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Economy

Calling for a Paradigm Shift

Faruq Hassan

The much proclaimed financial crisis hasn't really hit the shores of Bangladesh yet. Already, pundits and ministers alike are talking about the various precautions we can take in order to stave off the crisis. Should we devalue our currency in order to stem the ebbing fortunes of the export industries? Do we need our very own financial bailout package or should we trust the hidebound nature of our market forces which have so far protected us from the worst of the storms. Suggestions abound. Yet the solutions offered are merely Band-Aids on a deeper wound which, if untreated, is going to fester and become lethal: addressing Bangladesh's obsession with exports as a way out of poverty.

One only needs to look at the walking wounded around us to get an idea of where the Bangladesh economy is heading. In 1997 and 1998, most of Asia fell into an economic crisis mainly because of the continent's dependence on inflows of foreign capital, which suddenly trickled down to a few drops. The Asian Crisis, as it came to be known, caused much turmoil and pain but unfortunately lessons were not learnt. A decade later, we are again in economic free fall because of our dependence on foreigners, whether it be to buy the cheap garments that we produce or to provide jobs for the masses of skilled and unskilled workers we send out to foreign shores every year. Will we ever learn to stand on our feet?

Are we too dependent on foreign markets?

I realise that I am being a bit unfair: governments did actually learn some hard lessons from the crisis. China built up vast current-account surpluses and foreign currency reserves that served as a buffer during the present crisis. After all, this time around, no Asian country has suffered a currency meltdown to the same extent Iceland has. Moreover, export led growth is a tried and tested model for economies like the Bangladeshi one. But I'm not suggesting that Bangladesh should stop exporting and “decouple” from the global economy; what we should consider, however, is to slowly wean ourselves off from external demand and focus on our local industries.

Let's deal with some statistics. According to the World Bank, Asian exports of goods and services (including Bangladesh's), rose to 53.4 per cent of GDP in 2006 from 42.8 per cent in 1998. What these figures show is that there is latent demand for domestically produced goods in services, especially in South Asia. If ever there was a chance to turn crisis into opportunity, now is the ideal moment for our policy makers and ministers to reform our economy and spur domestic consumption.

So, how do we actually go about doing it? For one, we could start off by introducing competition in the enclaves of protected industries like big pharmaceuticals and tanneries; cutting red tape and making it easier to start small local businesses; nurture deep pockets and financial markets for household credit; and strengthen our non-existent social safety nets so that we do not feel an urge to save every poisha we earn for a rainy day.

I agree that such changes would appear almost radical to our export obsessed mentality and put a big strain on our moribund public administrative machinery. Moreover, there is a vested interest amongst policy makers in Bangladesh that have made millions from sustaining a growing export dependency in the country. Such institutions and mentality have to go. In fact, some of the ideas proposed by local big wigs that have been floating around, will have to be combated.

One such idea is to depreciate our currency so that locally produced goods become cheaper in foreign markets thus boosting exports. On the surface, the idea sounds appealing. Foreign currencies are already at an all time low compared to the Taka; slightly tweaking the mechanism so that you get more taka for every dollar or euro doesn't really sound bad at all. It would boost up the garment industry which has been flagging of late, while remittances sent by expats abroad would be able to buy more locally.

A couple of crucial caveats though. In all these discussions, we tend to forget one simple but salient fact: Bangladesh is by and large an import dependent country and an overwhelming majority of the country's population depend on cheap imports, mostly food and agricultural items which take up a significant portion of the income of the rural poor. Depreciating our currency would probably have a salutary effect on the urban and those involved in the industrial sector, but it would literally be a kick in the stomach on the poor who spend a significant portion of their income on food. Also, depreciation of local currency will farther dampen commodity prices which are already at a low, and exacerbate the condition of farmers and rural workers whose incomes have been falling steadily over the past few years.

So what to do? Well, as discussed earlier, we need to fight our obsession with exports. But more than that, we need a new paradigm shift where internal demand within the economy is given precedence over just making things to sell abroad. My detractors would probably say that we don't have much effective demand (demand backed up by means to pay for it) but that's just plain wrong. Both rural and urban consumption have gone up significantly over the last decade; it's just that we are consuming foreign goods instead of the ones that are produced within the country.

It's often said that a crisis is too much of an opportunity to go to waste. The present economic crisis gives us an opportunity to wake up and change our current economic paradigm. It's going to be a painful ride, but true reform is never pain free. Let's just hope our policymakers don't give in to political opportunism and populist pandering and actually take a long and sustainable route to development.