On the other hand

Jyoti Rahman

Published in the Independent on 10 October 2010.

This piece warns about the development challenges still faced by Bangladesh.

Bangladesh has been receiving some great publicity recently.  For example, the Prime Minister’s New York trip was accompanied by an article in the Wall Street Journal about how Bangladesh has been growing faster, and tackling terrorism better, than our former compatriots in Pakistan. [1]  This echoes a similar sentiment expressed by Nicholas Kristof in the New York Times a few months ago.[2]  Meanwhile, global investors are taking notice of Bangladesh’s macroeconomic strength.[3] 

These are, of course, welcome.  And all of it is well deserved. 

Since the early 1990s, a bipartisan commitment to macroeconomic stability, opening up to the world market, and female empowerment has seen per capita income nearly treble to about $1500 (in purchasing power parity terms), life expectancy rise by a dozen years to over 66, and adult female literacy double (nearly half of adult Bangladeshi women were literate in 2008, compared with a quarter in 1990).  Despite natural disasters, political instability, and the global recession, Bangladesh’s economic growth registered merely a blip in recent years, and a 6 per cent plus growth is expected in the coming years. 

Indeed, there are reasons to celebrate.

On the other hand, however, there are strong reasons why we shouldn’t get carried away.  There is a danger that complacency may set in: we have beaten the odds, survived the worst, and are about to take off to 8 per cent growth and be on our way to middle income status by the end of the decade.  Such optimism is ill placed.  There are a number of speed breaks on our economic path that needs to be cleared before we can think about a 8 per cent growth rate. 

Instead of getting carried away with the good news, let’s take stock of some of these impediments.

‘Productivity isn’t everything, but in the long run it is almost everything’ — Nobel winning economist Paul Krugman once said.  This is because over time and across countries, differences in productivity accounts for the bulk of differences in income and living standards.  The average Bangladeshi worker produced about $3,200 (in purchasing power parity terms) worth of goods and services in 2000.  By 2008, this had risen to over $4,800.  But this is considerably lower productivity than some of our neighbours (Chart 1).

Why is our average worker so much less productive than the average Indian or Vietnamese worker? 

Chart 1: Productivity (GDP per worker), 2000-08


Source: IMF, World Bank, author’s calculation.

Labour productivity depends on two things: capital per worker — machines and infrastructure available to a worker; and multi-factor productivity — efficiency with which all inputs are utilised in the production process.  Let’s compare Bangladesh with our neighbours on these metrics.

Capital per worker rises when there is investment in the economy.  At the turn of the century, investment accounted for about 23 per cent of our economy, similar to our neighbours.  Over the subsequent years, the region witnessed an investment boom.  But not Bangladesh.  In 2008, investment’s share of GDP had risen to only 24 per cent of GDP, lower than our comparable neighbours save Pakistan (Chart 2). 

Chart 2: Investment (percentage of GDP), 2000-08


Source: World Bank, author’s calculation.

Indeed, a recent UNCTAD report suggests that even Pakistan receives more foreign direct investment than Bangladesh.  So there is clearly a long way to go before our workers catch up with their neighbours in terms of using new capital.

As well as machinery, capital per worker also depends on infrastructure, which is often (though not always) provided by the public sector.  Indeed, private investment also crucially depends on infrastructure.  Much has been written and said about our infrastructure bottlenecks, and energy shortages.  Still, some figures might be instructive.  According to the World Bank’s World Development Indicator, the average Bangladeshi consumed less than 150kwH of electricity in 2006, which is much lower than our neighbours (Chart 3). 

Chart 3: Electricity consumption per capita, 2000-06


Source: World Bank.

We are struggling to meet the current electricity demand.  Imagine what is needed before our workers can be expected to be as productive as their Indonesian, let alone Thai, peers.

In addition to capital per worker, labour productivity also depends on multi-factor productivity.  Multi-factor productivity rises over time due to factors ranging from education and skills of the workers to technology adoption and innovation to managerial and corporate practices to socio-political institutions and cultures. 

Development economics literature is still trying to come to grips with the relative importance of these factors, and their policy implications.  But there is an emerging consensus — governments can foster innovation and enterprise by making it easier for the private sector to conform to public policy. 

How does Bangladesh fare? 

Not very well, it appears.  According to the World Bank’s Doing Business Database, it takes 55 months and 41 procedures to enforce a contract in Bangladesh.  The same can be done with 39 procedures in 19 months in Indonesia, or with 34 procedures in 10 months in Vietnam. 

That ‘red tape is a problem’ is something the government is well aware of.  For example, Board of Investment chief claimed in July that bureaucracy is a bigger problem for business than electricity.  And yet, the government has done little to cut red tape.  If anything, the situation has regressed under the current government.  The Regulatory Reforms Commission and the Better Business Forum have been left to wither.  The Finance Minister promised a new body and a fresh start to push through regulatory reform in the first budget of the current government.  Nothing has come of it yet.

Former American president Harry Truman once wanted a one-handed economist, because the practitioners of the so-called ‘dismal science’ likes to put caveats of ‘on the other hand’ around their analysis.  But economists and policy analysts, and commentators who write on such matters, do everyone a disservice if they don’t point out the other side of the story. 

Of course Bangladesh has come a long way from our shaky beginning four decades ago.  Of course we are proud of our achievements in meeting millennial development targets.  But this is no reason to shut down the city to receive the Prime Minister upon her return from a business trip when the fact remains that there is a lot of work ahead, and no room for complacency.

[1] Dhume S, Bangladesh, ‘Basket Case’ No More, Wall Street Journal, 29 September 2010. 

[2] Kristof N, Pakistan and Time Sq, New York Times, 10 May 2010.

[3] For example, a Morgan Stanley analyst favours Bangladesh over Vietnam here: http://frontiermarkets.thomsonreuters.com/Pages/MorganStanleyFundHeadLikesBangladesh,ShunsVietnam.aspx


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