Sheikh Hasina has announced that income per capita in Bangladesh will be $12,000 by 2041. That’s up from the current $1,600 or so but we should point out that the PM hasn’t quite announced that it will be so, rather that we are aiming to reach that amount.
We should also point out that while it is not unlikely to be easy, nor will it be a straight path, there is no fundamental reason why it should not or cannot happen.
Compound economic growth just works that way; if growth is just a little higher than it is currently and continues on for those decades then it will happen.
There is also no particular reason to think that it won’t happen that way.
Of course, there is always the possibility of disaster, a rather higher possibility of bad economic policy being implemented, but it is a general assumption in the economic world that the currently developing countries will continue to develop.
But what will really drive that growth is the people in Bangladesh applying the methods of adding value that others have already worked out
It’s such a basic assumption that it is even built into all our calculations about climate change, for example.
This process is called convergence and there’s a very good reason we think it should happen.
The difficulty with economic growth is that we’ve got to work out what to do next. Gross domestic product, or GDP, is the value that is added in an economy each year and we generally define economic growth as being a rise in GDP.
The head scratcher, the puzzler, is always, well, what is it that we do to add more value? At which point a developing country has an advantage over a developed one.
By definition, a developed country is at the technological frontier. They’ve already implemented all the ways to add value that they know of and thus to advance any more they’ve got to invent some more.
This is not an easy task and that’s why it takes time. Thus the currently advanced countries grow at 1, 2 and if they’re lucky 3% a year, simply because there aren’t all that many bright people to work out how to add more value.
A developing country, again by definition, is not at that frontier. If it were it would be rich already. But they have plenty of examples to follow – as in, developed countries – in terms of what to do to add more value.
As we all remember from school – OK, there will be a clever clogs who never did this but for the rest of us – homework is a lot easier if you can copy it rather than having to work it all out yourself.
A developing country can and should grow faster than an already rich one – thus that convergence – so that in the end we should all end up in roughly the same place, the same level of income and wealth.
One such idea is using VAT as a major part of the tax system. VAT is a tax upon consumption and this causes less economic distortion or dislocation than taxes upon incomes or capital.
So, the general move to a simple VAT system is a good idea for Bangladesh, despite it having just been postponed for a couple of years.
The rise in taxation upon SIM cards probably isn’t such a good idea. Of course, I’m not trying to tell the government what they should do but a general observation is that mobile telephony is the one single technology we know of that promotes economic growth more than any other.
The actual finding is that 10% of the population with a phone, in a country previously without a general landline network, adds 0.5% each year. That’s not 0.5% of extra growth, that’s 0.5% of GDP growth just from that 10% having a phone. Sadly, it doesn’t scale all the way, we don’t then assume we’ll get 5% GDP growth each year just by everyone having a phone.
But information is the lifeblood of economic growth – as above, we’re trying to apply, in most circumstances, things that others have already worked out. Thus we must know, of course, what it is that those others have already worked out.
We should therefore treat mobile telephony, and the next stage mobile internet, not as a consumption good but rather an intermediate. What that means is that communication is something that then feeds into the production of other things. And we tend to think that we shouldn’t tax intermediate goods, only final consumption, and or income.
In general Sheikh Hasina’s goal is entirely achievable, even if I’d prefer to agree that it will be a bit of a stretch.
I’m not the world’s greatest mathematician but I see that as being 8% compound GDP growth over the next couple of decades.
China has recently achieved that, South Korea and Japan before that, India looks on the way to it and Bangladesh has been managing just under that for two decades now.
Yes, it’s possible. Others have done it and Bangladesh is close to it already.
As to how, well, generally a market and capitalist economy is going to help, for no one has done it without that.
Other than that, the various policy decisions like VAT, or SIM card taxation, are going to make a difference at the edges.
But what will really drive that growth is the people in Bangladesh applying the methods of adding value that others have already worked out.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.