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There will be blood

  • Published at 06:22 pm May 4th, 2013
There will be blood

Every country in the world, rich or poor, dreams of striking big reserves of oil. Why shouldn't they? Striking oil is equivalent to winning the lottery prize. Your country gets an abundant source of liquid cash flow for decades, a cash flow that doesn't require much hard work or intelligent planning.

But, as many studies have shown that in most of the cases, winning a lottery makes the typical lotto winner more miserable and unhealthy in the long term, striking big oil can also be very detrimental to the health of the nation in the long haul.

Resource curse

In economics, a concept called “resource curse” has become very popular in recent decades. In general terms, resource curse means that when a country starts utilising a cheap and abundant natural resource, the strength of its economy become overly reliant on that resource, other sectors of the economies get neglected, government becomes dependent on the revenue from natural resource, and the country’s overall development suffers.

Resource curse does not occur in underdeveloped countries only, it can happen in rich-industrialised nations too. The most famous example is the “Dutch Disease’” that occurred in the Netherlands in the 1960s and 70s. Holland almost overnight became an oil exporting nation when North Sea oil reserves were discovered in the early 60s. Holland was and still is one of the most advanced industrialised economies of the world. But when it struck oil, its economy became imbalanced. The overnight riches from oil revenue pushed the general labour wages very high. The high labour cost made its manufacturing sector uncompetitive compared to close rivals like West Germany, France, etc. Within a few years the famous Dutch manufacturing sector rapidly shrunk to become a shadow of its previous self.

But it is upon the poorer and more under-developed countries that the curse of easy resources wreaks the full havoc. To understand the mechanics of the curse, we have to understand some very basics of political economy.

All governments, be they autocratic or representative, are somewhat accountable to the people. At the bare minimum they must feed the people, provide basic amenities and maintain the rudimentary structure of the state. If governments fail to do that, the people will rise up and sweep away the regime.

Moreover, even if the government is exploitative and extortionist, it wants to maintain a running economy, otherwise there will be no wealth to extract from the people. A prudent government therefore devotes lot of attention to economic growth because not only economic growth means a satisfied people; it also means more wealth to extract. But when a country strikes abundant natural resources, the government gets an easy source of wealth without being responsible for a healthy economy. The cash flow from resource export balances the budget, provides the wealth to maintain a police state, enables government to bribe the community leaders and keep the extortionist machinery going.

The government does not feel the need to develop a robust and diversified indigenous economy. The government also does not feel pressure to reform representative politics, as they can effectively buy people's silence by bribery or threat. Moreover, the flow of unaccountable wealth generates lot of venality in the politics and society.

Thus underdeveloped countries that struck oil often become poorly-governed and unrepresentative of the common people. From Russia, Venezuela, Nigeria to the typical countries in the Middle East, we can see the resource curse working to the detriment of the people.

Bangladesh’s abundant resource

Of course Bangladesh has not struck oil and our vaunted natural gas reserve is actually rather puny compared to the world (.001%). We also do not have other natural resources for big time export. But the idea that Bangladesh has indeed struck big oil came into my mind a few years ago. I thought that Bangladesh found oil in the form of abundant and inexhaustible source of cheap labour from its people. For more than two decades, the Bangladesh economy has been standing on the twin pillars of garments export and foreign remittances.

In general, a country is deemed resource dependent when 70 to 90% of its foreign exchange income is derived from just one or two natural resources. Let us now dive into some statistics to see how over reliant we have become upon our main natural resource, our abundance of people.

Bangladesh has been experiencing tremendous export growth over the last two decades. From 2002 to 2007, the volume of exports nearly doubled. From 2007 to 2012 the volume more than doubled again and in 2012 we exported more than $24 billion worth of goods and services. This statistic should be a source of unalloyed pride but the composition of exports throws some cold water on the joy.

Garments exports have rapidly grown from 53% of total exports in 1995 to almost 80% today. Bangladesh's exports in 2012 were $24.3 billion, of which garments contributed $19 billion. This close to 80% mark should be a very sobering indicator of a very unbalanced economy.

There are now over 5,000 garments factories employing over 4 million people, of which 80% are female. The primary determinant of sourcing for international garments business is still cheap labour. Labour costs are still major determinant of competitiveness in labour-intensive global garments production and trade. What is remarkable is that even among other poor and low cost garments exporting countries; Bangladesh boasts a great advantage in labour costs. The advantage becomes starker when we compare it with other developing economies.

Even when we compare with our national bugaboo India, we see a very dramatic contrast. Labour costs in Bangladesh are almost one-third of those in India. The average monthly labour cost in India is over Rs.7,000 per person, while it less than Tk4,000 in Bangladesh.

