1 bef paper-sadiq ahmed-searching for sources of … for sources of growth in bangladesh ..... 1 a....

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The First BEF Conference | Radisson Blu Water Garden Hotel Dhaka

21-22 June,

2014

Searching for Sources of

Growth in Bangladesh

Sadiq Ahmed

Bangladesh Economists’ Forum

i

Table of Contents

List of Tables ............................................................................................................. i

List of Figures ........................................................................................................... i

Searching for Sources of Growth in Bangladesh .................................................. 1

A. Background ....................................................................................................................................... 1

B. Growth Theories ............................................................................................................................... 1

C. Bangladesh Growth Experience ........................................................................................................ 4

D. Growth Drivers ................................................................................................................................. 7

E. The Way Forward ........................................................................................................................... 15

F. Summary and Conclusions.............................................................................................................. 26

References ...............................................................................................................27

List of Tables

Table 1: Bangladesh Governance Performance ...................................................................................... 13

Table 2: GNP/GNI Per Capita ................................................................................................................ 14

Table 3: Nominal Protection Trends (FY 10-FY 13) .............................................................................. 24

Table 4: Range of ERPs and Average ERPs 2012 .................................................................................. 24

List of Figures

Figure 1: Average Real GDP Growth Rate ............................................................................................... 5

Figure 2: Growth rate of per capita GDP .................................................................................................. 5

Figure 3: Trend in Per Capita GDP, 1980-2013 (Nominal US Dollars) ................................................... 6

Figure 4 International Growth Comparison, 2010-13 ............................................................................... 6

Figure 5: Projected Growth of Per Capita GDP (Constant US $) ............................................................. 7

Figure 6: Saving, Investment Rates (% of GDP) ...................................................................................... 8

Figure 7: Recent Developments in Investment ....................................................................................... 10

Figure 8: Trend in Labor Force, 1974-2010 (millions) .......................................................................... 10

Figure 9: Percent of Working Age Population, 1974-2010 .................................................................... 11

ii

Figure 10: Labor Force Participation Rates, 1974-2010 ......................................................................... 11

Figure 11: Education Attainment of Labor Force ................................................................................... 12

Figure 12: Public Investment as Percent of GDP--Actual Vs Target ..................................................... 16

Figure 13: ADP Implementation (taka billion) ....................................................................................... 16

Figure 14: Private Investment as Percent of GDP--Actual Vs Target .................................................... 17

Figure 15: Average Time Required for Enforcing Contracts .................................................................. 18

Figure 16: Bangladesh 2012 Global Performance Ranking .................................................................... 19

Figure 17: Global Competitiveness Index 2012 ..................................................................................... 19

Figure 18: Protecting Investors ............................................................................................................... 20

Figure 19: FDI Inflows as % of GDP ..................................................................................................... 20

Figure 20: Bangladesh Structure of Production ...................................................................................... 22

Figure 21: Export/GDP Ratio (%) .......................................................................................................... 23

Figure 22: Average Tariff on Import Categories FY10-13 ..................................................................... 25

1

Searching for Sources of Growth in Bangladesh

Sadiq Ahmed1

A. Background

Since independence Bangladesh has been experiencing a steady increase in the growth rate of

real GDP, accelerating from an average of less than 4% per year during 1972-1990 to 6.4% in

2010-13. This is a remarkable performance, even after allowing for the low initial base.

Importantly, this performance is still below true potential, which gives hope that with a stronger

performance Bangladesh can expect to attain middle income status by the year 2021 as

envisioned in the Government’s Vision 2021 and the 20 year Perspective Plan (Government of

Bangladesh, 2011a). Indeed, the ongoing Sixth Five Year Plan (Government of Bangladesh

2011b) aimed at achieving an 8% annual rate of GDP growth by 2015 and the Perspective Plan

projected to further accelerate this growth to 10% by 2021. How realistic are these growth

targets? What are the likely sources of growth and what will it take for Bangladesh to realize

and sustain such growth targets over the next 15-20 years? What are the implications for

policies?

The objective of this paper is to look at these questions in some detail, drawing on lessons of past

experience and also from lessons of experience in the dynamic East Asian economies, in

particular from Korea, China and Malaysia, who all have experienced spectacular growth rates

during their own journey in transition from low income to middle income. The paper is

organized as follows: following the background, Section B provides a brief literature review of

the theories of economic growth. Section C looks at the recent growth experience in Bangladesh

and provides a brief scenario analysis of the per capita income situation in Bangladesh in 2030

based on a number of growth projections. Section D looks at the past determinants of GDP

growth in Bangladesh. Section E identifies the likely sources of growth for the future and

analyzes what will it take secure the growth drivers underlying the high growth scenario. Section

F concludes the paper.

B. Growth Theories

One of the earliest and simplest growth model emerged from the work of British economist Sir

Roy Harrod (1939) and America economist Evsey Domar (1946). Their work is now popularized

in standard undergraduate macroeconomic text book as the Harrod-Domar growth model. In the

Harrod-Domar (HD) model growth is driven by investment (i) and the productivity of capital (k)

measured by the capital output ratio (K/Y). The higher the rate of investment and the lower is

K/Y, the higher the rate of growth of output (g). In the HD model the investment rate in turn

1 Sadiq Ahmed is Vice Chairman of the Policy Research Institute of Bangladesh.

2

depends upon the savings rate (s). The higher the national saving rate, the higher is the rate of

investment. The growth model is expressed symbolically in expression (1) below.

k = K/Y

g = (1/k) * i

i = s

g = s/k …………………………………………………………………. (1)

Thus an economy that has a 20% national saving rate and a K/Y of 4 will grow by 5% per year.

To achieve a 10% annual growth rate either the saving rate has to go up to 40% or the

productivity of capital has to double (K/Y has to fall to 2). A combination of contribution of the

two growth drivers is also possible. In HD model the labor force is considered in surplus and as

such is not a constraint on growth. What is scarce is capital and therefore the challenge is to

increase capital accumulation and improve its productivity.

It is remarkable that this simple growth model gained considerable recognition and dominated

public policy making in the 1940s and early 1950s. Development efforts focused on raising the

national savings rate and lowering the capital output ratio. When the national saving rate was

inadequate the policy effort focused on getting resources from outside (foreign aid) to

supplement the domestic saving effort.

