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What will it take for Bangladesh to become a Middle Income Country?

Zahid Hussain's picture

This is the fifth in a series of six posts about the recent report, Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth. The previous post looked at the numbers behind Bangladesh’s goal of middle income status by 2021. The next and last post will look at the way forward.

For Bangladesh, achieving its goal of middle income status by 2021 will require more than business-as-usual: the average annual GDP growth rate will have to rise from the current 6 percent to 7.5-8 percent, while sustaining remittance growth at 8 plus percent. Faster growth in turn will depend on four main factors: (i) increased investment, (ii) faster human capital accumulation, (iii) enhanced productivity growth, and (iv) increased outward orientation.

Increase investment by at least 5 percentage points of GDP. Investment is constrained by infrastructure, business environment, land, and skills. Analysis based on Investment Climate Assessment surveys highlights the role of infrastructure in triggering a virtuous cycle of growth: better infrastructure will improve productivity which in turn will make exports more competitive and attract FDI, thus leading to further increase in productivity. Expanded provision of infrastructure has to come with easing difficulties in doing business, increasing access to serviced land, and meeting skill shortages.

Build on achievements in human capital formation. Bangladesh has done well in increasing the stock of human capital, topping the list of Asian countries along with Vietnam by improving average years of schooling by 1.3 during 2000-10. Our analysis indicates that achieving the needed GDP growth rate will require further increases from the current 5.8 to 7.3 average years of schooling. In addition, relatively low returns to schooling point to the importance of improving quality of education. These will require addressing external and internal inefficiency as well as weaknesses in education management and finance.

Raise productivity growth from 0.5 percent to 2 per cent per annum. In the near and medium term, the expansion of Bangladesh’s economy will likely by spurred by relocation of labor-intensive production from fast-growing countries like China. While this in itself is unlikely to raise Total Factor Productivity (TFP) at the firm level, aggregate level TFP may still rise as resources move from low productivity sectors such as agriculture to high productivity sectors such as manufacturing, as well as through “leapfrogging” by learning from the experience of similar firms in other countries. Increase outward orientation by deepening and diversifying labor-embedded exports. Bangladesh’s accumulated experience in mass manufacturing, strategic location, and labor cost advantage suggest that it should be able to deepen and widen its export basket as well as destinations as it integrates better with the global economy. The country is well placed to expand manufacturing exports given its geographic proximity both to the world’s two most populous countries as well as other fast-growing economies.

Given its expanding labor force, Bangladesh needs to continue to deepen its presence in the global migrant labor market. If average remittance per worker from the estimated 13 percent of the working-age population currently employed abroad stagnates, the stock of migrants would have to grow by 8 percent per annum to achieve the desired increase in aggregate remittances needed to rapidly attain middle income status. Enhancement in the education and skill composition of migrants and remittance related public policies can play an important role in increasing average remittance per worker.

Becoming a Middle Income Country will not be meaningful unless it comes with greater inclusion. Income inequality in Bangladesh is still high, underpinned by unequal distribution of economic opportunities. The good news is that inclusivity of opportunity has largely improved in recent years. Further improvements will require stimulating employment and productivity growth by focusing on enhancing the human capacities of the poor. The employment challenge ahead for Bangladesh is to absorb higher numbers of new labor force entrants at rising levels of productivity. The demographic dividend could enable the factor accumulation needed for faster inter- and intra-sectoral reallocation of labor.

Beyond inclusion, the sustainability of growth is subject to challenges posed by climate change and poorly managed urbanization. Climate change will have both ex-post and ex-ante impacts on growth. While ex-post impacts on growth is unlikely to be large over the next decade, ex-ante actions by households to reduce their exposure to climate variability can lead to lower productivity and income growth. Better access to credit, safety nets, and better labor market opportunities can help reduce households’ need to take such sub-optimal actions. Urbanization offers opportunities for faster growth, but also poses risks if not managed properly. Faster growth can be sustained if the urban space is well connected, livable, and innovative, which can be achieved by focusing on infrastructure, institutions, and incentives.

A vast reform agenda lies ahead for Bangladesh. A renewed focus is needed on a few key policy actions that are important in every aspect to raise the GDP growth rate to 7.5-8 percent, and to make it more inclusive and sustainable. Improvements in infrastructure, a better business environment, and investment in human development are necessary across all fronts. Other studies too have pointed to these as central to the growth agenda; the multi-dimensional impact of achieving notable progress in all three will be far-reaching. Doing so will not be easy because of capacity and resource constraints, and the political economy surrounding reforms, but the payoffs from successful implementation could be substantial.