Moreover Indians firms have to pay 9.6 percent export duty to export to European markets while Bangladesh, which is categorised as a least developed country (LDC), enjoys duty-free access. Contrary to all protestations, cheap labour is indeed the great comparative advantage of Bangladesh garments sector; the “killer app” of our exporting prowess.

Foreign remittance

Now let us look into the other pillar of Bangladesh's external income, foreign remittance. Our foreign remittance income has really taken off, particularly in the last 10 years. With $14 billion of remittance income, Bangladesh is now the 8th largest recipient of external remittance income.

If we look into the source of remittance income we can see that although US and Europe have become growing sources of income in the recent years, the bulk of our foreign remittance still come from Saudi Arabia, the Gulf countries and countries in East Asia. Nearly 70% of our remittances come from these countries alone.

Bangladesh's explosive growth in foreign remittances is mainly comprised of semi-skilled and unskilled workers who accounted for 80% of the foreign workforce in 2007. The percentage of professional workers were less than 1% while skilled labourers accounted for 19%. As in the RMG sector, the main advantage of our overseas labour force seem to be readiness to work very hard for very little money.

So how big is the contribution of remittances to the economy of Bangladesh? In 2008 remittances were 9% of overall GDP and almost 60% of total exports. This contribution has been increasing rapidly over the last decade. For example in 2011 our GDP was $111 billion and remittances were $12 billion, the ration is still above 10% and in 2012 it has only become greater as remittance income touched nearly $14 billion.

But is this out of place? How do we compare with other remittance earning countries? Among similar economies, only Nepal has a larger remittance to GDP ratio. India, Pakistan, Sri Lanka, Cambodia, Indonesia all these rival economies have much less dependency on remittances.

Remittance is the only thing that is standing between sustainability and quick bankruptcy of our economy. Although we have experience impressive export growth, our import growth has been more spectacular. In 2010-11 the gap between imports and exports was nearly $8 billion. If it weren't for the $10 billion-plus of remittances, our balance of payments would have a massive and unplug-able hole in the middle.

The economic impact

Thus far we have seen that RMG export and remittances have affected the country's finances like an abundant source of natural resource, dwarfing other economic activities and shoring up the finances of the country.

But there is a difference between income from natural resources and income from people. Resources income mostly directly goes to the government and then how it is used depends completely upon the system of governance.

But our people's income from RMG and remittances mostly goes to people directly and is therefore changing the economy irrespective of the government. The most positive aspect of RMG and remittances is that common poor people have a large share in it.

In economics in is well understood that a unit of income in the hands of the poor has a much bigger multiplier effect for the economy than the same unit of income in the hands of the rich. Poor people spend the bulk of their income on basic necessities which tend to recirculate the money in the domestic economy.

Remittance income now accounts for 13% of household income for the poor and lower-income people. There is no doubt contribution of RMG sector will be at a similar level. A study found that almost a quarter of poverty decline between 2000 and 2005 in Bangladesh can be attributed to the combined impacts of remittances and RMG export. Since income from the two sources only accelerated from 2005 onwards, it is safe to assume their role in poverty reduction has only grown.

The down-side

While the torrents of cash flow from RMG exports and foreign remittances were boosting the economy of Bangladesh, they were also creating problems that are very similar to resource curse. With RMG exports and foreign remittances doing a lot of the heavy lifting for economic growth, wealth dispersion and poverty alleviation, the governments since the early 2000s have felt little urgency to reform the economy, implement regulations, and develop the human capital of the country.

Actually, these engines of economic growth took care of the country's finances to such an extent that it freed the governments from worrying much about economic development at all. Every year revenue collection kept rising because of increasing consumption of the common people. The governments ceased to worry about governance at all since these two sources went on delivering economic dividends without much tinkering from the top.

The governments have not been using their new freedom and ready cash bonanza wisely. Nothing makes the sorry performance of governments in the last 12 years starker than the state of infrastructure in Bangladesh.

Infrastructure investment

Those of us who have experience traveling abroad know that in the decade of 2000-10, Asia transformed itself from underdeveloped third world to world-beating top class infrastructure leader. Many economists credit Asian infrastructure spending as one of the key drivers of Asian economic growth.

Currently India is spending about 4.7% of GDP on infrastructure while China is splurging 8.5% of GDP in annual infrastructure development. Throughout 2000-10 Bangladesh's infrastructure spending remained below 2%. In fact from 2000 to 2007 there was actually declining trend in allocation for infrastructure. Lack of infrastructure spending and lack of regulation now have made Dhaka the worst city in the world and the whole country is on the way to become world's largest semi-urban slum.

