Bangladesh: Consolidating Export-led Growth

Chapter 1

Growth and Investment in Perspective: An Analysis of Trends

1.1Introduction

Bangladesh has come a long way since independence in 1971. Over the past 45 years, it has grown 4.7% per year on average, rising from extreme poverty and political instability in its early years through steady improvement: potential gross domestic product (GDP) growth increased almost one percentage point in every decade. Moreover, economic growth was inclusive in that it generated employment, particularly for the low skilled and for women, and went hand in hand with large improvements in health and education. Average life expectancy soared from 47 years to 71 years in the period, while enrollment in primary education for children ages 6–10 is now almost universal.

Decelerating population growth also contributed to higher income per worker. In the mid-1970s, GDP per capita grew only 1.0% as authorities tried to contain population growth amid meager economic gains.¹ Bangladesh is the world’s eighth-most populous country with over 159 million people² and among the most densely populated, excluding city-state countries. In spite of a seemingly unfavorable socioeconomic environment, family planning programs achieved remarkable success in lowering fertility from the mid-1970s to the mid-1990s. Population growth decelerated from a high of 2.9% in 1979 to 2.0% in 1999 and to 1.0% in 2009. Much of this came from the so-called demographic dividend, as the dependency ratio fell rapidly. The starting point was from a low base in which gains across a generation could be high. The demographic dividend is illustrated in the 2015 demographic profile by age and gender, in which 29.4% (47 million) of the population is below 15. This segment of the population will enter the workforce in the period 2020–2050 (Figure 1.1).

Figure 1.1: Bangladesh’s Population and Projection, 2015 and 2050

Source: United Nations Department of Economics and Social Affairs.

As fertility declines, and amid high primary school enrollment, the broad challenge now is to design policies and institutions that set the stage for growth, better and higher education, and foster long-term savings and productive investments. According to the World Bank definition of income strata, Bangladesh is now a middle-income country, but to sustain those gains, new approaches to new challenges are required.

1.2Economic Reforms

Development in Bangladesh started at a very low base. In 1971, the population was 67.63 million and current per-capita GDP was $178 according to the World Bank. About a fifth of Bangladesh’s economy was destroyed during the liberation war in 1971. After independence, the new state endured poverty, famine, political turmoil, and military coups. Following the war, both urban and rural poverty was rampant in the 1970s, particularly in the rural areas: according to the 1978 household income and expenditure survey (HIES), about 93% of the rural population consumed less than 2,200 kilocalories in food intake.

In the late 1970s, Bangladesh policy makers turned their attention to developing new industrial capacity and rehabilitating the economy. In the mid-1980s, the government, with assistance from programs with multilateral organizations, accelerated economic policies to encourage private enterprise and investment, privatize public industries, reinstate budgetary discipline, and liberalize the import regime. Export processing zones (EPZ) were established in 1980 and the government later enacted a law allowing the private sector to establish them as a mechanism to further encourage foreign investment (Box 5.1).

However, the political commitment to policy reforms remained problematic due to the government’s preoccupation with political legitimacy. With the restoration of democracy in 1991, the policy reform process gained substantial momentum; a liberal economic agenda led to more economic reforms and a significant transformation of the policy landscape.

In the 2000s, political uncertainties continued to strain economic gains. Some of these issues have resurfaced from time to time, even harking back to the days of liberation from Pakistan, up to the recent years, particularly in 2013 and 2014 as protests related to the legitimacy of the elections disrupted economic activity in the main cities.

Although bouts of political instability have periodically undermined economic activity since the late 1980s, these moderated significantly over time. At the least, the correlation between downturns and significant political events seems to have been reduced. This is possibly because political uncertainty has declined with every new political event.

The Five-Year Plans have guided development priorities with increasingly sophisticated design and implementation. The 2016–2020 plan is the seventh plan; it updates and extends the targets of the 2011–2015 plan, but with greater innovation, by setting up a results-based framework.

More recently, a consistent set of targets of the most important indicators and objectives was established, firmly based on the sectoral and theme-based research manifested in 28 background papers. The premise is that the main long-term challenges have changed little in 5 years. Continuing on these established fronts while deepening reforms is likely to lead to a better outcome. Box 1.1 discusses progress under the 6th Five-Year Plan, which ended in 2015, and explains the most salient features of the new one.

Box 1.1: The Recent Five-Year Plan: Progress and Prospects

Five-year development plans started in Bangladesh in 1973 to set a course for the private sector. The plans are characterized as essentially indicative and strategic in nature. In 2008, the government conceived Vision 2021, which would be implemented through two medium-term development plans between 2011 and 2020, the second mostly an update of the first. According to the 2011-2015 Sixth Five-Year Plan, Ensuring a proper balance between providing incentives to private sector and instituting regulatory policies for safeguarding public interests will be a major guiding principle of the policy and institutional framework of the Sixth and the Seventh plans.

