The last laugh

Abdul Bayes

Photo: A M Ahad/Drik News

ACCORDING to Debraj Ray, an eminent economist of the world, economic development is more like a treacherous road than a divided highway where only the privileged minority is destined to ever drive the fast lane. Bangladesh has been passing through this treacherous path since its birth in 1971. In the very early years of independence, pessimism pervaded through the country's economic prospects. The then US Secretary of State Henry Kissinger's rude remark that Bangladesh would always remain a "basket case" went to rock, if not to raze, the hope of those dearly nourishing a dream of Sonar Bangla (Golden Bengal). A little bit sympathetic but, nevertheless, suffocating submission came from Just Faaland and J Parkinson who wrote a book titled: Bangladesh: The Test Case for Development. In their book, the writers argued that if Bangladesh could attain development, there would be no country in the world without it. By and large, not even a reckless optimist foresaw any light at the end of the long economic tunnel of this newly born nation. Frustration was fueled further by the pitifully low morale of those in the positions of political and administrative echelon. Again, a general attitude of despondency and almost despair is alleged to have griped key people in government and its administration.

However, and appreciably, Bangladesh has managed to thrive through thick and thin. It is true that she has to continuously confront the debilitating impacts of acutely adverse land-man ratio, poor natural resource base, bad governance, frequent attacks from natural hazards, and the curse of climate changes. But despite all the odds over her head, she has so far displayed a number of successes in different fronts. Ratings about Bangladesh's resilience gradually improved with respect to per-capita income, food security, infant and maternal mortality, disaster management, micro-credit programmes, and income and non-income poverty. The receipt of a prize by the Prime Minister of Bangladesh from the UN can be taken as a pat on Bangladesh's back as far as the meeting of the Millennium Development Goals is concerned. And, all of these achievements clearly show that the country could confound the critics who have made chilling forecasts about her economic fortunes. But exhilarating though all that happened over time, things could have been much better had politics performed well.

Economic growth
Bangladesh can duly pride on a satisfactory growth performance and transformation of the last decade. The recent most estimates show that Bangladesh's GDP at current USD rose from $60 billion in 2005 to $79 billion in 2008. This compares with 6,400 Mln in 1975 at 1974 prices. The first decade of the 1980s fostered a lowly average annual growth rate of 3.7 per cent. Even that apparently feeble average growth rate was reassuring, and puzzling in the backdrop of the early forecast that the economy was destined for "economic cripple." Further, the first decade of the 1980s was mired by dismal agricultural growth performance but, the momentum of high growth rate was maintained by the non-agricultural sector. By and large, the period under review gifted a crawling growth rate when the nation was craving for a cozy one.

However, the much awaited "turning point" took place in the second half of the 1990s. The annual growth rate dazzled by crossing 5 per cent for the first time in history -- leaving behind the relatively disappointing growth rate of about 4 per cent. The growth was largely greased by a rebounded agricultural sector. Again, although the growth of manufacturing faced a decline, it was compensated by the average of other sectors running above GDP growth rate. Further acceleration occurred in later years pushing the growth rate to 5.6 per cent during 2000-2006, and to a sparkling 6 per cent and above in later years. The higher growth in recent years was mostly led by a satisfactory performance of the agricultural sector coupled with recovery of the manufacturing sector.

Thus, as against the 1980s, sustained GDP growth in later periods and, of course, coupled with a decent decline in population growth, resulted in a three-fold increase in per-capita GDP. The ramification of this remarkable transformation of the Bangladesh economy is obvious: it has vastly improved the prospects of poverty reduction, and has made the current generation of Bangladeshis almost exactly twice as rich as was the preceding one.

In sum, there are five key characteristics of the growth process over time that can be highlighted: (a) remarkable stable growth with no discernible dip reflected by the standard deviation of per-capita GDP growth falling from 1.6 over 1976-89 phase to 0.7 over 1990-2005; even the volatility had been the lowest in the world in recent periods; (b) broad-based growth spreading over a number of economic activities backed by modest diversification; (iii) uniformity in regional GDP growth process, and (c) relatively good record in employment creation.

