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State-business relationship in Bangladesh

Navigating the labyrinths of the 'deals world'

Mirza Hassan and Selim Raihan | Published: April 20, 2018 21:30:38 | Updated: April 22, 2018 21:13:44


For many economists, Bangladesh case is a paradox since such steady and reasonably high growth took place in the context of 'bad' or 'weak' governance.  The fundamental assumption of this view is that standard 'good governance' institutions or 'market enhancing governance institutions' are pre-conditions for a high and sustained growth rate in the economy. Market-enhancing governance institutions enable the market to be efficient since these reduce transaction costs, guarantee credible commitment of the state through the establishment of formal and universal property rights, and allow an efficient enforcement of contracts.

In contrast, we argue that the existing trend in growth rate has been possible in Bangladesh (despite lacking in or weaknesses of many of the market-enhancing  institutions) since a reasonably robust form of 'growth-enhancing governance', characterised by de facto rent sharing (across political divides), political elites' ability to separate economic and political rents (based on contingent needs), and (more critically) a largely ordered deals (explained below) environment (irrespective of being open, closed or semi-closed in various sectors of the economy), has created the enabling conditions (de facto credible commitment of the state, transactional certainty, etc., which are critically important to the private market actors) for economic growth to take place.

In contrast to 'Rules' environment (formal law-based governance whereby state-business interactions are governed by impersonal transactions and universal enforcement) 'Deals' environment is characterised by an informal and personalised transaction and selective enforcement. Deals environments can be again divided into several dimensions: whether deals, once negotiated, are honoured (ordered) or not honoured (disordered); and whether deals are widely available (open) or limited to an elite (closed).  Ordered deals are deals that, once negotiated between business actors and state officials, are honoured. 

Barring a few years after the independence, Bangladeshi state has been staunchly pro-business. But it manifested major syndromes of a 'soft state', dithering in implementations of pro-business reforms, especially related to privatisation and relaxing bureaucratic control over business through regulatory reforms. A combination of external pressure (by the World Bank and the International Monetary Fund) and domestic politics since the late 1970s, being dominated by pro-market elites - both politicians and technocrats - created enabling space for the state to formulate and adopt business-friendly regulatory and economic policies. Such meta/macro level features of elite political settlement largely shaped the meso-level deals world and structured the state-business relations, during the earlier phases of growth acceleration. 

A clearly discernible shift in the deals environment occurred during the late 1970s - from a largely closed and disordered (governing the processes of nationalisation of industries, allocations of permits and licenses, uncertainty with the land reform, adjudication of property rights, etc.) one to an increasingly open and ordered one.  In its drive to create new entrepreneurs and to bolster the private sector-led industrial growth, the state followed a de facto extremely lax form of regulatory governance in sanctioning industrial loans from specialised publicly-owned banks that led to massive loan default.  Such 'primitive accumulation' strategy was, in general, based on cronyism, to a limited extent (for a few politically connected and partisan business actors), but mainly based on open deals (for the multitude of business individuals with no political identity). The latter category generated a pro-active form of market-led corruption (unsolicited bribing of officials by the entrepreneurs) as well as massive rent-seeking, mainly by bank officials, but also by officials of the relevant ministries and the process was largely governed by an ordered form of deals (transactional certainty).  Such nature of rent management led to the emergence of the ready-made garments (RMG) sector at the end decade of the 1970s as well as the creation of indigenous entrepreneurs, especially in the RMG sector.  Such entrepreneurs, to a very limited number, were also created through the disinvestment of publicly-owned industries.

During the 1980s, closed but ordered deals can be observed to cover a diverse set of economic activities - granting of license and permits for export and import and large construction projects but not necessarily setting up of industries. The governance of industrial loan sanctioning and privatisation of nationalised industries continued to be largely characterised by a mix of cronyism (in greater form) and open-ordered deals. Such mode of state-business relations resulted in the creation of a significant number of local entrepreneurs (especially rapid increases of RMG factory owners) and capital formation in the private sector, which perhaps, to some extent, explain the growth acceleration, albeit weak in nature, that one notices during that decade. 

The competitive democratic political phase (1991-2013) saw a complex evolution of the deals environment, possibly due to the relatively newer forms of rent management in the economy - a complex mix of monopolistic but pre-dominantly duopolistic rent allocations (sharing rents across the political divide). Following such de facto rent management practice, direct access to state resources/privileges (permit, license, leases, etc.) tended to be predominantly closed and ordered in nature and individual's political identity critically mattered here. But even in these closed domains of businesses, market actors with wrong political identity (or no political affiliation as in the case of the majority of businesses) were also able to partner with political insiders to access state resources. Such strategic practice of the firms, in effect, transformed closed deals into an open deal to a large extent. Syndication of business firms (alliance of firms owned by ruling and opposition party actors along with non-partisan business) was another popular strategy used by the business, particularly at the sub-national levels (district and small towns), to access state resources (construction of public buildings, roads etc), which considerably opened up an otherwise politically important closed deal space. Also rent allocations, during the competitive political phase, became more centralised particularly in relations to the critical domains of the economy (power sector mainly but also large infrastructure, to some extent). Centralisation of rent allocations, in the Bangladesh case, implied closed deals but not necessarily disordered. Decentralised rent allocations, hardly seen in the critical domains of economy, tended to be largely governed by a stable and predictable network of actors and consequently ordered. It should be noted that ordered deals environment provides predictability and reduce uncertainty only for players who are willing to play by the de facto rules of the game. Foreign investors who cannot take recourse to informalities (due to legal restrictions imposed by the countries of origin) or domestic business who would like to play only by the formal rules may not be able to navigate through the system or find it largely closed and disordered.

The competitive political phase ended in Bangladesh in 2013. What emerged after that, in the political domain, can be called as the dominant party system. The first thing to note is that one of the features of de facto rent management, the practice of rent sharing across the political divide, seems to have altered to a certain extent. There has been a steep rise in crony capitalistic practices with the advent of the dominant party politics, although a steady increase of this has also been observed during the later years of the competitive period. Print media has exposed numerous unscrupulous cases in the banking sector, by politically connected businesses. Licensing of private banks has also been subjected to an obvious form of crony capitalism. The extent of rent-seeking seems to have changed considerably. Perhaps with the exceptions of a few critical sectors of the economy such as power (especially in relation to large plants) and very large infrastructure projects, state-business transactions have now been subjected to increasing numbers of rent-seekers (more politicians, government officials, police, regulatory agents, etc.), which has added to the investment costs. The mode of rent-seeking has also changed from the previous relatively centralised form to an increasingly decentralised one (again critical domains of the economy - large power plants or infrastructure are still mostly subject to centralised rent allocation process). This has been an inevitable consequence of increases in the number of rent-seekers. The business now has to engage with rent-seekers with veto power at various points down the bureaucratic hierarchies. Although there are anxieties among business actors regarding the current political situation, still this settlement has provided, since 2014, a form of political stability that contributed, among other factors, to the reasonably high and stable growth rates in recent years.

Dr. Mirza M. Hassan, Adjunct Fellow, BRAC Institute of Governance & Development (BIGD), Brac University. Email: mirzahass@gmail.com

Dr. Selim Raihan, Professor Economics, University of Dhaka and Executive Director, SANEM. Email: selim.raihan@gmail.com

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