Each of them poses difficult choices and challenges for the government
Bangladesh is facing five critical challenges in the coming year.
The challenges have critical long-run impacts in contrast to the issues around bringing the economy out of the slowdown from the pandemic and managing the end of Covid-19.
The five challenges each pose difficult choices and challenges for the government.
Two of these challenges focus on choices of development strategy; two focus on the two most important sectors of the society and one is the key foreign policy issue.
Economic growth and income inequality
This challenge is a continuing one for Bangladesh.
Over the past 20 years, the question of how to reduce income inequality has been discussed frequently and often it has been argued that this can be achieved without slowing the growth rate.
Most commentators appear to conclude that these two objectives are not in contradiction to each other.
That is, if one aims at maximum economic growth then one can still achieve an acceptable level of income inequality; alternatively, if policy choices are taken to reduce the income inequality this does not slow the growth rate.
We address this in a simple but compelling model: growth is directly connected with investment.
The more investment there is, the more rapid the economic growth.
Of course, one assumes that the investments to be made are the best possible use of savings to raise the value-added in the economy.
Otherwise, one can increase the growth rates by improving the allocation of capital.
High-income persons save more than low-income persons.
If government taxation and expenditure policies take resources away from the rich and give it to the poor, saving and investment will be reduced and the growth rate of the economy will be reduced.
The greater the income inequality, the greater the saving and hence the investment.
All economists in Bangladesh constantly counsel the government that the overall levels of investment must be increased to achieve more rapid growth.
Twist and turn as one tries, there is no escape from this argument. One can never say that there should be less investment!
There are two counterarguments: one is that the government can tax the rich and invest the funds.
Of course, one must tax the low savers. If you tax the high savers you do not increase saving; you shift the investor from the private sector to the public.
It does not work as government investments largely have very low returns so a higher growth rate is not achieved.
The second argument is that the rich shift a lot of resources overseas. This is a much-exaggerated argument.
Rates of return on investment are much higher in Bangladesh than in the advanced economies.
In my view, one of the important reasons for the increased growth rate of the Bangladesh economy is the rising inequality and the greater investments by companies that are making high profits.
I think there is a clear trade-off and one chooses to slow the growth of the economy at great risk.
What is the right growth strategy for the Bangladesh economy?
In the discussions of the way to achieve and maintain rapid growth, there is a dispute over the importance of export-led growth versus dependence on domestic production.
The history of the past 50 years is that for a low-income country to enter into sustained economic growth it must increase its exports faster than GDP growth.
Bangladesh has followed such a path over most of the past 30 years.
However, over the past five years, export growth has dropped below GDP growth.
The seventh five-year plan expected export of goods to reach $54 billion in fiscal 2019-20. Without the pandemic, it would have reached $42 billion at an annual growth rate of 6 per cent, which is below the GDP growth rate.
The eighth five-year plan will also argue for export growth at a faster rate than GDP growth. Government policy seems to adopt export-led growth.
There are constant calls for diversification of exports and all kinds of actions to support the garment sector.
In the past five years, there has been very limited success in these objectives.
The eighth five-year plan will have to come up with a revitalised programme for export growth; more of the same is unlikely to be successful.
Bangladesh’s trade economists have long explained that tax policies are biased against exports, but limited attention has been paid to this important finding.
Three problems have to be solved to have successful export-led growth.
a. Managing the exchange rate to achieve an undervalued currency.
Bangladesh is using export subsidies as a proxy for an undervalued exchange rate.
This does not work very well and violates the World Trade Organisation trading rules as Bangladesh moves to higher income levels.
b. The tariffs and value-added tax levied on imported raw materials to be used in the production of exports must be either not charged or easily and promptly refunded.
For the non-garment sectors, the various methods do not work. Garment factories trying to shift to high-value products face many difficulties with customs as they important new fabrics and accessories.
Unless government policy can manage this issue, there is limited hope of rapid export growth and diversification.
c. Introduction of new technologies through foreign direct investment.
