Economy: Changes, challenges and policy directions

Mirza Azizul Islam

Soon after its birth Bangladesh was branded as a basket case?. Somewhat later, the characterization was made a little more respectable as a test case for development?. The country has made substantial strides in its quest for development in the meantime. Two major global investment banks have taken note of the country's progress. Goldman Sachs's 2005 list of next eleven emerging economies and J.P. Morgan's list of frontier five economies include Bangladesh. The upcoming fortieth year of the country's existence as a sovereign, independent nation provides an opportune occasion for an objective assessment of what we have achieved so far and the challenges ahead as a basis for indicating future policy directions. Accordingly, this paper first identifies the important accomplishments and then highlights the lurking challenges. The limitations of space preclude any detailed discussion of policy measures needed to address the challenges; only sketchy indications of direction for the future are offered. The relevant data are presented in the accompanying table. The period covered is from mid1980s to fiscal year 2009; the choice of the period is based on ready availability of dependable data. Accomplishments The important accomplishments over the time period mentioned above can be summed up as follows:

Acceleration of growth in every five year cycle Population growth rate has been almost halved In consequence of the above, per capita GDP has nearly tripled A notable increase in investment as a proportion of GDP The distribution of investment as between the public and the private sector has undergone a sea change, the share of the latter rising from 36.6% in 1985 to 80.7% in 2009. A substantially reduced dependence on foreign aid which, as a proportion of GDP, has fallen to about one-third of the 1985 level. A much greater integration of Bangladesh with the global economy evidenced by phenomenal increase in the contribution of exports and remittances to GDP

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Commensurate with the experiences of development in other countries, there has been a drastic decline in the share of agriculture in GDP, falling from one-half to one-fifth; A notable feature of agricultural sector is the rise in productivity. Per acre rice production has almost doubled over the time period under review; The combination of accelerated GDP growth, increase in agricultural productivity, rise in export of labour intensive manufactures as well as remittances, fall in population growth rate and increasing emphasis on social safety net by successive governments have helped achieve remarkable progress in poverty alleviation; the proportion of population below poverty line now stands at one-half of the level in 1982.