Comments

Submitted by Anonymous on
Dear Dr. Zahid Hussain, This blog post series on Bangladesh has been most interesting and insightful. Considering that the country receives scant public and media attention, the little it does receieve is always negative, it is refreshing to read some upbeat information on the future of Bangladesh. Being the son of Bengali migrants to the UK, I understand from first hand experience the growing role of remittances back home. However, it is important to design and national or even division level mechanism by which we can collectively ensure that the remittances being sent back go into productive investment for domestic benefit. Look forward to reading the last and final part of the series. Kind regards, Mr. Zohir Uddin.

Submitted by Zahid on
Dear Mr. Zohir, Thanks for taking the time to comment. You are absolutely right about the focus on negatives when it comes to Bangladesh. This goes to show how negativism outlives positive perceptions. Remittances are now a very critical part of Bangladesh economy and I expect it to continue to grow in the near and medium-term. I have submitted four blogs on remittances and migration. I hope you will have the time to read them.

Submitted by Md. Joynal Abdin on
Now is the time to prepare ourselves to make and maintain an industrialisation-friendly environment for an industrialised Bangladesh. Let's see what necessary initiatives can be taken to create an industrialisation-friendly environment in Bangladesh. The list may include the following: Survey of our existing industrial sub-sectors: None of the government or private sector institutions is ready to provide a comprehensive profile of any one of the industrial sub-sectors of Bangladesh. How many enterprises are there in any particular sector? What types of machinery they are using currently? What are the latest technological up-gradations our competitors made in the sector? What types of raw materials they are using? What is the annual turnover of the sector? What is the total size of this sector at home as well as around the globe? Who are the existing importers and suppliers of a particular type of products? What is the recent trend of this industry locally and globally? What types of institutional supports this industry needs? What is the level of our products in context of quality and price? So, the first step of our preparation for industrialisation should be to conduct detailed survey of our existing industrial sub-sectors and prepare database of the existing enterprises, machinery, raw materials, imposed duties, required institutional supports etc. Developing need-based technical hands: Based on the detailed survey, technical training on trade/technologies, which are in great demand, may be started. For example, training in mould die designing, CAD CAM operations, CNC vertical machining centre operation etc. for light engineering, plastics and electrical sectors. Cluster-based technical and managerial training may be another option to develop need-based technical hands for flourishing of that particular sector. Ensuring easy access to finance with a competitive rate: At this point, easy access to finance is vital. Access to capital may be easy without collateral or without guarantor up to a certain amount. But availability of finance at a competitive rate is vitally important here because currently all the commercial banks, including state-owned ones, are providing loans with 15 per cent to 25 per cent rate of interest. At the same time, entrepreneurs are looking for bank loan and complaining every time that they are not getting it and the rate of interest is too high. Today our entrepreneurs are competing with their Chinese, Indian and Vietnamese counterparts at home and abroad. So, before fixing up local bank interest rates, the government/ policy-makers should think about the rates of interest now being charged in China or India and other competitor countries that export products either to Bangladesh or compete with our products in our export markets. Rates of interest should be equal to what our competitors are paying in their respective countries. If not, our products will become uncompetitive in terms of pricing in export markets and even in local markets. Seed financing, financing for technology up-gradation, financing for achieving international standard certification etc. should be introduced to promote industrialisation. Reducing import duty on all primary raw materials: The government may think of collecting either import duty or VAT, if all import duties on basic raw materials (do not have consumption without processing) are waived. The government incomes from import duty will go down. But this is for the time being. How much will be the reduced amount? All industries are adding at least 25 per cent value on raw materials to produce finished goods. Existing duty on raw materials varies between 4.5 per cent and 12 per cent. If we waive this 4.5 per cent import duty from the raw material import, the concerned industries will flourish. This will lead us to collect 15 per cent VAT from the finished goods produced with those raw materials. Questions may be raised that currently import duty to the extent of 4.5 per cent and VAT 15 per cent are being charged on the same products in different stages. How can the amount be larger if 4.5 per cent is waived? Think for a moment about currently imported amount and the imported amount without import duty. I am sure, without import duty, amount of import will be at least 50 per cent more than the current import. It will create a few more employment, increase GDP and 15 per cent VAT on the increased amount. The import duty waiver will pay more. Establishing an entrepreneurship development institute: Currently all business and engineering institutes are producing managers and professionals; in other words, job seekers in Bangladesh. None of the institutes is dedicated to create an entrepreneur, that is a job provider. Features, traits and characteristics of an entrepreneur are different than those of a manager or professional. Mind setting and risk bearing tendency of an entrepreneur make him a job provider instead of a