Photo: Anwar Hossain

Structural change
The structural changes in the economy over time provide interesting insights. In the first half of the 1990s, agriculture's share in GDP sharply declined. In common parleys, such a shift is seen as a real structural change away from the sector. But, beneath the surface, this is more a reflection of severe stagnation of agriculture rather than of its resilience.

As a matter of fact, the last decade of accelerating growth failed to widely open up windows of opportunities for productive employment generation. The reason is that, growth in all sectors was at best modest to negate a radical structural transformation. In consequence, the surplus labor from agriculture couldn't be absorbed in the modern manufacturing sector at an expected scale. A mismatch has also occurred between employment and output in the agricultural sector. It means that the share of agricultural employment has remained almost unchanged while its share in output at times fell by more than 37 per cent. Over a longer time span of two decades or so and up to the early years of the new century, the vast fall in agriculture's share in GDP -- almost by a half -- has far exceeded the feeble fall in employment -- by 12 per cent only. This implies that productivity and earnings of the labor force in agriculture have largely been lagging behind those employed elsewhere and, thus, greatly accentuating poverty among those eking out livelihoods from agriculture. The emerging differences in productivity and earnings widened further making it difficult for poverty reduction at a desired pace.

Savings and investment
It is nice to note there was a rapid upturn in the domestic savings rate over the last one decade and a half. From about 12 per cent of GDP in the 1980s, the share went up to claim about 15 per cent in 1990/91 and 20 per cent in 2007/08. On the other hand "national" savings rate also went up gradually over the same period. In generating savings, apparently, Bangladesh compares favorably with neighboring South Asia and low-income countries as a group. On the other hand, investment as a share of GDP (called capital accumulation) has also risen as rapidly as savings -- perking at about 32 per cent in recent periods as against roughly 17 per cent in 1990/91. Seemingly, the trend signifies a remarkable achievement when pitted against the ailing accounts of the past -- a period of negative domestic savings (foreign aid used for consumption) and reeling investment rate. It also reflects -- and clearly in defiance of the prophecy of doom -- Bangladesh's remarkable success in macroeconomic management and accelerating economic growth rate.

Impacts of aid
Net aid inflow in a country like Bangladesh is likely to produce following possible outcomes. First, availability of aid may contribute to large import surplus in either of the two following ways: increasing imports or reducing exports. Second, inflow of capital lead to an improvement upon the fragile foreign exchange reserves position, and finally, aid inflow may cause private capital outflows, legally or illegally. As explained before, in a regime of expanding export earnings and remittances, aid inflow in Bangladesh has little to do with financing any part of import surpluses. On the other hand, foreign exchange reserves have increased only by about one per cent of GDP -- far less than the net foreign aid inflow. The moot question then is: what happens with the rest of the inflow to the tune of about one per cent? In the absence of any alternative outlet, private capital outflow might peep into one's mind to explain the puzzle. In other words, during the period under review, about half of the foreign aid inflow has been siphoned off from the country.

Debt obligation
A lay notion is that Bangladesh is a highly indebted country. She borrows heavily to feed the present generation, and allegedly, forfeits the interests of the future generation. The appalling conclusion is that Bangladesh's growth has been driven more by the "mercy" of the donors than by the dictates of domestic capacities. Arguably then, the country is caught by the "debt trap" -- defined as borrowing from one source(s) to pay for the debt from other source(s). However, there are two answers to quell the concern. First, the news that the national savings exceed domestic investment to the tune of roughly 5 per cent of GDP, rejects the notion of heavy reliance on outside help -- an argument placed before. Again, budget deficit in Bangladesh is lower than in other South Asian countries; project aid has dominated foreign aid portfolio in recent years reflecting Bangladesh's success in development and its priority to public investment through development projects. Second, Bangladesh could bypass a debt trap that usually follows the growth process. It is evidenced by the debt servicing burden that, in the first half of 2000s, has remained extremely low in international standard -- accounting for 1 per cent of GDP and less than 8 per cent of export earnings. Relatively speaking, the burden is lower than 6 and 17 per cent of low and middle-income countries. In selected South Asian countries, the annual external debt services as percentage of total exports of goods and services (in 2003) was as follows: Bangladesh 7.3; India 18.1; Pakistan 12.7; Nepal 9.7 and Srilanka 7.2. One of the reasons for such a low burden could be adduced to, inter alia, a historical dependence on less expensive foreign official assistance rather than on commercial borrowing for financing investment needs. Especially, due to the larger share of grant to foreign aid in the past-accumulated foreign debt, and the ability to service such debt, have been within bearable burden.

