Miracle? Paradox? Or are synergies and tipping points behind robust economic growth?
Dr Syed Akhter Mahmood, former lead private sector specialist at World Bank, argues that two types of synergies — that among economic variables and that between policy actions and market responses — are responsible for the robust economic growth of Bangladesh
A view of the skyline of Dhaka, which has been witnessing a transformation in recent years with the construction of numerous high-rise buildings Syed Zakir Hossain/Dhaka Tribune
SM Abrar Aowsaf
Publish : 07 Dec 2021, 10:05 PMUpdate : 07 Dec 2021, 10:09 PM
The explanation for Bangladesh’s economic transformation should not be sought in some miracle or a paradox, says Dr Syed Akhter Mahmood, a former lead private sector specialist at World Bank.
Rather, he argues, the answer lies in a set of powerful synergies and a series of tipping points.
Covering seven important policy episodes spanning different sectors and time periods, he spoke about two types of synergies — that among economic variables and that between policy actions and market responses by economic actors.
“By a tipping point, I refer to a time in the long-run trend of an economic variable where there is a significant change in the trajectory of the variable reflected in a quantum jump in the absolute value of the variable and sometimes also in its growth rate.
“In other words, the tipping points herald phases of what I call great accelerations in the variables,” he explained.
Mahmood made the arguments on Tuesday while speaking at the third session of a four-day virtual international conference titled “Fifty Years of Bangladesh: Retrospect and Prospect”.
Organized by the CPD and co-sponsored by the South Asia Program of Cornell University, the conference aims to explore the country’s developments in different sectors — politics, economy, society, and culture.
“This year, we have seen a plethora of writing on Bangladesh’s remarkable development performance, including its economic transformation,” said Dr Mahmood while presenting the first paper of the session, titled Synergies and Tipping Points: Policy Actions, Market Responses and Economic Growth in Bangladesh.
Some have called this a miracle; others have found this a paradox, he said, adding that these papers have talked about many actors, NGOs, garment exporters and migrant workers, but the role of government has remained underappreciated.
Some have said that all this development has happened despite the government, which Mahmood termed as “unfair.”
He said that successive governments have taken policy actions, including public investment projects, that created the space for the entrepreneurs of Bangladesh to unleash their talents.
Bangladesh has witnessed several such tipping points and great accelerations since independence, the former World Bank specialist said.
“These great accelerations are not all related to each other, but many are — in other words, there has been powerful synergies among economic variables,” he added.
It is the repeated playing out of such synergies that explain a large part of the remarkable economic growth of Bangladesh, according to the economist.
“Examples of such synergies include that between irrigation expansion, rural road network expansion and remittances in the 1980s and 1990s that led to a significant jump in the trajectory of crop production and rural non-farm activities from the late 1990s,” he said.
Mahmood added that another, more recent, example of synergy is that between expansion of mobile phone network, internet subscriptions and MFS expansion, which is leading to significant growth of e-commerce services.
“These synergies between economic variables unleashed a process of cumulative development and, with the passage of time, these synergies became more varied and powerful, thus leading to an acceleration of growth rates and generating the promise of even higher growth rates in the future,” he said.
The second type of synergies, according to him, is between policy actions and market responses by economic actors.
Developments in the economy, which result from the cumulative actions of innumerable economic actors — 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,” Dr Mahmood said.
An acceleration in an economic variable, in turn, generates new dynamics, he explained, adding that 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, he argued.
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.
Such scenarios — policy actions generating economic dynamics which led to further policy actions — were repeated several times during the past 50 years, Mahmood said.
“This is an important part of the explanation of the remarkable growth performance of Bangladesh,” he said.
Critiquing the paper, Dr Khan Ahmed Sayeed Murshid, former director general of the Bangladesh Institute of Development Studies (BIDS), said: “When you get to the tipping points, you have already generated a lot of development energy, which is not yet evident, but at one fine point, it emerges.
“What is interesting is not to identify the tipping point and not what immediately preceded it, but also to look at all the various other policies, developments, initiatives, or interventions prior to that moment,” he added.
Therefore, he said, it is difficult to try and establish causality between policy and past interventions.
Murshid also noted that the presentation had missed out on certain aspects that must have played an important role in growth, such as fertility decline, revolution in aquaculture and dairy sectors, and so on.
