In a short span since independence, Bangladesh has proved the sceptics wrong. From an “international basket case” and a “test case of development”, Bangladesh has become an example of success. One leading economic development textbook observed, “And without question, from the viewpoint of the broader meaning of development, Bangladesh seemed to be forging ahead in the early years of the twenty-first century. As a result, there are good reasons to expect Bangladesh to soon move into the lead in income as well” (Todaro and Smith, Economic Development, Pearson/Addison-Wesley 2006, p. 89).
Observing Bangladesh’s progress, the UNDP’s 2000 Human Development Report (p. 3), concluded, “It was like a re-birth for Bangladesh, having moved from the status of being at the margin of history in the whirlpool of history, from the status of a mere testing site to that of a learning site…”
This write-up briefly reviews Bangladesh’s economic and social progress since 1972, and identifies factors that have changed its course. It also reflects on Bangladesh economy’s weaknesses and challenges in light of the current global economic situation. It begins with a brief account of the situation immediately after independence.
A wounded nation and broken dreams
Bangladesh was born as an independent State through the trauma of a brutal liberation war and associated destruction and dislocations. One estimate puts the total loss of physical assets to Tk. 1257 crores. In the transport sector, about 600 road and railway bridges, and half the trucks and buses were destroyed. Both Chittagong and Chalna ports were heavy damaged and blocked with sunken vessels. About 10 million people fled to India and about 20 million were dislocated internally during the war. The dislocation caused a serious shortage of food, amounting to 3 million tons. The public expenditure on relief, reconstruction and rehabilitation between January 1972 and June 1973 amounted to Tk. 290 crores ($400 million). The economy contracted by about 12% between 1969/70 and 1972/73.
Thus, the task of reconstruction, rehabilitation and development at the dawn of independence was overwhelming. Yet, there were high hopes and great expectations.
Alas, it was not the best of times – less than two years after its independence, the world economy went into a prolong recession due to two oil price shocks, and the international economic order was in a disarray. Domestically, the law and order situation deteriorated to the point that various elements linked to the regime got involved in hijackings, plundering of state-owned industries and other criminal activities. At the same time, the State engaged in extra-judicial killings, and forced disappearances of political opponents.
Mother Nature was also not so kind; a devastating flood hit the country in 1974. The unscrupulous business and speculators connived to take advantage of the situation and caused a famine that killed an estimated 1.5 million (15 lac) people and caused long-term damage to children born during the famine; about 25% of them died before their fifth birthday. Bangladeshi people felt ashamed, insulted and demoralised as a nation by the famine that was not due to a food crisis but, according to Amartya Sen, was due to the lack of governance and democratic practices.
This was not the Bangladesh for which an estimated 3 million (30 lac) people laid down their lives and about 200 thousand (2 lac) female folks were violated by the occupation force and their local agents. People’s disillusion reached its height when once revered leaders of the ruling party were found stealing relief materials.
Obviously, there were political agitations, especially, by Moulana Bhashani, who raised his voice against misrule, corruption, hoarding and smuggling. The dream of establishing a society free from all forms of exploitation was shattered, while the ruling regime stampeded on the state pillars of democracy and socialism. The ruling party spilt and the splinter group vowed to continue the struggle to establish a socialist state. Some left groups also took up arms. Various estimates put between 30-40 thousand political activists killed during 1972-1975 by the para military force, Rakkhi Bahini, culminating in the extra-judicial killing of Siraj Shikdar while in policy custody.
Amidst heightened political violence, corruption and rising destitution of common people, Bangladesh was declared a one-party state, and the Bangabandhu became the President of the Republic for life on 25 January, 1975. With this, there were restrictions on the media; all but four newspapers were allowed under government ownership. This put the final nail on the coffin of the one of the core principles of the liberation war – democracy – for which so many people gave up their lives. Kevin Rafferty of the Financial Times (June 6, 1975) characterised Bangladesh as “the end of the great development dream”.
