(July 26, 2007) Bangladesh could join the ranks of middle-income countries (MICs) within a decade (by 2016) or some time soon after. This will require raising GDP growth to and sustaining it at 7.5% or more.
Facts: -Per-capita (inflation-adjusted) GDP has more than doubled since 1975. -Dhaka and other urban centers have been the driving force behind this growth. -Poverty rate has fallen by 20 % since the early 1990s. -Merchandize exports to GDP ratio has increased to 18% in 2006 from just 6% in 1990. -Manufacturing sector contributes about 16% to national GDP. -Unemployment rate is only 4% and have been consistently low.
The premise of the report is that Bangladesh could join the ranks of middle-income countries (MICs) within a decade or some time soon after. It has the necessary assets: much-improved economic fundamentals; success in implementing many first-generation reforms; a young, rapidly growing labor force; and an established entrepreneurial culture. Despite the widely acknowledged and critical weaknesses in governance, Bangladesh also has an impressive record of achievement, especially in harnessing sound economic and social policies to pioneering social entrepreneurship.
This is a report on the growth performance and potential of Bangladesh. The report argues that the first phase of Bangladesh's development-rising from the post-independence desolation and establishing a positive development record-has been a success. The country has clearly come a long way since independence in 1971 and its future is anchored in far stronger fundamentals than the pervasively bleak conditions then. Good economic and social policies and pioneering social entrepreneurship, partnered under innovative institutional arrangements, have contributed immensely to the successes attained.
Chapter 1: Firm-Level Productivity in Bangladesh Manufacturing Industries
This chapter seeks to deepen the understanding of the factors that impact the productivity and, therefore, the competitiveness of the manufacturing sector in Bangladesh. The chapter tracks the total factor productivity (TFP) performance of five major manufacturing industries over the 1999-2003 period based on a firm-level survey that was done for this report. The industries covered were ready-made garments, textiles, pharmaceuticals, food, and leather/footwear – together these account for about 70 percent of the manufacturing sector and therefore give a good account of the sector. The chapter then uses econometric analysis to identify factors that impact firm-level TFP performance, taking into account differences in firm characteristics – such as location, industry, age, and size.
Chapter 2: Accelerating Income Growth in Rural Bangladesh
Chapter 2 covers the challenges faced by rural sector and associated reform priorities. Bangladesh has enjoyed major successes in rural development, in both agriculture and the non-farm sector. However, the rural sector is faced with a number of emerging challenges. Agriculture is under pressure to improve its productivity due to a shrinking land base. Furthermore, agricultural diversification is lacking, with potential in higher-end products largely unexploited: agriculture production is dominated by crops which, in turn, are largely rice based. The rural non-farm sector is faced with a number of structural constraints that (if unaddressed) risk undermining its future growth prospects. Sharp productivity increases in both agriculture and rural non-farm sector are necessary to support sustained high growth and faster poverty reduction. As discussed in the chapter, this calls for the next generation of agro reforms and addressing the major investment climate constraints faced by rural enterprises.
Chapter 3: The Labor Market: Trends, Characteristics, and Challenges
A relative abundance of labor provides Bangladesh with a comparative advantage in production of labor-intensive goods. Of course, global comparative advantage does not automatically translate into global competitiveness, which depends on a host of factors that affect productivity, including the efficiency of the labor market and labor skills. Are there inefficiencies in the labor market which undercut overall productivity of the economy? Chapter 3 assesses the key labor market trends and characteristics in seeking to answer this. On balance, the chapter finds that Bangladesh’s ineffectively enforced labor laws and regulations are less of a hindrance to the functioning of the labor market than are deficiencies in protecting worker rights. However, it identifies acute skills shortages as being a severe problem. Not only are the education levels among the workforce low, the education and vocational training system are not geared toward the market needs.
Chapter 4: Trade Liberalization and Export Competitiveness
Chapter 4 covers the trends and issues related to trade liberalization in Bangladesh. It records the considerable, albeit uneven, progress that has since been made on trade liberalization since the early 1990s. It also highlights the substantial agenda that remains. Largely as a result of rampant use of para-tariffs (import tariffs other than Customs Duty), the average nominal protection in Bangladesh is the highest in the region and among the highest in the world. The chapter then draws attention to the significant gains for Bangladesh from further opening up the trade regime and concludes with some specific policy recommendations.
