Chapter 2: Growth and Employment Strategies
Vision 2021 aspires for Bangladesh to attain a Middle Income Country (MIC) status by FY21. To achieve this it sets a growth target that rises from 6.1 percent annual growth in FY10 to 8 percent per annum in FY15 and 10 percent in FY21. A possible growth trajectory that is consistent with this target is illustrated in Figure 2.1.
Figure 2.1:Illustrative Growth Path for Vision 2021
Source: Sixth Plan Illustrative Projections
Although international experience suggests that growth does not necessarily follow a smooth upward trajectory, this is consistent with the Bangladesh experience so far. Bangladesh experienced low volatility of growth over the 15 year period FY91-FY06. More recently the growth path in Bangladesh shows a remarkable degree of stability despite the onslaughts of the global food and fuel crisis and the global recession. Figure 2.2 demonstrates another major point. Aspiring to achieve a 10 percent growth target is not a pipe dream. India nearly reached that target for an average of 3 years (9.7 average rate of growth over FY06-FY08) only to be restrained briefly by the global recession. In the 1960s and the 1970s, slow growing India’s 3 percent average growth rate was the subject of ridicule by its own professionals. Yet, with deft economic management and far-reaching market oriented reforms India came close to achieving the 10 percent growth target.
Figure 2.2:Recent Growth Paths in Bangladesh and India, FY3–FY09
Source: Government of India, 2010 and Government of Bangladesh 2010
Lessons of Past Growth Experience
A review of Bangladesh’s past growth experience tells a remarkably encouraging story. In 1972, in the aftermath of the devastation that happened during the war of liberation, the economy lay in shambles. Rough estimates put Bangladesh’s per capita GDP at around US$110. The physical infrastructure was all but destroyed. The economic and financial structure was similarly disarrayed. Unfavorable external environment characterized by the first oil price shock, very high global commodity prices, and low external reserve cushion also accentuated greatly the already difficult economic situation. A sequence of floods and natural disasters in the early 1970s made matters worse.
At the close of the 1970s decade, widespread poverty and poor economic outcomes continued to haunt policymakers. Soon it became clear that the course of economic management based on state ownership and control during the 1970s was unsustainable and Bangladesh gradually changed gear to a market-oriented economy with proper government interventions to protect social interests and provide an equitable social environment. This basic change in philosophy has prevailed ever since, with various fines tuning in terms of growth orientation versus social justice. One remarkable feature is that no government has denied the importance of growth for poverty reduction, but differences have prevailed about the relative roles of public and private sectors and the relative emphasis between agriculture versus manufacturing.
The long-term trend in GDP and per capita growth rates by decades is shown in Figure 2.3. A few striking results stand out. First Bangladesh has continued to improve its rate of growth steadily over the past 40 years after independence. Second, one can discern two distinct growth phases. In phase 1 (FY74-FY91), the growth rate expansion was subdued, below 4 percent per annum in aggregate terms and only 1.2 percent in per capita terms. The growth rate expanded significantly in Phase 2 (FY91-FY10), shooting up to over 5 percent per annum on a 10 year average, but importantly exceeding the 6 percent mark for a number of years during FY01-FY10. The expansion of growth did face a break in the wake of the global food, fuel and financial crisis of 2008-10, but this slowdown was fairly moderate by global standards and speaks well of the cautious macroeconomic management by policymakers over a long period. The rising trend of long-term growth gives comfort that even higher growth is possible provided policy reforms further strengthen the determinants of past growth.
Figure 2.3:Bangladesh Long-term Growth Trend FY74-FY10
Source: Bangladesh Bureau of Statistics.
In order to understand the determinants of growth it is helpful to look at the sectoral composition of growth and ask how much structural change has happened in the Bangladeshi economy relative to international experience. It is now well recognized that the growth dynamism is largely provided by modern manufacturing and services sectors. This transformation of a peasant agrarian economy to an organized manufacturing and services economy also provides the employment base for absorbing a growing labor force into productive and well paid jobs (“good jobs”). Indeed much of the gain in average national productivity comes from the conversion of labor from low skills, low return employment in agriculture and informal services to modern manufacturing and organized services.
Figure 2.4 shows the relative growth rates of the three major sectors. Over the longer term agriculture grew below 3 percent on average. Manufacturing and services both grew faster than overall GDP. On the whole, manufacturing grew the fastest (6.4 percent per year) while services sector grew at (5.4 percent annually). These relative performance ranking did not change between Phase 1 and Phase 2. Instead all sectors including agriculture grew faster in Phase 2 relative to Phase 1.
Figure 2.4:Sectoral Growth Rates FY74-FY09
Source: Bangladesh Bureau of Statistics and Worlds Bank World Development Reports
While the variable sectoral growth performance influenced the sectoral composition of GDP, the relative weights of the changes were heavily influenced by the initial starting point (Figure 2.5). So, despite the stronger growth performance of the manufacturing sector, the relative share of manufacturing in GDP did not improve substantially, mainly reflecting the low initial base. On the other hand, services sector gained share both due to a good growth performance but also because of higher initial weight in the composition of GDP.
Figure 2.5:Structure of the Bangladesh Economy, FY74-FY09
Source: Bangladesh Bureau of Statistics
In contrast, the slow growing agriculture substantially lost ground due to low growth and also owing to its heavy initial weight. The resultant economic transformation however is much smaller than the transformation achieved by the dynamic East Asian economies (Figure 2.6).
Figure 2.6:International Comparison Structure of Economy, 2006
Source: World Development Report 2008
The results of Figure 2.6 need to be analyzed with some care. The services sector combines both formal and informal services. It is well known that in countries like Bangladesh and Pakistan, the share of informal services sector is very high. For example in Bangladesh, it accounts for some 88 percent of all services. The share of informal services in the economies of East Asia, China, Malaysia, Brazil and even India are far lower. The large share of informal services in Bangladesh suggests that the observed high growth in services needs to be interpreted with caution as this may reflect the effect of migration of low productivity agriculture workers to low productivity services. With this caveat, the structure of the Bangladeshi economy resembles strikingly with that of average lower income economies. This is hardly surprising. Bangladesh, like other low income economies is yet to make the transition to a modern manufacturing and services oriented economy. The manufacturing share of China, Malaysia and East Asia on average is over 30 percent as compared with a low 18 percent in Bangladesh. Pakistan’s share is slightly higher at 19 percent, but like Bangladesh remains a low industrialized economy. The cases of India and Brazil, which also exhibit low share of manufacturing require a bit of explanation. Brazil, with a per capita income of $ 4710 in 2009 is in a different league and is already fairly well industrialized with organized services providing the high income jobs and linked to serving the manufacturing sector. India similarly is fairly well industrialized and its lower share is a reflection of the much faster expansion of export oriented modern services such as Information Technology.
Despite these shortcomings of the transformation of the production structure, Bangladesh achieved a per capita income of $750 in current prices in FY10 as compared with only $80 in FY72. Importantly, Bangladesh is nearly self-sufficient in rice production, a seemingly impossible dream in 1972. In this regard, notwithstanding the low growth rate of value-added, the good performance of the rice economy has been a watermark of the Bangladeshi economy.
What are the factors that allowed Bangladesh to achieve this growth success? In the first phase, growth relied much more heavily on nationalized production, state interventions in terms of licensing and price controls, heavy trade protection and subsidies. Reforms were partial and hesitant. In phase 2, since 1990, the incentive regime in Bangladesh changed rapidly. Private sector production and investment and exports supported by inflow of remittances were the main drivers of growth. Remittances in particular spurred the expansion of construction, especially housing, and other service-oriented commercial enterprises. Reforms of banking opened new opportunities for financing. A stream of trade liberalization and supply of mainly female low cost labor spurred investment in export enterprises, of which readymade garments is a shining example. About 80 per cent of workers employed in this industry are women who came mainly from the rural areas of Bangladesh.
However, in both phases growth was largely fueled by the expansion of investment, mostly from the private sector, and financed by national saving (Figure 2.7) and by an expanding labor force, particularly expanding women labor force. Contribution of total factor productivity – usually spurred by combination of technology with labor and capital — was very limited. This is in sharp contrast to the experience in India where total factor productivity played a major role in spurring rapid growth. While the domestic saving rate has been on a rising trend, the rapid growth in the national saving rate since 2000 has been fueled by the huge expansion in remittances. Indeed, this has posed a challenge and also an opportunity for macroeconomic management because the national saving rate is now higher than the national investment rate, which is something unusual for a low income economy like Bangladesh.
