Secretary of State and the country also faced nearly insurmountable challenges. Bangladesh now with a GDP of US$ 409 billion ranks as the 37th largest economy in the world with a per capita income of US$ 2554. It is to be noted that GDP is an aggregate country level measure of income, it does not necessarily tell how an average individual benefits from GDP growth.
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. In pursuing such a vision, Bangladesh needs to be careful that the country does not get stuck into the lower middle income trap like India and Indonesia to enable the country to have a smooth transition towards a high income country.
Over the last decade and a half Bangladesh averaged an annual growth rate of 6.5 per cent. The growth has largely been driven by RMG exports and overseas remittances. But that is not the whole story, over the last 30 years or so tremendous social changes have taken place in the country which have helped propel the country's rapid economic transformation, in particular starting with the increasing empowerment of women.
According to the World Bank (WB), 36 per cent of women aged 15 or over were economically active in Bangladesh compared to 21 per cent in India in 2019. 71 per cent of women above the age of 15 are literate in Bangladesh while 66 per cent are so in India.
Despite high population density, decreasing arable land and frequent natural calamities such as cyclones and flooding, Bangladesh has made significant progress in achieving food grain self-sufficiency and reducing poverty. According to the latest Global Hunger Index, Bangladesh moved up by 13 notches to the 75th position among 107 countries. The value of agricultural output has increased faster than most of Bangladesh's peers at 3.54 per cent per annum in the two decades from 1999-2019.
Bangladesh also stands out among least developed countries in terms of life expectancy, child mortality and access to water and sanitation. The literacy rate including female literacy has increased substantially over the last three decades, so much so that the country has done better than many middle income countries. Bangladeshis now enjoy an average life expectancy of 73.4 years, higher than in India and Pakistan.
According to the Household Income and Expenditure Survey (HIES) Report, 2016, the proportion of people in poverty fell from 31.5 per cent in 2010 to 24.3 per cent in 2016. The percentage of population living in extreme poverty also fell from 17.6 per cent to 12.9 per cent during the same period.
Bangladesh will officially graduate into lower middle-income country in 2026. This economic transition is primarily a result of Bangladesh's ability to harness the opportunities created from the emergence of global production network and global value chain since the mid-1980s.
Much of Bangladesh's economic growth in large part continues to be driven by exports and continuing remittance inflows which now accounts for 6 per cent of GDP. Since the mid-1980s, it is estimated that more than 10 million Bangladeshis (6 per cent of the total population and close to 10 per cent of working age population in the age group 15-64) now work overseas whose remittances now constitute the single largest contribution to foreign exchange earnings of the country. During the fiscal year 2020-21, Bangladeshi workers abroad sent US$24.77 billion.
Exports from Bangladesh have recorded an annual average growth rate of about 11 per cent since 2001. Bangladesh exported US$40.5 billion in 2018-19 but that declined to US$33.7 billion in 2019-20, a decline of 16.8 per cent from the previous year due to slow down in global trade flows caused by the Covid-19 pandemic. However, exports bounced back in 2020-21 to US$ 38.75 billion. The Bangladesh government has set a target for exports amounting to US$51 billion in the fiscal year 2021-22.
For more than forty years Bangladesh is heavily reliant on relatively low value added ready-made garment (RMG) for fueling its exports growth accounting for about 84 per cent of merchandise exports now. Such a very high dependence on one single product RMG for exports (SITC841-846) and a very limited number of markets leave Bangladesh vulnerable to external shocks. Bangladesh has also failed to use RMG as a springboard to diversify into more value added products as many other East Asian economies did in the past.
More importantly Bangladesh so far even failed to diversify within the RMG industry from low value added products to high value added products. The economic complexity of Bangladesh trade slipped from 77 in 1991 to 123 in 2019. The exports-to-GDP ratio also fell from 20 per cent in 2012 to 15 per cent in 2019.
The RMG industry now faces challenges from other cheap labour alternatives in other parts of the world and increased automation. The country's graduation to become a lower middle income country will cause to lose duty free access to developed country markets.
While Bangladesh also has pharmaceutical, footwear, processed food, jute goods and ship building industries, they are primarily domestic market focused and their contributions to exports remain fairly marginal. Research studies suggest that Bangladesh enjoys competitive advantage in RMG, jute goods, tea, sea food and leather, but only RMG has further enhanced its competitiveness over time while others stagnated.
Bangladesh is also the only country in South Asia that continually increased the manufacturing share of GDP as measured by the widely used measure of "share of value added by manufacturing" in GDP over the last twenty years . But Bangladesh still remains a capital scarce country. Inward foreign direct investment (FDI) as percentage of GDP stands at 1.1 per cent.
Despite such successful industrialisation, Bangladesh has experienced sharply deteriorating terms of trade (ToT). Between 1980 and 2019, the average value of ToT for Bangladesh with the base year 2000 stands at 99.91 per cent with a minimum of 57.47 per cent in 2011 and a maximum of 162.26 per cent in 1985. The latest value in 2019 was 65.4.
