The issue of policy comes up frequently in discussions.
Whether the subject is an economic issue, or the concern is with some societal trends, we often talk about the need for some government action.
The government has many policy tools at its disposal.
Taxes, subsidies, and government expenditures are important policy tools.
These fall in the fiscal domain. Import tariffs, export duties, and quantitative restrictions on imports and exports are subjects of trade policy.
Controlling the volume of money supply, setting or steering interest rates, adjusting the exchange rate of the Taka are examples of monetary or exchange rate policy.
And then there are legal and regulatory interventions in support of policy.
Whatever the tool may be, it is widely recognized that policy actions of the government can have huge consequences.
A single act of government policy can change the lives of millions of people.
The change can be enormously positive if policies are well conceived and properly implemented but can have huge adverse consequences if they are not.
By the same token, policy inaction, i.e., not taking a policy when one is needed, can also be very costly.
In talking about policies, or advocating certain policy actions, it is important to understand policy dynamics.
To do so, we may study the history of policy interventions in Bangladesh.
Such an exercise, something that I am currently engaged in, will provide us very useful clues on what makes the government in Bangladesh move.
It will tell us what the typical drivers of policy actions are in Bangladesh.
In what follows, I propose a framework to examine policy dynamics.
This is based on the actual experience with policy making in Bangladesh.
I focus on the formulation of economic policy, but some of what I say is also true of other types of policy making.
Relation between economic dynamics and policies
Historically, we have observed a two-way relationship between economic dynamics and policies.
Policy actions were intended to induce some desirable action (or cessation of an undesirable action) on the part of economic actors.
At the same time, policy actions themselves were triggered by the actions of economic actors. Such synergies have played out through several rounds.
Developments in the economy, which result from the cumulative actions of innumerable economic actors such as consumers, producers, and traders, trigger policy actions in various ways.
Positive developments signal the beginning of a potentially transformative long-run trend.
Here, policy actions are taken to help realize that potential, i.e., to convert the nascent developments into transformative change.
Sometimes, the trends are negative such as a slowing down of production.
Here, policy actions are taken to reverse the trend.
Sometimes, policy actions triggered by a positive trend in an economy may be slow in coming, leading to a slowing down or reversal of the positive trends.
This may put pressure to accelerate the policy reforms.
The impact of policy changes depends on how well these are implemented and how much response these can elicit from the economic actors.
Sometimes, even when policy does not change substantially, there may be shifts in the way economic actors respond to existing policies.
For example, economic actors may become more entrepreneurial or less risk-averse and thus start responding differently to the same policy initiatives.
This change in response may be substantial enough to generate a change in the trajectory of economic variables.
Acceleration in an economic variable, in turn, generates new dynamics.
A policy initiative that creates possibilities in the economy may also reveal certain constraints, which in turn, generates demand for additional policy interventions to remove such constraints.
The full benefits of the initial round of policy interventions may thus be realized only if such follow up policy initiatives are taken.
For example, an expansion in rural road networks can make villages better connected to the rest of the country, thus expanding markets for agricultural products.
However, farmers may be constrained from exploiting the increase in demand because, even with a road connection, they might lack access to inputs or are unable to take their produce to distant markets if logistical services are inadequate.
In such cases, the full impact of expanded connectivity is not realized till the constraints are relaxed.
Sometimes constraints not initially considered binding may become so after some positive changes in the economy.
For example, when road connectivity is poor, farmers may not consider selling to markets beyond their villages and thus the absence of logistical services, such as trucking services, may not be relevant.
However, when improvements in road connectivity create an incentive to market more widely, farmers will start feeling the absence of logistical services.
In such cases, market forces may sometimes act proactively to loosen the constraints.
Thus, in the example given above, market intermediaries may arrange for supplies of the required inputs, including through imports.
Truckers, sensing the increase in demand and the eagerness of farmers to meet that demand, may expand their trucking services to carry the produce to the markets.
Here, the market itself sorts out the issues without any further policy intervention.
However, in other cases, additional policies or programs may be required to unleash such market forces.
For example, restrictions on the imports of agricultural inputs may have to be relaxed, or additional infrastructure projects, such as improved marketplaces, may be needed to complement the expansion of the road network.