Figure 2.7:Average Trend in National Savings and Investment, FY74-FY09
Source: Bangladesh Bureau of Statistics and World Bank
Employment Effects of Growth: A less Comfortable Story
While there is much to celebrate the growth experience, the employment results are not that great. It is unfortunate that good data on labor market and job creation are scarce. Limited data available from the Labor Force Surveys (LFS) and the Census data and reports compiled by the Bangladesh Bureau of Statistics are inadequate, and often inconsistent and non-comparable over time. Recent research that seeks to reconcile the various inconsistencies in data suggests that the employment picture is rather discouraging. The main results are summarized in Tables 2.1-2.3.
|Employment||Pop gr. rate|
|LF gr. rate|
gr. rate (%)
On the positive side, the two encouraging results are first that Bangladesh is benefiting from a growing labor force owing to the demographic transition. Thus, the share of working population (ages 15-64) has been steadily rising from 40 percent in 1970 to 62 percent in 2009. Secondly, there is also a growing labor force participation rate, especially owing to the increased participation rate by female working population.
On the negative side, the first striking finding is that only 22 percent of the employed labor force is engaged in the formal sector (defined as manufacturing sector plus organized services). Thus, some 11 percent of employed labor is in manufacturing and another 11 percent is in organized services. The remaining bulk (78 percent) is still engaged in informal activities. A second striking result is that the responsiveness of employment to growth in manufacturing is rather low (measured by employment elasticity). Thus, between FY81 and FY10 value added in manufacturing grew by 6.4 percent annually whereas employment increased by 3.9 percent, suggesting a long term manufacturing employment elasticity of 0.61 which is rather low. While this is an improvement over the early 1970s, when only 15 percent of the labor force was in the formal sector (8 percent in manufacturing and 7 percent in formal services), the weak progress in transforming the labor market after about 40 years of independence is an indication of a major weakness in the Bangladesh development strategy that needs to be corrected.
Since informal activities mostly involve low levels of productivity and low earnings, these are not very good jobs. The average productivity in agriculture is much lower than in manufacturing or services. Agriculture’s GDP share has fallen drastically since independence, from over 55 percent in FY76 to 32 percent in FY81 to 19 percent in FY10, but its employment share has not fallen by as much and it continues to employ some 48 percent of the labor force. As a result, the average labor productivity has not increased much—by only 0.9 percent between FY81 and FY10. As compared to this, average productivity in manufacturing has grown by 2.9 percent and in services it has expanded by 1.1 percent. Since the services category is an aggregation of both formal and informal services, the average productivity and its growth are constrained by the large share of informal activities as much as 82 percent.
Low initial average labor productivity in agriculture, estimated at about only 48 percent (FY06) of the average productivity in manufacturing in FY81, combined with sharply lower productivity growth in agriculture has further widened the productivity gap between agriculture and manufacturing. Thus in FY10, the average labor productivity in agriculture fell to only 27 percent of that in manufacturing. Agriculture’s productivity gap with services is similarly large, despite the dominance of the informal services component.
Wages data show the differences in sectoral productivity. Agricultural real wages grew by only 0.3 percent annually between 1980 and 2009 as compared with 2.6 percent in manufacturing and 0.6 percent in services. The gap between the average real wages in manufacturing and agriculture also reflects the productivity gap.
The weak employment experience is linked with the growth experience and sectoral transformation illustrated in Figures 3.4-3.6 above. The main reason why good jobs have not grown much in Bangladesh is because of the low shares of manufacturing and organized services in GDP. Furthermore, even the limited growth of manufacturing has not yielded commensurate opportunities for the creation of good jobs. A range of policy and institutional constraints restrained the faster expansion of manufacturing sector and job creation. These include weak infrastructure, lack of long-term institutional financing, protective trade policies that create an anti-export bias, tax policies that bias private investment in favor of real estate and speculative stock market activities as opposed to investment in manufacturing and infrastructure, weak technological progress due to lack of foreign investment as well as inadequate information technology (IT sector) and inadequate labor skills.
Combining the growth experience with the employment experience provides a simple but powerful answer to addressing Bangladesh’s growth and employment challenges. A faster rate of GDP growth will require commensurate increases in the average labor productivity. Finding more productive and better paying job will require a faster expansion in high productivity, high earning sectors. The two can be reconciled by finding ways to create more jobs in manufacturing and organized services. International experience shows that high paying jobs are best created in manufacturing and formal services. Bangladesh is no exception. Other South Asian countries are striving to go through a similar transformation with varying degrees of success. However, India, Pakistan, and Sri Lanka have done better in increasing both the share of manufacturing in GDP as well as its share of employment. They also are higher per capita income countries.
SFYP Strategy for Higher Growth and Creating Good Jobs
Sixth Five Year Plan (SFYP) Targets
As noted earlier, Vision 2021 seeks to help Bangladesh attain middle income status by 2021. It accordingly sets targets of reaching 8% growth by FY15 (end of the SFYP) and 10% by FY21. The associated structural change targets are to increase the industrial sector’s GDP share from 30 percent in FY10 to 40 percent by FY21 and its employment share to expand from 14 percent to 25 percent over the same period6. The implied targets for the SFYP are:
- Achieve an average GDP growth of 7.3 percent per year over the Plan period
- Raise the share of manufacturing sector in GDP to over 20 percent by FY15
- Increase the employment share of manufacturing sector to 15 percent by FY15
The annual growth and employment projections and their sectoral composition are discussed in detail in Chapter 3 dealing with the macroeconomic framework of the Sixth Plan. The main strategic implications of these targets are that much of the additional growth will come from the manufacturing sector (which is the dominant industrial activity) along with commensurate productivity increases in agriculture, manufacturing and services. Within services, the structure will change with an increase in the share of formal services. As noted earlier, the employment challenge in Bangladesh is to create high productivity, high earnings good jobs. This calls for changing the structure of employment by withdrawing labor from low productivity agriculture and informal jobs (also known as disguised unemployment) to higher productivity jobs in manufacturing and formal services. This is admittedly a long-term process, but the SFYP will make concerted efforts to bring about this change in the structure of growth and employment.
SFYP Growth and Employment Strategy
The growth and employment experience of Bangladesh and related international experiences have a number of important lessons that would guide the formulation of these strategies to realize the targets for vision 2021 and the Sixth Plan. The important lessons are:
- The rising growth rate in Bangladesh has been underpinned by growing rates of national savings and investment. Further increases in the pace of growth will require additional investment and savings.
- Higher growth in Bangladesh has benefitted from a rising labor force both due to the demographic transition of a higher share of working population and an increasing labor force participation rate of the female labor. Encouraging higher female participation in labor force and enabling them to undertake gainful jobs and stay in the labor market will contribute to higher growth.
- While higher growth rate will require higher rates of investment, growth could also benefit from improvements in total factor productivity. The productivity of both labor and capital can be raised through a proper mix of policy and institutional reforms.
- The sectoral composition of growth has to change in favor of a much higher share of modern manufacturing and organized services to create a more rapid expansion of good jobs.
- The employment responsiveness of growth in manufacturing needs to increase to absorb more labor.
- The average productivity of all sectors, but especially agriculture, has to grow to provide better returns to labor.
- Economic growth, employment and investment respond to policy and institutional reforms. Many good policies have helped increase private saving and investment rates and supported growth. Yet, there are many other reforms that remain to be implemented in the areas of infrastructure, business deregulation, trade reforms, financial sector reforms, tax policies, information technology, education and training which all have a bearing for growth and employment by improving incentives, reducing cost, and raising productivity.
Savings and Investment
Despite the good performance in increasing the saving and investment rates, these rates are much below those found in the faster growing economies of East Asia and in India (Figure 2.8). While it is debatable whether a country really needs to emulate China’s rates of saving and investment rates and should there be a better balance between factor accumulation and productivity, there is no question that Bangladesh needs much faster rate of investment to achieve the 8-10 percent GDP growth rate. A simple rule of thumb is to look at the overall incremental-capital output ratio (ICOR). Presently, Bangladesh’s 6 percent growth is underpinned by an investment rate of 24 percent, implying an ICOR of 4. Assuming no increase in productivity over the present level, an 8 percent GDP growth will require some 32 percent investment rate while a 10 percent GDP rate will require a 40 percent investment rate.
Figure 2.8:Average Savings and Investment Rates, FY06-FY09
Source: World Bank Development Indicators
Even with some gains in long-term productivity the investment rates will remain large in the foreseeable future for at least two reasons. First, infrastructure in Bangladesh is quite underdeveloped and will require huge amount of investment, and second, long-term productivity growth itself will require initial investments and the gains will emerge with a lag. For example investments in labor skills, better technology including in IT, and research and development (R&D) are all necessary to raise productivity. Many of the gains in productivity from these investments will come in the medium term.
On the savings front, Bangladesh is well placed. The domestic saving rate has been rising as a share of GDP, benefiting from a supportive demographic transition where the share of working population has been steadily rising. The expansion of financial saving opportunities associated with the growth of the financial sector has also helped. With improved business environment, corporate saving is also on a rising trend. Further improvement in the business environment will help increase the corporate saving rate further. Perhaps the biggest scope for raising domestic saving rate is through the public sector by increasing public revenues which are remarkably low, even by low-income country standards. The domestic resource mobilization strategy is discussed further in chapters 3 and 4 dealing with the macroeconomic framework and the SFYP financing issues.
