In need of reforms beyond trade policy

The theme of the World Bank's latest South Asia Economic Update is timely and relevant to the prevailing global realities and economic challenges facing South Asian countries. In particular, the challenge of job creation is of utmost priority and key to maintaining economic and social stability in South Asia, where the incidence of unemployed/underemployed educated youth is alarmingly large and growing. 

The specific focus of the Update is on how to manage the downside risks of the spillover effects of artificial intelligence (AI) and trade disruptions arising from the US tariff policy for growth and employment in South Asian countries. The report presents a compelling, evidence-based case for how these emerging risks can be leveraged into opportunities by South Asian countries.

The report is rich in analytical content and empirical evidence, making the policy recommendations logical and solid. Franziska and team ought to be congratulated for sharing a fine piece of research with this audience and the policy makers. [Dr Franziska Ohnsorge is Chief Economist South Asia Region, World Bank.]

Moving forward, the primary challenge is to identify effective ways to support the implementation of the reform. The reform agenda is extensive, and implementation faces significant challenges.

In the context of Bangladesh, the most significant implementation constraint, in my opinion, is the fiscal constraint. The report identifies substantial public investment requirements for conducting the reform agenda, which includes education, training, infrastructure, technology, and social protection.The fiscal constraint is particularly binding for Bangladesh. We are acutely aware of the low levels of public spending in each of these areas. 

The prospect that the fiscal constraint will be eased substantially in the next 12-18 months is modest. Given this reality, a key policy question is how the reform agenda outlined in this report might be prioritized.

My own sense is that the top priority should be given to reducing trade protection, even if the fiscal resources required for augmenting spending on social protection, education, training, energy, and transport are not readily available.

But this brings me to the second major constraint to reform implementation: the political economy of trade reforms. Dr Zaidi Sattar and I have collaborated on research on trade policy reforms since 2009. We also wrote a book based on the research findings in 2019 entitled "Bangladesh Trade Policy for Growth and Employment". Despite strong supporting evidence, there has been minimal progress on trade reforms.

The powerful business lobbyists who gain the most from trade protection, along with the National Board of Revenue (NBR) which finds it most convenient to collect revenues from imports, are a formidable opponent to trade reforms. We have not yet found an easy way to manage this challenge.  Perhaps the World Bank can sponsor research on the political economy of trade reforms that brings good practice international experience to help address the constraints to reform implementation. This research might be a combination of focused policy briefs, case studies of successful reform implementation and the underlying success factors, and broad-based stakeholder consultation/dissemination.  

The key to securing the growth and employment effects of trade policy and AI-related reforms is the expansion of private investment. We recognise that Bangladesh's challenging investment climate demands significant reforms beyond trade policy, especially to reduce the cost of doing business. Years of experience have shown that this is easier said than done. For example, despite numerous road shows and investor conferences, Bangladesh has not attracted sufficient foreign direct investment (FDI). This is another implementation constraint that must be addressed.

A final comment on the gross domestic product (GDP) growth projections for FY2026 and FY2027. Given the realities of the United States (US) economy, where signs of stagflation have emerged, the adverse implications for South Asia's growth appear understated.Sometimes, the projections may not accurately reflect country realism.As an example, the recovery of GDP growth from 4  per cent in FY2025 to 6.5 per cent in FY2027 for Bangladesh appears too optimistic given the recent downward trends in public and private investment, the slowdown in the growth of private sector credit, the downturn in capital imports, the upcoming national elections, and the observed slowdown of exports to USA owing to high tariffs and slowdown in demand.

Dr Sadiq Ahmed is Vice Chairman, Policy Research Institute of Bangladesh (PRI). sadiqahmed1952@gmail.com. The piece is a slightly revised version of his statement delivered as the opening remarks at the launching event of World Bank's "South Asia Development Update" on Tuesday in Dhaka.