The Trapped Transition

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How will Bangladesh break the barriers to becoming a prosperous country, simultaneously maintaining competitiveness?

 

After fighting staggering poverty for decades, Bangladesh is now pursuing the target of climbing up to the middle income status. Are we on track? Or, what more do we need to do to attain the goal by overcoming visible and unforeseen challenges?

 

By Asjadul Kibria

 

Banking on a large pool of cheap labour and using lower-level technologies, the country has made unthinkable progress in poverty alleviation, and Bangladesh, a least developed country by definition, has now set the goal of becoming a middle income country by 2021, coinciding with the golden jubilee of its independence. If we want to touch the lower threshold of the upper middle income or the upper threshold of the lower middle income, our per capita income must be raised to around US$4,000 from the current level of $1,044 in a span of only seven years.

 

For some Asian economies the transition from middle income to high income country has proved to be slow due to shrinkage in surplus-labour and wage-increase. In some cases, a slight improvement in standard of living erodes the competitive advantages of the countries that fall into what is called middle income trap, as they are ‘unable to move from a low-cost to a high-value economy’.

 

Bangladesh has made one possible transition – ‘from being primarily a jute-exporting country to a garment-exporting one’, according to economist Wahiduddin Mahmud. The country’s present challenge is to make the transition towards the much-hyped middle-income country. Besides, there are four better performing sectors – agriculture, garments, remittances and microcredit – which are based on lower set of skills, technology, productivity, and income. ‘The economic growth so far has been driven by a ‘replication’ approach in respect of the growth of export-oriented low-productivity garment industry, export of under-skilled labour, and expansion of inferior-technology in small and micro enterprises,’ he tells ICE Business Times.

 

However, for over a decade, the country’s economic growth has stagnated slightly over 6%, which is much lower than the widely recommended 8% growth, let alone the magic double digit growth, for accelerating the national economic advancement in a generation. As a transition economy, it is facing another kind of trap even before joining the club of relatively richer countries.

 

With the current trends and practices of public and private sector developments, will we falter or can we go ahead? This confusion is primarily because of the contemporary experience that as the economies grow, it becomes increasingly difficult to keep the pace of development. Whether the country’s population, which is widely described as demographic dividend, can be turned into human resources leading to creation of a knowledge economy, remains a big question.

 

Development thinkers say reaching the next stage of development may be constrained by a combination of factors such as poor skills, lower firm productivity, crisis of urbanisation, lack of support for innovation, inadequate investments, policy uncertainty, and bad economic governance. Massive reforms, investment in education and research, a well-coordinated national drive for upgrading industry and services and thus attain an economic leapfrog are still missing.

 

Globally, the country must compete with both low-income and middle-income countries to make its transition possible. According to the Asian Development Bank, moving from a low-cost to a high-value economy requires a critical mass of firms with strong incentives for innovation, as well as the government to create a conducive environment.

 

In expectation trap?

 

There has been much publicity on the political front about Bangladesh targeting the middle income country status. Such target has been set on the basis of economic attainments of the country in the past four decades, no matter how they have been achieved. The country has attained food autarky, despite doubling its population and becoming second largest garment exporter and 8th largest remittance earner. Poverty declined to 31.5% in 2010 from 55.7% in 1991-92 and extreme poverty rate decreased from 41% to 17.6% during the same period.

 

So, it is not unusual to believe that achieving the middle income status is not a distant dream. According to Rostow’s growth model, Bangladesh is now in a take-off stage, where increased industrialisation and shifting of workers from the agricultural sector to the manufacturing sector occurs. Rostow also sets requirement for evolution of new political and social institutions that support the growth process. At this stage, growth should be self-sustaining as investment leads to increasing incomes, in turn generating more savings to finance further investment.

 

We have definitely created public aspirations for more prosperity. But have we created the platforms and appointed agents for the change towards the middle income status? About the strong potential of transformation from lower to middle income status, Dr Salehuddin Ahmed, a former governor of Bangladesh Bank, used an analogy describing the country as an aeroplane, the government being its pilot and regulatory institutions as its assistants. ‘Due to inefficiency and fault of the pilot and his/her assistants, our economic aircraft is yet to spread the wings,’ he said referring to various barriers to the private sector and entrepreneurship that could hamper the national target.