Concerning the national saving rate, as noted earlier, since 2000 the rapid growth of remittances have fueled a tremendous inflow of private transfers and rapidly raised the national saving rate. This expansion has outstripped the investment effort. The outlook for remittances looks robust. Despite the global financial crisis, Bangladesh continued to show sizeable gains in remittance inflows although the rate of expansion slowed. As the impact of the financial crisis stabilizes, Bangladesh can expect to have a steady flow of remittance income over the medium term.
Increasing the rate of investment is a bigger challenge. Following steady increases, the investment rate as a share of GDP seems to have stabilized at around 24 percent of GDP. The policy challenge is to increase this rate to 32-33 percent over the SFYP period and to 38-40 percent by FY21. The policy reform efforts to accelerate the investment rate in both the public and private sectors will be strengthened during the Sixth Plan. In addition, emphasis will be placed on the quality and composition of investment. Among the major policy reforms that will be undertaken include:
- Strengthening the domestic tax effort through reform of income and value-added taxes and improvements in tax administration.
- Emphasizing public expenditure on infrastructure.
- Reforming the state-owned enterprises to cut losses and improve efficiency.
- Improving incentives for private investment: through further business deregulation; through public-private partnerships in the financing of infrastructure; by reforming taxes to penalize speculative investments in real estate and stock markets and support investments in manufacturing and infrastructure; and by further improving the efficiency of the financial sector to lower intermediation costs and provide long-term financing options through an efficiently managed stock and bonds markets.
Taking Advantage of a Growing Labor Force: As noted, as a result of the demographic transition the share of working population in the labor force has increased. This, combined with the increasing participation of female labor force is a positive factor for growth prospects. However, at 24 percent (Table 3.3 above) the female participation rate is still very low by international standards and there is much scope for increasing the growth of labor force. Higher female labor participation has largely benefitted from girls education. Continued efforts to push female education at secondary and tertiary levels will be made in SFYP. To increase women’s participation in the labor force further efforts will also be made in SFYP for social mobilization to facilitate women’s access to employment and computer literacy which enable them to enter into the IT sector and utilize ICT.
Increasing Factor Productivity: Along with more rapid growth, the average labor productivity has increased since independence but from a very low base. Consequently, the average labor productivity in Bangladesh is very low by international standards (See Figure 2.9). With higher investment, especially in human development, the average labor productivity will rise but the challenge for raising total factor productivity will remain. Policies that might contribute to higher total factor productivity include technological change brought through direct foreign investment, investment in research and development, and investment in IT. Indeed, the “digital Bangladesh” idea popularized by the Bangladesh Prime Minister if implemented well can contribute to increasing the contribution of total factor productivity to the growth rate. These policies will be pursued at the aggregate level and complemented by sector specific policies.
Figure 2.9:Average Labor productivity, FY07
Source: Bangladesh employment data, BBS and World Bank Development Indicators
Transforming Bangladesh’s Agrarian Economy: Transforming Bangladesh’s agrarian economy into a modern manufacturing and service based economy is a long-term challenge. Yet this is needed to achieve a faster pace of growth and good job creation. The focus on manufacturing does not mean neglect of agriculture. It is simply recognition of two important points. First, the rapid expansion of agriculture is limited by the availability of land, which is a fixed factor, and by demand (food tends to have low income elasticity), and second, the increase in average labor productivity will require a strategy to withdraw labor from low productivity agriculture to higher productivity activities in manufacturing and modern services. Within agriculture there is substantial scope to raise the farm produce yields per hectare and to diversify agriculture from lower valued-added production to higher value-added production. These improvements will allow farm incomes to rise while also stabilizing food prices for urban consumers. The strategies and policies to raise productivity in agriculture and manufacturing while also enabling the required economic transformation are discussed below in greater detail.
(a) Raising Agricultural Productivity: Bangladesh agriculture is dominated by crop production that presently accounts for some 60 percent of the sectoral value-added. Within crop production, rice is dominant (around 60 percent of crop sector value-added). In many ways Bangladesh can still be regarded as a rice economy and its production and prices play a major role in domestic policy making. Despite the dominance of rice, the structure of agriculture has changed slowly with some gains mainly for fisheries (Figure 2.10). Livestock has remained virtually stagnant, while forestry products registered a small gain. The intense policy focus on rice has paid off well in terms of a rapid growth in rice production since independence. Absence natural disasters and other weather related mishaps, Bangladesh today is nearly self-sufficient in rice production. This is indeed a remarkable achievement and has made a major contribution towards securing food security. Many policies contributed to this progress including adoption of the seed-fertilizer technology, provision of irrigation, farm extension, research and development and public subsidies on fertilizer and water.
Figure 2.10:Bangladesh: Structure of Agriculture, FY81-FY10
Source: Bangladesh Bureau of Statistics. Sectoral shares are in current prices.
Productivity gains in rice production have been substantial, registering almost a three-fold increase in paddy yields per hectare between 1970 and 2009. Nevertheless, there is substantial scope for raising rice productivity as illustrated by productivity gap with the more productive rice producing economies (Figure 2.11). So, a key policy focus for the rice sub-sector during the SFYP is how to gain improvements in productivity.
Figure 2.11:International Comparison of Rice Productivity, FY10
Source: United States Department of Agriculture Database
The recent global food price inflation illustrates the critical importance of ensuring food security for a large poor country like Bangladesh. Past progress in rice production suggests that Bangladesh has the capacity to achieve food security efficiently through domestic production. Indeed, with proper incentives there is scope for food exports. The emphasis on productivity improvements will be particularly helpful in reconciling food security objectives with farmer incentives.
The limited diversification in agriculture, both within crop production and outside, is in part a reflection of the limited gains in productivity in other areas. A faster pace of diversification is needed to raise farm incomes. The demand for higher value-added crops like fruit, vegetables, oil seeds, and legumes is much more income elastic than rice. Additionally, these products have export potential. Outside crop, the good performance of fisheries is partly a reflection of higher export prices, especially for shrimps. However, its declining income share in sectoral value added suggests the need to rethink the production and marketing. The weak contribution of livestock is quite disappointing in the face of galloping domestic prices. The demand for livestock is highly income elastic and even in the absence of export prospects, in view of tough quality standards and much higher productivity in competing countries, the growing domestic demand and rising prices is an indication of domestic supply constraints that need to be addressed.
Much of agriculture is in the private sector and private sector investors including farmers respond to incentives. The key policies that affect incentives include prices of output, prices of inputs, taxes, subsidies, and public spending on rural infrastructure. Output prices are market based for most agricultural products except rice. Given the strategic importance of rice, the price of rice is regulated primarily through an export ban but also through buffer stock operations. The present policy regime provides incentives to rice farmers through input subsidies on fertilizer and water (diesel for irrigation). For all agriculture, public expenditure supports the availability of water through various irrigation schemes, through research and extension, by building rural roads, and providing electricity to rural areas.
The public spending priorities in terms of focus on rural infrastructure has served agriculture well and this focus will continue. Input subsidies on fertilizer and water have also contributed to the expansion of rice and this policy will be maintained. The SFYP will seek to provide a more flexible approach to rice pricing by better balancing the need for farmer incentive with price stability for the consumers. The objectives of providing incentives to farmers while keeping the price of rice affordable for consumers will also be reconciled by increasing rice productivity.
Private investments in non-rice agricultural activities are constrained by a number of factors including rural roads, availability of power, and rural finance. A more rapid progress in improving farm-to-market roads and the increased availability of rural power will be achieved by re-focusing agriculture spending away from subsidies to these areas. Regarding rural finance, despite many initiatives of the past including the substantial progress with micro-credits, the quantity and pricing of rural finance remains a matter of serious concern. Productivity growth in these activities will require producing to scale, focus on quality and standards for export markets, and improvement in private trade logistics such as cold storage facilities. These are relatively more capital and skill intensive endeavors and without adequate institutional finance at affordable rates, this transformation of agriculture will be heavily constrained. Higher productivity will also benefit from partnership with foreign producers that are present market leaders. Such foreign direct investment (FDI) partnerships are the best source of technology transfer and productivity gains. Many of the policies that support private sector development in manufacturing broadly are also relevant for private investment in non-farm rural enterprises. These are discussed in greater detail below.
b) Boosting the Manufacturing Sector Performance: The evolution of the manufacturing sector in Bangladesh is indicated in Table 2.4. In the 1970s and the 1980s the performance of the manufacturing sector was lack luster, growing below the average growth of the economy. Following the initial debacle, the manufacturing sector growth performance improved during the 1990s. The faster pace of expansion of manufacturing relative to total GDP since FY91 caused its share to increase gradually, rising from its low level 12 percent in FY91 to 17.2 percent in FY10. In the 1970s and 1980s, manufacturing sector performance was constrained by the dominance of poor performing nationalized enterprises, inward looking trade policies and inadequate private investment due to poor incentives.
|Total (% of GDP)7||13.7||13.4||15.6||17.9|
|− Large and Medium Scale||9.7||9.4||11.1||12.7|
|− Small Scale||4.0||4.0||4.5||5.2|
|Growth Rate (% annual average over the decade ending)8|
|− Large and Medium Scale||2.9||4.9||7.0||7.5|
|− Small Scale||1.0||5.1||5.8||7.9|
|Share of total employment||8.7||10.1||9.9||12.0|
|Percent of GDP||4.1||6.8||10.6||17.2|
|Percent of Total Exports||65.5||78.9||92.1||90.9|
|RMG (% of Total Exports)||0.1||38.9||56.1||77.1|
The policy regime for manufacturing improved significantly in the 1990s, based on investment deregulation, trade liberalization, better exchange rate management and improved financial sector performance. The emergence of the private sector led, export-oriented ready-made garments (RMG) sector as a dominant economic activity considerably altered the structure of the manufacturing sector. Along with a growing share of GDP, the manufacturing sector quickly dominated the export market and contributed to an expanding GDP share of exports. Together with remittances, the RMG sector has emerged as an economic power house in Bangladesh.