Economists were soon cognizant of the limitations of this overly simplified growth model and it

was replaced by the neoclassical growth model popularized by the research of Robert Solow of

the Massachusetts Institute of Technology. Following the traditional production function

approach, the Solow growth model (1956) identified three drivers of growth of output (Y):

increase in the stock of capital (K) through capital accumulation; increase in the stock of labor

force (L) and changes in technology (Ω). Thus,

Y= F (K, L, Ω)

/= F ( /, /, Ω). …………………………………………. (2)

In the neoclassical growth model an increase in either the rate of growth of capital stock (K) or

the labor stock (L) can increase the growth of output (Y). There are several features of the

neoclassical growth model that are worth noting:

First, with fixed labor supply, an increase in capital stock increases labor productivity and output

growth, But these increases are temporary. An increase in K over time with L fixed brings in

diminishing returns and the growth effects disappear over the longer term. For sustained

increases in Y, K and L need to grow continuously.

Second, when K and L both grow Y also grows. Under the assumptions of the neoclassical

model there is a tendency for the economy to reach a steady state whereby Y, K and L all grow

3

at the same rate. In that case output per worker (Y/K) remains unchanged. The only way output

per worker can grow is due to technological progress Ω that increases the productivity of factors

of production K and L.

Third, the most notable aspect of the neoclassical growth model is that technological progress Ω

is exogenously determined. Because of this feature, the neoclassical growth model is often

termed as exogenous growth model because the only way an economy in steady state can

achieve a growth in per capita income is through improvements in total factor productivity from

an exogenously determined technological progress (Ω).

One interesting feature of the neoclassical growth model is the conditional growth convergence

hypothesis. Owing to diminishing returns to capital, the marginal productivity of capital is high

in poor countries. With relatively abundant supply of labor the average labor productivity

continues to grow as more capital is accumulated in these countries, thereby contributing to

higher rate of output growth compared with rich countries. So, in the neoclassical model there is

an inherent tendency for growth rates of poor countries to catch up with rich countries. The

technology gap can continue to sustain the wedge, but since technological progress is exogenous,

it is also expected that the wedge from this would likely disappear and convergence in growth

rates will happen as poorer countries accumulate more physical and human capital.

The neoclassical growth model with various refinements continues to be a popular analytical

model in growth analysis. It has now become a standard tool for growth accounting that tries to

decompose growth results into the three standard growth drivers: accumulation of capital, growth

of labor and technology, also known as the Solow residual or total factor productivity (TFP).

Thus,

TFP = δY/Y – (α (δK/K) + β (δL/L)) ………………………………………….. (3)

The parameters α and β are the respective shares of capital and labor in national income. Since

TFP is exogenous, the main policy focus in a neo-classical model framework is to find ways to

augment capital stock and labor force. In a steady state, policy has no role because per capita

growth is driven entirely by TFP that is exogenous.

The exogeneity of TFP has come under considerable criticism. Several economists, notably Paul

Romer (1994) and Robert Lucas (1988), have pioneered research to suggest that technological

progress is endogenous. Investment in research and development (R&D) can augment

technology and promote capital deepening of production that can help increase the productivity

of capital and labor and thereby raise the growth rate of the economy. Also the concept of labor

is broadened to account for human capital that can be nurtured through investment in education

and skills development. Investment in human capital can also contribute to higher growth

through enhancing labor productivity.

4

Institutional economists like Daron Acemoglu, Simon Johnson and James Robinson (2004) have

developed the empirical and theoretical case that differences in economic institutions are the

fundamental cause of differences in economic development. Economic institutions influence

incentives, affect constraints on economic actors and shape economic outcomes. Different

groups and individuals benefit from different economic institutions, leading to a conflict over

these social choices. Growth encouraging economic institutions emerge when political

institutions allocate authority to groups that uphold broad-based property rights, when they

create effective constraints to minimize misuse of authority, and when there are relatively few

rents to be captured by power-holders. Thus, economies that have well-defined property rights,

where the rule of law prevails, where there is competition for resources, and where rent-seeking

behavior is minimal tend to have better long-term economic performance including higher

growth than otherwise.

The endogenous growth model is the often used analytical basis for explaining growth and

developing growth strategies. In this model GDP growth can be influenced by a whole host of

policies that work through the various growth drivers including physical capital, stock of labor,

investment in human development and investment in technology. Since total factor productivity

is endogenously determined, all policies that contribute to more efficient use of factors of

production can contribute to higher growth. The influence of institutional approach to growth in

growth strategies is less common partly because of the absence of a quantitative analytical

framework, although this is an emerging science and may gain momentum as new research

explores this aspect of the growth determinant.

One possible way to introduce institutional considerations in the endogenous growth model is to

postulate that TFP is a function of a range of variables including technology (Ω), deregulation

and competition policies that improve the efficiency of production (π) and institution variables

(µ) that boost productivity through a range of sources including business confidence, risk taking,

entrepreneurship, lower cost of doing business etc. (equation 4) In the neo-classical model these

factors are not relevant because of the absence of government, prevalence of perfect

competition, availability of perfect information, etc. In real world none of these assumptions

hold and institutional variables including government behavior become an important determinant

of growth.

TFP = F (Ω, π, µ) ………………………………………………… (4)

C. Bangladesh Growth Experience

Trend in GDP Expansion: Bangladesh economy has been experiencing steady acceleration in

economic growth over the last several decades (Figure 1). Thus, the average rate of GDP grew

from less than 4% per year during 1970-90 to 4.8% in 1990-2000; to 5.8% in 2001-2010 and

then surged to 6.4% in 2011-13 (the first three years of the Sixth Five Year Plan). This is a

Figure

Source: Bangladesh Bureau of Statistics (BBS)

remarkable achievement. The performance is even better in per capita terms (Figure 2). The

increase in GDP growth combined with a

Bangladesh to secure a fairly rapid expansion in the rate of growth of per capita GDP.

Figure 2: Growth rate of per capita GDP

Source: Bangladesh Bureau of Statistics

The acceleration in the rate of growth of per capita GDP led to a continuous expansion in the

level of per capita measured in current US Dollars. Thus per capita GDP grew from less than

$250 in 1980 to nearly $850 in 2013

once considered as a basket case.

2The Bangladesh Bureau of Statistics has recently revised the GDP series from a base of 1995

06. Under this new series, per capita GDP is base because consistent expenditure data for the 2005numbers with expenditure data.

4.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY1974-80

GD

P g

row

th r

ate

(%

)

1.6

0

1

2

3

4

5

6

1974-1980

An

nu

al

gro

wth

ra

te %

5

Figure 1: Average Real GDP Growth Rate



GDP growth combined with a successful population management policy allowed


Figure 2: Growth rate of per capita GDP


growth of per capita GDP led to a continuous expansion in the


nearly $850 in 20132. This is a remarkable performance of an economy that was

.