Photo: Amirul Rajiv

Growth and inflation
A "beauty" of Bangladesh's growth process is that the rapid growth didn't inject excessive inflation into the economy. Bangladesh appreciably managed to avoid a double-digit inflation (as of 13 per cent) that she faced in the early 1980s -- induced by excessive expansion of domestic credit for quite a long time. Barring that, trimmed inflation followed highly triggered growth in most of the comparable periods. However, in subsequent periods, the rate of inflation reached about 8 per cent during 2005-08 adducible to a global commodity boom rather than home spun inflation

Growth and environment
But, scanty though, some qualitative evidences point to a negative correlation between growth and environment. In other words, the growth-spree in Bangladesh, allegedly, spearheaded adverse impacts on soil fertility and drinking water (arsenic). The growth has also contributed to various diseases from industrial pollution, filling-in water bodies for housing purposes, etc. One-fourth of a country's land should be covered with forests, but it is less than half of the requirement (9-10 per cent) in Bangladesh. Half of the cultivated land is alleged to have organic material below the critical level. An estimated 4 per cent of the agricultural yield is being lost because of inferior soil quality. Economic costs of reduced quality of life, lost productivity and health care due to air and water pollution would range between 1.3 to 3.5 per cent of GNP.

Growth and corruption
The second nexus is between growth and corruption. Bangladesh has already emerged as one of the most corrupt countries in the world by topping the list produced by the Transparency International. Of late, the position is reported to have improved, but that can hardly quell public's concern about rampant corruption in the country.

As it is said, corruption is not only worrisome in its own right, but it also drives to deeper difficulties. Researchers on corruption tend to argue that it is a serious illness of the society -- "a cancer spreading relentlessly from official to official and agency to agency, undermining institutions until the political system they represent collapses." Corruption must be healed to return the system to health. It must be stopped before it starts as entrenched corruption grows out of control, and helps perpetuate the development problems. Again, the fact that growth can go with corruption doesn't seem to be tenable: "corruption may not affect growth in the short or medium-term; rather it may generate greater growth effect. However, in the long-run, both growth and poverty would be affected unless corrupt money is spent inside the country to create multiplier and linkage effects."

In this case also, one is struck by the shortage of data. However, there is a "magic" figure -- and mostly coming from World Bank estimates -- that corruption in Bangladesh annually costs 2-3 per cent of the GDP. It seems to tally with a survey finding of the Transparency International Bangladesh (TIB). For the year 2004, the surveyed households (in 55 districts) are reported to have paid Tk. 6,796 crores as bribe to 25 public service institutions. The bribed money accounts for 2.34 per cent of GDP. This excludes corruption in terms of leakages in various programmes such as Food for Works, Vulnerable Group Feeding, Public Procurement of rice, etc., that are estimated to ranges between 30-35 per cent. Again, one investment climate survey shows that 58 per cent of respondents see corruption as a major obstacle against global average of 30 per cent, and South Asian region average of 25 per cent. Some 86 per cent of firms expect to give gifts in meeting with tax inspectors, almost twice the level of South Asia.

But let's leave aside the other leakages, and brace only the bribes that the public had to pay to their "servants" in a year. It can be argued that, had there been no such corruption (although absolutely an absurd idea right now), the economy would have witnessed a growth rate of approximately 8-9 per cent, other things remaining the same. In that case, income-poverty would have reduced by about 2 percentage point or more per annum, and the incidence of income-poverty could come down to 20-25 percent (instead of 45-47 per cent as it is now). We can possibly argue that corruption in Bangladesh has slowed down the pace of poverty reduction.

