How can Bangladesh fulfil the dream of being a middle-income nation soon?
Over the past five decades, Bangladesh has gradually emerged as an economic powerhouse – the country is now one of the fastest-growing economies in the world. Bangladesh’s journey has never been smooth. The decade of the seventies was very significant in the history of Bangladesh. It began with a devastating cyclone that ravaged the southern part of East Pakistan. In this decade Bangladesh liberated herself from Pakistani occupation and became a sovereign state. Just after three years of independence, famine adversely hit Bangladesh. Coups and counter-coups took place that added woes to the already fragile economy. Throughout the decade, Bangladesh was highly dependent on foreign assistance.
The economy has transformed itself from that the status of ‘Basket Case’ to one of the fastest-growing economies in the world in 2021. Much of its success has been achieved during the past two decades. This transformation has mostly been possible for the rapid growth of the ready-made garments (RMG) industry.
During this period she successfully dealt with two major obstacles – one was the expiry of the multi-fibre agreement (MFA) in 2005 and thereafter, the global financial crisis of 2007-8. Except for 2013 (6.01%), the country witnessed a steady GDP growth (annual%) from 5.57% in 2010 to 8.15% in 2019.
To sustain this growth, Bangladesh first needs to smartly deal with the challenges of the COVID-19 fallout. Simultaneously, she needs to address the existing development challenges that may jeopardise the ongoing successes. Bangladesh needs to do more in terms of coordination and strengthening of the institutional framework.
This requires revisiting the policies that led her to achieve immense growth in the recent past. The country perhaps needs some shifts from policies that may not contribute or turn out to be mess effective to growth to continue, particularly in the medium term. For growth to sustain in the long term, the public sector should be able to finance infrastructure services. For this, crucial changes in policies and institutional mechanism are a must.
Quality FDI is still a challenge
For more than a decade, Bangladesh sustained economic growth till 2019. 2020 was projected to be a robust year of economic growth but the COVID-19 made things upside down. Till 2019, dependency ratio, a steady reduction in the population growth rate and decline in output volatility made this possible.
During this period surplus, labour moved from the primary agricultural sector to different manufacturing sectors including but not limited to RMG, textile, non-metallic mineral products and foods. Economists have characterised this as a structural transformation of the economy.
Soared external inflows, export of RMG, the inflow of remittance, a conducive monetary policy, ambitious five-year plans, macroeconomic stability have contributed among others to sustaining growth. However, in terms of foreign direct investment, Bangladesh’s net inflows (% of GDP) was low (0.63) compared to similar South Asian economies like India (1.76), Sri Lanka (0.90), Pakistan (0.79), and higher than Nepal (0.60) and Bhutan (0.51). Another underlying factor contributing to economic setbacks is Bangladesh’s high-level vulnerability to natural disaster and climate change-related effects.
Significant barriers to private investment exist
The private sector has long been advocating to properly address different growth-promoting elements including access and cost of finance, macroeconomic stability, energy and transport infrastructure, geography, speedy and coordinated service delivery, good governance of growth-promoting public institutions and education and skills of the workforce. Except for energy, all other conditionalities remain as major challenges that are deterring private investment.
An ADB diagnostic study identified the following three constraints as most critical to private investment; a) insufficient net supply of reliable and environmentally sustainable energy, b) insufficient security about property ownership, and c) policies that stunt new self-discovery on industry and economic activities.
As regards energy, Bangladesh now has the capacity of producing 25171 MW of captive and renewable power. A very little slice of which (723MW) comes from renewable sources. So environmental sustainability in power generation is still a big challenge. The sector largely depends on natural gas compared to all other fossil fuel-based energy resources. However, natural gas is very likely to be depleted by 2028, which may emerge as a threat to environmentally sustainable power generation.
Property ownership is a paramount issue and Bangladesh needs to do more to establish good governance regarding property ownership, strengthening the registration system of land ownership. And when it comes to policies, the country needs to design policies to address these constraints urgently to attract foreign and private investments to their full potential – a critical need of the present time for inclusive and sustainable growth.
Two other underlying challenges that Bangladesh has long been facing are a) increasing the education of education and skill of the workforce b) enhancing the domestic savings and widening the tax base to finance education, health and infrastructure. In this context investment in education, health and infrastructure should be made to create know-how, improve the capacity and wellbeing of the workforce, create a conducive environment for promising sectors and improve the quality of urban living.
Such long term and thoughtful investments will place the country on very high quality and sustainable development path that will not only attract private and foreign investments but also improve the living standard of the people and reduce poverty.