Despite this improved performance, overall the manufacturing sector does not show the dynamism that is witnessed in the East Asian economies. The average growth rate us still in the single digit and the employment share of manufacturing has increased modestly to 12 percent. Manufactured exports are heavily concentrated in RMG and a few other commodities. To achieve the Sixth Plan’s targets of increasing the manufacturing sector’s GDP share to 25 percent and employment share to 16 percent by FY15, its growth rate needs to be boosted to double digit levels. Both large and small enterprises need to contribute to this growth. The role of small enterprises is particularly important to provide the employment base. The promotion of small enterprises in rural areas needs to be a major strategic element for creating higher income and employment in the rural economy, which is critical for sustained poverty reduction.
How can manufacturing grow faster than in the past? How can it absorb labor at a faster pace? One can draw from the lessons of experience as well as from economic theory. Rapidly growing East Asian countries have relied on exports to develop their manufacturing sector with a great deal of success. From theory (the Hecksher-Ohlin model of trade) one can argue that Bangladesh can concentrate its development efforts on promoting labor intensive manufacturing exports based on the rationale that it has a relatively abundant labor endowment that gives it a cost advantage in labor intensive products. The experience with the ready-made-garments (RMG) sector seems to support both points.
One debatable aspect is can Bangladesh emulate the experience of East Asian economies in terms of successfully launching its large scale manufacturing sector or should it concentrate instead on medium and small enterprises? This debate partly germinates from the New Economic Geography (NEG) that suggests that the large scale manufacturing faces increasing returns and as such agglomeration benefits of freer trade and lower transport costs tend to accrue to existing firms making new entries difficult until such time that factor costs (typically labor costs) more than offset the agglomeration advantages. This debate requires additional research. But there is no reason for Bangladesh not to focus on the policy framework for implementing an export-oriented manufacturing strategy. The structure of manufacturing in terms of size (large, medium and small) and product composition will emerge from market conditions relating to demand, cost competitiveness, quality of products, and marketing efforts.
On the demand side the recent experience suggests that the world demand is not a major constraint for Bangladesh despite the recent global downturn. This is because Bangladesh is a very small player in the world market (exporting $12 billion of RMG products in a global market of $600 billion) and the experience of the RMG sector during the recent global crisis shows that a small country like Bangladesh that is producing low-cost, mass-consumption products (low end of the RMG market) can not only survive but even expand its market share with attention to market trends. Nevertheless, trade policies of partner countries can reduce access to Bangladeshi exports. These constraints to market access will be analyzed and resolved through proper dialogue with the authorities of concerned countries at multilateral, regional and bilateral levels. However, much of the policy attention will focus on production incentives, quality and cost competitiveness, and diversification of our export basket.
Regarding production incentives, investment deregulation, tax policies and labor market policies are important. There is also plenty of empirical evidence that the exchange rate and trade protection both matter for exports. The deregulation of investment policies has happened steadily since the 1980s, gathering momentum in the 1990s. Some progress has also been made to improve the tax structure but the inadequacies in the tax system resulting from virtual exemption of resources invested in land and stock markets including capital gains provide a natural bias against investments in risky and taxable ventures as in manufacturing. By and large, the labor markets in Bangladesh are flexible and manageable and wage costs are not a major constraint to manufacturing expansion.
By and large, Bangladesh has well managed its exchange rate policy although the appreciation of the real exchange rate since 2006 needs careful monitoring. On the trade protection front, unfortunately, Bangladesh has moved hesitantly. While trade protection has come down sharply from its very high levels in the early 1990s, Bangladesh remains amongst the most heavily protected countries in the world. Trade reform has also stagnated over the past few years. A rapidly expanding and diversified export-oriented manufacturing sector requires a much faster pace of trade liberalization and commensurate measures to minimize if not eliminate anti-export bias of the existing trade regime.
Regarding quality much will depend upon the quality of labor and adoption of better technology. The Labor Force Survey data show that some progress has been made in upgrading labor skills through improvements in education and training, but there is a long-long way to go. Indeed, the 78 percent informal labor force cannot be overnight converted into quality labor for manufacturing and formal services without a long-term massive enhancement effort in education and training. This is a huge challenge and requires a long-term strategy for public investment in human development and improvement in service delivery. Concerning technology, the experience of the RMG sector clearly demonstrates the importance of diffusion of technology through partnership with foreign investors. The adoption and successful implementation of the Digital Bangladesh program will also help raise labor productivity, reduce transaction costs, and improve market access as well as customer responsiveness.
Concerning cost, the most obvious place to look for improvement is in infrastructure. Both power and transport are key determinants of cost competitiveness. In electricity, the inadequacy of supply is well known. While efforts are underway to mobilize new investments in power, innovative ways must be found to address the power crisis. Among the solutions include better demand management, more aggressive efforts for energy trade with neighbors, ensuring the efficiency of electricity production and distribution, and ensuring the financial viability of the electricity industry. In transport, Bangladesh faces trade logistics costs that are much higher than in East Asian countries or in India. Trade logistic cost has to be brought down substantially through new investment in transport network including sea-ports, improvements in performance of existing facilities, and much better traffic management.
c) Strengthening the Services Sector and Others: The services sector has performed relatively better than agriculture and manufacturing and has been most important contributor to growth acceleration in Bangladesh (Table 2.5). Services such as professional services, finance, transport and public administration have been the leaders in spurring growth in this sector. Growing domestic demand and flow of remittances have been key determinants of the expansion of the services sector. The rapid growth of professional and financial services since 2000 is also indicative of a qualitative shift in the composition of the services sector.
|(Share of GDP %)||FY81||FY91||FY01||FY10|
|Wholesale and Retail Trade||12.9||12.4||12.2||14.8|
|Transport, Storage and Communication||10.7||9.7||9.0||10.7|
|Public Administration and Defense||1.5||2.1||2.3||2.8|
|Other Services (professional services, finance, etc||14.2||15.1||15.0||17.8|
|Others (Construction, Public utilities, Mining)||7.2||8.3||10.4||10.6|
|Of which: Construction||6.0||5.9||8.0||8.4|
|Growth Rate (% annual average over the decade)|
|Services (annual average)||4.0||3.7||5.8||7.3|
|Wholesale and Retail Trade||5.0||3.6||5.0||6.9|
|Transport, Storage and Communication||4.0||4.3||4.4||7.5|
|Public Administration and Defense||4.6||6.7||7.1||7.3|
|Other Services (professional services, finance, etc)||6.3||4.8||6.5||7.0|
|Others (Construction, Public utilities, Mining) (annual average)||6.5||5.4||7.2||7.2|
|Of which: Construction||6.5||5.4||8.3||6.0|
This may suggest the onset of a structural change in the services sector which augurs well for future growth. Nevertheless, the employment data shows that the large bulk of services employment is still informal in nature. Promoting the expansion of organized services remains a major challenge for creating more productive and higher return jobs in Bangladesh.
Services sector is typically demand driven. So, the growth in manufacturing and agriculture and their transformation to more export-oriented and commercial production (of agriculture) and continued inflow of remittances will support the growth and transformation of the services sector. At the same time, the focus of public investment on infrastructure, reforms in financial sector, and better human development will also improve the quality and productivity of the services sector. An area where Bangladesh is lagging behind concerns exports of services. India’s great success in breaking through this market, especially based on Information Technology (IT) is an example of how the services sector can be modernized to boost exports and income. The implementation of Digital Bangladesh is a key positive step in this regard. Facilitating women’s access to computer literacy can play an important role in improving domestic capacities for services exports. Better trade in services with the neighbors, especially India, can also play an important role in improving domestic capacities for services exports.