The Bangladesh Bureau of Statistics has recently revised the GDP series from a base of 1995-96 to a base of 2005

06. Under this new series, per capita GDP is said to have increased to $ 1044 in 2013. This paper uses the 1995base because consistent expenditure data for the 2005-06 series is not available to cross check the production

3.7

4.8

5.8

FY1981-90 FY1991-2000 FY2001-2010 FY2011

1.5

3.3

4.3

1981-1990 1991-2000 2001-2010 2011


successful population management policy allowed


growth of per capita GDP led to a continuous expansion in the


This is a remarkable performance of an economy that was

96 to a base of 2005-

in 2013. This paper uses the 1995-96 06 series is not available to cross check the production

6.4

FY2011-2013

5

2011-2013

Figure 3: Trend in Per Capita GDP, 1980

Source: BBS

International Growth Comparison:

first three years of the Sixth Plan compares favorably not only by own historical standards, it

also looks very good in international comparison (Figure 4). Along with China, India and

Indonesia, Bangladesh has been among the fastest growing countries in the World during 2011

2013.

Figure 4 International Growth Comparison, 2010

Source: World Bank Global Economic Prospects, July 2013

The Arithmetic of Bangladesh Growth

various growth paths for the expansion of per capita income

purposes three scenarios are postulated.

• A base case that projects

per year.

• A low case that assumes GDP will grow at 5% per year.

• A high case that projects

227.4

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1980

Pe

r C

ap

ita

GD

P

0

China

Bangladesh

Developing …

Thailand

Pakistan

Brazil

6

Figure 3: Trend in Per Capita GDP, 1980-2013 (Nominal US Dollars)

Comparison: The solid growth performance in Bangladesh during the



esh has been among the fastest growing countries in the World during 2011

International Growth Comparison, 2010-13

Source: World Bank Global Economic Prospects, July 2013

Bangladesh Growth Dynamics: An interesting question is the implications of

for the expansion of per capita income through 2030.

purposes three scenarios are postulated.

that GDP will expand at the current (2014) average pace of 6%

A low case that assumes GDP will grow at 5% per year.

projects GDP will expand at an average pace of 8% per year

277.8

365.5

685.0

841.6

1990 2000 2010 2013

2 4 6 8

Real GDP Growth Rate (% per year)

2013 (Nominal US Dollars)

solid growth performance in Bangladesh during the



esh has been among the fastest growing countries in the World during 2011-

ion is the implications of

through 2030. For illustrative

that GDP will expand at the current (2014) average pace of 6%

GDP will expand at an average pace of 8% per year

841.6

2013

10

7

It should be noted that these are average growth rates and they are consistent with a variety of

growth paths that have occasional upswing (above trend growth) and downswing (below trend

growth) on a year-to-year basis.

The implication for per capita income in constant price (2014 prices) US Dollar terms is

illustrated in Figure 5. The results are striking. Under the high growth scenario Bangladesh

attains middle income status comfortably by 2021 and moves on to $2500 per capita income in

20303. If growth rate stays at the present level, Bangladesh still attains middle income status by

2021. However, if growth slides to the low case, the attainment of middle income status by 2021

will likely become questionable4.

Figure 5: Projected Growth of Per Capita GDP (Constant US $)

The arithmetic of a higher growth path is well illustrated in these projections. The high growth

scenario causes per capita GDP to almost triple in 16 years, from a low of $882 in 2014 to $2500

in 2030. As compared to this, per capita GDP reaches $1867 under the base case and only $

1601 in the low case. The gap between the low case and high case is strikingly large and is

indicative of the importance of paying attention to the growth strategy.

D. Growth Drivers

The importance of achieving higher growth is obvious. The two main questions are what drives

growth and how policy could favorably influence growth dynamics? To answer these questions

3 The term middle income status is defined with respect to the income cut-off used by the World Bank. As of 2012, a country is said to have crossed over to the middle income category if per capita gross national income exceeds $1035 based on the World Bank Atlas Method. Because the range for middle income is very large, from $1036 - $12,615, countries that have per capita income between $1036- $4085 are said to be in the low middle income group. Countries with per capita income in the $4085 - $12,615 belong to the upper middle income group. 4 This is because the definition of middle income changes over the years and Bangladesh will be a border line case and may or may not cross over the revised threshold.

0

500

1000

1500

2000

2500

3000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

20

14

US

Do

lla

rs

Scenario L/C Scenario B/C Scenario H/C

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we look at the lessons of past growth experience in Bangladesh and also look at relevant

experience from the dynamic East Asian economies.

Drivers of Growth in Bangladesh

The review of growth theories in Section B suggest that among the most important growth

drivers are: the accumulation of capital, the growth of labor force, quality of labor force, and the

contribution of the growth of total factor productivity (TFP). Several researches have

investigated quantitatively the contribution of these factors to the growth outcome in

Bangladesh. All research efforts focused on growth accounting have concluded that the most

important determinant of growth in Bangladesh has been capital accumulation (World Bank

2012; World Bank 2007). This is hardly surprising and pretty much consistent with the

experience of most developing economies in the early stages of development. Results of growth

accounting show as expected that the expansion of labor force and investment in human capital

have contributed to growth. Research also concludes that while the contribution of TFP growth

was negative in the 1980s it played a positive role in the growth effort during 1991-2010,

especially during 2001-10 (World Bank 2012).

Role of Capital Accumulation: The trend in the rate of investment as a percent of GDP is shown

in Figure 6. The investment rate expanded from a low of 10% of GDP in the 1970s to 25% in

2013. This accumulation of capital has been the key driver of growth in Bangladesh so far. The

accumulation of capital has allowed the expansion of production capacities in agriculture, in

manufacturing, especially in the export-oriented garments sector, in infrastructure and in human

development. These in turn have fueled the expansion of economic activities in Bangladesh.

Figure 6: Saving, Investment Rates (% of GDP)


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5

10

15

20

25

30

1974 1980 1994 2000 2010 2013

Pe

rce

nt

of

GD

P

I/GDP NS/GDP

9

In the early years since independence (1974-1990) the expansion of investment was facilitated

by foreign saving mostly in the form of official aid (Figure 6). Since the early 1990s much of the

investment has been financed by national saving. This is a remarkable result and somewhat

different from the experience of many developing countries that have faced a saving constraint

for a fairly long time. Indeed, the expansion of national saving in recent years has exceeded the

investment rate thereby contributing to current account surpluses, which is very unusual for a

developing country. What this means is that there are other constraints on investment which if

removed would allow a greater pace of capital accumulation.

Several factors have contributed to the rapid expansion of investment and saving. These include:

First, is the positive role of a stable macroeconomic environment, which has been a hallmark of

long-term macroeconomic management in Bangladesh. By and large, fiscal policies have

maintained low fiscal deficits and kept public debt within prudent limits. Monetary policy has

been generally prudent keeping inflation under control. Exchange rate management has been

sound, avoiding long periods of appreciation of the real exchange rate. All these have helped

preserve the confidence of private investors.