Economic Growth has been inclusive but challenges remain
For development to work for all, equal distribution and access to economic opportunities, social services and basic needs are musts. Even in the face of substantial challenges, Bangladesh has been able to successfully implement different projects to address the basic needs of the people. The most considerable achievement in this regard is the reduction of poverty which fell to 48.9% in 2000 to 20.5 in the 2018-19 fiscal year. However, there are concerns over this achievement as the development partners and experts have argued that the decline was not evenly distrusted across all seven divisions.
Growth must ensure that access to basic needs like healthcare and education comes with equality and quality. Despite overall progress in healthcare, access to basic health is still limited to the poor and vulnerable community and people. Their access to basic infrastructure and productive assets is also limited.
It is pertinent to mention that microfinance played a very important in financing the productive assets that ultimately helped millions in Bangladesh and lift them out of poverty. Thanks to the driver’s role of key state institutions Bangladesh Bank and Microcredit Regulatory Authority. Microfinance has been largely inclusive and it will remain a key financing solution for low-income households and individuals.
As regards social protection, Bangladesh is committed to improving the landscape. According to Social Security Policy Support (SSPS) Programme Bangladesh’s spending on social security in FY 2020-21 is 95,574 Crore Taka which is 3.01% of GDP (16.83% of Budget). However, unplanned growth of the social safety net portfolio has caused fragmented implementation, with 123 programmes under 25 Ministries. To overcome this challenge, the country formulated a comprehensive National Social Security Strategy in 2015 to coordinate and consolidate the existing programmes to achieve better efficiency and results.
While the challenges remain to increase the coverage, COVID-19 emerged as a fresh challenge towards its effectiveness. According to the report commissioned by UNDP’s Regional Bureau for Asia and the Pacific, Bangladesh came up with the fewest social protection initiatives in the Asia Pacific region providing only income support or social assistance. The report recommended preventing job losses and providing social protection to those rendered unemployed.
In the face of COVID-19, Bangladesh needs to seriously consider a national pension system. At present the public pension schemes only cover public officials and the military. A national pension system will help individuals from falling to the depths of poverty and desolation and thus help them combatting crisis like COVID-19 and meet emergencies.
People in Bangladesh generally tend to save a portion of their income through formal and informal channels. The formal channel is mostly confined among the rich and the middle class. Therefore, an incentive programme to open a bank account and use mobile financial services to save a portion of their income will not only help the beneficiaries maintain a minimum standard of living during a partial or total loss of income but also generate a pool of funds to finance development and infrastructure projects.
RMG filled a vacuum
Initiated in the late 1970s with less than a million-dollar annual export, Bangladesh became the second-largest garment exporter in the world after China by 2015. There is hardly any argument that the growth of the ready-made garments (RMG) industry has been an amazing journey for Bangladesh employing millions, women in particular.
Though some other sectors like leather and shipbuilding also saw the same prospects, none could take off. On the contrary, the shipbuilding industry is crippled with the financial crisis and the leather goods manufacturing industry especially the tannery subsector has long been suffering from a lack of favourable infrastructure and access to finance.
The growth of the RMG sector has been possible due to excess labour supply that gave the sector a comparative cost advantage and tax waivers. With a change in the existing scenario and growing demand for fast fashion, the sector may not appear with the same potential to expand the economy.
While key competitors like China and Vietnam have largely diversified their export base, Bangladesh largely concentrated its focus in a few sectors for the last 15 years. China and Vietnam have successfully done basic manufacturing linking it to other sectors including different business services. Although goods in these business services are not exported, these have increased the productivity of the manufacturing exports. Learning from these experiences, Bangladesh must design policies to foster the value chain and production process of RMG and link it with other domestic sectors including the primary textile sector and business services.
An anti-export bias
Despite having potentials and being advocated by policymakers, non-RMG sectors are facing challenges in expanding their business. Some of these challenges which could be addressed by formulating conducive policies are yet to be in place. Incentives and tariff structures faced by non-RMG sectors have made it difficult to enter the global export market.
The contributions of non-RMG products to total export earnings in FY’20 were agriculture product (2.56 %), Leather and leather goods (2.37 %), Jute goods (2.23 %), Frozen food (1.29 %), Chemical products (0.59 %), Raw jute (0.39 %) and other products (7.58 %). Among these, only the pharmaceuticals sector witnessed a steady rise from U$D72.64 million export in 2014 – 15 to U$D129.95 million in 2018 – 19.