Bangladesh: Post-LDC graduation and beyond
Professor Mustafizur Rahman, distinguished fellow of the CPD, presented the second paper of the session, titled “Bangladesh Transitioning from LDC to Post-LDC Future: Challenges and the Next Steps.”
Through his presentation, he discussed the new challenges that graduation will create for the country.
Bangladesh is among the few LDCs that have reaped significant benefits from the special and differential treatment given to LDCs under several WTO agreements and has enjoyed preferential market access extended to the LDCs by several developed and developing countries, he noted.
But LDC graduation may cause the loss of the international support measures (ISMs), which will have a disproportionately large impact on the Bangladesh economy from both domestic policy space and the global market space, he said.
Middle-income graduation of Bangladesh will have other implications for the country's economy as well, according to Professor Rahman.
As Bangladesh goes forward in the future years, identifying the challenges in light of the dual transition and the strategies to be taken in addressing these challenges is of heightened concern and interest.
In the paper, he argues that the duties of managing the two graduations are deeply entwined and should be considered as mutually reinforcing endeavours.
Many countries having made the transition to middle income status tend to fall into middle income trap — either lower middle-income trap or upper middle-income trap, he explained.
Adding to this, he used many examples of countries that have achieved the transition but are now stuck in the middle-income trap.
The study examines the potential economic consequences of dual graduation for Bangladesh due to the loss of LDC-specific ISMs and graduation to a middle-income nation.
The paper also discusses some of the crucial challenges of dual graduation and how these challenges should be seen as mutually reinforcing and synergistic.
Moreover, the paper also sheds light on the problems of strengthening regional integration in trade-related areas as an integral approach for mitigating the negative impacts of preference erosion and for ensuring the sustainability of LDC graduation.
The paper has focused on three main aspects: how dual graduation would impact Bangladesh's domestic policy space and global market engagement; measures and policies necessary for a successful transition to non-LDC status; and steps to increase Bangladesh's regional economic integration as a critical medium-term strategy for graduation and a successful transition to an upper-middle-income nation.
Providing feedback on the paper, Dr Nazneen Ahmad, country economist of the United Nations Development Programme (UNDP), said that while Rahman mentioned that Bangladesh has to take a skill-based approach, innovation would also have to be a priority.
There are lots of homegrown innovations which fit with our development path, she added.
Though there are uncertainties, some of the issues are already known, like what the country would face as a middle-income nation; so, in that regard, it is very important how “we frame our policies,” she further said.
The power of institutions, or lack thereof
Selim Raihan, professor of the Department of Economics at Dhaka University and executive director of the South Asian Network on Economic Modelling (SANEM), presented the third paper at the session, titled “Institutional Challenges in Bangladesh's Economic Transformation.”
In it, he discussed Bangladesh's outstanding economic growth and development over the past five decades.
He spoke about developing six synthetic institutional indices — democracy, rule of law, business environment, land, bureaucracy, and human rights — using the available global databases.
Professor Raihan argued that there are four generic institutional features in Bangladesh: the supremacy of “pockets” of functional informal institutions over weak formal institutions; the supremacy of the “deals environment” over coordinated industrial policy; the challenges of effective regulation; and the challenges of state capacity.
Elaborating on the supremacy of informal institutions, he said that at the early stage of development, if countries can steer the informal institutions to the extent they are “growth-enhancing” as well as the “deals space” is more ordered (either open or closed), countries can manage strong growth rate and achieve some improvements in the social sector.
“However, for the transition from a lower stage of development to a higher stage, whether the country can maintain the high growth rate and achieve larger development goals, is dependent on the dynamics of how the informal institutions evolve and formal institutions become stronger and functional,” he said.
Raihan noted that not many developing countries have been able to make this transition.
“Certainly, the East Asian and most of the Southeast Asian countries are the success stories in using the informal institutions efficiently at the early stage of development as well as making some notable successes in the transition towards functional formal institutions,” he added.
He said that Bangladesh has been successful in creating some efficient pockets of “growth enhancing” informal institutions against an overall distressing picture of formal institutions.
Examples include Well-functioning privileges and special arrangements for the RMG sector, promotion of manpower export, agricultural research and development related to food security, and special arrangements for the NGOs to function.
To explain the supremacy of the “deals environment” over coordinated industrial policy, he gave the example of the RMG sector, which was born out of the Multifibre Arrangement, and then successfully exploited by a few industrialists.
The sector was then able to get “deals' ' with the government, sector-specific incentives such as bonded warehouses, back-to-back LCs, and interest rate subsidies, Professor Raihan said.