Economic progress – from despair to hopes
At the time of independence the income per head of $50-$60 of Bangladesh was unquestionably among the very lowest of the very low – low in the lowest decile of world incomes per head. In 1972, Bangladesh was supporting some 1,400 persons per square mile – 25 times as many as the average of the United States, nearly twice as many as Belgium or the Netherlands, two and half times the average of India – and importing one-eighth of its food needs every year. Bangladesh had no known natural resources except natural gas and the possibility of a limited quantity of coal and limestone. The most arrogant of all US Secretaries of State, Henry Kissinger, dubbed Bangladesh an “international basket-case”.
During the first four years of independence (1972-75), the economy contracted by 1.7% and inflation was over 40% (see Table 1). Two World Bank economists, Just Faaland and Jack Parkinson, termed Bangladesh as “the test case of development” – meaning that if development could happen in Bangladesh, it could happen anywhere. After a decade of poor performance, the average growth rate accelerated since 1996, reaching over 6% and average inflation rate remained within a single-digit limit despite political unrests and other governance failures.
The coups and counter coups and political instability that followed the brutal assassination of the founding father and his family did not help economic management. The country was in a political vacuum with the cold blooded murder of four senior leaders in jail. It also lost in the coups and counter coups a number of senior military leaders who were at the forefront of the liberation war. As the “legacy of blood” continued, the senior economists who enthusiastically led the National Planning Commission and designed the blue-print for economic reconstruction and recovery left the country. A sense of gloom developed among national economists.
Yet, Bangladesh recovered and managed to grow during 1976-80 at a moderate rate of 4.1%, while inflation was down to around 10%. It was a remarkable achievement, especially when many developing countries were struggling and the developed world was reeling under the twin pressure of high unemployment and inflation, commonly called stagflation, due to high oil prices. More significant was the re-generation of hope and creating confidence in the people, especially among the young generation, that the doubters could be proved wrong.
However, that hope was dashed once again with the murder of President Zia. With the subsequent usurping of power by the army chief Gen. Ershad the country plunged back to corruption and despair. Ershad failed to take the country forward on the economic foundation built by President Zia. As the economy faltered under his rule, Ershad entered into loan arrangements with the International Monetary Fund on the condition of privatising, liberalising and deregulating the economy. However, these policy reforms failed to resolve economic crisis. Economic growth remained much below the rate achieved during 1976-1980 while inflation remained elevated during the decade of 1981-1990. There was widespread unemployment as many lost their jobs from the privatised enterprises. The joblessness and lack of hope had a corrosive impact on the young generation, many of whom were lured to criminal activities.
One might point to the infrastructure development and decentralisation during the Ershad regime. However, it is well-known that a corrupt regime always prefers mega projects as they are sources of big money and hence corruption. Privatisation of state owned enterprises was another source of bribery through which the regime sought to buy support from the new rich who emerged predominantly by plundering state assets and corruption as their prime source of accumulation.
Decentralisation was a progressive and wise move. It was a much needed administrative reform for a balanced development of the country and to empower the local people. Nevertheless, it also carries the danger of decentralising corruption and becoming a tool of political recruitment of local elites. One can always debate to what extent Ershad introduced decentralisation from economic development perspective or with an aim of deepening his power base.
One may say that the democratic governments are simply reaping the benefits of a decade of liberalisation reforms during the previous Ershad regime. Mind you, the reform process started immediately after the regime change in 1975. However, more important is to recognise that many developing countries also embarked on liberalisation reforms, and only a handful of countries – Bangladesh being one them – succeeded in turning their economies around. Therefore, it is not the liberalisation reform per se that is the cause of Bangladesh’s success, but key enablers that helped.
Turning point – the key enablers
A number of factors contributed to this remarkable turn-around. The first and foremost was the visible improvement in the law and order situation during 1976-1980. The second was the emphasis on the rural economy and agriculture with improved irrigation and fertilizer distribution and encouragement of fisheries as well as opening up of new activities such as shrimp culture. As a result, agricultural output grew by 2.9% during 1977-1980 as opposed to 0.06% during 1972-1976. The third was the encouragement of the private sector. Most importantly, during this period the foundation for two critical drivers of the economy – remittances and ready-made garments – was laid.
Although several delegations from the Middle East visited Bangladesh between 1972-75 to recruit workers, no system was in place to promote manpower export in a systemic way. However, President Zia saw the opportunity and created the Bureau of Manpower, Employment and Training in 1976 to devise policies to export manpower in a coordinated manner.
