In a piece titled “Why economists differ so widely” (published in The Daily Star on January 5), Dr B Paul, chief economist of Bangladesh Bank, divides Bangladeshi economists, trying to predict Bangladesh’s economy in 2016, into four groups of forecasters: Ambitious, moderate, conservative, and pessimistic.
Furthermore, he goes on to accuse some economists of being politically motivated, that their predictions lack dispassionate judgment, econometric exercises, sound theory, and modern analytical tools. Yet, his own analysis of Bangladesh’s economy suffers from the same set of weaknesses he outlines in his article.
Dr Paul claims that “better traffic discipline in two mega-cities and in the four-lane highways can ensure at least an additional one to two percentage points in growth rate for the nation, sending our economic growth to 8%.” This is a new policy-related finding for us, particularly because the author stresses that one to two percentage points is the minimum Bangladesh stands to gain, suggesting that the actual figure can be even larger.
However, the writer chose not to back up this claim with any data or evidence. Did the Bangladesh Bank conduct any study to conclude that the Bangladesh economy’s growth rate would increase by a quarter (from 6% to 8%) simply through better traffic management? How confident is the writer about the reliability of the evidence?
The writer further mentions: “Economic growth is a complex variable that comes up after adding consumption, investment, government spending, exports, and imports [Y = C + I + G + X – M].” However, this contradicts the lessons we received on the basic theories of economic growth in Dhaka University from leading macro-economists of the country. “Y” does not represent growth. Rather, it refers to income. In all economics textbooks, growth is typically explained as some combination of changes in capital stock, labour force, labour quality, and technology.
Returning to the earlier speculation that Bangladesh could achieve 8% growth rate in 2016, how do economists usually work that out? In Malaysia and many other countries, the central bank often performs an analysis that economic textbooks describe as “growth accounting.”
Generally, sources of the growth come from changes in the potential output which are determined by changes in the underlying aggregate production function, Y = A·F(K, N) where Y is GDP, K is total capital stock, L is total labour force, and A is a proxy for overall technology. The growth accounting equation is given by %DY = %DA + aK·%DK + aN·%DN where D indicates “change.”
Statistical exercises such as this help break down the relative contribution of capital (which includes infrastructure). In his commentary, Dr Paul’s point is about how the current stock of infrastructure capital is used, which is related to issues of governance (instead of investment in new infrastructure), and very hard to identify. Besides, this then brings up a very different issue on which there is an agreement among everyone in Bangladesh; that is, without good governance, it’s not possible to lift the current growth rate from 6% to 8%.
On this issue, I’d like to share the views of two renowned macro-economists, Prof Wahiduddin Mahmud and Prof Ali Taslim, both of whom taught me economics at Dhaka University. In a paper titled “Economic Reforms, Growth, and Governance: The Political Economy Aspects of Bangladesh’s Development Surprise,” Professor Wahiduddin Mahmud conceded that rapid economic growth may be achieved despite poor governance in the short run.
However, he cautioned that, ultimately, poor governance would prove a barrier to putting the economy firmly on a path to higher rate of growth. Growth acceleration is unlikely without the viability of core systems of political governance.
This point is also supported by Professor MA Taslim. In an article, “Investment and Growth” (published on June 6, 2013 in bdnews24.com), Professor Taslim estimates that if Bangladesh aims to achieve a growth rate in excess of 7%, the investment-GDP ratio must be increased much beyond its current 25%.
On the basis of available data, he shows the large reduction in private credit was most likely caused by a fall in investment demand due to confrontational politics, exorbitant financing costs, a gloomy international economic outlook, and most importantly, poor governance. However, citing the growing budget deficit and serious governance issues, he advised the government to do more on the latter to ensure efficient use of available resources.
In conclusion, I’d like to thank Dr Paul for his popular writings on Bangladesh economy. I’ve enjoyed reading his earlier pieces in The Daily Star and elsewhere. Like those contributions, his latest article addresses a very important issue -- the lack of consensus and agreement among Bangladeshi economists for the wrong reasons, that they position their views to support their political masters instead of their faith in economic science and depth of their academic training.
I couldn’t agree more with the writer on this point. At the same time, the writer’s own method of reasoning and inference did little justice to the large theoretical and empirical body of economic literature that is out there on what factors shapes a country’s macro-economic growth rate and what are its constituents elements, particularly in developing countries like Bangladesh.
Researchers from the central bank of any country have the moral obligation to engage with the mass media and provide important insights on the future trends facing the economy. This is very important at the start of the new year, and particularly so in 2016, a year when the world economy risks significant volatility.
But Bangladeshi readers expect much more careful, evidence-based, and thoroughly researched analyses in the near future, considering the significance of such policy commentaries from senior officials of our central bank.