In the paper, he argues that Bangladesh’s strong economic and social advances have not been matched by equal improvements in institutional development, and thus Bangladesh's institutions are still weak and are poorly ranked among other institutions in the world.
In the face of weak institutions and economic pressures, Bangladesh thus faces difficulty in figuring out a new and sustainable development path.
The paper also argues that several studies had previously looked at the long-term effects of institutions on development and concluded that better institutions lead to higher growth rates over long periods.
Better economic and political institutions are essential when growth converges to a stable trajectory.
When a country goes from stable growth to rapid growth, better economic institutions are more important than political institutions. In light of this, this paper looked into whether Bangladesh was an exception based on a cross-country analysis of secondary sources.
The paper concludes with two questions: first, can Bangladesh achieve bigger development goals with the business-as-usual process? And second, what is the position of Bangladesh when it comes to moving from some "pockets of efficient informal institutions" to well-functioning formal institutions?
The paper states that Bangladesh’s inadequate institutional capability may be holding the country back from achieving the SDGs by 2030, becoming an upper-middle-income country by 2031, and a developed country by 2041.
The paper also pointed out the slow development of formal institutions and explained that the trends in the quality of formal institutions showed that most of the indicators were getting worse.
The paper also mentioned that Bangladesh faced a number of other problems, such as lack of economic diversification, slow structural change, insufficient job creation, poverty, and inequality.
Discussing the paper, Dr Ahsan Mansur, executive director of the Policy Research Institute (PRI) of Bangladesh, said: “Institutional weakness is not only limited to the institutions, it also spreads to the real economy, to the society and to the lives of every individual.”
Particularly poor is rule of law, he also said, adding that although our bureaucrats are handsomely paid, the quality of bureaucracy is very poor too.
Becoming a high-income country requires fundamental second or third-generation reforms, including institutional reforms, and that is not happening, he further said.
“High cost of doing business leading to lower investment, low quality of education, low quality of public health delivery, low FDI inflows, low level of negative public sector savings, entire ADP funded by borrowed resources — these are not very positive things for the country,” Dr Mansur noted.
Professor Wahiduddin Mahmud, chairman of the Economic Research Group (ERG), chaired the session, while Dr Khondaker Golam Moazzem, research director of CPD, moderated the session.
CPD Chairman Professor Rehman Sobhan and Distinguished Fellow Professor Rounaq Jahan also attended the session.
50 YEARS OF BANGLADESHPowered by Froala Editor
Miracle? Paradox? Or are synergies and tipping points behind robust economic growth?
The explanation for Bangladesh’s economic transformation should not be sought in some miracle or a paradox, says Dr Syed Akhter Mahmood, a former lead private sector specialist at World Bank.
Rather, he argues, the answer lies in a set of powerful synergies and a series of tipping points.
Covering seven important policy episodes spanning different sectors and time periods, he spoke about two types of synergies — that among economic variables and that between policy actions and market responses by economic actors.
“By a tipping point, I refer to a time in the long-run trend of an economic variable where there is a significant change in the trajectory of the variable reflected in a quantum jump in the absolute value of the variable and sometimes also in its growth rate.
“In other words, the tipping points herald phases of what I call great accelerations in the variables,” he explained.
Mahmood made the arguments on Tuesday while speaking at the third session of a four-day virtual international conference titled “Fifty Years of Bangladesh: Retrospect and Prospect”.
Organized by the CPD and co-sponsored by the South Asia Program of Cornell University, the conference aims to explore the country’s developments in different sectors — politics, economy, society, and culture.
“This year, we have seen a plethora of writing on Bangladesh’s remarkable development performance, including its economic transformation,” said Dr Mahmood while presenting the first paper of the session, titled Synergies and Tipping Points: Policy Actions, Market Responses and Economic Growth in Bangladesh.
Some have called this a miracle; others have found this a paradox, he said, adding that these papers have talked about many actors, NGOs, garment exporters and migrant workers, but the role of government has remained underappreciated.
Some have said that all this development has happened despite the government, which Mahmood termed as “unfair.”
He said that successive governments have taken policy actions, including public investment projects, that created the space for the entrepreneurs of Bangladesh to unleash their talents.
Bangladesh has witnessed several such tipping points and great accelerations since independence, the former World Bank specialist said.
“These great accelerations are not all related to each other, but many are — in other words, there has been powerful synergies among economic variables,” he added.
