Fighting the great recession

Jyoti Rahman

Published in the Daily Star, 18 May 2009.

NO country has been immune from what is being dubbed as the Great Recession — the sharpest synchronised global slump since the Great Depression. Bangladesh is no exception. Compared to the average economic growth of 6.3% recorded in the past five years, the growth estimate for the current financial year is 5.9%, and it may dip to less than 4.5% next year according to a range of forecasters. This growth slowdown will undoubtedly have flow-on effects on employment and poverty alleviation.

To combat this, the government announced a Tk. 34 billion package on April 19. Interestingly, only about an eighth of the package is geared towards exports. More interestingly, the readymade garments (RMG) sector — the country’s largest export earner — received nothing. The bulk of the package is for agriculture, power generation, and social safety (such as food relief) programs.

How should we think about the package?

The discussion should start with the fact that the government’s ability to spend is limited. The ADB forecasts that the fiscal deficit will remain higher than 4 % of GDP in the next fiscal year. We have had deficits of that size before. And this deficit is much smaller than the double digit relative to GDP deficits in the US or the UK, but the inequities of global capital markets are such that massive borrowing by rich countries’ governments will leave the poor ones, like ours, with limited sources to finance their deficit.

This could mean borrowing from the private sector, which will mean less private investment, and therefore slower growth. It could also mean axing of the development budget or under implementation of development programs, which will further hamper economic development. It could mean asking the Bangladesh Bank to print money, which will eventually ratchet up inflation. Or it could mean relying on the international financial institutions, who will ask for conditionalities that may or may not be beneficial.

Faced with this unpalatable choice, whatever the government did, some sector would have been left out. But still, does it make sense to overlook the major exports sector?

The government has noted that the export sector has held up reasonably well thus far into the recession — the size of our export slump appears miniscule next to those of our neighbours (Chart 1).
2009-05-18__point1

Our RMG sector actually grew between September 2008 (when the Great Recession entered its most virulent phase) and Feb 2009 (the latest available data for Bangladesh). At the beginning of the recession, experts noted that our RMG sector might not suffer as much because we sell mainly to the low-end market. This so called “Wal?Mart effect” appears to have been borne out by the data. During the same period, however, exports of leather goods and frozen food fell at rates experienced by exporters in other Asian countries.

As such, it makes sense that these sectors, rather than the RMG, received whatever assistance the government could provide.

There is more to the story about assisting the exports sector. Experience from our Asian neighbours suggests that export-led industrialisation is one of the most effective ways to reduce poverty and increase living standards. However, it is not clear that we will be able to rely on this strategy for coming out of the Great Recession.

With the households in the rich world heavily indebted, some commentators argue that their appetite for buying cheap products from the emerging world might be greatly reduced even when the recession ends. Meanwhile, much of the rich world is likely to have very high rates of unemployment, and to protect domestic manufacturing jobs, western governments may well be tempted to hide behind protectionism.

There is much uncertainty about both of these factors, and, therefore, the outlook for our exports sector. However, we do know this much; our RMG sector has proved resilient and is globally competitive; we have an excessive reliance on this one sector, and should diversify our exports base; and our other export industries may not survive the recession without assistance.

From this light, the decision to “rescue” the non-RMG exporters does appear sensible. But why only an eighth of the package for the exporters though?

The answer lies in the fact that the bulk of the package is about “stimulating” the economy. Because of the recession, our growth has slowed, and by spending money, the government aims to resuscitate the growth process.

The government, it seems, is particularly focussed on the agricultural sector. This makes sense. While the fall in rice (and other food) prices has been welcome news for the consumers, for the farmers this has been at best a mixed blessing. The government aims to boost farm production, and contain rural poverty, through the stimulus measure. Increased allocation for social safety programs are directly aimed at keeping the purchasing power of the poor afloat.

Will this stimulus work?

The truth is, no one really knows. Large-scale fiscal stimulus has not really been tried in recent decades, and economists don’t really know much about their effectiveness. This is as true in the US as it is in Bangladesh. That is why policymakers should try a range of programs. While much has been said about the omission of the RMG sector from the package, it is striking that almost nothing has been said about the relative absence of any infrastructure spending (other than on energy) from the package.

Should economic growth fail to recover next year, and a second package is needed, it should focus on infrastructure investment that can create jobs and support income in the near term, boost the country’s productive capacity and raise potential growth in the medium term.

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