Second, good progress has been made in banking reforms, especially since 2000. As a result,

there has been considerable increase in financial deepening (reflected in M2/GDP ratio) that has

contributed to investment financing. Interest rates have been generally within manageable range.

Third, progressive investment deregulation has provided incentives to private domestic and

foreign investment. Domestic private investment in particular has benefitted from this

deregulation drive.

Fourth, the expansion of national savings has benefited tremendously from the rapid inflow of

remittances, which now account for over 10% of GDP.

While the long term track record for the role of capital accumulation in driving growth is

generally very good, the recent results are worrisome. In the past two years, the investment rate

seems to have stagnated, especially the private investment effort (Figure 7). The fact that the

national saving rate exceeds the domestic investment rate is suggestive of an incentive problem

and other demand side constraints that require proper investigation and resolution. If Bangladesh

is unable to expand its investment effort substantially in the coming years, this traditional source

of growth will be jeopardized. This presents a major policy challenge.

10

Figure 7: Recent Developments in Investment


5

Role of Labor Force: The trend in labor force is shown in Figure 86. On average the labor force

has grown by 2.9% per year between 1974 and 2010, as compared with a population growth rate

of 2.1%. The faster expansion of the labor force is caused by two factors. First there is a rising

share of population in the working age group of 15 plus (Figure 9). And second, overall labor

Figure 8: Trend in Labor Force, 1974-2010 (millions)

Source: Bangladesh Labor Force Survey Various Years7

5The BBS data have been modified to make them consistent with balance of payments data from Bangladesh Bank

and public investment data from Ministry of Finance (Ahmed 2014). 6 Labor force data and related analysis are based on separate detailed research on employment aspects of Bangladesh. See Ahmed (2013). 7 The definition of labor force is population age 15 and above and follows the “usual definition” that excludes unpaid family labor. Historical data is adjusted to confirm to this definition. Ahmed (2013) provides details of labor force definition and sectoral distribution issues.

25.126.6 26.8

20.321.7 21.4

4.8 4.9 5.4

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25

30

2011 2012 2013

Total I/GDP Priv I/GDP Pub I/GDP

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10

20

30

40

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60

1974 1981 1984 1985 1986 1989 1991 1996 2000 2003 2006 2010

Lab

or

Fo

rce

siz

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ilio

ns

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force participation has been increasing owing to the growing participation of female workforce

(Figure 10). Because of the growing female participation, the share of female labor in total labor

force is rising, expanding from a low base of only 12% in 1989 to 30% in 2010. Yet, the level of

female participation (only 36% in 2010) remains low by international standards. This is another

important area where policy intervention would contribute to higher growth. Thus, as policy

efforts are made to increase this participation, total labor force and the share of female labor

force in total labor force will both rise. This is a potentially favorable factor for future growth

prospects in Bangladesh.

Figure 9: Percent of Working Age Population, 1974-2010

Source: Bangladesh Labor Force Survey Various Years

Figure 10: Labor Force Participation Rates, 1974-2010

Bangladesh Labor Force Survey Various Years

0

5

10

15

20

25

30

35

40

1974 1981 1984 1985 1986 1989 1991 1996 2000 2003 2006 2010

% W

ork

ing

ag

e p

op

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tio

n

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10

20

30

40

50

60

70

80

90

100

1974 1984 1986 1996 2000 2003 2006 2010

Pa

rtic

ipa

tio

n r

ate

(%

)

National Male Female

12

Alongside the contribution of the expansion of labor force, investments in human capital have

helped improve the skill of the workforce thereby contributing to higher growth. Bangladesh has

put strong emphasis on the expansion of education with impressive progress in primary and

secondary education enrollments. With progress in literacy and education, some improvement

has happened in the quality of the labor force (Figure 11). For example the percent of work force

with no formal education has fallen from 47% in 1996 to 40% in 2010. Similarly, the percent of

work force with secondary or higher education levels has increased from 30% to 37% over the

same period. Yet, the facts that 40% of the workforce had no education and 23% had only

primary level education in 2010 are indicative of a very low skilled work force. Clearly the skills

gap presents a fundamental policy challenge for future growth strategy.

Figure 11: Education Attainment of Labor Force

Source: Bangladesh Labor Surveys Various Years

Role of Total Factor Productivity (TFP): The positive contribution of TFP growth to GDP

growth during 1990-2010 is indicative of the potential role of a whole host of factors that could

improve growth prospects in Bangladesh. As noted in Section B, TFP is an endogenous variable

and can be influenced by government policies. The most important policy is the investment in

technology. Spending on research and development (R&D) is a major determinant of technology

development, innovation and adoption of technological change. Technology can also be

imported from abroad through investment in education of specialized skills in reputed foreign

universities and through foreign direct investment. There has been notable progress in all these

areas. R&D spending has been especially beneficial for agricultural production and has

contributed tremendously to increase rice yields that have been instrumental in helping

Bangladesh achieve rice self-sufficiency. In manufacturing much of the technological progress

has happened from specialized skills trained in foreign universities who have helped transfer new

technology and from foreign direct investment. A particular example of the later is the

technology transfer in the garment industry from partnership with foreign investors.

0

5

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35

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45

50

no education primary secondary tertiary

Pe

rce

nt

of

lab

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e

1996 2010

13

One important factor that is likely to have contributed to TFP growth is the increase in

competition resulting from trade and investment deregulation. The rapid decline in the share of

inefficient nationalized enterprises in manufacturing since the mid-1980s and the emergence of

competitive private manufacturing in textiles, readymade garments (RMG), pharmaceuticals,

food processing and leather based on trade and investment deregulation are an indication of the

increased efficiency of production in manufacturing. The expansion in manufacturing exports,

mainly in RMG, has been a major source of GDP growth and employment during 1990-2013.

Progress with Institutions: When it comes to the matter of institutions, Bangladesh is regarded

by many as a development surprise because good development outcomes, including higher GDP

growth, human development and poverty reduction, have happened despite the fact that both

political and economic institutions are weak. Governance is generally considered as weak and

Bangladesh performs poorly by most governance indicators such as Transparency International

(TI) ranking of corruption prevalence, and governance indices measuring the rule of law, voice

and accountability, government effectiveness, regulatory quality and others (Table 1). While it is

possible to quibble with these indicators, it is generally accepted by most independent observers

that poor governance and weak institutions are a major challenge for Bangladesh.

Source: World Bank and Transparency International

In the absence of a quantitative framework that links these indicators to growth and other

development outcomes, it is not possible to make a one-to-one correspondence between variables

representing institutions and growth. But it is reasonable to expect that stronger institutions will

improve total factor productivity. So, a future growth strategy must pay greater attention to the

establishment of stronger institutions to support and sustain higher growth over the longer term.