It is the repeated playing out of such synergies that explain a large part of the remarkable economic growth of Bangladesh, according to the economist.
“Examples of such synergies include that between irrigation expansion, rural road network expansion and remittances in the 1980s and 1990s that led to a significant jump in the trajectory of crop production and rural non-farm activities from the late 1990s,” he said.
Mahmood added that another, more recent, example of synergy is that between expansion of mobile phone network, internet subscriptions and MFS expansion, which is leading to significant growth of e-commerce services.
“These synergies between economic variables unleashed a process of cumulative development and, with the passage of time, these synergies became more varied and powerful, thus leading to an acceleration of growth rates and generating the promise of even higher growth rates in the future,” he said.
The second type of synergies, according to him, is between policy actions and market responses by economic actors.
Developments in the economy, which result from the cumulative actions of innumerable economic actors — 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,” Dr Mahmood said.
An acceleration in an economic variable, in turn, generates new dynamics, he explained, adding that 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, he argued.
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.
Such scenarios — policy actions generating economic dynamics which led to further policy actions — were repeated several times during the past 50 years, Mahmood said.
“This is an important part of the explanation of the remarkable growth performance of Bangladesh,” he said.
Critiquing the paper, Dr Khan Ahmed Sayeed Murshid, former director general of the Bangladesh Institute of Development Studies (BIDS), said: “When you get to the tipping points, you have already generated a lot of development energy, which is not yet evident, but at one fine point, it emerges.
“What is interesting is not to identify the tipping point and not what immediately preceded it, but also to look at all the various other policies, developments, initiatives, or interventions prior to that moment,” he added.
Therefore, he said, it is difficult to try and establish causality between policy and past interventions.
Murshid also noted that the presentation had missed out on certain aspects that must have played an important role in growth, such as fertility decline, revolution in aquaculture and dairy sectors, and so on.
Bangladesh: Post-LDC graduation and beyond
Professor Mustafizur Rahman, distinguished fellow of the CPD, presented the second paper of the session, titled “Bangladesh Transitioning from LDC to Post-LDC Future: Challenges and the Next Steps.”
Through his presentation, he discussed the new challenges that graduation will create for the country.
Bangladesh is among the few LDCs that have reaped significant benefits from the special and differential treatment given to LDCs under several WTO agreements and has enjoyed preferential market access extended to the LDCs by several developed and developing countries, he noted.
But LDC graduation may cause the loss of the international support measures (ISMs), which will have a disproportionately large impact on the Bangladesh economy from both domestic policy space and the global market space, he said.
Middle-income graduation of Bangladesh will have other implications for the country's economy as well, according to Professor Rahman.
As Bangladesh goes forward in the future years, identifying the challenges in light of the dual transition and the strategies to be taken in addressing these challenges is of heightened concern and interest.
In the paper, he argues that the duties of managing the two graduations are deeply entwined and should be considered as mutually reinforcing endeavours.
Many countries having made the transition to middle income status tend to fall into middle income trap — either lower middle-income trap or upper middle-income trap, he explained.
Adding to this, he used many examples of countries that have achieved the transition but are now stuck in the middle-income trap.
The study examines the potential economic consequences of dual graduation for Bangladesh due to the loss of LDC-specific ISMs and graduation to a middle-income nation.
The paper also discusses some of the crucial challenges of dual graduation and how these challenges should be seen as mutually reinforcing and synergistic.
Moreover, the paper also sheds light on the problems of strengthening regional integration in trade-related areas as an integral approach for mitigating the negative impacts of preference erosion and for ensuring the sustainability of LDC graduation.
The paper has focused on three main aspects: how dual graduation would impact Bangladesh's domestic policy space and global market engagement; measures and policies necessary for a successful transition to non-LDC status; and steps to increase Bangladesh's regional economic integration as a critical medium-term strategy for graduation and a successful transition to an upper-middle-income nation.
Providing feedback on the paper, Dr Nazneen Ahmad, country economist of the United Nations Development Programme (UNDP), said that while Rahman mentioned that Bangladesh has to take a skill-based approach, innovation would also have to be a priority.
There are lots of homegrown innovations which fit with our development path, she added.
Though there are uncertainties, some of the issues are already known, like what the country would face as a middle-income nation; so, in that regard, it is very important how “we frame our policies,” she further said.