The industry has managed to sustain growth due to limited policy support (e.g. 10% cash incentive against export) and steady demand for medicine amid COVID-19 induced economic and health crises, which have adversely affected other major exports. However, the pharmaceuticals industry is heavily dependent on the import of Active Pharmaceutical Ingredients (API) as there are not sufficient backward linkages like a fully functional API park and bio-equivalence testing laboratory.
Growth and penetration of non-RMG final products to the world market have largely been arrested due to effective tariff protection rates. The non-RMG sector has remained confined within the domestic market due to the protection of final goods. This barrier can only be overcome by increasing links to the global value chain. In doing so, policies must endorse the non-RMG sector as it has profoundly done for the RMG sector by providing almost tax-free benefits under special economic zones.
Policy support must be inclusive
As elsewhere in the world, post-COVID-19 recovery will be led by the private sector by creating employment and diversifying the business into other sectors. It is also imperative to sustain the economic growth that Bangladesh achieved before the pandemic. A right mix of private investment and foreign direct investment will act as the driving factors in this regard.
At present, FDI is largely concentrated in RMG, banking, oil and gas, telecommunications. Of these, only RMG is linked to the global production chain. There are strong prospects for other areas like repair of machinery, light engineering and related services to grow with the right policy support. For other non-RMG sectors altering the tax regime can be helpful. This is necessary to eliminate special tax exemption and slash down tax biases across sectors.
Apart from the industry sector reforms, Bangladesh needs to increase spending on basic health and education. Sadly, Bangladesh has one of the lowest tax-GDP ratio (9.9% on an average since 2015-2019) which has made it quite difficult to increase such spending. Besides, governance is still a challenge when it comes to efficient spending of limited resources in health and education.
The only way to address this challenge is to have conducive policies in place that will not only support growth but also inclusive. By doing so, the government can have the private sector as a strong alley for inclusive development in the forms of public-private partnership.
It is worth mentioning that a recent study conducted by the Centre for Policy Dialogue estimated that the COVID-19 pandemic threw more than 3% of the labour force out of their jobs and made 16.38 million people new poor. Therefore, Bangladesh has no other alternative but to focus on creating new jobs by reallocating resources in infrastructure and giving equal policy support to the potential non-RMG sectors. Reallocation of resources should also be considered in education to have skilled human resources and on creating on job skill development programmes.
The RMG sector has long been seen as the thrust sector of Bangladesh’s economy. It is still the largest contributor to the GDP, principal source of export earnings. Over the past few decades, the sector has also contributed significantly to socio-economic development through employment generation, poverty reduction, women empowerment.
But careful look into the recent performance of the RMG in terms of contribution to GDP (14.17% in 2013-14 to 11.70% in 2017-18) indicates that it is high time for Bangladesh to look beyond the thrust sectors and find better horizontal interventions across sectors. This can only be achieved if Bangladesh improves the different pillars of competitiveness – strengthened institutions, appropriate infrastructure, stable macroeconomic framework, good health and primary education, higher education and training, efficient goods markets, efficient labour markets, developed financial markets, ability to harness existing technology, domestic and international market size, sophisticated production processes and Innovation.
Like elsewhere in the world, COVID-19 had its scar on the economy of Bangladesh and the life of the people – the vulnerable and marginalised people, in particular, leading to unemployment or loss of income. Even though economic miracles happened here – migrant workers contributed more than U$D 18 billion in remittance in 2019-20 fiscal. Life expectancy, literacy rate (74.68% in 2019), per capita food consumption, everything witnessed firm growth over the past few years backed by steady GDP growth.
Much of Bangladesh’s ability and competitiveness lies in her capability of moving ahead with resilience amid challenges. Bangladesh graduated to middle-income status in 2015 and met all three eligibility criteria to graduate from the UN’s Least Developed Countries (LDC) to a developing country in 2026. For this to happen a policy framework, better urban planning and development and an enabling environment of economic activities, a national adaptation plan and a disaster management plan should be on the top of Bangladesh’s list of priorities.
This was first published in the 8th anniversary supplement of the Dhaka Tribune on 1st July 2021. This version is a bit longer from the published version. Click here for the pdf version of the article. The author gratefully acknowledges the valuable contributions from the entrepreneurs and industry experts in writing this opinion. Data have been used from different sources including the World Bank Group, Asian Development Bank, World Economic Forum, Bangladesh Bureau of Statistics and Bangladesh Bank.
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