Lessons of Experience of Dynamic East Asian Economies

Per capita income outturn of three dynamic East Asian economies is shown in Table 2. The

Table also dramatically illustrates the magic of growth compounding. In the early 1970s, all

three countries were low-income countries like Bangladesh. Indeed per capita

Table 1: Bangladesh Governance Performance

TI 2012** Worldwide Governance Indicators 2011*

Corruption

Perception

Index

Voice and

Accountability

Political Stability

and Absence of

Violence

Government

Effectiveness

Regulatory

Quality

Rule of

Law

Control of

Corruption

Bangladesh 26 -0.31 -1.50 -0.85 -0.81 -0.72 -1.00

India 36 0.41 -1.20 -0.03 -0.34 -0.08 -0.56

Pakistan 27 -0.83 -2.70 -0.82 -0.61 -0.90 -1.00

Nepal 27 -0.53 -1.55 -0.79 -0.72 -0.99 -0.77

Sri Lanka 40 -0.53 -0.54 -0.08 -0.09 -0.07 -0.42

*Estimate of governance (ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance

** TI CPI Score ranges between 0 (Most Corrupt) and 100 (Least Corrupt)

14

Table 2: GNP/GNI Per Capita

Countries Current US $ Annual rate of growth

1974 1990 2012 (GNI) 1974-1990 1990-2012 1974-2012

South Korea 480 5440 22,670 16.4 6.7 7.7

Malaysia 700 2340 9820 7.8 6.7 5.2

China 160 370 5720 5.4 13.3 7.1

Bangladesh 100 210 840 4.7 6.5 4.2 Source: World Bank World Tables (1993) and World Development Indicators 2014

income of Bangladesh was not much different from that of China. Both were very poor countries

with per capita income at below $200. South Korea achieved the most radical transformation,

moving from a low-income economy in 1974 to high income economy in the early 2000s. In

2012, its per capita income reached $22,670 that is 47 times higher than the level in 1974. China

similarly performed well after 1990. Malaysia also performed well but less dramatically than

Korea and China. The important point is that all three East Asian countries grew substantially

faster than Bangladesh over the past 40 years allowing them to move away from a low-income

status to higher middle income (China, Malaysia) or high income (South Korea) status. In

comparison Bangladesh is still at a low-income status. Had Bangladesh grown at the same pace

as China over the past 40 years her per capita income would have been $3575. If it had grown at

the same rate as South Korea, the per capita income would have crossed the present threshold of

upper middle income and reached $4723. The magic of the compounding effects of higher long-

term sustained growth is obvious.

While each of the three East Asian country experiences has its own unique features and political

and social institutions in each country are vastly different, a number of common features stand

out. Research shows the following common aspects in each country:

• In the early stages of transformation from low-income to lower middle income, the main

emphasis was placed on capital accumulation. All three countries achieved high rates of

national savings and investment.

• All countries emphasized investment in human capital from the early stages, both in

terms of education spending as well as skill formation through labor training. This

emphasis grew as the economy expanded with emphasis on tertiary and scientific

education,

• The transition from lower middle income to higher middle income saw considerable

capital deepening. Capital intensity of production increased substantially that contributed

to increased labor productivity.

• Considerable effort was put on the acquisition of new technology, especially through

rapid inflows of foreign direct investment.

• R&D spending was emphasized and it grew in strength as the capital and skill intensity of

production increased.

15

• The development of infrastructure (electricity, energy, transport network) was given

highest priority.

• All three countries relied very heavily on manufactured exports as an engine of growth.

E. The Way Forward

Bangladesh has achieved considerable success in securing higher rates of GDP growth but this

performance falls short of the aspirations articulated in the Government’s Vision 2021 and the

Perspective Plan 2010-2021. These growth rates also fall short of growth achieved in the

dynamic East Asian economies of South Korea, Malaysia and China and these countries have

moved far ahead of Bangladesh. There is no reason why Bangladesh cannot aspire to do better

and achieve higher growth.

The analysis of past growth experience in Bangladesh and the lessons of experience of growth in

South Korea, Malaysia and China suggest there are a number of policy areas where greater

emphasis needs to be placed for the future growth strategy in order to achieve the high growth

scenario of 8% per year illustrated in Figure 5 above.

Renewing the Investment Effort: Past efforts to accumulate capital paid off well in Bangladesh.

The experience of South Korea, Malaysia and China show that Bangladesh still has a long way

to go for deepening the capital intensity of production. For example investment rates in China are

in the 40% of GDP plus range as compared with 26% in Bangladesh. The Sixth Plan had

expected to attain an investment rate of 32% of GDP by 2015, which is not likely to materialize.

This is unfortunate in an environment where the national saving rate exceeds domestic

investment rate.

The breakdown in investment performance shows the shortfall happened in both the public and

the private sectors 8 . The Sixth Plan recognized the need for substantial increase in public

investment especially to upgrade infrastructure and invest in human capital. Evidence shows that

some progress was made in increasing the rate of public investment, but the effort fell

substantially short of the Sixth Plan target during the first three years (Figure 12). There were

two elements of public investment strategy underlying the Sixth Plan. The first strategic focus

was to strengthen public resource mobilization with a view to financing increasingly higher

8Total investment data is obtained from BBS, which uses the commodity flow method. Private investment data is

derived by subtracting public investment from total investment. Public investment data is from the budget and includes the ADP as well as capital spending outside the ADP. The BBS also compiles public investment data that shows huge variance from the budget. The gap grows exponentially in FY13. For example, BBS data suggests that some taka 360 billion was invested by public enterprises and local governments from own sources in FY13. It is well known that public enterprises run operational deficits. Local governments rely on government transfers to meet their operational costs. In this environment they do not have any surplus for investment and cannot possibly fund such huge investments (equal to 70% of ADP) from own resources.

16

Figure 12: Public Investment as Percent of GDP--Actual Vs Target

Source: National Budget

levels of public investment. The second strategic consideration was a recognition that even with

strong efforts there will be shortfall in required resources and as such the Sixth Plan aimed at

considerable investment through public-private partnership.

The implementation of public investment through the Annual Development Plan (ADP) is shown

in Figure 13. The ADP has increased progressively, but has always fallen substantially short of

the budgeted level. The gap is partly due to financing shortfalls emerging from a range of issues

including revenue shortfalls, large subsidy expenditures and implementation concerns. However,

a bigger disappointment is in the implementation of the public-private-partnership (PPP)

strategy. Despite ambitious plans, the PPP strategy has not taken off in any significant shape for

a host of reasons including institutional challenges. The net result is a substantial shortfall in

public investment rate in comparison with the Sixth Plan targets.

