Investment must for growth

The economy of Bangladesh is not doing well. In fact, it has not been doing well since the second quarter of 2023-24 as should be evident from the chart-1. At this low rate of growth unemployment could have risen and a large section of the people at the lower end of the income scale could have fallen into outright poverty. Handouts or subventions cannot do much to improve their living conditions on a sustained basis. This could be achieved only by a permanent increase in the economic growth rate.

An old and widely accepted theory of economic growth suggests that it depends mostly on the economy's investment in real capital. The historical records show that the rapidly growing economies, such as China and Vietnam, devoted a high proportion of their income to capital formation which enabled them to attain sustained high growth. Hence, countries that aspire high growth must aim for high investment to rapidly augment the capital stock of the country.

The funds for domestic investment can be obtained from three sources: national saving, external borrowing and foreign direct investment (FDI). Developing nations often find their own saving insufficient to fund the level of investment required to achieve the growth rate they aspire. Hence, they are forced to borrow funds from overseas for this purpose. The advantage of foreign borrowing is that it provides substantial funds at short notice allowing the country to invest more than it could otherwise do. This raises the growth rate above what it would otherwise be.  The downside of external borrowing is that the amount borrowed has to be repaid in international currency with interest. It is, therefore, essential that the country does the calculations carefully to ensure that the returns from the investment will cover the full costs including debt servicing liabilities such that the borrowed funds can be repaid. The severe consequences of reckless borrowing by Hasina government are all too well known to bear repetition.

The other source of funding domestic investment is FDI. In this case foreign financiers invest in the real capital of a firm which they own and manage themselves. If the firm makes a profit, it accrues to the foreign financiers. If it runs a loss, they alone bear its burden. The direct gains of the domestic economy comprise the employee wages and benefits, the taxes paid by the firm and the money spent locally by the financiers and the firm on many other things such as rent and utilities.

However, it is the indirect gains or externalities of FDI that have attracted the attention of policy makers.  FDI often brings in superior technologies of production. The local people and business get an opportunity to observe and learn from, and eventually adopt, these. The process of technology transfer is thereby quickened and widened. Foreign firms often bring in modern management practices to manage their workforce. These set examples that are eventually disseminated to local business which improve the performance of their workforce. FDI firms also have better knowledge of and firmer footing in the international market. These could also help the local firms to gain greater access to the international market.

All such benefits imply that there would be keen competition among countries to attract FDI. Hence, foreign firms will have many choices. Bangladesh will have to work hard to convince prospective foreign firms to invest here. Apart from the pecuniary profitability of business, the most important consideration of the prospective investors would be the business and social climate prevailing in the country. Almost certainly the prospective investors would enquire local business about the business climate. The local businesses who are themselves suffering from business climate related problems will most likely share their experience with them. The very things that deter the indigenous businesspeople from investing will also deter the foreign investors. The abject failure of Bangladesh to attract significant new foreign investment, which is much is less than one-half of one per cent of our gross domestic product (GDP), is a testimony to the unfavourable business climate existing in the country. Most of the paltry foreign investment that we receive is actually reinvested earnings.

The government seems to have put much emphasis on FDI for accelerating economic development. However, to achieve such an outcome the rate of inward FDI will have to be increased many fold. The interim government has held glitzy investment summits both at home and abroad to attract more FDI. Similar efforts were also undertaken by the previous government with little success. There is no compelling reason to believe the outcome will be much different now.

Hence, the government might consider directing its limited resources and efforts to improving the general business environment without distinguishing between national and foreign investment. What is needed is to raise the investment ratio much beyond the current 30 per cent of GDP (see Chart-2) if the growth rate is to be raised to above 7 per cent sustainably. Such a rate is necessary to significantly reduce poverty and unemployment.

The author is an economist and columnist. m_a_taslim@yahoo.com