Over time, sustained rises in income reflect either a growing pool of workers, or the average worker becoming more productive
The Liberation of War on 1971 was not just one of the worst humanitarian tragedies of the 20th century, it also left significant material footprints.
Average incomes fell by about a fifth in what was already one of the most impoverished places on earth.
Pre-war income levels wouldn’t be reached until the early 1990s. Since then, however, average incomes have tripled, significantly reducing poverty along the way.
Over time, sustained rises in income reflect either a growing pool of workers, or the average worker becoming more productive.
The progress notwithstanding, Bangladesh has significant unfulfilled potential. Millions still remain outside the formal labour market, and the average Bangladeshi worker in industry and services sectors remain far less productive than their peers in Southeast Asia.
Countries that are open to foreign trade and investment tend to create more jobs, and their workers tend to be more productive.
On both counts, Bangladesh is behind Southeast Asian neighbours.
Consider exports. Poor countries typically tend to export agricultural commodities.
Starting with Japan in the early 20th century, followed by Korea, Taiwan, Singapore and Hong Kong in the decades after World War II, to China in the past few decades, export-driven industrialization has brought prosperity to billions.
In each of these cases, exported products changed over time, starting with readymade garments, then moving on to toys and light electricals, followed by complex electronics and heavy machinery, eventually to hi-tec products.
Bangladesh have started down the path of exports-led industrialisation in the past three decades (Chart 1).
In the late 1980s, jute products amounted to nearly a third of the country’s exports, and other agricultural produces formed another quarter.
By 2020, agricultural produces contributed to only 5% of total exports.
This industrialization, however, remains practically solely dependent on readymade garments, which accounted for nearly three-quarters of total exports in 2020.
Exporters operate in a highly competitive global economy.
A country that exports a relatively large share of goods and services that it produces is likely to create more jobs in the formal economy, and its workers are likely to become more productive over time compared with a country that doesn’t export much.
And Bangladesh still doesn’t export much (Chart 2).
The discerning reader would have noticed that Vietnam exports more than produces. How can that be?
This reflects the fact that Vietnam imports a lot of goods that are than reprocessed into exports. Indeed, this is exactly how the garments industry in Bangladesh operates.
By importing the intermediate goods for assembly and re-export, local producers tap into the global supply chain.
This, in turn, allows local businesses to adopt better technologies and management practices.
Further, imports create competition for domestic firms, pushing them to become more efficient over time.
All of that lead to more jobs and more productive workers.
While Bangladesh has a higher import penetration than some of our neighbours, it still remains relatively closed to imports (Chart 3).
Another source of high productivity jobs is foreign direct investment, particularly in the manufacturing sector.
When foreign companies set up factories in a poorer country, not only do they hire local workers, over time, many of these workers eventually go on to create their own businesses, generating more jobs and income.
Bangladesh, however, does not receive much foreign direct investment compared with the neighbours (Chart 4).
The early years of Bangladesh’s economic policy was dominated by an intellectual paradigm that shunned exposure to foreign trade and investment.
While the statist, socialist ideology was abandoned long ago, in practice, Bangladesh still remains a relatively closed economy.
Jyoti Rahman is an applied macroeconomist. His analyses are available at www.jrahman.wordpress.com