Regarding other activities which comprises of construction, public utilities and mining, construction is the dominant activity. This has been a dynamic source of growth in Bangladesh since the early 1990s, fueled by growing income, remittances, private investment and urbanization. Construction related to housing and commercial enterprises have both flourished. As a result, the value added of construction has grown faster than overall GDP. The construction industry also has been a significant source of job creation for skilled and semi-skilled labor. Over time, the quality of construction activities in urban areas has also increased. This will remain a source of higher growth and employment in the medium term.
d) Managing the Cross-cutting Sectoral Linkages: The strategic review of policies for transforming the Bangladesh economy, especially the manufacturing sector, raises a number of cross-cutting sectoral linkages that need reform. These include trade policy reforms to reduce the anti-export bias of production, reforms of the financial sector to improve access and reduce cost of finance, improvement in infrastructure, and development of skills.
Trade Policy Reforms: Bangladesh made significant progress in reforming the foreign trade regime and reducing protection since the early 1990s. This is reflected in the simplification of trade licensing, removal of quantitative restrictions, reduction in custom duties, and the implementation of a flexible exchange rate policy. As a result the trade to GDP ratio has more than doubled since FY91, reaching 40 percent of GDP in FY10. This progress with trade liberalization has served Bangladesh well in terms of growth and poverty reduction. Nevertheless, the average tariff protection in Bangladesh is still very high (Table 2.6) as compared to most other South Asian countries, even though average protection in South Asia is higher than in other regions.
|Some QRs on imports||Yes||Yes||No||Yes (minor)||Yes (minor)|
|Some direct export subsidies||Yes||No||Yes||Yes||No|
|Indirect exports subsidies||Yes||Yes||Yes||Yes||Yes|
|Avg. Custom duty||10||n.a||13.6||n.a||n.a|
|Customs duty+ Other Para-tariffs||10||16||22.1||27||12.5|
One worrisome development in Bangladesh budgetary management is the growing importance of a range of supplementary duties (para-tarrifs) that have grown in significance and are almost inversely correlated with the reduction in custom duties (Figure 2.12). These para-tariffs have tended to offset much of the gains intended for productivity gains and export promotion through the impact of lower customs duties on protection. The large dispersion of both customs and supplementary duties tends to distort production incentives through high rates of effective protection. Importantly, the current tariff regime undermines export competitiveness and impedes growth of new exports, thus restraining export diversification.
Figure 2.12:Average Nominal Protection and Para-tariffs
Source: National Board of Revenue
A part of the reason for imposing supplementary duties was to raise revenues. But research has shown that much of these duties have ended up raising protection instead. As Bangladesh moves towards a more modern tax regime with greater reliance on income and value-added taxes during the Sixth Plan period, the role of supplementary duties for protective purpose will be substantially reduced with a view to limiting them for discouraging socially undesirable consumption or for discouraging luxury items by imposing supplementary duties uniformly on imports and domestic production. To support the growth of a labor-intensive, export-oriented manufacturing sector, a review of the trade protection regime will be done with a view to lowering protection.
Banking Sector Reforms: International evidence shows that over the longer term economic development and the maturity of the financial sector are strongly correlated. In today’s world of global markets and competition, the cost and efficiency of financial services can often make the difference between a competitive and non-competitive firm. In low income developing economies the financial sector typically tends to be dominated by banking enterprises. Non-bank financial institutions and capital markets normally tend to be at an evolutionary stage. So, much of the financing for private enterprises are typically provided by the banking sector. This situation is also representative of Bangladesh. For example, as of December 2008, the banking sector accounted for over 80 percent of the country’s financial assets. Consequently, the performance of the banking sector is a key determinant of the growth of the private sector.
Formal banking sector performance and future strategy: In Bangladesh, following independence, the banking sector was nationalized. The dominance of these nationalized banks continued well until the late 1990s, even though gradually private banks were allowed entry into the banking business. The combination of public ownership and lack of competition contributed to not only weak performance of the banking sector measured in terms of what is known as the CAMEL indicators, but very importantly, the banking sector became a huge source of rent seeking and corruption. One key indicator of this is the volume of non-performing loans. For example, as of 2000, total non-performing loan (NPL) of the state-owned commercial banks (SCBs) stood at a whopping 39 percent of total loans (Taka 110 billion or 10 percent of GDP). While some of the NPL reflected bad lending decisions, especially those given to weakly performing public enterprises, a large part reflected the non-servicing of loans by politically well-connected private business. This NPL ratio has come down recently based on reform efforts while at the same time the lending share of the SCBs has been sharply cut back by greater competition from private banks, yet the gross NPL of SCBs remains fairly large (24 percent or around taka billion 200 as of June 2009). In the private sector, NPLs for domestic private banks fell from 22 percent in 2000 to only 4.9 percent in June 2009.
Historically, Bangladesh has suffered from a poorly performing banking sector due to public ownership, lack of competition, poor governance, weak management, inadequate regulatory framework and lack of Central Bank’s autonomy and capacity. This manifested itself in a sharply deteriorating banking portfolio quality, raising concerns about its viability. Faced with this alarming situation, Bangladesh has launched a comprehensive reform program since 2000. The program has focused on improving prudential regulations, strengthening the oversight capacity of the Bangladesh Bank, improving competition through greater participation by private banks, deregulating interest rates and developing the banking legal system for speedy resolution of loan disputes.
Evidence shows that good progress has been made in deregulating interest rates, strengthening prudential regulations, enhancing the capacity of the Central Bank and allowing more competition through greater entry of private banking enterprises. Less progress has been made in reforming state owned banks, preparing them for privatization, and developing institutions for speedy resolution of loan recovery disputes.
The outcomes show this policy progress. Thus, there has been a significant growth in banking deposits and credit relative to GDP, a sharp increase in the private sector banking activities from a low base, interest rates now better reflect market forces, and there has been significant improvement in the quality of banking portfolio in terms of better capital adequacy ratios and lower share of NPLs. The performance improvement is mostly concentrated in private banks, including domestic private banks. The private banks now have a greater share of the banking deposits and loans than the public banks. Their NPLs are substantially lower than found in public banks. This encouraging progress with the transformation of banking system within a relatively short period is a truly commendable outcome.
Not surprisingly, private banks also show stronger performance in terms of CAMEL indicators. Despite some improvement, the quality of public banks remains of major concern. Evaluation of CAMEL ratings suggests that the performance of most public banks is rated as marginal.
When compared internationally, despite the substantial progress over the past few years, the average banking performance in Bangladesh is weaker than in other large South Asian countries of India, Pakistan and Sri Lanka. This performance ranks even less favorably when compared with the East Asian countries, particularly regarding banking portfolio quality and capital adequacy.
The experience with banking reforms in Bangladesh suggests two important lessons going forward. First, prudential regulations matter a lot for improving the efficiency and soundness of the banking institution. This is also the most important lesson emerging from the global financial crisis. So, further progress with instituting prudential regulations and oversight/supervision responsibility/capacity of the Central Bank will be pursued. Secondly, competition and sound management of public banks matter a lot in strengthening the quality of the banking system. Greater competition by allowing new entry of private banks is fast changing the quantity and quality of banking services in Bangladesh. The continued vulnerability of the banking sector is largely explained by continued management weaknesses in the SCBs. While partial reforms have helped improve performance in SCBs, this performance remains substantially weaker than in private banks, thereby sharply pulling down the industry average. The continued high NPL ratio for SCBs is of particular concern. Although some progress has been made in recovering loans, this remains a major challenge for the SCBs. For the Sixth Plan, efforts will be made to strengthen the performance of the SCBs by ensuring better management and accountability by strengthening the oversight of the Bangladesh Bank. Continued efforts will be made to recover overdue loans and improve performance of SCBs through the corporatization process.
Regarding prudential regulations and capacity of the Bangladesh Bank, past progress has served Bangladesh well. This progress will be consolidated with an even greater move to ensure the independence of the Bangladesh Bank. International experience suggests that countries with an independent monetary authority tend to perform better with regulating the financial sector and managing inflation. On the regulatory front, in addition to implementation of measures for strengthening the soundness of the banking sector (e.g. implementation of Basel II Framework), a careful review of the state of corporate governance and the points of vulnerabilities would be helpful to assess progress on this important dimension and to design appropriate measures.
Finance for the Poor: Global experience shows that formal banking does not always service the needs of the poor and underprivileged who typically are engaged in small-holding agriculture and small rural and urban enterprises. Different countries have adopted a variety of publicly-supported specialized schemes to reach out the poor engaged in these enterprises. These include specialized financial institutions like Agricultural Credit Banks, Cooperative Credit institutions, and subsidized credit schemes channeled through commercial banks. Governments, through central bank directives, often also require commercial banks to provide a certain amount of credit for special programs such as agriculture. These programs invariably involve subsidized credit and credit rationing owing to excess demand. Evidence on the success of these enterprises in achieving stated objectives is mixed. In view of these limitations, social enterprises like micro-credit schemes have emerged as a growing business in most developing countries.