Capital flight
Capital flight -- defined as unofficial transfer of capital from Bangladesh to other countries -- continues to be confined in theoretical level and very little empirics are available on this. One researcher observes a massive capital inflow into the country in aid mostly, which has coincided with a substantial outflow of domestic capital. He hypothesises that inflow of foreign capital directly contributes to outflow of domestic capital. According to another study, there are three main channels through which capital flies out of the country. First, the payments extracted from import procurements (mostly of capital goods) and investment contracts. The corrupt people cunningly siphoned off much of these payments outside the border without leaving a trace on official accounts. "The fact that crude ICOR has been so significantly higher in Bangladesh than the average of South Asia and the low income countries group may partly be due to the higher rent on investment and procurement contracts in Bangladesh than in comparator groups." Second, capital flight may consist of under-invoicing of exports for which there are plenty of incentives. And third, capital flight has also been taking place by way of diverting potential remittances from Bangladeshis working broad.

Hunger and malnutrition
Bangladesh is bracketed as a hub of hunger. But she has been striving hard to contain hunger and malnutrition. Appreciably the country seems to have done better, if not the best. It has witnessed a rise in per-capita income and in tandem, a fall in the incidence of income and non-income-poverty. In this context, special mention may be made of the progress towards reducing non-income-poverty. Infant mortality rate is reported to be 41 per 1000; under-5 child mortality is 58 for boys and 56 for girls per 1000; girls have surpassed boys in terms of primary school enrolment (94 per cent vs. 89 per cent), and almost marginally lie ahead of boys in high school enrolment (43 per cent vs. 45 per cent); life expectancy is 68.1 years for females and 65.8 years for males (UNFP 2010). All of these indictors are deemed to have depicted improvements over the years. Again in terms of hunger trends, legal framework, small holder agriculture, social safety and gender equity, Bangladesh is reported to have ranked sixth among 28 vulnerable countries in 2010 scoring 44 points -- three points more than last year's.

But the complacency is overcast by the concern that, in addition to malnutrition and underweight, about 18 per cent of rural households are extremely poor (about 26 per cent moderate poor); nearly 10 million people can't make satisfactory meals a day, and 28 per cent have always remained poor during the last two decades. They failed to graduate despite the desperate efforts of the Government and the NGOs. Thus, seemingly, the dent to the den of hunger is yet to come.

There is little disagreement to the observation that Bangladesh at 40 is griped by pervasive poverty, rampant corruption, bad governance, and pyromaniac politics -- all that stand on the way of her rapid progress towards the fulfillment of the dreams of the martyrs. But there also seems to be no shade of doubt that she could courageously confound earlier critics who forecast an economic cripple for Bangladesh. Sadanand Dhume, a columnist of the Wall Street Journal writes:

"…. Bangladesh ought to be held up as a role model, especially for the subcontinents' other Muslim-majority state. Arguably no countries in the region share as much in common as Pakistan and Bangladesh, two wings of the same country between 1947 and 1971…..Yet, when it comes to government policies and, national identity, the two countries diverge sharply. As a percentage of gross domestic product, Islamabad spends more on its soldiers than on its school teachers; Dhaka does the opposite. In foreign policy, Pakistan seeks to subdue Afghanistan and wrest control of Indian Kashmir. Bangladesh, especially under the current dispensation, prefers cooperation to confrontation with its neighbors…...Nearly 40 years ago, only the most reckless optimist would have bet on flood-prone, war ravaged Bangladesh over relatively stable and prosperous Pakistan. But with a higher growth rate, a lower birth rate, and a more internationally competitive economy, yesterday's basket case may have the last laugh."

The writer is a Professor of Economics at Jahamgirnagar University. The article, with twists of language, is taken from his newly released book “Beneath the Surface Development Issues in Bangladesh and Beyond (2011). The references can be found in the book.