The power of institutions, or lack thereof
Selim Raihan, professor of the Department of Economics at Dhaka University and executive director of the South Asian Network on Economic Modelling (SANEM), presented the third paper at the session, titled “Institutional Challenges in Bangladesh's Economic Transformation.”
In it, he discussed Bangladesh's outstanding economic growth and development over the past five decades.
He spoke about developing six synthetic institutional indices — democracy, rule of law, business environment, land, bureaucracy, and human rights — using the available global databases.
Professor Raihan argued that there are four generic institutional features in Bangladesh: the supremacy of “pockets” of functional informal institutions over weak formal institutions; the supremacy of the “deals environment” over coordinated industrial policy; the challenges of effective regulation; and the challenges of state capacity.
Elaborating on the supremacy of informal institutions, he said that at the early stage of development, if countries can steer the informal institutions to the extent they are “growth-enhancing” as well as the “deals space” is more ordered (either open or closed), countries can manage strong growth rate and achieve some improvements in the social sector.
“However, for the transition from a lower stage of development to a higher stage, whether the country can maintain the high growth rate and achieve larger development goals, is dependent on the dynamics of how the informal institutions evolve and formal institutions become stronger and functional,” he said.
Raihan noted that not many developing countries have been able to make this transition.
“Certainly, the East Asian and most of the Southeast Asian countries are the success stories in using the informal institutions efficiently at the early stage of development as well as making some notable successes in the transition towards functional formal institutions,” he added.
He said that Bangladesh has been successful in creating some efficient pockets of “growth enhancing” informal institutions against an overall distressing picture of formal institutions.
Examples include Well-functioning privileges and special arrangements for the RMG sector, promotion of manpower export, agricultural research and development related to food security, and special arrangements for the NGOs to function.
To explain the supremacy of the “deals environment” over coordinated industrial policy, he gave the example of the RMG sector, which was born out of the Multifibre Arrangement, and then successfully exploited by a few industrialists.
The sector was then able to get “deals' ' with the government, sector-specific incentives such as bonded warehouses, back-to-back LCs, and interest rate subsidies, Professor Raihan said.
In the paper, he argues that Bangladesh’s strong economic and social advances have not been matched by equal improvements in institutional development, and thus Bangladesh's institutions are still weak and are poorly ranked among other institutions in the world.
In the face of weak institutions and economic pressures, Bangladesh thus faces difficulty in figuring out a new and sustainable development path.
The paper also argues that several studies had previously looked at the long-term effects of institutions on development and concluded that better institutions lead to higher growth rates over long periods.
Better economic and political institutions are essential when growth converges to a stable trajectory.
When a country goes from stable growth to rapid growth, better economic institutions are more important than political institutions. In light of this, this paper looked into whether Bangladesh was an exception based on a cross-country analysis of secondary sources.
The paper concludes with two questions: first, can Bangladesh achieve bigger development goals with the business-as-usual process? And second, what is the position of Bangladesh when it comes to moving from some "pockets of efficient informal institutions" to well-functioning formal institutions?
The paper states that Bangladesh’s inadequate institutional capability may be holding the country back from achieving the SDGs by 2030, becoming an upper-middle-income country by 2031, and a developed country by 2041.
The paper also pointed out the slow development of formal institutions and explained that the trends in the quality of formal institutions showed that most of the indicators were getting worse.
The paper also mentioned that Bangladesh faced a number of other problems, such as lack of economic diversification, slow structural change, insufficient job creation, poverty, and inequality.
Discussing the paper, Dr Ahsan Mansur, executive director of the Policy Research Institute (PRI) of Bangladesh, said: “Institutional weakness is not only limited to the institutions, it also spreads to the real economy, to the society and to the lives of every individual.”
Particularly poor is rule of law, he also said, adding that although our bureaucrats are handsomely paid, the quality of bureaucracy is very poor too.
Becoming a high-income country requires fundamental second or third-generation reforms, including institutional reforms, and that is not happening, he further said.
“High cost of doing business leading to lower investment, low quality of education, low quality of public health delivery, low FDI inflows, low level of negative public sector savings, entire ADP funded by borrowed resources — these are not very positive things for the country,” Dr Mansur noted.
Professor Wahiduddin Mahmud, chairman of the Economic Research Group (ERG), chaired the session, while Dr Khondaker Golam Moazzem, research director of CPD, moderated the session.
CPD Chairman Professor Rehman Sobhan and Distinguished Fellow Professor Rounaq Jahan also attended the session.
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