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Journey towards inclusive growth: challenges and policy imperatives for Bangladesh at 50 and beyond

| Updated: January 09, 2022 20:28:25


A large number of people are yet to get the optimal benefit of growth.  —FE Photo A large number of people are yet to get the optimal benefit of growth.  —FE Photo

Fifty years ago, inheriting a fragile and war-devastated economy, Bangladesh faced a herculean task of moving forward dealing with poverty, deprivation, natural disasters, and political instability. Fast forward five decades, Bangladesh is now often cited as a development success story for its phenomenal socio-economic progress. Robust economic growth, investment in female health and education, impressive health and educational attainment, strong export and remittance growth, prudent macroeconomic management, improved capacity to manage natural disasters, among others, contributed to the country's remarkable development. Even amid the Covid-19 global pandemic, Bangladesh has remained relatively resilient, posting a rather solid growth of 3.6 per cent at a time (in 2019-20) when most global economies experienced an economic decline.

Despite its impressive achievements on many fronts, numerous challenges and vulnerabilities remain. The Covid-19 global pandemic has exacerbated some of the longstanding challenges. As the nation celebrates its golden jubilee of independence and aspires to achieve higher development milestones, it is imperative to reflect on tackling the major factors that confront the country's attaining its inclusive growth and development objectives.

Rising inequality among different socio-economic groups has been a pressing concern. Between 1991-92 and 2016, the income share of the poorest 5 per cent of households got further squeezed from already a paltry 1 per cent to just 0.23 per cent, while the corresponding share held by the richest 5 per cent rose from 19 per cent to 28 per cent during the same period. Although the overall poverty incidence over the past three decades before the onset of Covid-19 declined at a brisk pace, certain areas could not register much progress, indicating regional disparities. The district-level poverty data for 2016, the latest year for which such information is available, portrays a dismal picture for Kurigram with the poverty incidence being as high as 71 per cent, followed by Dinajpur (64.3 per cent), Bandarban (63.2 per cent), Magura (56.7 per cent), Kishoreganj (53.5 per cent), Khagrachhari (52.7 per cent) and Jamalpur (52.5 per cent).

Pandemic-induced shocks and the resultant poverty incidence might have deteriorated the inequality situation. According to a study, the pandemic could have created at least 16.4 million new poor. One issue that is not clear yet is whether any new rise in poverty would be permanent or transient. The post-pandemic growth process and the nature of recovery will determine how fast the lost gains in poverty reduction can be reversed along with any implications for inequality.

Inequality is also evident in educational outcomes among different socio-economic groups across geographical locations. Evidence suggests that the literacy rate among the rural population (63 per cent) is about 7 percentage points lower than that of their urban counterpart. The advent of COVID-19 crisis may have aggravated the inequality situation across educational outcomes. Recent evidence indicates that, due to the pandemic, some 15,000 schools were shut down with about 2.5 million students. In rural areas, class attendance after school reopening is lower than 50 per cent now.

Inequality in different health outcomes and in accessing various health services is also quite prevalent. Data from the Multiple Indicator Cluster Survey (MICS) 2019 reveal that the population from the poorest wealth quintile has substantially higher infant and under-five mortality rates than those associated with the top two quintiles. Therefore, mortality and malnutrition are still dependent on the overall household wealth and income status.

There are numerous underlying factors contributing to this rise in inequality. Policy instruments for tackling inequality and ensuring inclusive growth have not been effectively utilised. Dealing with inequality would require raising more government revenue through direct taxes (such as income, wealth, and corporate taxes). But Bangladesh has so far not been able to utilise its taxation system to generate more gains for the poor and disadvantaged groups. Bangladesh has one of the lowest tax-GDP ratios amongst global economies-just about 9 per cent in comparison with more than 15 per cent for lower-middle-income developing countries. A study has shown that, between 2012-13 and 2018-19, while per capita income almost doubled, tax revenue per taxpayer declined. Dependence on indirect taxes (e.g., value-added and customs duties) can make the existing income distribution even worse.

This overall low tax revenue can only provide for a limited fiscal space and thus severely constraining government efforts to put in place adequate redistributive policies. This is reflected in the low public expenditure on social protection programmes (about 2 per cent of GDP after excluding pensions for retired government employees). The average benefit of social protection programmes is marginal. For instance, the regular monthly transfers for the elderly population, persons with disabilities, pregnant women and mothers of young children are just in the range of 3-6 per cent of Bangladesh's per capita income. For these allowances, inflation adjustments are not undertaken and thus the transfer values keep declining in real terms. Consequently, the impact of redistributive support measures to address poverty and inequality remain small.

Lack of access to quality education and health services by poor and vulnerable population is another broad factor contributing to rising inequality. The education system has lagged in terms of infusing cognitive skills and analytical ability as the students often lack basic skills even after completing tertiary education. Industry leaders have consistently identified a lack of relevant skill sets among potential job entrants as the main challenge constraining job creation.