President Zia could also see the opportunity created by quota-free access to the US market of ready-made garments from least developed countries under the Multi Fibre Agreement (MFA). His government facilitated technical co-operation and financing arrangements between the Desh Garments and the South Korean Daewoo, under which the Desh Garments sent around 150 critical personnel to Daewoo’s garment production plant in Pusan in 1979, and Daewoo met the cost of hosting and providing production-line training. The government also provided support with back-to-back LCs and bonded warehouses that reduced the cost of financing imports of fabric required as inputs.
President Zia also could foresee the demographic shift that was happening in Bangladesh and the growth of young people. Thus, he created special ministry for the development of youth. These factors and the economic turnaround created hope among the people, especially the young generation, a key for success.
Human Development – NGOs heavy lifting
Bangladesh has also done remarkably well in human development achievements. Its Human Development Index composed of per capita income, life expectancy, mean and expected years of schooling increased from 0.345 in 1975 to 0.50 in 2011, and is now categorised as a medium human development country. Life expectancy at birth increased from 45.2 years in 1970-75 to 68.9 in 2011. Adult literacy rate improved from around 20% in 1973 to over 55% in 2010. Bangladesh has also successfully tackled population growth which declined from close to 3% to less than 2%.
While favourable budgetary allocations have helped achieve good results in human and social development, Bangladesh’s public social spending remains quite low in per capita terms, even by south Asian standards. It is also noteworthy that some of the spectacular achievements in health indicators could be achieved with low cost technology (in particular, oral rehydration technology for diarrhoea treatment, leading to a decrease in child mortality) and by creating more awareness (e g, about immunisation, contraceptive use). New ideas catch on rather quickly in Bangladesh, perhaps facilitated by the density of settlements and their lack of ‘remoteness’.
The non-government organisations (NGOs) have played a significant role in this area. The impact of NGOs on a range of health and nutritional indicators is outstanding. For example, in communities where NGOs are present, cure rates averaged 85% per cent in the tuberculosis programme, malnutrition rate dropped by about 20% among the poor and neo-natal mortality is significantly lower. NGO schools have a positive impact on school enrolment, particularly of poor and girls, and higher attendance record and completion rates than formal schools.
The unique role of the NGOs is not confined to the delivery of social services and pro-poor advocacy. They have developed commercial ventures in order to link poor producers with input and output markets, as well as to develop a source of internally generated revenue for the organisations.
Not all well
Poverty, according to the World Bank’s international poverty line of $1.25-a-day, is still quite high. The UNDP estimates reveal that about half the population (49.6% or 80 million) people lives in poverty as opposed to 22.6% in Pakistan. While 21.2% of the population remains vulnerable to poverty (only 11% in Pakistan), 26.2% of the population lives in extreme poverty. This means a small economic shock or change in personal or family circumstances due to accidental death or illness can push a large number of people (70% of the population) to poverty.
The second black spot is growing inequality. According to the Asian Development Bank, Bangladesh is one of the 15 Asian countries, where inequality has increased significantly during the past three decades. According to a 2011 Report of the Unnayan Onneshan, the Gini coefficient, a common measure of inequality, stood at 0.458 in 2010, which is above the critical value of 0.4. According to the World Bank, the share of the lowest 10% of the population (poorest) in the national income declined from 4.23% in 1984 to 3.99% in 2010, whereas during the same period, the income share of the top 10% (richest) rose from 21.87% to 27.03%. This perhaps is the result of rampant corruption of the politically connected and the capture of the political institutions by the business class. The rise in inequality has dampened the impact on economic growth on poverty as the bulk of the gains from growth went to the rich and politically connected instead of the poor. Inequalities also exist in other areas. For example, only 8% of the students coming from poor families can complete secondary education as opposed to 33% from the well-off families. Only 1% from the poor families is able to enrol in higher education. According to the UNDP, over 27% of human development progress was lost due to growing inequality.
Challenges – made worse by governance failure and gloomy global outlook
Bangladesh’s fundamental challenge is to raise economic growth much above its current rate, and to do in an inclusive and environmentally, socially and economically sustainable manner. Otherwise, it would be very difficult to reduce poverty significantly, maintain social cohesion and the momentum in its human development gains. The ultimate goal is to make the country liveable.