Bangladesh's lack of competitiveness is further reflected in the current account balance as a percentage of GDP. Between 1997-98 and 2019-20, the average value of current account balance as percentage of GDP for Bangladesh stood at 0.6 per cent. This figure reached an all time high of 3.3 per cent in 2009-10 and a record low of -3.7 per cent in 2017-18. The data clearly indicates Bangladesh's lack of international competitiveness.
According to the World Economic Forum's Global Competitive Index for 2019, Bangladesh ranked 105th, down two points from the previous year. The role of technology and human capital is well recognised in achieving economic growth and both are inter-related. According to the World Bank Human Capital Index (HCI) for 2020, Bangladesh slipped from 0.48 in 2017 to 0.46 in 2020.
In terms of the quality of education Bangladesh's global ranking was 84th while the neighbouring country India ranked 29th in 2017. These are not very encouraging signs for the country. What the WTO describes as "technology goods", their share in total exports from Bangladesh usually accounted for less than one per cent over the last several decades. There is a strong correlation between the quality of education and economic performance. South Korea and other economically successful Southeast Asian countries have managed to excel in this respect.
To face the challenges Bangladesh will have to boost the productivity of its abundant labour force with investment in productivity enhancing skills development, efficient infrastructure, machinery and technology supported by a well functioning and efficient financial system. Bangladesh will also need to rebalance the economy towards domestic demand while export orientation remains in place.
The country also has a cumbersome business environment, it ranked 168th in 2020 out of 190 countries according to the World Bank's Ease of Doing Business Index. Infrastructural deficits cause long delays in the movement goods to and from the ports. Bangladesh is also an energy deficit country. This will seriously hinder the country's effort to achieve rapid industrialization to diversify its manufacturing base.
Also, bureaucratic delays and cumbersome bureaucratic processes cause increases in transaction costs for exporters and importers. Therefore, it is not surprising Bangladesh has not been much successful in attracting foreign direct investment (FDI) which has averaged only 1.1 per cent of GDP over the last two decades. According to the Transparency International Bangladesh ranked 146 out of 180 countries in terms of the corruption perception Index in 2020.
Rural population in Bangladesh as a percentage of total population is estimated to be 65 per cent. Agriculture contributes 13 per cent to GDP but employs 40per cent of the workforce in the country. But it is the services sector that dominates economic activity in the country accounting for 55 per cent of GDP but employs 39 per cent of the workforce.
The services sector's growth has been unsustainable and unpredictable. The sector has been unable to absorb a very large number of educated Bangladeshis, not to speak of a vast number of unskilled and semiskilled rural unemployed. In fact, sustained growth in per capita income may not be feasible in Bangladesh as a developing country relying on a growing services sector and bypassing manufacturing.
According to the HIES Report- 2016, the rate of poverty reduction has slowed down between 2010 and 2016 and during this period income inequality has increased. The report in particular highlighted the dire situation faced by the rural poor. Poverty continues to be largely a rural phenomenon in Bangladesh and it has remained so since the independence of the country.
Although population growth rate decreased to 1.1 per cent, the country remains very densely populated with a population density of 1,278 persons per square kilometre. It is estimated that the country is losing 1 per cent of arable land a year to give way to housing and other purposes. Climate change also poses formidable risks and Bangladesh ranks as 7th most vulnerable country in this respect.
While the country has made steady progress in poverty reduction, poverty has always remained much higher in rural areas as reflected in all HIES reports published since 1974. Extreme poverty in rural areas is three times higher than in urban areas. Covid-19 has now exacerbated poverty by pushing millions who had escaped poverty back into it.
Despite achieving impressive economic growth over the last two decades, one could be forgiven for believing that people in the country are doing well. This is also the message coming from the government -- of the 'trickle down effect' from high growth momentum.
While the HIES report- 2016 gives a very buoyant picture in its interpretation of the income data just focusing on the nominal values, the real picture is somewhat different. In fact, household real disposable income appears to be stagnating or in some instances even declining.
Using the HIES data, monthly average household income when adjusted for inflation (using the Consumer Price Index) for the country as a whole between 2005 and 2016 remained almost the same. The rural average household income increased by about Tk 200.
This increase in income for the rural households can be largely attributed to overseas remittances. But the average urban households experienced a decline in its average monthly income by Tk 950.
This continued weak income growth, or even the decline poses a particular risk to the consumption outlook. The problem can compound further for the indebted households. Any reasonable sweep of history will tell us there is no guarantee even with the country's graduation into a middle income country will improve anything in the near future. The Covid-19 pandemic further added to the current economic woes.
Despite all the economic achievements, Bangladesh still relies on foreign aid. According to the Organisation for Economic Co-operation and Development (OECD) Bangladesh received US$5.5 billion in foreign aid in 2019.
Bangladesh faces challenges of altering the course to reflect on the shifting comparative advantage in the face of resistance from vested interests that have grown rich and powerful from the status quo. But such a growth performance can eventually be stalled if those vested interests are not reined in.
The growth process also does not have an automated impetus propelled by time. As Bangladesh celebrates its economic achievements at the 50th year of independence, the country faces an economic environment that may be unfavourable over the coming decades.
A foresighted economic strategy based on pragmatic realism combined with its own vision of the economic future is needed to keep the growth momentum to continue. Successful implementation of such an economic strategy will depend on political will, institutions to establish good governance, and economic capacity of the country.