Chapter 5: Urban Development and Economic Growth in Bangladesh
The process of rapid, largely Dhaka-centric, urbanization underway in Bangladesh, offers major opportunities and challenges, which need careful management. The increasing returns to investment that typically arise from urban agglomeration can be an important stimulus for economic growth and productivity. Already, Dhaka’s economic dynamism makes it a magnet for migrants and economic activity. At the same time, because of poor urban management, service provision in Dhaka is being stretched to the limit while real estate prices sky-rocket, traffic congestion worsens, and infrastructure decays. The urban management challenge, therefore, is twofold: the first relates to improving access to and the quality of basic services and infrastructure in Dhaka and other major metropolitan areas, and the second to improving prospects for the smaller cities to emerge as viable urban alternatives. Bangladesh also needs a well-reasoned and carefully considered national strategy to bring more balance and energy to urban development across the country. These issues and policy options are covered in Chapter 5.
Chapter 6: Sub-National Income and Expenditure Dynamics in Bangladesh: Insights from the Macro-GDP and Micro-Survey Data
Chapter 6 seeks to shed light on the sub-national differences in the levels and growth of income and expenditure in Bangladesh. The chapter also identifies some factors that are correlated with cross-district differences in expenditure growth over FY1992-2005. Specifically, expenditure growth is found to be negatively correlated with the initial levels of expenditure inequality, gender disparity, and large landholdings, and positively correlated with the degree of urbanization and access to electricity. Also, in general, districts with lower per-capita expenditure experienced faster expenditure growth, implying mild regional convergence in per-capita expenditure, although the speed of convergence was quite slow; the estimated time to full convergence is about 90 years.
Chapter 7: Governance and Growth: the Bangladeshi Conundrum
ABangladesh’s impressive record of economic growth and social change has been achieved despite weak governance, particularly high levels of corruption and a perceived worsening of regulatory quality. Bangladesh is thus an outlier in cross-country studies which relate governance to economic growth. What explains this relatively strong performance despite apparently poor governance? And would this performance be better and more sustainable if governance were better? Chapter 7 grapples with these questions. The chapter unbundles governance in an effort to demonstrate that Bangladesh’s governance also has some positive aspects together with the many problems that are more widely recognized. It concludes by arguing that building on its many successes and addressing the negative governance factors could help remove some of the constraints that are preventing Bangladesh’s growth performance coming closer to its faster growing neighbors.
Chapter 8: Creating a More Efficient Financial System
CChapter 8 summarizes the state of the financial sector in Bangladesh and argues that a deeper and more efficient financial system is essential to Bangladesh’s aspirations to become a middle-income country in a relatively short period of time. The chapter argues that this will require a substantial change in the role of government – from an operator and arbiter in the financial system to a facilitator role. This implies not only divestment from the nationalized commercial banks, a laudable reform process that is underway, but also de-politicization of the licensing process and a market-based framework for resolving bank failure. Most importantly, the government would need to move away from the implicit guarantee provided to depositors and owners to applying the existing limited explicit deposit insurance for depositors, while simultaneously relying more on market participants to monitor and discipline banks instead of micro-managing financial institutions. This redefinition of government’s role also applies to other segments of the financial system, such as capital markets and the micro-finance sector, and should be seen as an essential element in the governance reform agenda and in the movement from a relationship-based economy to a market- and arms-length economy.
Chapter 9: Infrastructure and Growth: a Focus on Power and Trade Facilitation
Infrastructure bottlenecks related to power and trade facilitation (ports and transportation) are severe in Bangladesh and place a major (and growing) drag on its economic performance. Only about 35 percent of the population – four-fifths of urban population and one-fifth of rural population – has access to network power, and load shedding to those fortunate enough to have access is rapidly increasing. Firm-level surveys consistently reveal access to power as being among the top obstacles to investment. Trade facilitation, critical for export competitiveness, is also not faring well. For one, Chittagong port, which handles nearly 85 percent of the country’s merchandise trade, is plagued by labor problems, poor management, and lack of equipment. Moreover, transport networks connecting the ports with hinterland are underdeveloped and beset with logistical problems that impose significant costs on exporting and importing firms. Chapter 9 presents an overview of these two infrastructure areas critical to sustained good growth in Bangladesh, and outlines a practical reform strategy for each.