Figure 13: ADP Implementation (taka billion)

Source: National Budget

4.8 4.95.45.3

6.56.8

7.17.5

0

1

2

3

4

5

6

7

8

FY11 FY12 FY13 FY14 FY15

Pe

rce

nt

of

GD

P

Actual Target

305

385

460

550

285

359

411

524

256

329379

500

0

100

200

300

400

500

600

FY10 FY11 FY12 FY13

Ta

ka

bil

lio

n

ADP RADP Actual

17

Strengthening the public investment effort is a top policy priority. Policy has to focus on stronger

public resource mobilization, in rationalizing spending and reinvigorating the PPP strategy. The

scope for raising tax revenues is large since personal income taxes account for a mere 1.5% of

GDP whereas 35% of the national income is held by the top 10% of the population. This clearly

indicates the scope for increasing revenues from personal income taxes. A tax effort to increase

the yield from personal income along with the introduction of a well-designed property income

tax can easily yield an additional 2% of GDP in public resources in the next 2-3 years. Regarding

public spending, the energy subsidies must be rationalized and reduced to increase resources for

other priority uses including public investment in human development. Regarding PPP, a major

overhaul is needed to shift this venture from bureaucratic control to a specialized professional

agency that has international experience in managing large PPP infrastructure projects.

Private Investment Rate: The story is somewhat similar in the case of private investment. The

shortfall in the actual rate of private investment from the Sixth Plan target rate is significant and

growing (Figure 14). This is worrisome because the Sixth Plan identified private investment as a

major engine of growth and exports, especially in the manufacturing sector.

Figure 14: Private Investment as Percent of GDP--Actual Vs Target

Source: BBS

It is often argued that the primary reason for lower level of private investment is the

“contractionary” monetary policy stance of Bangladesh Bank since the beginning of 2012. The

proponents of “easy” or so called “accommodative” monetary policy argue that the recent tighter

credit situation has been constraining private enterprises from increasing real investment.

Evidence suggests that while availability of credit and its cost are important, this is only one

factor underlying private investment decision. Indeed in the current business environment,

availability of credit is not an issue for organized business enterprises. This is suggested by the

fact that the growth in the demand for credit is much slower than the supply. Investor surveys

show that what matters more for investors is the general investment climate and competitiveness

20.321.7 21.4

19.5

22.2 22.723.8

25

0

5

10

15

20

25

30

FY11 FY12 FY13 FY14 FY15

Actual Target

18

of the economy. Long delays in contract enforcement, limited access to serviced land, power and

gas shortages and red tape have all become major constraints to investment in Bangladesh.

Issues in Private Investment Climate: Some useful insights on areas of policy constraints that

impinge on private domestic and foreign investment emerge from a review of the investment

climate. Such data are compiled by the World Bank and other global institutions based on cross-

country investor surveys.

According to IFC’s Doing Business Reports, while many countries have improved their

institutional arrangements for contract enforcement, Bangladesh did not make major headway.

At more than 1400 days, the time required for enforcing a contract in Bangladesh is the highest

among its comparators and ranked at 182 out of 183 countries surveyed in 2012 (Figure 15).

Figure 15: Average Time Required for Enforcing Contracts

Source: Doing Business 2013, IFC.

Similarly, performance rankings for attaining construction permits, getting electricity for

business, registration of property suggest that investors continue to regard these areas as

problematic (Figure 16). Moreover rankings for getting credit facility, protection of investment,

payment of tax and resolution of insolvency have worsened relative to other countries. On the

whole, investors feel that getting electricity, enforcing contracts and resolving insolvency are

serious constraints.

Some additional insights obtain from looking at the rankings of global competitiveness index

(GCI). Bangladesh compares rather poorly with its major competitors, except Pakistan (Figure

17). At the global level Bangladesh ranks at 118 in terms of GCI when compared with 144

countries in 2012. China, India, Sri Lanka and Vietnam all out-perform Bangladesh by a wide

margin. This weak competitiveness is a major constrain on foreign direct investment.

0

200

400

600

800

1,000

1,200

1,400

1,600

Bangladesh China India Nepal Pakistan Sri Lanka Vietnam

Nu

mb

er

of

Da

ys

19

Figure 16: Bangladesh 2012 Global Performance Ranking

.

Source: Doing Business 2013

Figure 17: Global Competitiveness Index 2012

Source: GCI, 2012.

One positive finding, however, is with regards to the investor protection. Bangladesh ranks

amongst the best performers (top 25 countries) globally in terms of protecting investors (Figure

18). This is a useful result and suggests that Bangladesh is regarded by foreign investors as a safe

place to invest in terms of low sovereign appropriation risks. As such improvements in problem

areas relating to acquisition of land, getting electricity and enforcing contracts will boost foreign

investment in Bangladesh.

25

83

83

95

97

119

119

175

182

185

0 50 100 150 200

Protecting Investors

Dealing with Construction Permits

Getting Credit

Starting a Business

Paying Taxes

Trading Across Borders

Resolving Insolvency

Registering Property

Enforcing Contracts

Getting Electricity

118

59

29

6875

124

0

20

40

60

80

100

120

140

BD India China Sri Lanka Vietnam Pakistan

Figure 18

Source: Doing Business 2013, IFC

On the whole, the Bangladesh investment climate remains challenging and only modest progress

has been made during the first three years

effort has been restrained and the flow of foreign direct investment (FDI) has been small relative

to competitors. Despite some recent improvements, Bangladesh’s average net FDI level of

than 1% of GDP is the lowest

believed that 1-2% of GDP in additional FDI inflows would help GDP growth by about 0.5% on

average with employment generation of about 150,000 per year in the formal sector.

Figure 19

Source: UNCTAD Database 2013

Clearly, the investment climate agenda is substantial. Renewed efforts are needed to reduce the

cost of doing business through further deregulation and to strengthen the quality and availability

of infrastructure. Availability of land is fast becoming a m

investment that must be addressed by simplifying land procurement and lowering land

transaction costs. Computerizing land records will

25

100

0

20

40

60

80

100

120

140

160

180

Bangladesh China

Ra

nk

ing

s

1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Bangladesh China

Pe

rce

nt

of

GD

P

20

Figure 18: Protecting Investors

, IFC


has been made during the first three years of the Sixth Plan. As a result, the domestic investment


Despite some recent improvements, Bangladesh’s average net FDI level of

% of GDP is the lowest among the regional comparators (Figure 19)

2% of GDP in additional FDI inflows would help GDP growth by about 0.5% on


Figure 19: FDI Inflows as % of GDP

Source: UNCTAD Database 2013



of infrastructure. Availability of land is fast becoming a major constraint to manufacturing


transaction costs. Computerizing land records will greatly help simplification of land

49

82

32

49

China India Nepal Pakistan Sri Lanka Vietnam

3.65

2.171.80

1.46

7.21

China India Indonesia Sri Lanka Vietnam

2007-12 (Avg.)


of the Sixth Plan. As a result, the domestic investment


Despite some recent improvements, Bangladesh’s average net FDI level of less

). It is generally

2% of GDP in additional FDI inflows would help GDP growth by about 0.5% on




ajor constraint to manufacturing


greatly help simplification of land

169

Vietnam

7.21

Vietnam

21

transactions. Emphasis on industrial parks done professionally through the private sector is also

an important priority to boost private investment.