In recognition of the role of finance in poverty alleviation, the Government has adopted an inclusive strategy of credit for the poor and under-privileged. The main challenge lies in specific program design and implementation to ensure that the programs are cost effective and reach the intended beneficiaries. The publicly supported programs of credit for the poor in Bangladesh include provision through formal institutions such as the Bangladesh Agricultural Bank, subsidized credit through the formal public commercial banks, specialized programs for small and medium enterprises (SMEs) through the SME Foundation, special credit programs for agriculture and SMEs managed by the Bangladesh Bank, and a range of micro-credit schemes supported through the PKSF. Additionally, of course, the micro-credit social enterprises like the Grameen Bank, ASA, and the BRAC-supported micro-credit schemes are active participants in supplying credit to the poorest of the poor.
The SFYP will make concerted efforts to enhance the availability of credit for the poor. However, given the multiplicity of initiatives, limited capacity, excess demand and limited budget, there is a need to review the cost-effectiveness of these programs to ensure that the stated objectives are being achieved. As an example, the program for supporting the SME sector through subsidized credit is hampered by the lack of adequate data on the sector.
Without a proper database it is very difficult to know where the money is going and what the impact of this program is. There is a perception that a part of the resources channeled through the SME window may have been diverted to the share market. This is illustrative of the importance of having a proper supervision, monitoring and evaluation of the SME program. Ensuring an adequate results-based monitoring and evaluation (M&E) framework for all government programs, but especially for subsidized credit, is a core policy reform that will be implemented over the Plan period. Based on this review the various credit programs will be strengthened.
Capital Market Reforms to Promote Private Investment: Bangladesh stock market has grown in size in terms of market capitalization, market turnover and is poised to become a source of mobilizing investment by listed companies (Figure 2.13). Although the recent bull run had pushed market valuation well beyond the underlying economic fundamentals, following the significant market correction since January 2011, stock prices have broadly reached their fundamental levels. Despite the correction, market capitalization at about 35.3 percent of GDP (as of March 2011) is quite respectable and likely to grow steadily with many new firms listing in the stock market in the coming years. Market turnover has also stabilized to more sustainable levels and likely to grow in a sustainable manner.
Figure 2.13:Bangladesh: Total Market Capitalization
Source: Dhaka Stock Exchange
The role of the stock market as an important source of investment fund is likely to grow in a sustainable manner during the SFYP period. The rapid growth of the capital markets in recent years in terms of market capitalization and turnover and broader participation of investors are, by and large, welcome trends in terms of the ongoing development of our financial system. However, the recent correction and increased volatility in the stock market have raised a number of important issues in terms of effectiveness of the regulatory framework as well as the need for reforms that might reduce the excesses and improve the functioning of the stock market.
The recent developments in the stock market are shown in Figure 2.14. The main drivers of the 2-year bull run in the stock market were: excess liquidity growth with broad money (M2) expanding by more than 20% last fiscal year and once again this year; a sharp increase in the number of retail investors (from 0.5mn around three years ago to 3.21 million by end of 2010); lack of supply/IPOs with only 6 IPOs and 2 direct listings in 2010 and limited issuance in 2009; excessive investment by commercial banks in the capital market; microcap and low free float stocks being more vulnerable to extreme price volatility; and on occasions, inadequate coordination among regulatory authorities sometimes leading to moral hazard. These developments suggest the need to manage the capital market with much more care than in the past.
Figure 2.14:Bangladesh Capital Market Developments
Source: Dhaka Stock Exchange, Bangladesh
To ensure healthy growth of the stock market, wide ranging reforms including strengthened market surveillance by the SEC will be implemented. The envisaged reforms will encompass improved regulations in respect of accounting rules, transparency issues, governance structure and reporting requirements; criteria for determining insider trading; rules for dealing with market sensitive information/announcements; and sanctions (criminal and financial) for violations of the rules and regulations. Initiatives will also be taken to promote more fundamental research; and training of professional market participants through a range of programs under the newly established Capital Market Institution. Measures will also be taken to stimulate increased equity issuance in Bangladesh including fairer IPO pricing with the re-adoption of the book building method; regulations and tax incentives for increased free float; the listing of State Owned Enterprises; and the development of a mechanism whereby companies can raise the capital they need and meet free float requirements. The government and regulators would consider carefully the issues related to commercial banks’ exposure to the capital market, and ensure more regular co-ordination between Bangladesh Bank and SEC on stock market policies.
Power Sector Reforms: At the start of the Sixth Five Year Plan, Bangladesh faces an unprecedented energy crisis that has taken the form of a sectoral ‘emergency’. The frequency of power and gas outages is threatening citizen welfare. The annual loss to production and income from power outages could well exceed 0.5% of GDP per year. The availability of domestic primary fuel supply is getting so scarce that it is forcing severe measures like shutting down fertilizer factories, rationing gas supplies for household and transport uses, and keeping idle installed power units. This sad state of affairs reflects years of mismanagement and neglect, so much so that power has now become a binding constraint to higher GDP growth.
Every 1% of GDP growth is estimated to lead to a growth of 1.4% in electricity demand in a typical developing country. For a 5-6% typical annual economic growth rate, this would imply a need for close to 7-8% growth in electricity supply. Rural electrification ratio expanded rapidly since the early 1990s, growing from 10 percent in 1994 to 37% in 2008. Yet, this is still amongst the lowest in developing world. In the rural economy, low power connectivity is a serious constraint to non-farm sector growth. Against this demand pattern, unfortunately no substantial low-cost and reliable power generation capacity has been added since 2002.
Due to the severity of the power crisis, the Government has been forced to enter into contractual agreements for high-cost, temporary solutions, such as rental power and small IPPs, on an emergency basis, much of it diesel or liquid-fuel based. This has imposed tremendous fiscal pressure, as budgetary transfers are routinely made to the power sector in order to enable it to stay current on payments to power suppliers. The Government is aware that precious resources are being diverted to cover operating losses of the utility that arise from purchasing short-term high cost power which is not sustainable for the financial health of the sector in the long run. Therefore, the longer term strategy embedded in the SFYP power sector plan is to use budgetary allocations to promote low-cost, sustainable expansion of power generation, transmission, and distribution capacity.
Also, there has been no new capacity addition to fuel sources for power generation. With a power sector that is almost totally dependent on natural-gas fired generation (87% of power comes from gas-fired generators), the country is confronting a simultaneous shortage of natural gas and electricity. Other fuels for generating low-cost, base-load energy, such as coal, liquid fuel, or a renewable resource like hydropower, are not readily available, and any policies put in place to access them are likely to have a 3-5 year lead time. Gas supply is dwindling, and the absence of obvious choices for alternative fuels implies that there are no readily identifiable and immediately available options for alternative, new generation sources to meet its base-load power requirements.
Clearly, the situation calls for an urgent but well-crafted sustainable strategy to address the energy crisis. Accordingly, the Government has adopted a comprehensive energy development strategy9. The strategy provides a balanced approach that looks at both supply increases and demand management aspects of the energy market. Energy options from domestic sources needs to be complemented with possible options for energy trade. Specifically, the strategy will address what the Government can do about gas and power, and will look at options for diversification of fuels for generation. The strategy will also explore alternative solutions such as increased electricity imports from neighboring countries and LNG trade. The supply side options will be balanced with policies for demand management that conserve energy and discourage inefficient use.
In order to curb the existing energy crisis government in principle agreed in the construction of a nuclear power plant (NPP) consisting of two reactor power units with a capacity 1000 MW each (total 2000 MW) at Rooppur Nuclear Power Project (RNPP) Site.
A part of the reason for the past lack of investment in power is pricing policies that kept the publicly owned electricity industry in constant deficit. It also contributed to inadequate maintenance practices, resulting in power losses and frequent breakdowns. Other constraints that have contributed to power crisis include difficult sector governance and inefficient management.
The Government recognizes that electricity should be priced appropriately to both ensure that there is efficient use of electricity and the industry generates enough surpluses for re-investment. Social objectives like reaching out to the poor and rural community could be achieved through cross-subsidization as well as explicit budget subsidies. As a result of past reforms in pricing, regulations and management, private sector participation in electricity generation has increased; the sector governance has also improved in a number of areas including bill collection and corporatization. However progress on proper pricing of electricity is still inadequate. A key policy reform for the Sixth Plan is to ensure proper pricing of power based on a review of good international practices. The possibility of establishing private electricity distribution companies will also be explored.
Energy trade including electricity trade with neighbors has tremendous potential for unlocking Bangladesh’s long-term energy constraints in a cost-effective manner. South Asia’s North East Sub-region has tremendous untapped hydro-power potential (See Table 2.7). Through proper grid connectivity and transmission lines, the scope for power trade to relieve Bangladesh energy constraint is tremendous. A head start has already been made to initiate power trade with India. In the short-to medium term 250 MW of power flow through Bheramara-Bahrampur grid connectivity is envisaged. Over the longer-term, this could move up to 1000MW of power imports. Importantly, grid connectivity with India opens up possibility for power trade with Nepal and Bhutan. Additionally, opening up of power trade will facilitate new investments from India’s private sector into Bangladesh for power as well as primary fuel.
|Country||Hydropower potential (MW)||Installed Capacity (MW)||Utilization (%)|
Given the acute shortage of primary energy owing to past neglect, the Sixth Plan will put special emphasis on its development. In addition to trade with neighbors discussed above efforts will be made to exploit all possible sources of primary energy (hydro-power, gas, coal and solar energy). This will be pursued in some combination of public investment, PPP, and pure private investment. Proper pricing of primary energy will be critical to attract foreign private investment as well as to ensure efficient use of scarce primary fuel. Social needs for primary fuel will be balanced through cross-subsidies and budgetary transfers with a view to reconciling incentives for private investment and efficient use with social need for ensuring access for the poor.
