A few days ago, there was a report in a Dhaka daily about several Bangladeshi companies that are now making annual profits of more than Tk500 crore (“Quiet grows the Tk500cr profit makers’ club”, reported The Business Standard on October 30 last month.)
The article had a list of 10 such companies with information on the year in which they started operating, the year they first made a profit of 500 crore takas, and the annual profit they are now making.
The oldest of the companies included in this list was set up in 1949 (British American Tobacco) and the newest in 2008 (Walton Hi-Tech Industries.)
While it took the former 65 years to reach the elite club of Tk500 crore annual profits, the new kid on the block, Walton did it in just seven years, the shortest time taken among the 10 companies listed in the article.
Readers may be curious. Is it that the new companies are growing much faster than the old ones?
The data for these 10 companies show a remarkably clear pattern (see chart).
There is a direct relationship between the age of the enterprise and the time taken to cross the threshold of Tk500 crore profits.
New companies are indeed growing faster than the older ones. Of course, all new firms are not growing that fast, some may even be faltering.
But it is interesting to see this clear pattern among the ones that have made it big.
Perhaps we should not be too surprised to see this expanding league of Bangladeshi companies earning such impressive profits.
After all Bangladesh has a huge economy.
According to the IMF, Bangladesh had the 31st largest economy in 2020 with a GDP (adjusted for purchasing power parity) of $874 billion.
It has also been growing at a very respectable rate for the past several years.
Thus, it is no surprise that companies which are catering to the domestic market, and all the companies in the list are doing so, can make such a lot of money.
The article suggests that the size of what it calls the “Tk500 crore profit club” may expand to 100 publicly-listed members by the end of the decade.
And there will undoubtedly be some which are not accounted for since profit data are not easily available for unlisted firms.
An important question is the following: how much of the profits and growth mentioned in this article are due to: a) productivity increases in a competitive market; b) output growth (not necessarily with productivity gains) in a protected market; and c) government largesse other than import protection (such as large contracts)?
This distinction is very important.
We would like to know what proportion of these impressive profits are coming from activities falling in each of these three categories.
There is a reason why such information is important.
We have had the good fortune of achieving very respectable GDP growth over a prolonged period.
It is indeed a remarkable achievement.
But there is no ground for complacency.
We need to remember that economic history is replete with examples of countries which grew at respectable rates for a long period of time but were not able to sustain such growth rates for one reason or another.
Thus, while we justifiably feel good about this growth performance, the time has come to ask whether the growth will sustain and if there are fault lines that may threaten such growth performance in the future.
The answer depends partly on what kind of companies will dominate the economy going forward.
The future
If the economy is dominated by competitive companies, with a relentless pursuit of efficiency, always on the lookout for productivity gains, not seeking protection but having the courage to face intense competition in local or global markets, the future looks good.
However, there could be a problem if the economy comes to be dominated by firms that have grown big not because of efficiency gains but because they operate in a protected market or came into business thanks to large government contracts.
Such companies may not necessarily have the incentive and the discipline needed to enhance efficiency, nor the resilience to withstand shocks.
It does not mean that this will always be the case.
Some firms may have benefited from getting large government contracts through a non-competitive process but may have subsequently embraced a culture of efficiency and not privilege.
That is why the question posed above is important: going forward, will the economy be dominated by efficiency-seeking firms or by privilege-seeking firms?
Economist Caroline Freund, till recently with the World Bank, and now Dean of the School of Global Policy and Strategy at the University of California, San Diego, published a fascinating book in 2016 called Rich People Poor Countries: The Rise of Emerging-Market Tycoons and their Mega Firms.
There she wrote: “Before the growth spurt of the 2000s, the vast majority of the super rich outside advanced countries inherited their wealth, made it from resources, or reaped unearned benefits accrued not from productive investment but from government connections, government-sanctioned monopolies, or privatizations that benefited people with connections.
This group of so-called rent seekers or rentiers got rich not from supreme talent or innovation but because of commodity price movements and/or government connections.”
And in our work on the Middle East (Privilege-Resistant Policies in the Middle East and North Africa), my co-author and I summarized evidence showing how the lackluster manufacturing and productivity performance of the economies of the region had much to do with the prevalence of privileged firms.
We wrote: “Past industrial policies in the region were captured by well-connected businesses and neither rewarded firms on the basis of performance nor safeguarded or promoted competition.
The policy environment created privileges rather than a level playing field.
These privileges insulated firms from domestic and international competition and subsidized their operations through preferential and sometimes exclusive access to cheap inputs.”
As we strive to enhance the competitiveness of our economy, we should welcome the emergence of large companies because these can be a source of innovation and productivity-enhancing good practices.
But this is not guaranteed. A lot depends on whether they have the incentive to do so.
And that, in turn, depends on how they are growing in the first place – how much is through efficiency improvements and how much through privileges granted by the state?
It is now time to ask such tough questions.
The author is an economist, previously with an international development agency