If these follow-on reform initiatives do not materialize, the transformative potential is not fully realized.
When such initiatives are taken, additional dynamics are created that may lead to a new growth acceleration, in the same or a different variable.
Visionary policies
Governments may proactively adopt policies based on a long-term vision or may react to prompting by other stakeholders in society.
In some cases, the government may notice the developments based on its own monitoring or research and conclude that some action is required.
Sometimes, the economic actors associated with the development would bring it to the notice of the government and ask for policy support.
This is particularly true for those who have a voice, such as the community of large businesses.
However, often it is a third group of people who alert the government about developments in the economy and ask that the government intervene with policy actions - to strengthen the momentum if the developments are positive or reverse them if they are negative.
This group may be termed as policy intermediaries or policy entrepreneurs, and includes academics, researchers, journalists, and donor agencies.
Politicians who are not themselves in policy making positions may also advocate policy interventions.
Sometimes, these intermediaries not only raise issues and demand policy interventions but also recommend specific policy actions.
Policy intermediaries provide the link between developments in the economy and the policy responses.
In some cases, a single policy change may have a far-reaching effect and shift an economic variable to a different trajectory.
However, in most cases, a single policy initiative usually does not have the impact that creates an inflection point, which is often the result of a critical mass of policy initiatives.
Also, most policy changes take time to have impact; hence what we see today is often the result of policies taken several years ago.
The chart depicts such policy dynamics at work. Let me illustrate these dynamics, i.e., the two-way interaction between policy and market developments, and the repeated playing out of such dynamics, with a real-world example from Bangladesh. This is the hugely consequential reforms in agricultural input markets carried out largely in the 1980s.
The 1970s saw the spread of HYV rice.
Rice production moved to a trajectory of sustained growth from the mid-1970s.
This happened within a public sector model, i.e., largely government import and distribution of inputs with many restrictions on private players.
Eventually, the constraints of such a public sector model became evident.
Irrigation growth decelerated and demand grew for expanding the role of the private sector.
The government responded in the early 1980s by initiating moderate reforms to liberalize input markets.
The licensing requirement for fertilizer dealers was abolished, restrictions on fertilizer movement removed and fertilizer prices deregulated.
There were also some reforms in the market for irrigation equipment.
These reforms triggered a market response. The supply and use of critical inputs, such as irrigation and fertilizer, increased substantially leading to faster agricultural growth.
However, such market responses revealed additional constraints.
More ambitious reforms were then demanded to address these constraints and strengthen the positive developments catalyzed by the first set of reforms.
The demand came from both economic actors and policy intermediaries.
But reforms were slow to come.
Detour
Agricultural growth slowed in the mid-1980s, further accentuated by devastating floods in 1987-88.
The government commissioned an agricultural sector review which recommended bolder reforms.
Policy intermediaries, including donors & researchers who had been advocating such reforms, finally found a resonance among top policy makers.
A tipping point in policy dynamics was reached and the pace of reforms accelerated.
In 1987, private traders were allowed to purchase directly from factory gates and ports.
In 1988, restrictions on import of engines and pumps, and standardization restrictions on irrigation pumps, were withdrawn, and sitting restrictions for irrigation removed.
In 1989, restrictions were removed for imports of power-tillers & pesticides.
Seed imports, except for rice and wheat, were liberalized in 1990 and, from 1992; the private sector was allowed to import fertilizer from world markets.
The above is just one example of how policy making has interacted with market developments in Bangladesh.
Certain developments in the market - such as slowing down irrigation coverage or of agricultural growth - created demand for further policy actions including regulatory reforms.
Such actions generated market responses and these responses, in turn, highlighted the need for further actions.
Government then responded with the actions, perhaps not all that was recommended but enough to keep the momentum going.
The scenarios depicted in the chart and illustrated with the real-world example of agricultural input market reforms were repeated several times in different policy areas during the past 50 years.
This is an important part of the explanation of the remarkable growth performance of Bangladesh.
Going forward, as we advocate policy actions in various areas, we will do well to study the past, and understand how policy dynamics have played out historically in Bangladesh.
A bit of history is useful to understand the present and to get guidance for the future.
The author is an economist, previously with an international development agency