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Elections

Economic growth and elections in Bangladesh

Zahid Hussain's picture

Bangladesh has turned the political business cycle phenomenon upside down.
 
Political business cycles are cycles in macroeconomic variables – output, unemployment, inflation – induced by the electoral cycle. This type of business cycle results primarily from the manipulation of policy tools by incumbent politicians hoping to stimulate the economy just prior to an election and thereby improve their reelection chances. 
 
Expansionary monetary and fiscal policies have politically palatable consequences in the short run. When pursued to excess, these very policies can also have very unpleasant consequences in the longer term in the form of accelerating inflation, decreasing savings, worsening foreign trade balance, and long-term expansion of government's share of the GDP at the expense of private consumption and investment. So immediately after the election, politicians tend to “bite the bullet” and reverse course by raising taxes, cutting spending, slowing the growth of the money supply, and allowing interest rates to rise. As a result, the regular holding of elections tends to produce a boom-and-bust pattern in the economy because of the on-again-off-again pattern of government stimulus and restraint to induce an artificial boom at every election time.
 
Bangladesh’s experience also shows the existence of a political business cycle in GDP growth, albeit with exactly the opposite pattern of boom and bust. GDP growth has consistently declined in each of the last five election years. It happened in 1991, 1996, 2002, 2007 (an election year without election) and 2009 (Figure 1). From the perspective of Western political business cycle theory these growth tendencies appear suicidal for the incumbent. Instead of expanding the economy faster to gain votes, the incumbents appear to be shooting themselves in the foot by allowing the pace of expansion to slow in the election year!
 
Is this another case of the Bangladesh paradox?

Connecting Sri Lankans to Prosperity

Eliana Cardoso's picture

The presidential election in Sri Lanka this January resulted in an easy win for the incumbent Mahinda Rajapakse. The end of the long lasting civil conflict with Tamil separatists, strong remittances and an IMF agreement boosted investors’ confidence. Foreign exchange reserves recovered from about one month of imports in the first half of 2009 to six months of imports by January 2010.

Now that the war is over and the global economy recovering, the government needs to grasp the opportunity to do the right things and avoid hurting confidence in the country’s stability, which is key to the rise in foreign investment and tourism.

The bad news is that the withdrawal of GSP Plus by the European Union countries can hurt industrial exports. The EU decision is worrisome. Thanks to the increase in manufacture exports from 6 percent of total exports in 1975 to 60 percent in 2005, firms began to lead Sri Lanka‘s connectivity with the rest of the world.