Thailand’s explosive economic growth from 1975 to 1997 arose from establishing an undervalued currency matched with the increase of Japanese FDI bringing the technologies and marketing skills needed for exporting.
When I worked in Thailand from 1965-1975 manufactured exports were very limited; exports were all agricultural or mineral [tin].
Our efforts to establish the way for large scale exports of manufactured goods were laughed at as ridiculous.
But by 1995, more than 90 per cent of exports were manufactured.
In Bangladesh, the FDI largely from Korea paved the way for the remarkable growth of the garment sector. But there is no other FDI supported export sector.
Bangladesh’s future depends on the education system
At present, the school attendance is high but the quality of education is assessed by most as very unsatisfactory.
There are three objectives of a good education system: (a) provide a basic education in numeracy and literacy to enable every citizen to function in a modern industrial economy; (b) provide training in special skills needed in the economy particularly in the higher technology and engineering industries; (c) develop widespread attention to science and mathematics to achieve a truly scientific society.
At present, the Bangladesh education system is failing to achieve these three objectives.
At present, true literacy rates are much lower than those claimed; education at the primary and lower secondary level are not efficient and successful.
The industrial sector is hungry for trained technicians. In the garment sector, reliance on foreign technicians probably costs the sector $2-3 billion per annum.
This problem has been around for decades but is unsolved.
There are many brilliant young Bangladeshi who are potential scientists and mathematicians.
Little is done to help their development. The pace of movement towards a scientific society is very slow.
Reform of the financial sector
Every day, we read about the disasters hitting the financial sector. Bangladesh economists and financial sector experts plead for action.
It is not necessary to repeat the problems.
The objective of the financial sector is to take the savings of people and make them available to entrepreneurs and businesses that will put them to the best use, i.e. invest in projects with the highest returns.
We sadly read of the scams and corruption reaching high into the regulatory organisations all suggesting that the savings of the Bangladesh people are being wasted through investment in low-return projects or stolen, and moved abroad to benefit the Canadians or the British.
The regulatory institutions know what is needed. The staff of Bangladesh Bank is probably the most competent of any organisation in the nation.
I remain puzzled as to why it has failed to carry out its responsibilities.
Living in the middle
Fate has placed Bangladesh in a location to be caught between two giants, India and China, who are bringing their conflict into Bangladesh.
For China, Bangladesh is the last neighbour of India where India retains major influence and reputation.
Afghanistan, Pakistan, Sri Lanka, Myanmar and Nepal find that China is a better partner than India for security and development.
Only Bangladesh has managed to follow a balanced path.
This is going to become more and more difficult in the future.
China’s economic power is growing far faster than India. China’s economic support for Bangladesh far exceeds India’s which has done remarkably little.
The most serious part of this problem is the uncertainty about future relations between India and China. The more conflict there is between the two the more difficult for Bangladesh.
There are two real problems over the next decade where China has a key role:
The first is the Rohingya issue. The Prime Minister is pushing very hard for the return of the Rohingya to Myanmar.
Promises from Myanmar, India, and China fly around but nothing has been achieved to send the Rohingya back.
Despite the promises of support reality is that return over the next five years is unlikely to take place.
Perhaps a symbolic return of a few thousand but no significant progress for most.
The second major problem that has little discussion is the Chinese upstream development of the Jamuna River.
This is a problem for both India and Bangladesh, but ultimately much more for Bangladesh.
The flow of the Jamuna through India is marginal to most of India’s economy.
But for Bangladesh, the future river flows are of immense importance.
We are all aware of China’s development of upstream dams on the Mekong River which took place with little concern for the impact on Cambodia and Vietnam.
Aim at high investment levels and rapid GDP growth. This is the most effective way to reduce poverty if not the inequality of income distribution.
Go all out for export growth with FDI driving technology innovation.
Face the truth about the education system, reward ability, support scientific development and work with the industries to produce the trained workers needed.
Let Bangladesh Bank and the other regulators control the financial system.
They must have independence from the political authorities. Maintain the current balance between the Chinese and the Indians, but recognise the gap between China and India is rising as India cannot keep up.
Forrest Cookson is an economist