Rising Tides

Sadiq Ahmed makes the economic case for better Indo-Bangladesh relations

Munir Uz Zaman/AFP

Despite solid development performance since independence, Bangladesh's per capita income at around $600 remains very low. Poverty has come down from over 70 percent in the early 1970s to around 40 percent in 2005. Yet this level is still very high and rural poverty is even higher at 44 percent.

A look at spatial distribution of development progress shows significant disparity between leading and lagging regions of Bangladesh. Notwithstanding progress in tackling natural disasters and establishing social safety nets, the poor in Bangladesh remain highly vulnerable to a range of internal and external shocks. The lagging regions are mostly border districts. The labour force is mainly engaged in low productivity agriculture; connectivity with growth centres is limited; human indicators are weak; and good jobs are scarce.

Development Constraints
To address these development challenges comprehensively, they need to be related to the key development constraints:

Low labour productivity: While the GDP share of agriculture has sharply declined from around 50 percent in the early 1970s to below 20 percent in 2009, employment share has fallen only marginally and remains at over 50 percent. Outside agriculture, employment is heavily concentrated in low productivity informal services.

Manufacturing sector's GDP share has increased from 11 percent in the early 1970s to 18 percent in 2009, but employment share has barely increased from around 7 percent to 10 percent over the same period. On the supply side, labour productivity is constrained by low skills.

To tackle the employment challenge effectively, policies will need to focus on both demand and supply sides of the labor markets. On the demand side, creating good jobs will require a rapid growth in manufacturing investment, output, and exports. On the supply side, government investment in education and training will be the key to improving labour skills.

Weak trade logistics: Research shows that trade logistic costs are a key determinant of export competitiveness. According to World Bank analysis, Bangladesh ranks 79 out of 155 countries in terms of the 2010 trade logistic index (LPI). This index is a combination of performance on six areas: customs, infrastructure, international shipments, logistic competence, tracking and tracing, and timeliness.
The 2010 ranking is an improvement in performance over 2007, yet this performance is much lower than the rankings achieved by competitors (China at 13, India at 47 and Vietnam at 53). Bangladesh scores particularly low on customs procedures and on infrastructure and logistic competence.

Infrastructure constraint: Energy crisis is already constraining growth by an estimated half percent of GDP. This constraint is rapidly growing in intensity and needs to be tackled on a crisis footing. To meet expected power demand of 6,600MW in 2010, installed capacity needs to grow to 8,000MW as compared with 5,200MW presently. This 30 percent shortage of power generating capacity (2,800 MW) will challenge policy.

Linked to this, the availability of primary fuel is a worrisome factor. Gas accounts for some 70 percent of primary fuel for commercial use. Rapid growth in demand for gas without commensurate expansion in supply has caused the emergence of excess demand for gas. Present shortfall in gas supply exceeds 10 percent leading to rationing.

Power outages are estimated to lower GDP by an estimated $1 billion per year. Electrification ratio expanded rapidly since the early 1990s, growing from 10 percent in 1994 to 37 percent in 2008. Yet, this is still amongst the lowest in the developing world. In the rural economy, low power connectivity is a serious constraint to non-farm sector growth and human development. Inadequate investment in primary fuel (gas, coal, and hydro-power) raises serious concerns about the severity of future energy constraint.

Water and climate change: Ganges-Brahmaputra-Meghna river basins are home to 530 million people. The water is shared between India, Nepal, Bangladesh, China, and Bhutan). Among the challenges for water management include: increased pressure on water resources from growing population; growing water pollution; increased vulnerability from climate change especially as the monsoon is expected to be more severe and less predictable; reduced dry-season flows; increased intensity and frequency of water related hazards; sea level rise and salt-intrusion. Countries acting alone cannot effectively address these risks.

Role of Geography
Resurgence of global interest in understanding growth dynamics shows that geography matters for growth. While Bangladesh decries its downstream location disadvantage emerging from the flow of international rivers, it does not celebrate its two major advantages: tremendous access to sea and being the gateway between Central/South Asia and East Asia.

Taking advantage of location: There are two distinct ways in which Bangladesh can take advantage of its geographic location. First, global evidence shows that countries with access to sea (ceteris paribus) do better than land-locked countries. By opening up existing ports and through further investment, Bangladesh can tap a dynamic source of revenues and economic growth. The true potential, for example, is illustrated by the development performance of internationally renowned sea ports like Rotterdam, Singapore, and Hong Kong.

The second source is Bangladesh's location as the "Asian Gateway" linking Central and South Asia with East Asia. Through better land, air, and sea connectivity Bangladesh can become an Asian commercial hub with immense development opportunities.

