Economic transitions rarely take place at any particular point. One exception to the rule, however, is August 15, 1975. It was a turning point for the Bangladesh economy. Since then the economy was set on a different path altogether. Not going into the merits or demerits of what was the appropriate path, I would see that as a very distinct break.
As the economy took shape in its direction, there are no significant reverses in its trajectories. The process has remained continuous. In fact points of transition or change manifest themselves over a period of time through a process. Now, what were the critical elements in this period?
The pre-75 period was associated with dominance of the state over the economy. What happened since then is the crucial point to understand - a very definite move through the process of strengthening the private sector and to put it on the trajectory through the construction of capitalist mode of production.
The crucial transition points clearly emerged over this period in terms of the relative power and capacity of the state and the private sector to in fact respond to the turning point which had been set for the economy. In the immediate post-1975 period, the main process, which was set in motion, was to construct a business class or capitalist class. Prior to this, we had an underdeveloped class.
And the one policy which was significant about the pre-75 period was the fact that the state was going to be the dominant player. There was a decision if that class developed, it would not develop through a process of state sponsorship.
The critical element of the period after that was the process of state-sponsored capitalist development. And the critical agents of the state sponsorship process were the development finance institutions which began to pump money in a reasonably indiscriminate way into the hands of a first-generation entrepreneurial class. This process continued virtually through the 1980s. So, the regime change from 1981 from one general to another did not really change the trajectory. It merely perhaps accelerated the pace. Because there was still, up to that period, a reasonably active state sector and there was an attempt in that interim period to attempt to see if the state sector performed reasonably well.
What was significant in the post-1982 period was the progressive demobilisation of the state sector and the constant emphasis on the private sector. In this period, the debt default process was set in motion. The consequential outcome was pushing resources into the hands of the first generation of the privileged class, which would be classified as a form of crony capitalism taking root at that particular moment. And the consequence was quite massive debt default.
Between 1981-82, Akhtar Mahmood did the first investigation of Shilpa Bank and Shilpa Rin Shongostha which showed that taking out of the equation all debt rescheduling, you were recovering loan at the rate from 5-10 per cent of total loans distributed. And by the time Binayak Sen came into the scene to do the third of these, that still remained at the levels of which recovery had been going on. Over the period, the defaults had become massive and cumulative. In this process, there was unrequited and unregulated resource transfer from the state sector to a select class of individuals in an attempt to build themselves up as capitalists.
From 1982 onwards, there was the first emergence of the readymade garments industry. What was significant about the RMG industry was that it was a parallel process which was not really contingent on the state's effort. It was already dependent in the form of what I and AR Khan had classified as a regime of export protectionism where, under the Multi-Fiber Arrangement, a whole class of people was given access to reserve markets. They could access the market in a protected way. At that time, this was running a tailoring establishment outsourced by the Koreans and others. But this was a parallel phase and it was functioning in a way autonomous of the state though the state was certainly giving certain supportive policies. This was the agenda of the 1980s.
By the time we transitioned into the second democratic wave in 1990-91, we had already the emergence of a fledgling capitalist class which had been built up through state financial institutions. You had the emergence of an export-oriented, more market-driven parallel class.
The 1990s sustained this process. What was interesting about this period was two significant trends: one was by the end of the 1980s and the beginning of the 1990s; the development finance institutions had virtually collapsed because of the default loans. Binayak Sen was investigating the attempt to recover these loans and there was virtually no financial recovery when you were going to the courts. The courts were completely dysfunctional. And eventually, the financial institutions collapsed.
We went into a process of investment financing by commercial banks at that period through the 1990s. Initially it was the state commercial banks, which was a very dangerous trend because it was a case of mismatching maturities where you are taking short-term borrowers' deposit and you are using it for long-term lending which has very dangerous consequences. It was rapidly driving the state banks into bankruptcy.
So, this again meant that we had the emergence of the private banking sector. This was a very significant transition point. This was the alternative source of bank financing for the entrepreneurial class, particularly for the garments industry which was hitherto emancipating itself from state control and developing autonomy in its reproductive process. By the time we came to the end of the 1990s, we had a significant private banking sector emerging; the state financial system was now in a comprehensive collapse because the state commercial banks were entering into high levels of debt default. But also, you now had a much stronger emerging garment sector which was an autonomous growth process built around market competitiveness in the global system and which was progressively going in for backward linkages.
When we entered the 21st century, we had the emergence of an independent entrepreneurial class that had grown up without dependence on the state which was coexisting with the state-driven capitalist class, a by-product of the default culture which had now become a self-perpetuating process. The emergence of the autonomous capitalist class was a significant part of the 21st century. For the first time in our history, you have got a capitalist class which can reproduce itself without the patronage of the state. This was a very significant development because they were in a position to reinvest their profit which mostly go to the banking system.
This, however, led to a very dangerous trend which persists event today. You were becoming heavily dependent on bank financing. And this bank financing is coming not from the owner's capital but from the deposit of millions of small scale depositors. So, there was a transfer of resources from small depositors to big capitalists and particularly that was not being repaid. And it was leading to a massive redistribution of income from the less resource-endowed to the highly resource-endowed without any sense of obligation that they actually had to be paid back.
Now a strong independent class has moved away from garments, a dominant export sector. You now have a strong steel, construction and shipbuilding industries and a variety of other industries which have emerged as autonomously competitive ones and not really dependent on defaults to sustain themselves. But these forces are having to contend for competing in a progressively unequal market play. Because you now have a state patronised class and an autonomous class which are competing with each other.
An autonomous self-reproducing agricultural sector which has quadrupoled output and heavily diversified itself has stimulated non-farm economy that has grown rapidly and which has provided a market base for the emergence of strong small and medium entrepreneurial sectors. These have largely grown up without any dependence on state patronage.
Moreover, in the women's sector, we have the case of the microfinance sector which has also grown up without the dependence on the state. Migration, another process of autonomous growth in the economy, is unequal in form with many negative features to it.
So, at the end of the second decade of the 21st century, we have a strong independent capitalist class with many strong and negative features. The elements which are essentially associated with the state have now become sufficiently powerful to bring about a process of state capture, where they have moved from being a dependent class to being a class which have actually captured state power. Now if you look at the composition of parliament, about 75 per cent are acknowledged businessmen in their self-declared form and the status of the remaining 25 per cent would suggest that they may well have become businessmen in this period since they have been elected in this process. The state power in the political process has become central to their own process of growth and reproduction. And now that they are the politically dominant force, they can influence and dictate the state policy and they can actually escape any form of regulatory conduct.
Now, there are two strands. One is very positive and the second has its positive features. Because it has also been part of the growth process and it isn't that the people who are defaulters and patronised by the state have not generated significant investments and growth but these are two contending forces there.
And the third and the most important force is the subaltern element going up from the farmers to small businessmen to microfinance borrowers to the now newly emergent IT entrepreneurs who are now functioning with dynamism and enterprise with enormous capacity for promoting growth and investment without any effective and significant state support. These are the significant stages in the transition.
[This piece was prepared from the author's speech at a virtual discussion on "Turning Points of the Economy", organised by Power and Participation Research Centre]
Professor Rehman Sobhan, currently Chairman of Centre for Policy Dialogue (CPD), is a former finance and planning adviser to the 1990-91 Caretaker Government.