job seeker. Bangladesh does not have any institute for creating entrepreneur. We should have it as soon as possible. India established the Entrepreneurship Development Institute (EDI) in Ahmedabad in 1983. It has dozens of branches throughout India creating successful entrepreneurs for last 30 years. They are providing free-of-cost technical assistance to the LDCs to establish entrepreneurship development institutions. Bangladesh may make use of this opportunity easily. So far as I know, EDI, India is assisting Myanmar, Cambodia, Vietnam and many African and Latin American countries to establish entrepreneurship development institutes. Establishing sector-specific engineering and technology institutes and testing labs: We have glass and ceramic institute, textile university, college of leather technology etc. Till now we are missing a plastic engineering and technology institute, world-class electrical testing laboratory, institute of automobile engineering and technology, furniture institute of Bangladesh etc. Such types of sector specific institutions and testing laboratories should be established to support industries for sustainable development of the sectors. Setting up of product display and sales centres: For promoting Bangladeshi products, permanent display and sales centres may be established in all international airports, major tourist spots at home and in all Bangladesh embassies abroad. Trade shows/exhibitions may be organised by all Bangladesh embassies. B2B matchmaking events may be part and parcel of these trade shows/exhibitions. Providing uninterrupted power and utility supplies to the manufacturing industries: Uninterrupted supply of electricity, gas, water etc. should be ensured with highest priority. Residential and industrial grid of electricity may be differentiated and uninterrupted supply of electricity should be provided to the industrial units. Load shedding should be lessened with lower utilisation of human resources and capital machinery as well as higher rates of wages and bills. Otherwise, per unit cost of products will go up and make local products uncompetitive. Establishing industrial park: It is quite easy to ensure all sorts of industrial infrastructure and utilities at a particular place. At the same time, there are a few industries like light engineering, plastics and electrical products which use few common processes and raw materials. Establishing collocated industrial park with these interdependent sectors may give more output; minimise processing time and cost, maximum utilization of land and other facilities. EPZ is a successful model of industrial park in Bangladesh for export-oriented industries. Similar success stories may be written by establishing collocated industrial cluster park for the Bangladeshi entrepreneurs. Providing/assisting in achieving international standard certification: Agro-processing, fresh vegetable, frozen fish, shrimp etc are major exportable items of Bangladesh. Main consumers of Bangladeshi agro and other products abroad are non-resident Bangladeshis. Foreigners are not consuming these because our products are not quality-certified by any international standard organisation. Export earnings from these products may increase hundred times if we can create ethnic market in these respective countries by ensuring quality certification so that foreign buyers could trust our products. The government may establish an institute or BSTI (Bangladesh Standards and Testing Institute) may increase its mandate to assist local factories to get international standard certification like ISO, FSMS, HACCP certification for increasing export earnings and promoting this sector at home and abroad. Creating an industrial cadre in civil service: Agriculture officers are supporting farmers in selecting appropriate crops for specific lands, better use of pesticide, and grading and preservation process of crop. Similarly, the government may create separate 'Industrial Cadre' in civil service to assist small and medium entrepreneurs in making their time-to-time decisions regarding business trends and expansion possibilities. It will create employment to business graduates in civil service and provide information/direction assistance to the entrepreneurs. A business graduate will feel proud to serve the small and medium entrepreneurs as a first class government official like agriculture/ fisheries officers. Removing legal barriers to industrialisation: There are many laws that create barriers towards industrialisation. Our bureaucrats are unable to go an inch beyond those laws. So many certification, licensing, and enlistment issues have to be resolved. Now it is the time to identify laws and policies creating barriers towards industrialisation and remove those on the basis of current priorities. Establishing common facility centres in different clusters: There are some industrial processes that need larger investment to be established, which is beyond the reach of small or medium entrepreneurs. For the sake of industrialisation, employment generation, increasing GDP growth and maintaining social stability, the government has to take initiatives to establish cluster-based common facilities centres to ease the process for the small entrepreneurs. Setting quality guidelines for different industries: One of the major causes of our failure to face the challenge of imported products is inferior quality of our goods with higher prices. If Bangladeshi products lose local market in the face of high quality imported products with the same price how can these local industries be sustained? The government will have to issue quality guidelines for different products being manufactured locally. BSTI may play a vital role to increase quality of local products by issuing and enforcing quality guidelines for all locally manufactured products. Adopting ICT and E-business and E-commerce: The government has yet to ensure E-commerce infrastructure for the local industry. By adopting ICT and e-business, our exports may be increased. Postal service and other e-commerce-related services should be strengthened to allow local entrepreneurs to go for a hassle-free e-business globally.