Border area development: Of the 30 border districts, some 29 districts are a part of the lagging regions in Bangladesh (the only exception is Jessore). Growth and investment in the lagging regions will benefit tremendously from reducing cross-border restrictions on trade, transport, and investment. Removal of these restrictions will also facilitate agglomeration economies and production sharing arrangements as in East Asia under Asean Plus 3.

Easing energy constraint: South Asia's North-East sub-region has tremendous untapped hydro-power potential (See Table 1). Through proper grid connectivity and transmission lines, the scope for power trade to relieve Bangladesh energy constraint is tremendous.

Water security and climate change: On the negative side, the location of Bangladesh makes it especially vulnerable to climate change and natural disasters as it lies at the bottom end of the flow of the three mighty rivers Ganges-Brahmaputra-Meghna. Importantly, all three rivers, especially the Ganges and the Brahmaputra, flow through upstream India.

Other countries that are also upstream and have an impact on water flows are China and Bhutan (Brahmaputra) and Nepal (Ganges). It is obvious from geography that the only viable solution to Bangladesh's water problems and vulnerability to climate change is through a cooperative solution with upstream neighbors (India, Nepal, Bhutan and China). Arguably, without water cooperation long-term solution to poverty reduction in Bangladesh is not possible.

Economic Aspects
Much has been written and discussed about the security, political, and economic implications of the prime minister's recent visit to India and associated cooperation agreements. I will not be concerned about security and political issues and focus exclusively on the economic aspects of the visit.

The economic aspects do have implications for the other two aspects, but the economic issues have to be related to a proper frame of economic analysis and linked to Bangladesh's key development challenges and constraints in order to understand their true significance. This can lay the basis for informed political debates. The agreements reached have implications for four areas of economic outcomes:
-Removal of further restrictions on trade and investment.
-Access of all neighbouring countries to Chittagong and Mongla sea ports with associated improvements in rail-road networks.
-Initiation of regional power trade through grid connectivity.
-Stronger dialogue and cooperation on water resources.

If properly implemented, these agreements would lay the basis for following specific benefits for the Bangladesh economy:

Higher trade and investment: Presently, Bangladesh has a huge trade deficit with India because of very low exports. With cooperation, exports can grow from $350 million to $800-900 million per year. Reduction in NTBs should help exports to other parts of India. Opening up will also boost exports to Bhutan and Nepal.

Given present low levels of development, the investment opportunities in India's seven North-Eastern states (the so-called Seven Sisters) are quite large. In view of its location advantage, Bangladesh should have huge comparative advantage vis-à-vis other Indian states in terms of transport cost for reaching out markets in India's Seven Sister states.

Connectivity: Trade creation will require inter-country connectivity agreements and upgrading of transport networks. Upgrading of transport network will be especially beneficial for the lagging border regions of Bangladesh. Fees from inter-country land crossings and port charges can be substantial (conservatively estimated at $300-400 million per year).

Energy security: In the short-to medium term some 250 MW of power will flow into Bangladesh through the Bheramara-Bahrampur grid connectivity agreed during the PM's visit. Over the longer-term, this could move up to 1,000MW of power imports.

There are other options for grid connectivity as well. Importantly, grid connectivity with India opens up possibility for power trade with Nepal and Bhutan. Additionally, opening up of power trade will likely facilitate new investments from India's private sector into Bangladesh for power as well as primary fuel.

Regional water cooperation: Water cooperation is possibly the most difficult and long term in nature. So, the implications of the prime minister's visit in this particular area must be seen in the longer term context. Even though difficult, with careful design and investment such cooperation can be a win-win for all. The Indus River Treaty and the Nile River Basin Agreement are good examples of how with sustained efforts even warring nations can be brought together to share water equitably. Strategically, cooperation in other three areas (trade and investment; transport; and energy) can set the basis for more considerate and equitable resolution of water disputes.

All riparians would benefit from enhanced productivity (irrigation, fisheries, navigation/access) and reduced costs (floods, droughts, cyclones). Benefits are maximized if the most optimal technical options can be adopted regardless of national boundaries; financial costs and output benefits are shared equitably; and cooperation focuses on bundling opportunities linked to water management (institutions, infrastructure, etc).

Policy Framework for Long-Term
The next step is to prepare for implementing the agreements. In doing this, it is advisable to develop a longer-term engagement strategy and associated policy framework. This engagement strategy and policies could be refined and adjusted based on lessons of actual experience with implementation of these first round agreements. Some of the important policy and strategic considerations in these four areas would include the following.

Trade and investment: Bangladesh, Bhutan, India, and Nepal should take concerted actions to reduce all trade and non-trade barriers beyond normal trade duties. Steps should be taken to facilitate exchange of ideas and knowledge with potential investors in Bangladesh, India, Nepal and Bhutan through the investment boards and business chambers. Two other areas where policy interventions are urgently needed include easing visa requirements for face-to-face business interface and removing banking regulatory restrictions to facilitate investment flows through the formal sector.