The growth process would set the basis for more employment opportunities in the manufacturing and organized service sectors and allow a transfer of many workers engaged in low productive employment in agriculture and informal services sector of the economy to these higher income jobs. Both large and small enterprises would be expected to contribute to growth. Emphasis would be placed on diversification into products dependent on imported contents, but employing a large labor force. Examples of such activities include furniture, toys, footwear, and consumer durables.

The government has taken full ownership of the Seventh (2016–2020) Five-Year Plan, borrowing extensive research from different areas. The document itself was the synthesis of 28 background studies commissioned by the General Economics Division of the Ministry of Planning. Its innovation is in the results-based framework developed with target indicators in all areas and linked to a medium-term macroeconomic framework with a newly created set of Sustainable Development Goals fully incorporated into the targets.

The philosophy of the Seventh Five-Year Plan, entitled Accelerating Growth, Empowering Every Citizen, gives priority to ways of enhancing so-called job-creating GDP. Emphasis is placed on improving the growth drivers and on policies, institutions, and programs that will support the lowering of income inequality and empower citizens. Importance is also placed on ameliorating the challenges of lagging regions. The human development and social protection strategies underlying the Five-Year Plan place a particular focus on gender and social inclusion. The plan also mentions improving the environment and good governance and increases the emphasis on improving investment in favor of infrastructure and manufacturing. Other general goals include improving the efficiency of the financial sector, improving the investment climate, managing land constraints, and addressing the skills challenge facing industry. The planned goals and targets under the Seventh Five-Year Plan are set out below.

Nonetheless, overambitious targets may pose challenges. First, for policies, little change is made in direction and strategy. The Plan sets forth an expectation that growth would accelerate to 8% a year over the next 5 years (from 6% in the previous 5 years). This would require private investment to rise from the 21% seen in 2014 to 28% in 2020. The Plan also proposes a threefold growth of foreign direct investment (from 1% of GDP with 3% of GDP). The key growth driver will be industry, which would need to reach 11% annual growth (compared with 8% at present). These goals are consistent but would require an unusually long period of political and economic stability. Another objective is to reduce extreme poverty to 8% in 2020 and to almost eradicate poverty by 2030. Reaching this goal would require a significant revamping of the conditional cash transfer program. The household survey will be used to identify the poor, and biometric identification cards will be provided to all, which through mobile phone banking can digitize the process. Finally, given the results-based framework used, monitoring and evaluation of the plan’s implementation will become paramount.

Plan Goals and Targets Under the Seventh Five-Year Plan

A. Income and Poverty

•Attaining average real gross domestic product (GDP) growth rate of 7.4% per year over the plan period.

•Reduction in the headcount poverty ratio by 6.2 percentage points.

•Reduction in extreme poverty by about 4.0 percentage points.

•Creating good jobs for the large pool of underemployed and new labor force entrants by increasing the share of employment in the manufacturing sector from 15% to 20%.

B. Sector Development

•Significant growth of the agriculture, industry, and service sectors.

•Increase the contribution of the manufacturing sector to 21% of GDP by fiscal year (FY) 2020.

•Substantial improvement of exports to $54.1 billion by FY2020.

•Achieving a trade–GDP ratio of 50% by FY2020.

C. Macroeconomic Development

•Total revenue to be raised from 10.7% of GDP to 16.1% by FY2020.

•Maintain the current fiscal deficit of 5% of GDP.

•Government spending to be increased to 21.1% of GDP by FY2020.

•Foreign direct investment to be increased substantially to $9.6 billion by FY2020.

D. Urban Development

•Access to improved water source will be ensured for all urban dwellers.

•Coverage of drainage system to be expanded to 80%.

•Ensure sustainable urban development that supports increased productivity, investment, and employment.

E. Human Resource Development (education, health, and population)

•Achieving 100% net enrollment rate for primary and secondary education.

•Percentage of cohort reaching grade 5 to be increased to 100% from the current 80%.

•Under-5 mortality rate to be reduced to 37 per 1,000 live births.

•Maternal mortality ratio to be reduced to 105 per 100,000 live births.

•Immunization, measles (by percent of children under 12 months) to be increased to 100%.

•Births attended by skilled health staff to be increased to 65%.

•Reduction of total fertility rate to 2.0.

•Increasing contraceptive prevalence rate to 75%.

F. Water and Sanitation

•Safe drinking water to be made available for all urban population.

•Safe drinking water to be made available for all rural population.

•Proportion of urban population with access to sanitary latrines to be increased to 100%.

•Proportion of rural population with access to sanitary latrines to be raised to 90%.

G. Energy and Infrastructure

•Installed generation capacity of electricity to be increased to 23,000 megawatts by 2020.

•Increase per capita energy consumption from 371 kilowatt-hours (kWh) to 514 kWh.

•Electricity coverage to be increased to 96%.

•Reduce system loss from 13% to 9%.

•Construction of 6.15-kilometer long Padma Multipurpose Bridge at Mawa-Janjira.

•Construction of about 26-kilometer long Dhaka Elevated Expressway.