Policies for Expanding the Supply of Labor: Evidence provided in Section D showed that

Bangladesh is beginning to benefit from the demographic dividend. But there is considerable

scope to do better. At 36% the female labor force participation rate is still very low. With policy

efforts to promote female education, provide female labor training and eliminate social and

economic discriminatory policies against the women, this rate could be increased to 50% and

beyond. Implementation of the proposed National Social Security Strategy (Government of

Bangladesh 2014) will also help. The NSSS provides for measures that will help enhance the

participation of female in the workforce. These include social insurance for maternity benefits

and childcare facilities in work place. Both are important considerations for female labor force

participation.

Strengthening Human Capital: The experience of East Asian economies illustrating the

importance of this factor is very telling. While Bangladesh has also placed strong emphasis on

education, its public spending on education is considerably below what is needed to improve

education quality at all levels and to expand coverage at secondary and tertiary levels.

Bangladesh should aim to provide free education for all until grade 12. It must also invest more

to improve quality and retain children in schools. This is a long journey ahead but a stronger

head start could be made by increasing public spending in education from the current 2.2% of

GDP to at least 3% of GDP in the 2014 Budget and then followed through to 4% of GDP by

2020. This is arguably the best investment that Bangladesh can make. The lack of resources is a

false argument because Bangladesh spends more than 2% of GDP on energy subsidies and with

strong political determination the subsidies could be cut by 50% and the additional 1% of GDP

could be transferred to education.

The gains from investment in education will come with a time lag. Of immediate priority is the

need for developing a coherent and thoughtful labor training strategy. Bangladesh can learn from

the experiences of China, Korea and Malaysia how work skills were accumulated through on-

the-job training and other forms of public-private partnerships.

Developing the Infrastructure: A major lesson that Bangladesh can learn from East Asia is the

importance of infrastructure. A recent review of the infrastructure situation shows that

notwithstanding some progress, the infrastructure gap is large in Bangladesh (Ahmed 2014b).

The infrastructure supply is emerging as a major constraint on faster growth and must be

addressed soon. While good progress has been made in increasing the supply of electricity, there

are substantial gaps in primary energy and in transport, especially roads, bridges and railway.

There is a financing constraint as well as an implementation capacity problem. These problems

are not insurmountable. A part of the required increase in the capital intensity of production to

raise labor productivity must come in the form of investment in infrastructure. Public investment

and PPP are the main financing instruments. As noted earlier, both require additional policy

22

effort. Attention should also be given to strengthening the public entities that deliver

infrastructure services. In the short- to-medium term capacity constraints in the implementation

of large infrastructure project could be addressed through turn-key contracts supervised by

reputed international firms or donor agencies. Attention also needs to shift to improvements in

public procurement policies. The recent fiasco with the Padma Bridge is an example of how

governance problems in public procurement can hurt the interests of the country.

Acquiring Better Technology: Improvements in TFP can be secured through a cohesive strategy

to acquire new technology. The technology gap in Bangladesh is large. Again Bangladesh can

learn from the experience of East Asian economies. Lots of Bangladeshi students study abroad

acquiring special skills. Some return home but many don’t. As a result a sizable specialized

skilled population has migrated abroad. Unlike East Asia where lots of migrant skilled

workforce has returned back, Bangladesh makes no effort to attract back these skills. As a result,

a major source of technology transfer is under-utilized. Another potent source of technology

transfer that is under-utilized is partnership with direct foreign investment that has played a

substantial role in improving labor productivity and growth in East Asian countries.

Improvements in investment climate noted above will help attract direct foreign investment. But

governance issues reduce the attractiveness of Bangladesh as a foreign investment destination

that needs to be addressed.

Strengthening the Structure of Production: Consistent with other country experiences including

the East Asian economies, the Bangladesh production structure has been undergoing important

changes in terms of a rising share of manufacturing and a declining share of agriculture (Figure

20). The share of exports in GDP has also been growing, led by manufactured exports (Figure

21). Indeed, both manufacturing GDP and exports have served as the two main engines of

growth in recent years.

Figure 20: Bangladesh Structure of Production

Source: Calculated from BBS Data

0

10

20

30

40

50

60

70

Agriculture Manufacturing Services &Others

pe

rce

nt

of

GD

P

FY74 FY13

23

Figure 21: Export/GDP Ratio (%)

Source: Estimated from Bangladesh Bank and BBS Data

While this is encouraging, there is a long way to go. Manufacturing is yet the register and

sustain double digit growth that is needed to accelerate total GDP growth beyond the 6% growth

rate of the base case scenario. Manufacturing production is constrained by a number of factors

including stagnant private investment rate, infrastructure problems, skilled labor shortages and

inadequate technology transfer through FDIs. Of particular concern is the weak contribution of

the small enterprises. In Korea, Malaysia and China small enterprises played a substantive role

in both production growth and employment during the early phases of industrialization. This is a

missing link in Bangladesh that requires urgent policy attention. The policy reforms discussed

above will support a faster pace of growth of the manufacturing sector. A special effort is needed

to do a solid diagnostics of the small enterprise sector based on good data, which can then

provide the basis for developing a strategy for small manufacturing enterprises.

Regarding exports, much of the good performance is due to the rapid expansion of ready-made

garments (RMG). Thus, RMG exports account for almost 80% of total exports. While the

dynamism of RMG is to be celebrated on its own merit, the absence of a similar performance in

other manufacturing area is cause for concern. There is still scope for doing more in RMG and is

reflected by the increasing share of RMG exports in total exports, but policy efforts also need to

explore options for boosting other manufactured exports.

Research suggests that a major factor constraining the diversification of exports is the trade

policy that continues to suffer from an anti-export bias (Ahmed and Sattar, 2012).With regard to

trade policy, consecutive governments have recognized the need to reduce trade protection and

there was a series of trade reforms starting in the mid-1980s by which most quantitative

restrictions were eliminated and the tariff protection was sharply reduced. Nevertheless, trade

reforms have stagnated since 2007and there has been little or no progress in reducing anti-export

bias during the first three years (FY11-FY13) of the Sixth Plan. Indeed, if anything, there was

further deepening of the bias as becomes clear from the analysis of trends in nominal (Table 3)

3.7 3.5

5.5

13.7

16.1

20.3

0

5

10

15

20

25

1974 1981 1991 2001 2010 2013

Pe

rce

nt

24

and effective protection (Table 4). Apart from pharmaceuticals, whose domestic price is

controlled that tends to offsets the advantage of the fully protected domestic market, effective

rates of protection (ERP) average more than 200% for most import-competing domestic

industries when ERP for export products is zero or modestly negative. During FY11-FY13,

while average NPRs increased, those for intermediate inputs and capital goods declined further,

thus raising ERPs (Figure 22).

