Bangladesh’s economy has made remarkable progress in the past 35 years.
Growth has been seen in the manufacturing sectors, led by the RMG and textiles. Agriculture has expanded to the point that the country is virtually self-sufficient in food. The education system has greatly improved, albeit still unsatisfactory.
Health of the population has made leaps from life expectancy, pharmaceutical industry, vaccinations, and even with rural facilities. Even Covid-19 was managed effectively.
Women’s rights has made significant progress and their participation in the labour force has yielded much benefit to the economy. Infrastructure from banking, roads, transportation, and electricity have all expanded to allow efficient distribution of resources.
Initial reforms
The transformation of the society was initiated from five reform programs designed by the Ershad regime and implemented by the AL and the BNP. Each reform had a strong positive impact on the economy. With time the thrust of the reforms faded leading to the major economic problems now facing the country.
The first reforms were in agriculture and focused on shifting the supply of agricultural inputs to the private sector (pumps, seeds, fertilizer, pesticides).
The second reform was the introduction of VAT. This had a strong immediate impact on government revenues, reduced the deficit and moderated inflation.
The third reform was on trade policy attempting to lower tariffs, reduce the paperwork for imports, all to lower the anti-export bias. This program had some success but protection elements in the society were very powerful, limiting what could be achieved.
The fourth reform focused on the financial sector and concentrated on expanding private banks, freeing interest rates, reducing foreign exchange controls, and requiring banks to recognize and pay for unpaid loans if the borrower defaulted. Capital market modernized financing through public limited companies.
Finally, the energy sector was partially privatized and the path opened for future expansion.
These reforms established the basis for the subsequent strong growth performance. Common to all was the growing importance of the private sector. Government enterprises were inefficient and generally unable to earn profit requiring government subsidy. The five reforms shifted responsibility to the private sector.
Political economy
This progress brought with it a great deal of corruption and suppression of political opposition. The election system became progressively manipulated. It was obvious to any objective observer that a neutral and temporary caretaker government was absolutely necessary to ensure free and fair elections.
From the start of the reform program the economy was highly competitive leading to efficient price formation and sensible levels and direction of investment. This contrasted with the inefficient investments directed by the government. Competition declined as time passed and corruption in the financial system supported expansion of the larger corporations.
The owners of the production facilities took much of the increase in the value of output. Labour supply was plentiful so real wages rose slowly. Experienced and educated workers gained more from wage increments, than did the unskilled workers. Taxes were generally underpaid.
As time passed corruption and unpaid interest increased; also, businesses failed to make principal payments of loans adding to the money taken by the owners.
The income distribution became increasingly unequal. The basic reason for this arose from the large labour force that moderated the growth of wages. The formal labour market was concentrated in the RMG sector and the government where compensation was carefully regulated. For the informal labour market that comprised 80-85% of the labour force, wages were established by the market and there was no stable set of rules governing this market.
Movement from the informal to the formal arose from demands of the RMG sector and persons with HSC qualifications. But most of the labour force remained in the informal sector.
The transformation of the society was initiated from five reform programs designed by the Ershad regime and implemented by the AL and the BNP
Speculation changes
The managers of the economy began to make major errors in the past three years. Competition in the economy declined as large industrial groups gained access to more credit, compared to medium and smaller businesses. Inflation emerged and the balance of payment went into deficit.
Large amounts of funds were spent by the government on inappropriate projects. Private investment fell off. Exports stagnated and there was no progress towards diversification. Imports declined. The GDP estimates continued to be political rather than factual.
It was not recognized at the time but people were losing confidence in the stability of the country. The United States and the EU were putting pressure on the political leaders to have a fair election in 2023. International organizations increased their accusations of human rights violations in Bangladesh.
Conflicts with the BNP were rising and the government was taking actions to weaken the opposition by bringing many legal cases against party leaders and using violence against their public meetings.
The prime minister was responding to American pressure by taking tough steps to weaken opposition to her rule, urged on by her advisors to take a strong anti-American stand. The financial system became increasingly corrupt, with growing non-performing loans.
The central bank took no effective actions to limit such deterioration. The stock market was manipulated and failed to develop. The business community and many of the Awami League leaders became very concerned as to where this was all leading.
This led to increased use of the hundi system to move money out of the country. The availability of funds from the hundi system grew with the reduction of imports, lessening the volume of hundi dollars needed for under invoicing. The demands for more dollars to move money out of the country grew. More illegal schemes were cooked up to enable transfers.
The stealing of the tiny Jubilee Bank (by elements of the judiciary) and of Islami Bank by the PM's associates (courtesy of DGFI) opened a hole to facilitate capital flight. This violation of private property with regulatory silence undermined every component of the financial system (banks, NBFI, insurance companies, and the share market).
The banking system increasingly fell victim to fraud, authorizing loans to people who were unlikely to repay; loans were rescheduled without any change in the operation of the enterprise, apparently expecting a miracle to emerge. And the courts took cases that protected defaulters.
It appears that a large share of important companies do not want to meet their obligations. This deep immoral behaviour seems in the DNA of the Bangladesh financial system and did not arise first with the Hasina regime. Bangladesh Bank rationalized all of this on the argument that collateral was largely land that went up in value over time. Bank boards looted the banks while the regulatory authorities stood by.
Forrest Cookson is the Research Advisor to the Research and Development Centre. In Bangladesh, he led the central bank component of the Financial Sector Reforms; was the Team Leader of the study of Northwest Area Development of Bangladesh; and served as the Statistical Advisor of the Legal and Judicial Capacity Building Project.