 

While official development documents set the target, there are political grandiosity that often lacks popular appeal and confidence of the people. The policymakers have been able to create the hype, but do not engage the people in the policymaking and budget making process. There is no dialogue between the two sides of the political divide on how to attain the middle income status. But the stakeholders know what needs to be done. Mir Nasir Hossain, former president of Federation of Bangladesh Chambers of Commerce and Industry, feels that investment must be raised to over 30% and economic growth to 10% for attaining the middle income country status.

 

Growth stagnation!

 

The growth rate of gross domestic products (GDP), a prime indicator of development trend of a country, has been hovering around 6% or so, in the past one decade, rather a kind of stagnation. While a steady 6%-plus growth is considered good, it is not enough for take-off, especially for breaking the shackle of poverty.

 

The sixth five-year plan has set 7% annual growth as prerequisite for reaching the middle income status by 2021, although economists and business leaders insisted on 8-10% GDP growth for the next stage of development. Even then there are doubts if a 6% growth could be achieved in the current fiscal year (2013-14). The growth rate has shown declining trends for last couple of years after peaking at 6.71% in 2010-11. It was 6.32% and 6.03% in 2011-12 and 2012-13 respectively.

 

Thus, Bangladesh falls short of the target at the moment, as the targeted 7% annual growth is yet to be achieved. In fact, Bangladesh set this target of growth rate to be achieved by the terminal year of the fifth five-year plan – 2001-2002. The plan was meant for 1997-2002 and the growth attained during the period was 5.2% against the 7% target.

 

After the revival of five-year plan, under the 10-year perspective plan framework for 2010-2021, new target for GDP growth has been set. A higher growth rate in the perspective plan is predicated upon a substantial increase in investment rate from the current level of around 25% of GDP to 38% by the end of the plan, averaging 32.7% of GDP per year during the period.

 

‘Much of the increase in investment could be financed through national savings, and foreign direct investment (FDI). The incremental Capital Output Ratio (ICOR) is expected to improve due to increased competitiveness and productivity engendered through expected improvements in infrastructure and greater economic openness as well as through technological progress resulting from partnership with foreign investors in strategic are as and the implementation of the ICT strategy (Digital Bangladesh),’ reads the plan

 

However, the finance minister himself recently admitted the stagnation in investment in the recent past and said a major challenge for him in the next budget would be to bring momentum in investment. Average growth until 2015 is likely to remain below 6.7% on an average, let alone reaching 7.1% by then. This is the case of the baseline scenario while medium policy shift scenario and high policy shift scenario set the average target of growth at 7.2% and 7.8% respectively during the same period.

 

Projections in the long-term perspective plan that GDP growth rate would be 8% in 2014-15 and 10% in 2020-21 appear to be not so rosy. Accelerating the growth rate from 6% level to double digit level within six years requires a magic. So, it would not be possible to attain the status of middle income country by 2021, unless there is a massive change in development approach.

 

While growth stagnation may be termed a pessimistic view, the optimists like to see the current as a `transition period of growth’. The problem is structural as growth cannot be accelerated due to lack of adequate investment. It requires at least 28% investment in proportion for GDP to attain 7% growth, and 32% investment to attain 8% growth. With investment-GDP ratio hovering around 25%, the gap between savings and investment has been widening. Also ICOR has deteriorated in the past few years, indicating that the country has not been able to boost productivity of investment.

 

Therefore, the lack of adequate investment is the main obstacle to required growth. Setting Tk 13.47 trillion as required investment target for the period (2011-15), the sixth five-year plan says, ‘Much of the investment will be undertaken by the private sector, although public sector investment will play a bigger role in catalysing much greater private sector investment. Private sector investment (including through PPP programmes) will account for 77.2 percent of the total investment under the plan, much of that from domestic sources. External financing for private investment, primarily in the form of foreign direct investment (FDI) is expected to grow, but will still remain modest in relative term at about 4 percent.’ The PPP has not been successful so far while the private sector investment is yet to pick up after the recent hibernation.

 

Critical infrastructures

 

Over the last few years, a lot of physical infrastructure project has been taken and implemented and more construction works are going on. A major function of infrastructure is to smoothen physical mobility of people and products. Priority to constructing bridges, flyovers, roads and highways looks justified. But a close look at such a construction boom would show overemphasis on road-based communication, ignoring the importance and utility of expansion of railway, and revival of river-based transport system. History of development is linked with development of railway which is cost-effective, safe and environment friendly. Just look at India, how the vast country with one-billion-plus population using and expanding the rail network to ease the communications.