Connectivity: The long term gains from transport connectivity are large. The bold first step taken during the prime minister's visit to remove the political barrier to connectivity needs to be converted to a full-fledged long-term strategy for connectivity.

A key first step would be to identify and upgrade critical trans-modal routes and related networks to improve port connectivity and speed. Second, there is a need to synchronise rail networks to allow through rail transit. Third, major border outposts need to be modernised with modern technology, simplified customs procedures, and modern warehousing facilities. Fourth, implementation of connectivity also calls for developing sound inter-country transport agreements based on principles of efficiency and time saving while safe-guarding other national interests.

MUNIR UZ ZAMAN/AFP

Europe has a rich experience that can be adapted to the needs of the North-East sub-region. Bangladesh can also learn from Asean and African experiences. Finally, Bangladesh should become an active participant in the Asian Highway initiative.

Energy cooperation: The grid connectivity initiative is highly welcome. This trade enabling action could be generalised by a broader policy of engaging in energy trade with India and other neighbors including Myanmar. There are a number of areas where this engagement can be broadened.

First, India should be allowed to wheel power through Bangladesh from its North-Eastern states. Second, the market for solar home systems in Bangladesh and India's East and North-East could be integrated. Third, a joint development framework for offshore oil and gas in the Bay of Bengal (including settlement of any maritime boundary disputes) could be developed. Fourth, options could be explored to develop Bangladesh's coal fields (consistent with sound social and environmental practices) and export coal-fired power to India (coal by wire). Fifth, in the area of natural gas, there could be cooperation on LNG imports (focus on Mongla port for gas in Khulna Division and West Bengal). Sixth, another possible area is cooperation on oil refinery in Chittagong to serve Bangladesh and NE Indian markets. Seventh, talks on the Myanmar-Bangladesh-India gas pipeline could resume. Finally, dialogue should start on the possibility of Bangladesh import of hydropower from Bhutan and Nepal.

Water cooperation: As earlier noted, engagement here will be long-term. Building on the experience of past dialogue where progress has been very limited, there may be a need to rethink the engagement strategy with concrete work program that distinguishes between quick gains and the long-term options. A possible approach could be:

Short-term
-Joint study tour with Bangladeshi, Indian, and Nepali delegates to raise awareness of international best practice (e.g. Senegal river basin, Guinea, Mali, Mauritania and Senegal have achieved high level of operational, institutional and legal integration -- including joint-financing, ownership and management of energy power pool)

-Joint assessment of costs and benefits of water cooperation under different infrastructure investment scenarios.

-Water resources technical analysis with regional focus (including data sharing and regional flood warning, institutional building, and strengthening of Joint River Commission).

-Establishment of a regional steering committee made of leading national institutions (e.g. Institute of Water Management on Bangladesh side).

-Inter-ministerial committee on Regional Cooperation (e.g. Ganges Basin).

Mohammad Islam/Driknews

Short-to-medium term
-Joint water resources management initiatives/investment project involving North-Eastern India and Bangladesh on the Brahmaputra River (including Brahmaputra basin institution building)

-Another joint project involving West Bengal and Bangladesh on the Ganges River (restoration of Ganges Dependent Areas to support endangered livelihoods/ fragile Sundarbans ecosystems)

Medium-to-long term
-Broad regional investments on Ganges and/or Brahmaputra involving Joint equity, ownership and management -- including the bundling of institutional development, legal framework, and infrastructure investments.

Building public support
More and better regional cooperation is constrained partly by political will and partly by public misconceptions. A well-designed public campaign will be helpful to build public opinion. This can be done by undertaking good technical analysis of issues and sharing more broadly with the public through the media. Partnerships with local think tanks can help with analytical work as well as build broader public support. Multi-lateral approach to cooperation based on commercial principles and supported by local think tanks and international institutions will also help deflect misconceptions of political deals.

Partnerships
The quality of implementation will depend upon strong partnerships with private sector, local think tanks and IFIs. In particular, quality analytical work on a range of topics relating to trade facilitation, international connectivity agreements, pricing policies, least-cost options, and distribution of gains from cooperation will be essential to ensure best outcomes. India relies on a range of government-sponsored think tanks for the regional agenda (ICRIER, IDSA, NCAER, NIPFP, RIS). Bangladesh needs to gear up its efforts to establish partnerships with local think tanks. This is especially important given the serious capacity constraint in the government.

Sadiq Ahmed is Vice President of the Policy Research Institute (PRI). He formerly served as the Chief Economist and Director Economic Management of the South Asia Region of the World Bank in Washington DC.