Transport Sector Reforms: Research shows that trade logistic costs are a key determinant of export competitiveness. According to World Bank analysis, Bangladesh ranks 79 out of 155 countries in terms of the 2010 trade Logistics Performance Index (LPI). This index is a combination of performance on six areas: customs, transport infrastructure, international shipments, logistic competence, tracking and tracing, and timeliness. The 2010 ranking is an improvement in performance over 2007, yet this performance is much lower than competitors (China at 13, India at 47 and Vietnam at 53). Bangladesh scores particularly low on customs procedures, on transport infrastructure and logistic competence. Other international research show that transport cost could well pose a greater barrier to trade than tariffs.
The economic expansion and social development witnessed in Bangladesh since independence was accompanied by rapid growth in transport demand, at 9 percent per year. Much of this growth was met by road transport, which emerged as a dominant mode of transport over the years (Table 2.8). The share of passenger transport demand provided by road transport increased from 54 percent in 1975 to 88 percent in 2005, while rail declined from 30 to 4 percent and Inland Water Transport (IWT) from 16 to 8 percent. A similar change also happened for freight transport demand.
Due to its comparative advantages in terms of speed, flexibility, and accessibility, road transport has emerged as the most popular mode of transportation in Bangladesh. Reflecting this demand, road development has continued to receive major attention of all successive governments since independence. Other modes of transport, particularly rail lost ground rapidly. Policy attention also weakened.
Since independence the road infrastructure has much improved including rural roads. Strategic investments in key bridges such as the Jamuna Bridge have also served the country well. Yet, it is clear that the modernization needs are large and involve all modes of transport—road, rail, sea, inland water and air. Rough estimates suggest 3-4 percent of GDP in additional investment will be required per year to modernize the transport sector. Given the large resource needs, priorities will need to be set. Also strategic partnerships with the private sector will be necessary to mobilize the additional resources. In addition to investments, a key challenge is to improve management. This is a particular issue in urban areas, especially Dhaka, where traffic difficulties have become a nightmare.
A number of principles would guide the strategic choice of which transport investments should proceed first. The Government has already put priority on the construction of the Padma Bridge, which is of high national importance. The implementation of this decision is already on a fast track. Another top priority is to build those transport network corridors that provide regional connectivity to the two national ports. Bangladesh’s open access to sea is a great national asset and the conversion of this asset to secure concrete gains requires conversion of the two national ports, Chittagong and Mongla, to regional hubs allowing access to all countries who wish to use these ports for trade. In addition to serving the needs of the nation, the traffic coming from India’s Northeast, West Bengal, Nepal and Bhutan could provide a high rate of return to this strategic investment. Related to this, the capacity of both ports need to be carefully assessed and expanded as necessary to handle the expected cargo flows from the neighboring countries. A third priority is to break the traffic gridlock in Dhaka. Given the importance of Dhaka for the overall investment and growth of the country, the high-cost imposed by the present traffic gridlock cannot be sustained without choking off the growth potential and dynamism of the city and the country’s economy. A fourth, priority is to modernize Bangladesh railway through proper investments in rolling stocks, modern traffic and safety equipments and the conversion of narrow gauge to broad gauge system to harmonize with neighboring countries and allow the regional rail connectivity. Establishing proper rail connectivity to provide access to Bhutan, India and Nepal to the Chittagong and Mongla ports will be a major investment priority. A final priority is to continue upgrading the rural roads to provide better farm-to- market access roads.
Even with these guiding principles, the underlying investment needs will be beyond the reach of the annual budgets during the plan period, given the low initial resource base and other competing claims on the budget. International experience shows that it is very much possible to mobilize private funding for road network, especially in terms of inter-city toll roads and bridges. The experiences from India and Indonesia are of especial relevance in this regard. As noted earlier, the Sixth Plan will put substantial emphasis on the PPP approach to infrastructure financing including for transport (discussed in greater detail in Chapter 3).
Money alone will not solve Bangladesh’s transport problems. Proper management is a key issue that will be pursued over the plan period. The four most challenged areas are: urban transport management; management of the railways; port management; and management of the airline industry. The traffic gridlock in Dhaka is not just an issue of pouring more money in terms of building flyovers and new diversion roads. It requires a strategic overhaul of the entire urban transport system. The opportunities for building flyovers and diversion roads are many, but will ultimately be constrained by availability of land and the displacement of huge number of people and existing facilities. So, a combination of strategic investments in choking points, establishing time-of-day use restrictions, enforcing traffic laws, establishing school busing system, investing in urban mass transit and proper pricing of fuel, especially CNG, will be necessary. In the end, urban traffic management becomes a part of overall city management and cannot be simply delinked. Railway reforms are well identified, implementation has been a problem. This issue will be carefully reviewed to identify what has held back progress. Based on this review, proper measures will be taken to speed up reform implementation. In the area of port, the Government will look into the option of privatizing port management. In airways, the deregulation of the industry has made some impact, but the option of building a strategic partnership with a leading foreign commercial airline will be examined to provide better scope for growth and dynamism. In Sri Lanka, the strategic partnership between Air Lanka and Emirates has paid off very well.
Skills Challenge: The demographic dividend along with the scope for expanding the participation of female labor force from its present low levels provides Bangladesh with a great opportunity to convert these factors to its advantage by focusing on labor skills. In general, average labor productivity is low in Bangladesh and investment in skill formation will pay rich dividends in terms of growth acceleration. In technical terms, Bangladesh is way inside its potential production frontier both due to low technology and also due to weak labor skills. With proper policies, institutions and investments, Bangladesh can be pushed up to its true production possibility frontier. For skills formation, a major challenge is to raise the quality of education at all levels as well as to increase enrollments at secondary and tertiary levels. Improvements in education quality will also help address the chronic problem of school dropout. In addition to investment, the education challenge requires improvements in public service delivery through governance and other institutional reforms. Strengthening public-private partnerships in education is important. Additionally, serious efforts are needed to upgrade the capacity to deliver technical education and skills training. This is a major deficiency that has not received much attention in the past and goes beyond public investment. A true public-private partnership based on experiences in East Asian countries and India can provide inputs to a successful training strategy. Education and training issues and the Sixth Plan strategy are discussed in greater detail in Chapter 5.
Managing the Land Constraint
Being one of the most densely populated countries in the world, it is hardly surprising that land has become the scarcest factor of production in Bangladesh. This is reflected in galloping land prices throughout the country but especially in the metropolitan cities. Future growth strategy must take this binding constraint into account in order to ensure its sustainability. Efforts to reduce the growth of population will help, but better management of land is of paramount importance for sustaining rapid growth in Bangladesh. Sound land management also has a direct effect on people’s welfare and poverty reduction. Landless farmers are amongst the poorest of the poor. Land is also essential for housing. The rapidly expanding slum population and rising land prices in urban areas are indications of increasing difficulties Bangladesh faces in providing people with proper shelter.
Past land use policy and management: Because of diversion of agricultural land to multiple uses and river erosion, the per capita availability of land is declining and the loss of agricultural land is going on at the rate of about 1 percent per year. The poor have very little access to government land like char land, khas land, water bodies etc. There are land laws and policies to allot such land to the poor and the landless, but in actual allocation the interest of the poor is rarely preserved. The vested interest groups in both rural and urban areas are in de facto and de jure possession of these lands with the help of money and muscle. The ethnic people of the Chittagong Hill Tract (CHT) and other areas are losing their common property rights in land. In the cities, the slum dwellers pay high rent for staying in the slums and they remain under threat of eviction.
Land is being degraded by soil salinity, soil contamination, deforestation, water pollution, falling water table and drainage congestion. Financial constraints, lack of awareness, reluctance to obey rules and enforce laws, piece-meal efforts to deal with these issues, implementation of contradictory and ineffective policies are the main reasons for such degradation.
The Ministry of Land formulated a National Land Use Policy in 2001 to prevent land degradation and to ensure its best utilization. The policy highlighted the need for carrying out a National Land Zoning Program for integrated planning and management of the country’s land resources. However, the institutional structure for implementation is lacking. Illegal encroachment on rivers, canals and water bodies for housing, industries etc. is common in both rural and urban areas. This leads to obstruction of the flow of water, reduction in flood plain areas and increased flooding.
