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The Paradox That Bangladesh Isn’t

Zahid Hussain's picture

This is the second in a series of six posts about the recent report, “Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth”. The first post was Better Jobs Can Outweigh a Secure Life. Next week’s post will look at how Bangladesh’s economy has remained resilient despite global and local shocks over the past few years.

Bangladesh lacks natural resources and good governance. It is beset by natural calamities. Corruption and self-destructive political non-cooperation are common. Yet Bangladesh’s GNI per capita more than tripled in the past two-and-a-half decades, from an average of US$251 in the 1980s to US$851 by 2012. This growth was accompanied by impressive progress in human development. Growth in GNI came almost entirely from growth in GDP in the 1980s and 1990s, but this changed in the last decade due to a surge in remittances from Bangladeshi workers abroad. GDP growth has accelerated by a percentage point and per capita GDP growth has accelerated by 1.7 percentage points in each of the last four decades. A recently published World Bank report, “Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth—Opportunities and Challenges” explains how Bangladesh managed to beat the odds.

Where did GDP growth come from? 

By definition, economic expansion is the sum of two sources of growth: (i) increase in inputs—employment, education level of workers, and in the stock of machines, buildings, roads and so on and (ii) increase in output per unit of input resulting from better management, better policy and, in the long run, increases in knowledge. The primitive form of growth accounting distinguishes between the part of overall GDP growth due to the growth in the supply of labor and part due to an increase in the value of goods produced by the average worker.

Labor productivity increases have driven growth, especially in the past two decades. While population growth has slowed, the proportion of working-age population has continued to increase, due to faster population growth in the earlier decades. As a result, changes in the ratio of working-age-to-total population have contributed to growth since the 1980s. However, demographic changes have accounted for only a small part of the variation in GDP growth over the past three decades. Bangladesh’s economic growth over that period has been driven by growth in GDP per working-age person––a measure of labor productivity. In fact, the post-1990 acceleration in growth is almost entirely driven by changes in labor productivity.

Increases in labor productivity are not always caused by the increased efficiency of labor. Workers may produce more either because they are better managed or have more knowledge, called total factor productivity (TFP), or because they have more equipment to work with (usually referred as capital deepening). Growth accounts show that capital deepening and, to a much lesser extent, TFP have been important for Bangladesh’s growth. This is generally similar to the growth experience in East and South Asia. Modest investment rates notwithstanding, capital deepening in both agriculture and industry played the most important part.

Capital deepening, in turn, was made possible by increasing the national savings rate due to a rapid increase in the domestic savings rate over the last two decades and surging remittances in the past decade (Figure 3 from the report Overview, below). The national savings rate, about 26% of GDP, in Bangladesh is now roughly the same as the South Asian average and that of low-income countries as a group. Demographic transition, greater integration with the global economy, financial deepening and macro-economic stability and policy reforms enabled the increased savings and investment rates.

• Bangladesh is now passing through the third phase of demographic transition with declining birth and death rates (Figure 2 from the report Overview, above). The dependency ratio continued to decrease during the last three decades, contributing to an increase in the savings rate.

• Openness in Bangladesh, as measured by the ratio of exports-plus-imports-to-GDP, increased from 16 percent on average in the ‘80s to over 40 percent in the ’10s. Overall, by aligning nominal exchange rate to reasonably competitive levels and avoiding significant periods of real exchange rate appreciation, Bangladesh was able to preserve export competitiveness substantially. Since adopting the floating exchange rate regime in 2003, the Bangladesh Bank has followed a market-based exchange rate policy that ensured smoothing out exchange rate volatility and building up foreign exchange reserves.

• Financial development indicators such as M2-to-GDP, private credit-to-GDP, and total deposits-to-GDP have risen significantly, indicating financial deepening. Bangladesh’s financial system has come a long way from a state-dominated system to a now largely market-based system.

• Macro-economic stability was maintained consistently with only occasional slips. Inflation in Bangladesh was contained well below double digits most of the time. While credit goes to sound monetary management, macro stability was also underpinned by sound fiscal policy.

• There have been significant policy reforms in the last three decades. The policy reforms to create a more market-based economy varied in pace of implementation across sectors and over different periods. Bangladesh embarked on market-oriented liberalizing policy reforms towards the mid-1980s. The beginning of the 1990s saw the launching of a more comprehensive reform program, which coincided with a transition to parliamentary democracy from semi-autocratic rule. Successive governments since then have on balance built on these reforms.

The World Development Report 2013 rightly notes: “Some countries have done well in human development indicators, and others have done well in economic growth, but Bangladesh belongs to a rather small group of countries that have done well on both fronts,(Chapter 6). The frustration for many is that Bangladesh's low labor costs and stable macro-economic policies are counteracted by politically motivated confrontations that paralyze the urban economy, vested trade union interests that disrupt its main port functioning, inefficient business interests that impede its dynamic sectors of industry, and corruption which holds up large and high impact infrastructure development.

Comments

Submitted by Shanta on
Zahidbhai: Thanks for this great post. It's nice to see Bangladesh continuing to make such good progress. Your post shows that policy matters even in, or perhaps especially in, weak-governance environments. But that raises two puzzles. First, how can a succession of governments, all of whom have engaged in what you call "politically motivated confrontations", also pursue sensible economic policies? Second, despite the evidence that you present in the report (and previous reports), my sense is that the general public, and especially the intellectual community in Bangladesh, is not supportive of these policy reforms. Trade liberalization, which as you show contributed significantly to poverty reduction, still has a bad name. Any thoughts on these apparent paradoxes? Shanta

Submitted by Zahid on
Dear Shanta, thanks for taking the time to read my blog. As usual, you ask incisive questions. I think pursuit of a minimal set of sensible policies is not only good economics but also good politics. Politicians on both sides of the aisle know how not to drive themselves out of business. On your vsecond question, yes the intellectual community have consistently opposed liberalization of imports, but they have also been supportive of increasing export orientation and to that end they have not generally (there are exceptions) opposed access to inputs at world prices for the exporters. Your thoughts make me wonder what could have been in the absence of mindless political confrontation and still very high trade protection. Zahid

Submitted by Zee Shan on
Dear Zahid Hussain. Very Interesting post and excellent post. Please tell me how much is the contribution of 1)Demographic Factor, 2)Remittance (in percentage) in overall economic growth outlook of Bangladesh.? and how much is the impact of unstable political factor (% of GDP) in GDP growth? Best regards. Zee Shan.

Submitted by Pamelia on
Dear Zahid Bhai: Thanks for your details on GDP growth. Do you know any latest article/data reviewed on Bangladesh's women's poverty over time, since 1971- 2013. How Bangladesh women came in to work, and what is the current statistics poverty in women in Bangladesh. Looking for explanation for why women moved into the workforce, if there is anecdotes, data, evidence... Best, Pamelia

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