Key challenges and Policy directions i) Accelerating Growth: Bangladesh aspires to become a middle income country by 2021. Election manifesto of the dominant party in the present ruling coalition targets GDP growth of 8 percent to be achieved by 2013 and 10 per cent by 2017. Given our historical experience of incremental capital/output ratio, the achievement of these growth targets will require an increase of investment/GDP ratio to 30-40 percent. This represents a quantum leap over the current level which has stagnated at about 24 per cent over the last decade. Both pubic and private sector will have to play their due role in increasing investment to the desired level. Policies will have to be designed for the Government to play a facilitating role to boost private investment. In addition, the Government will have to increase its investment in areas where private sector is unwilling or unable to invest because of externalities or other limitations. The areas of public investment include provision of adequate physical infrastructure (eg. Power and energy, transportation, port facilities, water resources etc.) as well as quality education relevant for meeting the market-driven skill requirements and efficient health services. The principal limitations that impede public investment are (a) paucity of financial resources, (b) lack of capacity to utilize effectively the available resources. As will be seen from the table, pubic investment as a proportion of GDP has been consistently falling and dependence on foreign aid for financing development expenditure remains high, despite remarkable decline of aid as a proportion of GDP. In order to remedy the situation, the Government needs to gear up domestic resource mobilization efforts. Inspite of some improvement during the last three years, tax revenue ( which accounts for about four-fifths of total revenue) as proportion of GDP in Bangladesh is the lowest among South Asian Countries and one of the lowest in the world,. An improved performance in this regard would require interalia
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enhancing the capacity of NBR in terms of both numerical strength and professional competence, reform of income tax laws to rid the system of the mess of rebates, exemptions and concessional rates, rationalizing import duty structure to reduce incentives for misdeclaration and proper administration of value added tax. All such improvements should be aimed at widening the tax net, rather than increasing the tax rate. Besides, pricing of public utilities and other services provided by the Government should be rationalized and the colossal losses of state-owned enterprises have to be reduced through subjecting them to hard budget constraint, corporatization and privatization. The persistent failure to utilize allocations under the annual development programmes eloquently demonstrates poor capacity of the bureaucracy. The Government needs to formulate comprehensive human resources management policy. Such policy should provide a system of rewards for professional competence and integrity as well as disincentives (including disciplinary actions) for incompetence and indecision. In addition, the Government should visibly demonstrate its commitment to avoid politicization of the bureaucracy. As regards private investment, the most important impediments lie in an unfavourable investment climate resulting from (a) political uncertainty (b) poor governance and (c) severe infrastructure deficit (elaborated later). As is well-known, politics in Bangladesh not exist remains any highly divisive. Though there does perceptible difference between the two major political parties in terms of basic thrusts of development strategy (e.g. outward-oriented, private sector led and poverty alleviation focused), the frequently observed acrimony regarding many non-economic as well as minor economic issues signals potential political instability. In order to restore a more congenial atmosphere for private investment, political parties should collectively assure the public that the differences of their views will not be allowed to degenerate into break-down of law and order. Bangladesh is widely perceived as a poorly governed country. The country falls in the bottom third in global governance indices such as Doing Business ranking of the International
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Finance Corporation, Corruption Perception Index of Transparency International and the World Bank Institute's Government Effectiveness Index and Rule of Law Index. In order to improve the situation, governance-related institutions should be strengthened, staffed by professionally competent, honest and independent-minded people and given sufficient autonomy to be able to operate without yielding to illegitimate extraneous influences. The Government should also consider reviving, in one form or another , the Regulatory Reforms Commission and the Better Business Forum set up by the immediate past Caretaker Government to improve business environment and economic governance. (ii) Meeting infrastructure deficit: There is a huge unmet demand for infrastructural facilities in Bangladesh. Daily shortage of electricity is estimated to be about 2000 megawatt per day even though only 45 percent of households have access to electricity. In case of transport, roads cater to 88 per cent of available services, yet less than 40 per cent of rural populations have access to all season roads and only 40 per cent of main roads are in good condition. The country remains overly dependent on a single port Chittagong. In order to eliminate the prevailing shortage and ensure balanced supply, huge expenditure will be needed in many areas. These include expansion and upgrading of road networks and railways, improvements in water transport which involve extensive dredging of rivers, exploration and extraction of gas and coal, facilities for import and internal transportation of coal and liquefied natural gas, development and use of renewable sources of energy, construction of deep sea port etc. The cost of reaching targeted electricity generation of 11,500 megawatt by 2015 alone as per the Government's road map is estimated to be $ 9 billion. Domestically raised public revenues and potentially available external assistance are unlikely to be adequate for meeting the huge financial requirements of infrastructure development. The Government should engage in serious consultation with stakeholders to achieve significant progress in public-private partnership, adopt measures to encourage investment by non-resident Bangladeshis and make use of the country's capital market to bridge the infrastructure financing gap. Besides, the Government needs to pursue a policy of economic pricing. iii) Ensuring Food security: There has been a considerable decline in population growth rate, but progress in this regard has slowed down in recent years. With a large base, current growth rate will add large numbers of people to be fed by ever-shrinking land available for food production. The shrinkage is the result of diversion of land for production of non-food crops, erosion caused by rivers, intrusion of saline water, increasing use of land for
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infrastructural and industrial development etc. The demand for food is continuously rising with increasing population and per capita income. At the same time, reliance on import to feed a huge population is not a viable option, particularly because many of the traditionally food-exporting countries are finding it difficult to export because of increasing domestic demand in their own countries. In recent times, many of them have imposed export ban, minimum export price and other restrictions on export. Effective policy actions are needed to raise agricultural productivity further. So far the increased productivity has been primarily input based. We have possibly reached a stage when efforts have to be directed towards knowledge-based increase in productivity. Recognizing this I had set up a dedicated fund for agricultural research. The present Government has retained and slightly added to it, but much of the fund remains unutilized. Agricultural scientists should come forward with proposals for research to increase agricultural productivity without necessarily requiring greater use of traditional inputs such as fertilizer and water for irrigation. Furthermore, it should be recognized that merely increasing production will not ensure food security for all, given the high incidence of poverty (despite significant reduction). Therefore, income-generating opportunities for the poor through the programmes like 100 days employment guarantee scheme instituted by me (the scheme has been retained by the present Government in a slightly modified form) micro credit and various other social safety net programmes will require expansion. Also, it has to be ensured that benefits of such programmes accrue to the targeted beneficiaries. iv) Dealing with the impact of climate change: Bangladesh is internationally recognized as one of the countries most vulnerable to climate change. The frequency and intensity of natural disasters such as drought, floods, cyclones, and tidal surges are likely to increase. These would seriously affect production of food and fisheries, cause damage to infrastructural facilities, and uproot many people from their habitat and disrupt their livelihood. The country would require huge financial and technological resources for adaptation and mitigation measures to deal with the impact of climate change. In consideration of the above, I had set up a Climate Fund financed by domestic resources. The present Government has retained and made substantial addition to the Fund. I also took initiative to set up a Multi-donor Fund which has received a contribution of $110 million from different donors by now. The Government needs to intensify efforts to augment these funds and ensure proper utilization by formulating and timely implementing required adaptation and mitigation related projects in consultation with relevant stakeholders.

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v) Developing human resources: Appropriate development of the country's abundant human resources will remain a major challenge for quite some time to come. Meeting this challenge is critical not only for meeting the skill requirements of accelerated growth with diversified production base of the domestic economy, but also for boosting remittances by exporting skilled labour. The policy issues that need to be dealt with in this context relate to, among others, appropriate allocation of pubic resources among various levels (primary, secondary and tertiary), balance among various disciplines (e.g. general, technical, medical, engineering etc.), ensuring acceptable quality at all levels, providing access to the meritorious students from under-privileged families and the relative role of the private and the public sector. vi) Diversifying production: The country's economy has undergone significant structural transformation as refleted in the falling share of agriculture in GDP and concomitant rise of industry and services. Nevertheless, our production base remains narrow. The contribution of manufacturing to GDP is less than 20 per cent. Exports are dominated by garments which account for about 80 per cent of total exports. The contribution of small industries to GDP is barely five per cent. Policy measures are, therefore, needed to increase the production of small industries which are typically more employment intensive and less import intensive. Diversification of exports should be encouraged through policy support for expansion of emerging products such as pharmaceuticals, ship building, light engineering goods etc. and potential new areas such as assembling of electronic products and provision of off-shore information technology services. Concluding Observations Bangladesh has made remarkable strides in its quest for economic development. A number of indicators provide indisputable testimony to the country's progress. Nevertheless, there are several daunting challenges. These relate to acceleration of growth, balanced development of physical infrastructure as well as human resources, ensuring food security for all, dealing with the potential impact of climate change and diversification of production. Policy makers will have to demonstrate firm commitment to deal with them to be able to fulfill development aspirations of our teeming millions. The author is Mirza Azizul Islam, Ph. D. is a former Adviser to the Caretaker Government, Ministries of Finance and Planning

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