As we are celebrating 50 years of independence of Bangladesh, questions remain about the development challenges in the days to come. The development challenges of Bangladesh in the coming days are associated with larger development goals. The country aims to become an upper-middle-income country by 2031 and a high-income one by 2041. Also, there are stiff development targets to be achieved by 2030 under the Sustainable Development Goals (SDGs).
If we look back past 50 years, Bangladesh has achieved many developments compared to the state after the devastating war in 1971. The country made a significant improvement in the per capita GDP from a small base in 1971. The economic growth performance over the past three decades remained impressive. The country graduated from the low-income category (as per the classification of World Bank) to the lower-middle-income category in 2015. Bangladesh will graduate out from the LDC status by 2026. The remarkable success in the export of RMG made the country the second-largest exporter of RMG in the world. There have also been important improvements in some social indicators. Both maternal and child mortality rates declined substantially from very high levels and life expectancy at birth increased dramatically. The country achieved universal gross enrollment in primary education. Also, there have been some notable progresses in gender parity and women empowerment. Given the weak performance in formal institutional capabilities (both economic and political), the achievements so far prompted many to argue whether Bangladesh was an outlier in development experience. Some recent political economy analyses, however, indicated that while in the cases of progress in some social indicators, Bangladesh acted like an outlier, in the case of economic performance, Bangladesh was not an outlier.
Four lessons we can draw from the past experiences of development in Bangladesh. (i) The supremacy of pockets of functional informal institutions over weak formal institutions. (ii) The supremacy of the deals environment over coordinated industrial policy. (iii) The challenges of effective regulation. (iv) The challenges of state capacity.
The supremacy of pockets of functional informal institutions over weak formal institutions: Against an overall distressing picture of formal institutions, Bangladesh made success in creating some pockets of functional informal institutions. The examples of pockets of functional informal institutions in Bangladesh include the well-functioning privileges and special arrangements for the RMG sector, promotion of labour exports, agricultural research and development related to food security, and microfinance. The fundamental question, however, remains whether Bangladesh will be able to achieve much larger development goals with weaker formal institutions.
Informal institutions can have two distinct roles concerning the stages of development. At an early stage of development, if countries can steer informal institutions to make them growth-enhancing, countries can achieve strong economic growth and also some improvements in the social sector. However, for the transition from a lower to a higher stage of development, whether the country can maintain a high growth rate and achieve further development goals depends on the dynamics of how informal institutions evolve and whether formal institutions become stronger and functional. Not many developing countries have been able to make this transition. Certainly, the East Asian and most of the Southeast Asian countries are success stories in using informal institutions efficiently at the early stage of development, as well as achieving some notable successes in the transition to functional formal institutions. Bangladesh’s progress in developing formal institutions over the years has remained weak, and this will certainly act as a binding constraint to the development process in the days to come.
The supremacy of the ‘deals environment’ over coordinated industrial policy: Under the ‘deals environment’ the industrial – or, more broadly, development strategies, as well as significant investment or resource allocation choices, are frequently the outcome of agreements, or ‘deals’, between the political and business elites. These arrangements are for specific activities or programs that are decided on an ad hoc basis rather than following a well-defined overall strategy. The recent political economy analysis suggests that the ‘deals environment’ rather than any coordinated industrial policy has been the major feature of Bangladesh’s development process. Such a ‘deals environment’ is discriminatory and does not allow diversification of the economy. Though the ‘deals’ involving RMG exports resulted in positive outcomes, many other sectors remained excluded and have not been the beneficiaries of the ‘deals environment’.
Bangladesh needs to pursue a coordinated industrial policy that is inextricably linked to the government’s other policy instruments, such as macroeconomic policy (e.g., the real exchange rate), public infrastructure, and SEZ management. Transparency and accountability regarding the implications of these policies for industrial development are also important. There is a need to make a substantial improvement in the general business climate too.
The challenges of effective regulation: The challenge the government faces in regulating certain key activities to achieve more efficiency and equity in the economy is referred to as the ‘problem of effective regulation’. In some circumstances, the legal framework for such regulation is an issue, which may be antiquated or otherwise inadequate for the goal pursued, and in which reform attempts have continually failed. In other circumstances, the framework may exist, but there is not enough capacity to put it into action. The banking system’s dysfunction, the failure to control labour conditions in a crucial sector like RMG, or simply the poor performance of taxation are examples of the areas. Other regulatory authorities may be similarly ineffective. Their result is a waste of resources, such as excessive NPLs in the banking sector or SROs in taxation and their misallocation, social damage and lost lives in Rana Plaza-style accidents, numerous scam scandals, and rising inequality, as rules violations disproportionately benefit the wealthy while harming the poor. The economic cost of these rule violations may be significant, despite how difficult it is to assess. Effective regulatory reform in critical economic domains like the financial and taxation sectors will be extremely important in the times ahead.
The challenges of state capacity: The challenges of state capacity are manifested in a variety of ways in which Bangladesh has to make a substantial improvement to achieve larger development goals. Some of these challenges are obvious, such as a lack of public resources (e.g. low level of domestic resource mobilisation through taxation), resulting in the limited provision and poor quality of public goods (e.g. very low level of public spending on health, education and social protection), a lack of public service capabilities, or lack of efficiency in the administrative structure. Others are less obvious, such as the corruption in most administrative clusters, which makes public service delivery inefficient and inequitable, cuts revenues, and discourages economic projects. The capacity of the state to implement the mega projects cost-effectively and timely also remains a big challenge.
The article was published at Thinking Aloud on 1 January 2022.