•Improve the multimodal transport network with a significant increase in the share of rail and waterway traffic.

•Reduce urban traffic congestion, with focus on Dhaka and Chittagong metropolitan areas.

•Reduce road accidents.

H. Gender Equality, Income Inequality, and Social Protection

•Female-to-male ratio in tertiary education to be raised from current 70% to 100%.

•The ratio of literate female to male for age group 20–24 to be raised to 100% from the current 86%.

•Encourage female enrollment in technical and vocational education.

•Reduce or maintain the current income inequality of 0.45.

•Spending on social protection as a share of GDP to be increased to 2.3% of GDP.

I. Environmental Sustainability

•Increase productive forest coverage to 20%.

•Improve air quality in Dhaka and other large cities and enact Clean Air Act.

•Promote zero discharge of industrial effluents.

•Urban wetlands are restored and protected in line with Wetland Conservation Act.

•At least 15% of the wetland in peak dry season is protected as aquatic sanctuary.

•500-meter-wide permanent green belt established and protected along the coast.

•Eco-tourism promoted at least in 20 protected areas and Ecological Critical Areas.

•Land zoning for sustainable land/water use completed.

•Environmental, climate change, and disaster risk reduction considerations are integrated into project design, budgetary allocations, and implementation process.

•Canals and natural water flows of Dhaka and other major cities restored.

J. Information and Communication Technology Development

•Spending on research and development to constitute 1% of GDP.

•Increase proportion of primary government schools with a computer laboratory.

•Improve telephone density to 100%.

•Expansion of broad band coverage to 35%.

•Increase earnings from information and communication technology, travel, and tourism from $1.5 billion to $6 billion.

Note: Fiscal year 2015 goes from 1 July 2015 to 30 June 2016.

Source: Planning Commission.

The data point to the enormous success in 2000–2015. A combination of very high export growth, growth of remittances from 4% to 8% of GDP by 2015, rural–urban migration leading to more productive jobs, higher labor force participation among women, greater access to drinking water and electricity, and the availability of microfinance pulled many out of poverty: the poverty headcount declined by 17.4 percentage points from 2000 to 2010 (Table 1.1). Nonetheless, the ambitious goal to become an upper-middle income country by 2021, as part of Vision 2021 will be challenging. Per capita GDP would have to increase from $1,212 in 2015 to more than $4,126 in 2020. This will require annual growth of 7.5%–8%, but the conditions that fueled recent high growth may not be the same, because new challenges will come with the passing of real important development milestones.

Table 1.1: Broad Socioeconomic Indicators of Bangladesh, 1985–2014

( ) = negative, … = not available, GDP = gross domestic product, US = United States.

a Average annual exchange rate used to estimate fiscal balance in US dollars.

Sources: ADB. Statistical Database System; United Nations Statistical Division; World Bank. World Development Indicators online database (accessed January 2016); World Bank.

Economic growth really took off in the 2 decades ending in 2015 (Figure 1.2). The restoration of democracy in 1991 has been followed by relative calm and economic progress as industrialization in Bangladesh took off. GDP growth during the 1990s and 2000s, posted 4.6% and 5.8%, respectively. Economic growth improved to 6.1% in the 5 years through 2013 despite political instability.

Figure 1.2: Bangladesh GDP, 1973–2014

GDP = gross domestic product, RHS = right-hand side.

Note: $ per capita value GDP is at 2005 prices.

Sources: UN Statistical Division; ADB Statistical Database System; and World Bank. World Development Indicators database (accessed January 2016).

The significant deceleration in population growth explained the steep rise of per capita GDP that started in the mid-1990s. In the last 5 years, per capita GDP grew by 4.9%, from 2.4% in the 1990s (Figure 1.2). Despite this increase, GDP per capita remained the second-lowest among South Asian nations. Measured at constant 2005 dollars, per capita GDP was at $748 in 2014, higher only than Nepal’s $426. Compared with other countries in the region, Bangladesh started as the one of the poorest in 1985 but has caught up very quickly, while Pakistan’s per-capita growth has stagnated somewhat. Still, Bhutan, India, and Sri Lanka have been able to take bigger strides (Figure 1.3).

Figure 1.3: Per Capita GDP of South Asian Countries, 1985–2014 ($)

GDP = gross domestic product.

Source: World Bank. World Development Indicators online database (accessed January 2016).

1.3Growth by Sources and Uses

The domestic economy is still important for growth. With a labor force of more than 57 million, the laborintensive manufacturing sector is the main driver of the economy. However, the services sector has led the economy in the 4 decades through 2015 (at least in its share of GDP). Industry emerged as a strong growth sector in the 1990s, when agriculture was already on its downward path (Table 1.2). Economic growth accelerated from 1990, driven by a remarkable turnaround in manufacturing, although highly concentrated in the garment industry; and the progress in the last 2 decades in RMG has lifted millions out of poverty, despite major internal and external challenges, including global economic downturns, natural disasters, and periods of political