It gets worse

Government apathy is the least of our problems now. Unprecedented cash flow from the RMG exports and remittances have helped transform the political organisations of the parties into full-fledged extraction rackets. From lowly political cadres at the streets to MPs, ministers and head of the government at the top, the extraction pyramid has become so lucrative that holding power of the state has become a higher stake than ever.

We get a picture of the fantastic amount of money sloshing around when a few of the scandals, which are but the tip of the iceberg, gets reveals before a dazed public. Freed from concerns of economic development, the leaders of the governments in the last two elected regimes devoted most of their time in scheming to do what they always wanted, annihilation of the opposition.

Inherent lack of check and balances in our democratic system and our pervasive lack of democratic ethos meant that we always had governments that ruled like autocracy. The two external sources of income have reduced economic accountability thus further exacerbating the problem of governance.

Businessmen everywhere hate regulations. They think regulations only make them less profitable and competitive. They think they can police themselves and government interference is unnecessary. We must understand that in Bangladesh the government itself is incentivised to regulate the golden egg laying RMG and manpower export sector as little as possible.

Government is performing the role of patron and protector of the export oligarchy. Not only the ruling party but even the opposition largely sings from the same hymn sheet. Even the middle class have become addicted to the easy money from RMG and remittances.

We know that the consumption boom that is fueling the commercial sector, the salary inflation that is making the corporate sector so lucrative, the property bubble that is creating thousands of millionaires, the money transfers that is enabling us to get second citizenships and second homes, all these have been made possible to a large extent by the growth in these two sectors.

Nowadays, export and remittance growth have become the most eagerly anticipated economic indicators in the country. Our think tanks and policy makers unabashedly discuss how we can send yet more people abroad to increase the flow of money.

We feel pride in the fact that India with a population of 1,200 million has only 12 million emigrants abroad while Bangladesh with 150 million has sent nearly 5.5 million of its children abroad. We feel no shame that we are failing to create opportunities at home and emptying our country of most of the enterprising people.

The new frontier

High profit, high risk, lack of regulation and lack of implementing authority always create a mad scramble for profit. In the US, from mid-19th century to early 20th century, there were several petroleum oil booms. Successively oil was discovered in Pennsylvania, Texas and then in California. This was the period when petroleum was fast becoming an essential household and industrial commodity.

Since petroleum was never extracted before, these new oil wells were easy to extract. If you were lucky, you just dig a few feet and black gold gushed forth. There were several mad scrambles to make easy money from oil wells. People with little or no experience went on buy extraction rights and operate oil rigs. Prospecting for oil and operating rigs were very risky but at the same time wildly profitable if luck clicked.

At the same time America was still a frontier country, therefore regulations and authority were minimal. There were plenty of intrigue, deceit, murders, and accidents. The very excellent film “There Will Be Blood (2007)” shows some of the ruthless and gung-ho nature of the oil business in the early days.

High risk, high profit and lack of regulation also characterise our RMG export sector. We can also see a mad scrambling to make quick money. Like remittances, the entire money-making edifice of RMG stands on the fact that we have a huge supply of desperately poor workers who are willing to work in the worst environment for the least amount of money. Therefore there is also no shortage of fly by night entrepreneurs who jump in with a ramshackle setup to make a lot of money in a very little time.

The same basic features also ensure that we see a steady stream of deaths from factory fire and collapse, deaths in inhuman working conditions in the Middle East, deaths in desert and sea among people who risk everything to go someplace better. We are building a Shining Bangladesh on the bones of the wretched poor. Nobody asks unpleasant questions about the actual contribution of the educated middle class in building this new economy.

Where we go wrong

This is not a path unique to Bangladesh. Lot of countries went through a similar phase in their economic development. China’s unprecedented rush to industrial superpower-hood left behind hundreds of thousands of deaths from factory-mining accidents and a ruined environment. In China too, the government and business operated in tandem just like the fascist fusion of corporate and government.

But the Chinese government and many other newly developed Asian governments were also single-minded about developing the economy and moving up the economic value chain. They quickly invested most of their gains from cheap labour into developing the human and country capability to prepare for the next economic level.

Many of the developing nations have had rapid income growth on the basis of RMG export but as their economies developed and income reached certain level, their garments industry became non-competitive and business moved to a different country. Bangladesh has still a long way to go before we reach that level of income.

So in the near future the RMG export sector has little fear of being priced out of competition. But we have everything to fear from temporary sanctions from buying countries or companies because of the globally publicised mega-accidents. Our over-reliance on RMG sector have made us very vulnerable even to temporary shocks.

Shafiqur Rahman is currently pursuing a Ph.D. at a US university. An abbreviated version of this article was originally published at AlalODulal.org  

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