Table 3: Nominal Protection Trends (FY 10-FY 13)

Fiscal Year Un-weighted

Average CD

Average para-

tariff

Average

NPR

Top NPR* Coefficient of

Variation (%)

FY 10 13.67 10.21 23.88 79 153.38

FY 11 13.55 10.20 23.74 79 156.34

FY 12 13.57 13.39 26.96 88 164.97

FY13 13.87 14.72 28.93 108 156.41

Source: PRI staff estimates based on NBR Asycuda database

Table 4: Range of ERPs and Average ERPs 2012

Sub Sectors Range Average ERP

Footwear 214%--342% 273%

Jute Textiles 33%--125% 76.5%

Agro-based industry 4.5%--381% 187%

Light Engineering 117%--386% 219.5%

Ceramics 190%--239% 214.9%

Pharmaceuticals 9.4%--20.6% 3.1%

Electrical Products 1.6%--272% NA

Domestic Garments &Embroidery 5.75%--51% 25%

Plastic Products 86.8%--483% 259.8% Source: PRI estimates based on industry survey

The policy question is that if such asymmetrical incentives persist, it is difficult to understand

how non-RMG exports could expect to reach the kind of heights that was attained by RMG in

the global market. As the Ahmed and Sattar study of nominal and effective rates of protection

reveal, the current trade policy stance, while allowing a free trade regime to the RMG sector,

essentially perpetuates the high degree of protection support to domestic (import substituting)

industries, at the expense of emerging and potential export industries. As a result, investors are

driven to import substitute production due to their relatively higher profitability. Continuation of

this stance might prop up current profitability of import substituting firms, including that of

many that might be uncompetitive or inefficient. But import substitute production catering to the

domestic market cannot alone create jobs for the two million people added to the workforce each

year. Export production can achieve this objective.

25

Figure 22: Average Tariff on Import Categories FY10-13

Source: NBR Tariff database and PRI Staff Estimates

High ERPs typically indicate latent inefficiency in firms which tend to perpetuate over time. It is

then economically efficient to switch resources away from high ERP (processing margin)

activities to lower ERP activities – with consequent increase in productivity and manufacturing

growth. In Bangladesh, the way to do that would be to cut the sources of the high ERPs, which in

turn means cutting the output tariffs which protect them (especially the para-tariffs) combined

with increasing the very low input tariffs. This has the advantage of protecting against revenue

losses. Increase in imports owing to reduction in tariffs and SDs will also help revenue growth.

Moving forward, the challenge before policymakers is to reverse the anti-export bias of the tariff

and overall trade policy to ensure neutral if not favorable pro-export nature of the overall

incentive regime.

Improving Governance, Developing Institutions: Figure 18 showed that international investors

regard Bangladesh as a safe haven in regards to protection against risk of government

acquisition. This is a positive result from an institutional perspective and is reflective of

confidence in the area of establishing property rights. Bangladesh can cash on this strength by

striving to make progress in several other areas of institutional weakness.

One such area is rule of law. This is probably a binding constraint on foreign investment because

they investors not feel secure that they will be protected and treated fairly as per the rule of law

prevailing in the country. Quite apart from foreign investment, progress in strengthening the rule

of law is critical for sustained growth. If citizens do not feel comfortable of their security of life

and property under the rule of law, long-term investments and growth will suffer. This can be a

major determinant of outflow of physical and human capital and constraint the growth prospects.

Another area where stronger progress can be made concerns reduction in rent seeking behavior.

Deregulation in trade and investment has reduced the scope for rent seeking and improved the

5

15

25

35

45

55

FY 10 FY 11 FY 12 FY 13

Basic Raw Materials Intermediate Goods

Capital Goods Final Consumer Goods

26

efficiency of investment and production. Yet, political interventions in the areas of banking,

procurement, taxation, employment, land markets, conduct of monetary policy etc. continue to

promote rent seeking behavior and lower the efficiency of investment. Establishing strong

public agencies with clear definition of rules of business, professional management, regulatory

policies to protect public interest and enforcing the rule of law when violations happen can play a

major long-term role in improving incentives, lowering rent seeking and improving productivity.

Examples of such institutions are an independent central bank that is professionally managed; an

autonomous tax administration agency; a strong Ministry of Finance; fully privatized

commercial banks; computerized land records and simplification of land transactions; strong and

autonomous municipal governments; e-procurement; and a professional civil service with

recruitment, transfer, training and promotion all based on merit.

Finally, a continued and long-term effort is needed to address the corruption problem. It seems

to be deeply entrenched in all facets of Bangladeshi life and substantial progress will likely only

happen over the long-term. Progress with enforcing the rule of law, deregulation and

strengthening institutions will all help. Political reforms that provide for check and balance

between the different institutions of the government (executive, parliament and judiciary) will

also help. The government and the people need to join hand-in-hand through a social contract

that corruption must be tackled with full determination.

F. Summary and Conclusions

This paper looks at past growth experience of Bangladesh and identifies the sources of growth

moving forward to 2030. The paper notes that Bangladesh has made impressive progress in

increasing total and per capita GDP over the past 40 years. Per capita income has grown from

$100 in 1974 to $850 in 2013. Nevertheless, this performance is below the potential and much

lower than growth rates achieved by China, Malaysia and Korea. In 1974 these countries were

also low income countries like Bangladesh (albeit at higher end). Today Malaysia and China are

at the higher end of the middle income group while Korea has crossed over the high income

category. Bangladesh is still at low income country group and is aspiring to enter the low-end of

middle income by 2021. There is no reason why Bangladesh cannot achieve a higher growth rate

than presently, as envisaged in the Perspective Plan. The paper provides evidence of the sources

of growth in the past, policies that supported the growth expansion and constraints that hamper a

faster pace of growth. It identifies policies and institutional reforms that will help improve

Bangladesh’s future growth prospects. The paper concludes that policy efforts will need to focus

on the traditional sources of growth (capital accumulation, labor growth, human capital and

technology) while also paying attention to improving the efficiency of resource use through trade

and investment deregulation and addressing the governance and institutional constraint. Policies

that promote efficiency and improve governance and institutions are particularly important to

increase the contribution of total factor productivity growth.

27

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