The coming years will be challenging for the government’s economic management.
The complexities of an increasingly globalized world with rapid developments in technology had been with us for a while.
Then came our graduation from the least-developed status and our plans to be a middle-income country in ten years, and a developed country in twenty.
As we started deliberating on the challenges of making these transitions, we were confronted with Covid-19 and now with the consequences of the Russia-Ukraine war.
Recent developments in Sri Lanka and the diminishing of our own foreign exchange reserves have also raised alarm bells.
The bottom line is this. It cannot be business as usual.
The government must learn a few new things.
Few things
It needs to learn how to help diversify our exports, especially that of sophisticated products such as electronics.
It needs to develop a performance culture within itself and trigger a productivity culture in the private sector.
It needs to learn about new risks and about better managing both old and new risks.
It needs to learn how to craft public policy more creatively so that the private sector, in its pursuit of profits, carries out its activities in a socially and environmentally friendly manner.
But to learn new things, the government must first do something important. It must unlearn a few things.
Let me explain why.
A few years ago, I had the opportunity to work in a large oil-rich country in the Middle East.
The country had grown rich based on natural resources but was now feeling the need to diversify its economy and reduce dependence on oil revenues.
It could do so by anchoring new activities to the dominant one (such as moving to petrochemical products) or go for activities unlinked to oil.
Either way the country needed significant inflow of FDI to achieve its diversification objectives.
It had asked the World Bank to advise on how to set up a policy and regulatory regime conducive to foreign investors.
I was part of the World Bank team deployed to this task.
My focus was the regulatory regime for investment.
Diversification involves learning about innovative products, new technology, and uncharted markets.
But we quickly realized that another agenda was equally important for this country.
This is the “unlearning” agenda.
This is relevant for most stakeholders but specially for governments.
Why is this so?
Unlearning
Natural resource-rich countries, such as the one I was working on, typically have a dominance of natural resource-seeking and public procurement-seeking investment, such as investment in oil extraction or refining, or building publicly funded roads and hospitals.
Less common are efficiency-seeking investors, who seek to use countries as an efficient production base for export to other countries, thus helping them enter new export markets and establish links to global value chains.
In the traditional paradigm of the natural resource countries, governments choose among competing investors willing to either exploit rich natural resources or compete for public infrastructure projects.
In the efficiency-seeking investment paradigm, such as the one this country was seeking to move to, it is the other way round.
Here it is the countries who must compete to attract investment.
Moreover, in a public procurement driven paradigm, government agencies draw up output specifications that companies fulfill.
In the new paradigm the investors themselves will need to decide the specifics of their businesses in response to market conditions.
Understanding this requires a mindset shift.
A paradigm shift in overall development strategy (i.e., toward diversification), leading to an efficiency-seeking foreign investment paradigm, means that governments need to view their regulatory role differently.
The regulatory regime, both de jure and de facto, will need to provide investors with considerable freedom to operate in a dynamic market environment, while safeguarding legitimate societal objectives.
This includes reexamination of how rules and regulations are written and how they are administered.
In brief, the shifts in the development and foreign direct investment attraction paradigm requires a third paradigm shift—in mindset and behavior—leading to a different approach to regulation
Particularly important is to move away from a risk-averse, control approach to regulation to a more creative and flexible one.
Diversification implies new activities and new ways of doing things, even if the move is to adjacent areas in the product space.
Innovative companies are often small and lack the resources that large, established companies possess to negotiate the regulatory landscape.
A risk-averse, control-oriented approach to regulation thus discourages investors from entering uncharted territory.
Natural resources
Yet, such regulatory approaches are common in economies dominated by natural resources.
As governments sought to ensure optimum use of natural resources or the efficient delivery of infrastructure and services funded by public procurement, they developed a risk-averse approach.
Driven by distrust of businesses, regulators acquired an attitude of control and paternalism.
Elaborate licencing regimes reflect this.
In the country I was working in, officials argued that these are needed to closely monitor investors and investment trends.
Why must you monitor them so closely, I asked. “So that they do not indulge in “undesirable” activities and make wrong decisions that are costly to them and to society”, was the response.
These tendencies are understandable, but they create the worst of both worlds. Businesses are burdened and investment is discouraged.
At the same time, regulatory enforcement and other important tasks of government suffer due to the strain placed on the limited administrative resources of government.
For example, investment promotion agencies often devote a highly disproportionate amount of resources to licensing and inspections functions, distracting attention and resources from their important investment promotion and attraction responsibilities.
In the paragraphs above, I have described the challenges in the context of a natural resource rich country where the attitude of government officials towards FDI, and even towards domestic investors, has been shaped by the many years of managing large procurement contracts for infrastructure and other public service projects.
But this is also true of the government of Bangladesh.
Many years ago, an expert on public-private partnerships (PPP) told me about the problems he saw in Bangladesh in pushing forward a PPP agenda.
Many government officials were viewing PPP projects in the same way as they viewed traditional public sector projects where private contractors would be hired to carry out specific tasks such as building a road, bridge, or a hospital.
There it made sense for the government to lay out the specifications and expect the contractors to adhere to these.
But, in a PPP project the private party, which must take many commercial and other risks, has to come up with its own specifications of what the project should be like, given market conditions.
The PPP expert was complaining that many officers involved in PPP projects in Bangladesh could not appreciate this and were thus insisting on laying down rigid specifications.
This approach, perhaps applicable for the more traditional projects, was counterproductive for the newer type of projects.
As Bangladesh aspires to diversify its economy and meet the other challenges mentioned at the outset, the government will have to unlearn the old approach to regulations.
It will need to adopt a new approach, relying on smart risk management and a more nuanced method of regulatory governance based on trust.
It must proceed on the belief that the majority of investors have good intentions and do not require heavy scrutiny at every stage.
This shift in the mind-set is not easy. But it is essential.
If the government is serious about achieving its developmental goals going forward, it must learn many new things.
But first, it must unlearn a few.
Unlearning is often a prerequisite to learning.
The author is an economist, previously with an international development agency