Public spending on education, about 2 per cent of GDP, is much lower than the developing country average of 4.6 per cent. Inadequate public health spending and the quality of public health services disproportionately affect the poor and disadvantaged groups. In fact, Bangladesh has one of the lowest rates of government expenditure (as per cent of GDP) on health among the global economies

Bangladesh's limited capacity to generate adequate and productive jobs constitutes another underlying factor of the growth not being inclusive enough. Higher job concentration in the informal sector, low productivity, huge underemployment, high youth unemployment (more than 10 per cent), the deepening of capital-intensive production processes and  automation are major labour market challenges.

Women's limited participation in the labour market is another challenge that adds to the growing inequality. Only 36 per cent women participate in the labour market. The proportion of women engaged as unpaid family workers is 29.1 per cent against just 4.2 per cent for men. Gender-based wage discrimination is also prevalent. Lack of decent jobs, workplace safety, and social norms, among others, are some significant reasons leading to the low level of female labour force participation.

Natural disasters and climate change-related challenges are also a big threat as Bangladesh remain the 7th most-affected country due to climate change-induced calamities. Some long-standing factors are affecting certain population groups, particularly those living in coastal and riverbank areas. Children, women, the elderly, persons with disabilities (PWD) and people living in geographically vulnerable areas are more exposed to these climate-induced risks. Inequality in access to resources, capabilities, and opportunities could further aggravate such risks. Climate change can lock vulnerable population groups into adverse circumstances and severely limit their human development potential in the long run.

Considering the above broad challenges that undermine the inclusive growth process and prospect for Bangladesh, it is imperative to address the underlying issues and build forward a better society with shared prosperity. In doing so, instituting an effective taxation system along with an appropriate redistributive policy mechanism is of paramount importance in attaining inclusive growth and development objectives. The macroeconomic framework of the Perspective Plan 2041 and Eighth Five Year Plan (July 2020 - June 2025) consider increasing the tax-to-GDP ratio from the current level of about 9 per cent to more than 17 per cent by 2031 and over 22 per cent by 2041. Implementation of the tax reforms proposed in the Plans will play a critical role in attaining the targets and those should be seriously pursued. Reforming the taxation system and tax institutional capacity building therefore constitute a policy priority. This should also help create the fiscal space needed for rolling out redistributive fiscal policies tackling poverty and reducing inequality.

Going forward, an increased focus should be given towards creating productive employment opportunities and transforming the labour market to raise the significance of formal sector jobs. Productive employment will be preconditioned by the quality of human capital, and thus supporting skill development is immensely important. How to transform the social sectors to generate productive employment should be one of the most critical policy areas. Given the pandemic-impacted situation, there is room for generating millions of jobs in health and education sector while ensuring the quality of public services. Investment in public health and education can be seen as a major way of expanding the endowment of the poor and vulnerable population groups. A productive workforce would also help expand the tax base, creating fiscal capacities for the government in the long term.

In the backdrop of the Covid-19 pandemic, the importance of strengthening the social protection system cannot be overemphasised. The National Social Security Strategy (NSSS), adopted in 2015, made numerous recommendations for undertaking reforms and strengthening the system. The implementation, however, has been slow and thus must be reinvigorated. The allocation for the overall programme is too small. Therefore, a strong political commitment is needed to make the interventions meaningful.

Gender disparities across various dimensions need addressing on a priority basis. Social constraints faced by women in labour market participation should be a major area for bringing in corrective measures. A World Bank study estimated that improving women's labour force participation to just 45 per cent (from the current level of 36 percent) would increase the country's GDP growth by 1 percentage point.

Preparing for a long-term climate change adjustment mechanism is a reality for Bangladesh.  Need-based and tailored measures should be directed to enhance the resilience of poor and vulnerable, especially children and women. Policy instruments should also consider these population groups residing in certain geographical locations that are exposed to greater risks. How these groups can be integrated with the economic growth emanating from the sectors with relatively less exposure to climate shocks should be given due consideration.

Finally, it is worth noting that the abovementioned recommendations are largely aligned with the national priority areas identified under the Eighth Five Year Plan. Implementing these would help address the longstanding and emerging challenges hindering inclusive growth and development while ensuring fairness and shared prosperity.

 

Dr M Abu Eusuf is a Professor of Development Studies and Director of Centre on Budget and Policy, University of Dhaka, and Executive Director of Research and Policy Integration for Development (RAPID). Rabiul Islam Rabi is a Research Economist at RAPID.

This article draws on a Policy Brief on the same topic prepared by (RAPID), with the support from The Asia Foundation.

Any views expressed and/or shortcoming associated are those of the authors of this article and should not be attributable to The Asia Foundation.

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