 

In fact, Bangladesh is among a very few countries where policymakers ignored railway despite having a good and planned rail infrastructures. Huge amount of valuable lands of the railway are grabbed by different influential quarters. The 6th five-year plan virtually ignored its development. A few steps taken in recent years to strengthen the railway were marked by half-hearted efforts. Introduction of Demu Train is an example that proved to be costly but less effective due to wrong planning. An opportunity was also missed when Dhaka took the move to provide transit facility to India along with Nepal and Bhutan. If emphasis was given on rail-transit plan, the entire rail infrastructure could have been revitalised for long term.

 

Bangladesh needs investments amounting to US$74 billion to US$100 billion between 2011 and 2020 to reduce the huge infrastructure gap that impedes further development of the country, a latest report of World Bank, Reducing Poverty by Closing South Asia’s Infrastructure Gap, estimated. It shows the country is required to invest the second highest amount in terms of share of GDP in the South Asia Land-locked Nepal needs a minimum of 8.24% of GDP to invest in infrastructure which could go as high as 11.75%. The low and high level for Bangladesh is 7.38% and 10.02% respectively. It implies that Bangladesh has failed to invest adequately for infrastructure. Investment in infrastructure is 6% of GDP on am average during 1973-2009 in Bangladesh.

 

The WB has classified infrastructures in five greater categories — transport, electricity, water supply and sanitation, solid waste, telecommunications and irrigation. In Bangladesh, the private sector likes to invest in electricity and telecom only, showing interest in faster profit generation while the state has a monopoly on basic infrastructures. In order to construct required infrastructure, more private investment is recommended with a well planned and balanced approach.

 

Human resources defocussed

 

A large army of the youths in Bangladesh is often described as ‘demographic dividend’ and some experts and policymakers have been highlighting it as our future strength. This is, however, true only when the country can accommodate this young workforce in sustainable jobs. Otherwise, the demographic dividend may turn into demographic nightmare. Currently, overall job creation or employment generation is at a stake at the one hand, there are acute shortages of skills but increasing incidences of educated unemployment.

 

The latest labour force survey report, prepared by Bangladesh Bureau of Statistics in 2010, shows that unemployed rate is 4.5%. According to the International Labour Organisation, some 26 million people are unemployed in Bangladesh. This apparently low level of unemployment made the policymakers complacent as they did not take into account the disguised unemployment nor did they go deep into the statistics. Almost half of the employed labour force is engaged in agriculture where employment is declining over the years. The sector accommodated 51.7% labour in 2003, 48.1% in 2006 and 47.3% in 2010.

 

As data suggests service sector dominates in non-agriculture employment, it means that transformation of the economy from agriculture to industry is not taking place. This is a major structural flaw in the transition process and may hinder long-term sustainable employment. Without proper industrialisation, the country will not be able to create enough jobs that are considered rewarding for today’s youths.  Almost 2 million people enter the job market every year. While service sector jobs often depend  on sector boom and seasonality, the overseas job opportunities have also been uncertain due to the government’s short-sighted policy and approach.

 

The 6th five-year plan has projected creation of 10.4 million new jobs in manufacturing, construction and services sectors and is expected to absorb all new entrants (about 9.2 million as per official estimate) enabling a sizable number of workers (about 1.2 million) to find jobs away from agriculture. Practically, labour-intensive sectors, particularly micro, small and medium enterprises, are either missing from the focus or ignored in the development policy. This is where the country is facing a trap that may hamper its journey towards middle income country.

 

Managing the transition drivers

 

Professor Wahiduddin Mahmud explained that Bangladesh’s growth drivers have somehow been able to bypass or successfully negotiate with the constraints of a governance-challenged environment. However, he pointed out that the institutional weaknesses may be reaching a tipping point. ‘We shall need a more capable system of economic management that can respond to the needs of putting the economy firmly on a path of modernisation and global integration,’ he added.

 

The World Bank has identified three key areas that need to be managed in the process of transition from low-income to middle-income country. These are: (a) reaching a more advanced stage of transition out of agriculture and into manufacturing and services; (b) more open to investment and trade; and (c) far more urbanisation. At the current stage of development, we need to examine the status of these three areas.