There are a number of short- and long-term hurdles. Bangladesh has huge deficits in infrastructure, especially in energy and transport. Its urban-biased development strategies are causing not only regional imbalances, but also fuelling unsustainable urbanisation. It has to tackle growing inequality, protect vulnerable people and eradicate poverty, while it is under serious threats from climate change related factors.
Although aid dependence has declined substantially, Bangladesh still has to depend on foreign aid and loans for large infrastructure projects as it has very low domestic revenue. Bangladesh’s tax-GDP ratio of around 10% is among the lowest in developing countries where the average is between 17-25%. Raising tax revenue is a daunting task given the capture of the legislature by the business class and the rich. There is a built-in incentive for not to pay tax and instead whiten the black money (not declared in the tax return) by paying only 15% tax.
The low tax revenue creates immediate threats to macroeconomic stability, as the government needs to borrow a huge amount from either commercial banks or from the Bangladesh Bank. Borrowing from commercial banks squeezes out the private sector; borrowing from the Bangladesh Bank causes money supply to rise which may lead to inflationary pressure.
Resorting to Public-Private Partnerships (PPPs) may not resolve the fiscal needs for infrastructure as abundantly revealed by the colossal failure of the rental power generation scheme. Government does not only need to subsidise PPPs to make them attractive, but also has to bear the risk of failures of PPPs. Furthermore, PPPs are another way of privatisation and hence are vulnerable to becoming a tool for corruption and pork-barrelling (political buy-over). In South Africa, where PPPs are tried, it is found that PPPs offered far greater latitude for manipulation by foreign and domestic firms or government officials that were difficult for the public and anti-corruption efforts to spot.
The inefficient and inadequate tax system also does not help when government needs to strengthen social security system to protect the large number (70% of the population) of vulnerable people. The lack of adequate tax revenue is straining public provisioning of basic services such as healthcare and education. The withdrawal of public provisioning or their deterioration or charging user fees, in turn, contributes to inequality of access or opportunity as well as outcomes.
The Bangladesh economy is narrowly diversified where more than 75% of export earnings come from only one sector, ready-made garments and knit-wear. This makes Bangladesh vulnerable to global economic shocks. Although Bangladesh has done reasonably well so far during the recent global economic crisis, it may not be able to insulate itself for very long as the global economy is still not completely out of woods.
One of the main markets for Bangladesh’s ready-made garments, Europe, is likely to stagnate in 2014 as its two largest economies – Germany slowed and France posted negative growth in the 3rd quarter of 2013. The US economy is forecast to grow at around 2-3% in 2013, but still faces significant risks from planned monetary tightening. Economic growth is also projected to moderate in both East and South Asia. The average regional growth in the Arab world is expected to decline from 6.9 per cent in 2011 to 4.4 per cent in 2013 and below 4 per cent in 2014.
These developments are going to affect both export earnings and remittance, exacerbating the financial woes of the government. Bangladesh also faces additional problem of rising oil prices and high food prices. Although food prices in the international market have come down from the highs of 2011, they still remain elevated. Although an interim deal between Iran and the West has been achieved, uncertainly continues in the Middle-East and oil price may not decline significantly.
One doubts whether recent rise in remittances is from genuine sources, i.e., money sent by workers abroad, or due to money laundering. From the rising value of dollar vis-à-vis Taka when dollar depreciated against almost all currencies, except a few (mainly in the subcontinent) since the 2008-2009 global financial crisis, one can suspect that a large sum of ill-gotten money is being transferred through illicit channels and is finding their way back as clean. It is worth pointing out that a UNDP report ranked
Bangladesh at the top of least developed countries in illicit transfer of money. (See UNDP discussion paper, ‘Illicit Financial Flows from the Least Developed Countries: 1990-2008’, May 2011)
Bangladesh needs to diversify its economy as well as reorient towards domestic market. This is not an easy task in a depressed global economy and slowing regional growth. The growing inequality is a hindrance for the growth of the domestic market as the majority of population does not have enough purchasing power. Of course, the heightened political unrest, governance failure and the lack of national consensus, makes the task even more frightening.
Anis Chowdhury is a retired professor of Economics, University of Western Sydney, Australia.