On the fast track

We have the GDP numbers for the first 10 months of the fiscal year now and they show that the Bangladeshi economy is growing nicely. Of course, any of us can understand that just by seeing that the GDP growth rate is some 7% or so, as it was last year and as we predict and hope it will be next year. However, it’s worth having a look below that deadline figure because the country is showing all the classic signs of how growth actually occurs. There is no economy that has become rich which has diverged from the template that we’re following, so it should be considered as a good sign. This might not be entirely sufficient but it is a necessary condition. Agriculture is shrinking in importance, manufacturing and services increasing. And that really is just how economic growth happens, how a place becomes rich. Paul Krugman has pointed out that productivity isn’t everything but that in the long term it is pretty much everything. It is, absolutely and without a doubt, the major determinant of living standards over the long term. Which is why, if a place is to get rich, agriculture has to shrink. For our basic economic problem is that while agriculture is essential – no one has yet worked out how to live without eating – that basic agriculture is very low in productivity. Labour intensive, rain-fed (or, if you prefer, river-fed from rain further upstream) agriculture produces the peasant lifestyle. Not because there’s anything wrong with being a peasant, but just because that’s the word we use to describe the lifestyle which rain-fed labour intensive agriculture will provide. By global standards, that $2 and $3 a day is what we call absolute poverty and which was the historical lifestyle of nearly all humans. If we are to get rich as a people, as a nation, we therefore have to be doing more of what has higher productivity and less of this basic agriculture. Which is, as I say, what every other place that has become wealthy has done and which Bangladesh is doing right now. For when we look at those GDP figures in more detail, we find that agriculture has fallen as a portion of the economy. 14.79 % of GDP instead of the 15.35% (or, if we want to exclude fisheries and look at agriculture and forestry only, to 11.18% from 11.70%) the year before. Well, OK, maybe we’re not actually happy about a portion of the economy shrinking. How will we all feed ourselves? Ah, but this is falling as a percentage of the economy, not falling in absolute terms. After we adjust for inflation, agricultural output actually went up, to Tk1.34 trillion from 1.30. And that is a market of a place getting richer. Consider, for example, the United States. Agricultural production – there, it is higher than it has ever been. And yet it is also about 1% of GDP of the country and it employs about 1% of the population too. What has happened there these past two centuries – and a little slower across most of Europe – is that agricultural output has continued to grow while the rest of the economy has grown even faster. The sector, thus, declines as a portion of the economy even as it grows in absolute terms. Further, as we mechanise the system, we find that we use ever less labour. Until, as here, we find that the portion of the labour force used is about the same as the portion of GDP produced. This means we now have this sector – agriculture   as productive in its use of labour as the rest of the economy. What everyone freed up from standing in the fields is doing is of course manufacturing and services. And we are seeing that happens here in Bangladesh too. Industry’s (industry is usually counted as manufacturing plus mining and utilities) portion of the economy rose from 31.54% to 32.48%. We might think these are all small variations but don’t forget compounding. A movement of 0.5%, 1%, a year makes a huge difference when we start totting up such changes over a decade or three. And it really is these sorts of changes which, taking place over a century or two, made the currently rich nations rich. And we are seeing this happen here for which we’re all most thankful – as well as able to see that we’re on the right path. To use slightly less accurate and more handwavey figures, agriculture widely defined produces about 15% of Bangladesh’s GDP. It also employs about 40% of all labour. Industry is 30% of both output and labour; services 55% of GDP and 30% of labour. In a currently rich country like the US or UK, agriculture will be 1-2% of both GDP and labour, industry (more accurately, manufacturing) some 12% of both; and services everything else. Again, note that neither agriculture nor manufacturing and industry have shrunk in any manner. For both countries, they’re at all time highs in output. What has happened is that first manufacturing grew faster than agriculture, then services even faster again. And labour moved from one sector to the other in following that change in portions of output. This is the process by which a place becomes rich. People move away from lower productivity, like labour intensive agriculture, activities to higher productivity ones like manufacturing or services. And the joy of looking at our local GDP numbers is that we can see this happening, fast enough for the annual numbers, let alone the decadal ones, to reflect this. The bottom line here being that Bangladesh really is getting rich and its doing so in the way that everyone else did it before. Also, in the only way that anyone else ever has done so. Meaning that while things aren’t perfect – and of course nothing ever is that – we are on the right path and doing about as well as we could possibly hope to be doing.Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.