 

The economic dependence on agriculture is slowly declining as its contribution to GDP, which was 25% in 2000-01 came down to 18.7% in 2012-13. The share of the industrial sector increased from 26.2% to 32% during the period while the contribution of services sector rose from 48.8% to 49.3%. The shift is mainly between agriculture and industry while the services sector, almost stable for a decade, alone contributes half of the Bangladesh GDP.

 

The tariff structure has been simplified over the decade Although the average customs duty has come down over the past 13 years, the average nominal protection rate shows mixed trends. After decrease in rates between 200-01 and 2008-09, it started rising again since 2009-10. In fact, businesses and industries in Bangladesh are yet to be fully prepared for more open so they seek continued protection. The perspective plan document, however, says, ‘Over the next decade, trade openness will deepen further so that only those manufacturing enterprises that remain globally competitive are expected to survive and prosper.’

 

Protection may sometime erode competitive capacity of the local industries. Upon graduation to middle income country, businesses and industries would have to compete more with the global players. The lack of confidence of some Bangladeshi industries including Ready-Made Garments (RMG) is visible when they express reservation about graduation from LDC status, saying that Bangladesh would no more enjoy preferential market access as it is now enjoying as an LDC. Unfortunately in the transition process, all factories cannot be competitive and some has to make exit. The government, too, cannot bail out every factory to overcome market competition. In fact, unending support and wrong protection may turn out to be another trap for none but Bangladeshi businesses.

 

However, many entrepreneurs have already proved that Bangladesh is well equipped to face and sustain global competition. The best example is the country’s success in the quota-free regime after 2004 when the RMG industry has gradually consolidated its position in the global market. Dr Salehuddin Ahmed underlined the importance of facilitating business mainly by removing barriers so that the private sector can perform smoothly and the potential for transformation to middle income country is not damaged. The Bali declaration of the World Trade Organisation (WTO) has stressed on trade facilitation to reduce cost of doing business, something that can help the businesses most. Also, the branding of ‘Made in Bangladesh’ in the global domain will be instrumental in the graduation.

 

While a smooth and well-planned urbanisation is considered a pre-condition for being a middle income country, unplanned, sometime ill-conceived and ill-coordinated urbanisation has emerged as a threat to environment and sustainable development. Urbanisation is more concentrated in large cities as more than half of the urban population lives in four major cities – Dhaka, Chittagong, Khulna and Rajshahi. This concentration is identified rather as by-product of economic development.

 

The government has undertaken a series of urban development plans of which Dhaka Metropolitan Development Plan (DMDP) and Rajuk’s Detailed Area Plan are notable. But, development of urban areas in conformity with these plans has been ignored in a large scale due to lack of political will. The necessity of urbanisation in a densely populated country has turned into a complete mess. Flawed and distorted transport infrastructures in Dhaka city have made accessibility and mobility in urban life costly, time consuming and hazardous.

 

Bangladesh urgently needs to tackle the urbanisation challenge with coordinated manner and in line with national development strategy. While outputs of Dhaka and Chittagong dominate Bangladesh’s economic landscape, the reality also promotes a rural-urban divide and income disparity. Dhaka, where 9% of total population lives, accounts for around 35% of the country’s GDP. Currently, an estimated 40 million people live in cities and towns while the perspective plan has projected that by the year 2021 one-third of the population of Bangladesh will be living in urban areas.

 

In conclusion

 

Transition from low-income to middle-income status will be essentially a painstaking process as many countries have already gone through. Falling into the trap before the transition will be more painful as it means wastage of resources, potential of human development, anarchic economic activities and livelihoods and loss of social welfare effects of development.

 

The prospect of attaining middle income status does not look rosy also because political unrest and bickering between main contenders for power create a sense of uncertainty among the commoners and investors alike. Public service delivery is poor and institutions neither function properly nor are accountable to citizens. For being a middle income country, Bangladesh ‘will require sustained reform efforts in many areas — from improving governance, managing urbanisation, and narrowing the power and transportation deficits to reducing vulnerability to external shocks, promoting migration for increased remittances, and capitalising on low labour costs,’ World Bank Country Director Johannes Zutt told ICE Business Times.

 

Despite the targeting, the country’s pursuit of economic take-off seriously lacks a clear vision and strong political commitment. Our policymakers and political leaderships are yet to take into consciousness the transition trap, let alone the trap awaiting even after transition. The issue requires urgent attention and pro-active approach.

 

[Edited by Khawaza Main Uddin]

 

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