Submitted by Najmun Noor on
(This is a corrected version of comments submitted earlier after editing typos) Dear Dr. Zahid Hussain, Against the backdrop of a variety of factors impeding the pace at which the country should have been progressing towards being a Middle Income Nation, there are certain other elements that are severe deterrents. The need for a vibrant International Air Traffic Center has become acute. There is no way to fast track the creation of one. Conditions have to be right for a pulsating Air Traffic to be in place. Ironically, the success of domestic carriers is one of them. This evidenced by success of airlines and airports or of both. More often than not, the success of either or both of them is not mutually exclusive. It is not so much a question of the success of one (domestic/native carrier) being dependent on the other (airport) as much the fact it is the success of one inevitably leading to the other. The opportunity for showcasing a country's initial portrait or frontal impression or image is totally lost in the absence of either, or both. Alarm bells are often sounded with either flight of capital or corruption, or both. Hardly anybody takes notice of the loss of earned revenues brought about the near anarchy in the airline industry in Bangladesh. Bilateral point to point traffic gets affected and tampered with when there is overcapacity and markets run amok with large airlines dumping seats. Hardly anybody knows, too that carriers of Bangladesh were arm twisted into paying royalties to the big league carriers of other wealthy countries to address what they felt were"imbalance in capacities (frequencies)". And the result of the carte blanche operation allowed to the major carriers of other carriers: bilateral operators of markets are affected because of other large carriers, as a result of operating to/from markets of their own and with number of seats far exceeding the demand if markets of their own. So, who gets affected from this market indiscipline which deceptively wears the garb of free market mechanism or under the guise of "Open Skies"? The major big league airline is certainly not one of them which has the strength to power through the inordinate number of flights that are hugely excessive than what genuine market demand would suggest. The imbalance thus allowed spells disaster for domestic carriers and, one after the other, their operations cease for long-haul markets because they can never be feasible under this laissez-faire style of operation. Additionally, the possibility of a establishing a proper hub is lost, and with it the chances that would have led to investments and employment in multiple segments of the economy other than aviation as well. The potential of showcasing Bangladesh through its proper hub and projecting the country in other areas or take advantage from, like the multi-billion dollar tourism industry is also lost. Under these circumstances, too, where operations of airlines, should have some semblance of demand and supply, the existence of domestic or native airlines, let alone their growth, is always at stake. Small wonder that we see the domestic carriers, one after the other, end up going bankrupt without knowing what hit them. After all, one can conclude that the national carrier is inefficient. What about the others? The line of causation is simple here:...there is no successful airline unless its hub is successful. Examples of successful airlines all around justify that statement. In other words, the strength that airlines draw is from its hub and the success of it, which in a roundabout rationale, depends on the success of the native airline which makes it its hub. World Bank has gone about setting things right in many areas. Can we go expect something similar in the aviation industry in Bangladesh? After all, there is flight of capital here, too and the first step in the right direction would be to start with an objective and unbiased assessment of market demand. There are skilled experts capable of doing just that under a transparent method. And, by the way, the rationale justifies just that. We sincerely hope that the attention of World Bank will be drawn to making that objective analyses and set the stage of correction

Submitted by syeda on

I understand your point of view and you are correct to a point, the problem I have is that if the tables were reversed would an article written about African achievements contain any African Americans? By the way, I am only using that term to denote what people have come to identify themselves. I for one believe that some people of the continent of African should have been listed as achievers of goals and objectives in technology. They (African achievers) should have been added, but to negate the entire article for this oversight is the thing that whites have been doing to all of us for years, and it is about time we get over it and stop the petty bickering that holds us all back from greatness. Website design company Abu Dhabi

Submitted by Monir on

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