The Government is acutely aware of the poverty implications of landless farmers. To alleviate this problem of landlessness, the Ministry of Land is implementing a program under which at least 20 landless families are being given khas land in each upazila. A total of 6,397 landless families in 436 Upazilas have been given nearly 2,185 acres of khas land till July 2009. In addition, 71,032 landless families have been rehabilitated through providing khas land including houses under Ideal Village I and II projects. Similar rehabilitation program has been targeted for 10,650 landless households under Climate Victims Rehabilitation Project within January 2009 to June 2012. In addition, rehabilitation of 9,500 households is in progress under Char Development and Settlement-3 Project.
Strategies and policies for land management in the SFYP: The main goal of the government’s land use policy and management is to ensure best possible use of land resources and delivery of land related services to the people through modernized and efficient land administration for sustainable development with accelerated poverty reduction. The lack of coordination between different departments responsible for preparation and maintenance of Record of Rights (ROR) often leads to confusion, conflicts and many instances of litigation causing suffering of the people especially the small and marginal farmers. To mitigate this problem, the Ministry of Land has already undertaken projects to conduct digital surveys and introduce e-governance. Land records will be computerized and land mutation will be made automatic.
Necessary measures would be initiated to ensure sound coordination of the activities undertaken by department of registration, A.C. Land and DLRS. Through appropriate delineation of supervisory responsibility of settlement activities, better coordination of the two offices in dealing with the preparation and maintenance of land records at the upazila level will be achieved. The Directorate of Registration will be directed to remove inconsistency in land records management and also for immediate updating of land titles.
A database including all land resources, land zoning information and other resources in selected areas such as Char land and other ecologically endangered areas will be developed. The Ministry of Land is implementing a coastal land zoning project to ensure proper use of land and mitigate land degradation. There will be provision for a participatory and joint monitoring system with government employees and the local people for overseeing the activities of land classification, and land record modernization for effective land management. The participation of the poor in the whole process, from formulation to implementation of laws and policies will be instituted.
The land in CHT is administrated under the relevant Acts, Rules and Regulations of the Manual of 1900. The customary common property rights of the ethnic people will be protected. Laws and policies would be framed for the proper management of the land in the CHT. The provisions of Rangamati/Khagrachari/Bandarban Hill District Local Government Council Act 1989 have been amended according to the CHT Peace Accord. Laws and policies will also be introduced to avoid environmental degradation, such as hill-cutting and tree-felling, while using available land for the development of tea and rubber plantation.
The modification and simplification of all land-related laws are expected to remove many of the land related disputes. A special committee will be set up to come up with recommendations in this regard.
Planned use of land according to Land Zoning Maps prepared on the basis of present and potential land uses will be ensured through enforcement of the provisions of relevant laws. The provisions of the Town Improvement Act of 1953 will also be more strictly enforced. The Government will take up projects for the development of rural townships where specific areas are to be earmarked for housing, marketplaces, industries and infrastructure.
Land acquisition act and policy would be rationalized. Unused acquired land or acquired land not used for the declared purposes would be resumed by the Deputy Commissioner. Unused land of Bangladesh Railway may be given to Roads and Highways and Local Government Engineering Department for construction of roads if needed. In the case of big public sector projects like the Padma Bridge (for which the government has already approved the resettlement plan) affected persons would be motivated to make their resettlement voluntary. They would be compensated for their land at the price suggested by the National Involuntary Resettlement Policy.
While building rural roads, highways, bridges and culverts, the government departments do not keep enough space for the natural flow of water. In the big cities, the land grabbers are filling up the water bodies, thus creating drainage problems. Provisions are to be made for free flow of water. The natural flow of rivers and canals is to be restored by removing the land grabbers. The water bodies and the flood plain areas in Dhaka and other big cities would be freed from illegal occupants.
The rivers, canals, haors, etc. would be leased out to poor and genuine fishermen. This will be ensured with the involvement of the MOFL, DOF and major stakeholders including NGOs. The Jalmahal Management Policy 2009 has already been finalized and gazetted in June 2009. Similarly, Balumahals and other Sairat Mahals would be managed in a way which will benefit the poor.
Inspections of industries would be conducted more frequently to strictly enforce the construction of ETPs and their due continuous operation. The relevant provisions of EBSATA would be strictly enforced to stop degradation of crop land by industries. Projects would be taken to develop perennially inundated areas like Bhabadaha. The conflict between the growers of shrimp and crops would be resolved by involving the Union Parishads, DOE, DOF, DAE and stakeholders’ representative organizations including local NGOs.
The Ministry of Land would continue with its program of housing for the urban poor. Khas land in urban areas (i.e. non-agricultural) would be utilized for housing the slum dwellers. Non-agricultural khas land would be provided to the Ministry of Food and Disaster Management and Ministry of Social Welfare for constructing (i) houses for women, marginalized people and endangered communities, and (ii) vagrant homes and night shelters in the cities for the uprooted population.
Managing the Spatial Dimensions of Growth
Growth experiences in Bangladesh and elsewhere demonstrates both a tendency towards urbanization as well as uneven regional growth. The urbanization problem has become particularly acute in Bangladesh owing to the primacy of Dhaka. The unbalanced growth of Dhaka shows both a large concentration of wealth and income as well as unsustainable pressure on Dhaka’s already fragile infrastructure. Concerning regional disparities, the divisions of Dhaka, Chittagong and Sylhet seem to do better in terms of both growth and poverty reduction as compared with Rajshahi, Khulna and Barisal. The Sixth Plan will make efforts to address both these spatial dimensions of growth.
The urbanization challenge: Bangladesh has been experiencing rapid increase in its urban population ever since its independence in 1971. Urban population as a percentage of total population increased from around 8 % to nearly 23 % during 1974-2001 periods. By the year 2015 nearly one-third or 33% of the population of Bangladesh will be living in urban areas.
The phenomenal rate of urbanization is posing a major development challenge. The cities and towns of Bangladesh, numbering more than 525, suffer from acute problems of deteriorating infrastructure in the form of poor housing, inadequate availability of drinking water, paucity of drainage and sewerage facilities, logjam of urban transport, and pollution. Homeless population in most cities is on the rise and the slums and squatter settlements have become integral part of urban life in the country.
Chaotic urban development and the accompanying unemployment, environmental degradation, lack of basic services, crime and the proliferation of slums are obviously major obstacles to creating better cities and better urban living conditions. This does not necessarily mean that urbanization is bad and the government has to adopt policies for reversing the process of urbanization. What is important is to realize that urbanization is an unavoidable element of economic development that requires careful planning and management. The government needs to manage urbanization in such a way that beneficial aspects of urbanization are strengthened and negative aspects of urbanization are minimized. Well-managed urban growth and development can contribute not only to economic advancement but also to reduce poverty and improved quality of life for all citizens, including the poor.
Urbanization has now become a powerful force, especially in developing countries. The role of urbanization in transforming traditional societies can hardly be over-emphasized. The emerging socio-economic situations in developing countries like Bangladesh have made this amply clear. In Bangladesh cities and town are playing a crucial role in the country’s socioeconomic development despite the adverse socio-economic and environmental consequences resulting from rapid growth of these urban centers. At present urban dwellers constitute about 30 percent of the total populations of Bangladesh, but their contribution to GDP is more than 60 percent indicating that the productivity of labor in urban areas is much higher than in rural areas.
Building on past experience, the Sixth Plan will redouble efforts to institute a much better management of the urbanization challenge. In particular, it will emphasize a more balanced growth of urban centers across the entire country through proper institutional reforms that involves the establishment of locally elected municipalities and city corporations. Property tax base will be reformed to strengthen the financial autonomy of these entities along with block grants from the budget based on principles of equity and population. A strong multi-disciplinary urban planning system to cover all levels of national and local government planning units will be introduced with planning, implementation and management functions so that well coordinated project planning and urban management can be ensured. An effective and efficient mechanism to achieve good governance and urban management with emphasis on coordination of functions will also be established and measures will be taken for effective decentralization of institutions and development activities away from the metropolitan cities. The urbanization issues are reviewed in great detail in Part 2.
Managing regional disparities in growth—the lagging regions problem: International research shows that divergences in spatial growth outcomes are inevitable in view of diverging initial conditions including human development, infrastructure, and geography. However, policy neglect has also contributed to spatial disparities. Low growing regions also tend to have a higher incidence of poverty. So a meaningful poverty reduction strategy must also address the lagging regions problem.
Policies can play a major role in offsetting some of the initial disadvantages by removing the various growth constraints. Of particular importance are public expenditure policies that focus on removing the infrastructure and human development constraints in the lagging regions. In particular better infrastructure, especially transport, can contribute to raising the growth rates in the lagging regions by linking these areas to the national and regional growth centers.
The Plan would strive to address the lagging regions problems, especially focused on Khulna, Rajshahi, and Barisal Divisions, through a strategy that involves public expenditure in infrastructure and human development and also by facilitating more trade and investment in the border districts with neighbors including India. The spatial distribution of poverty shows that most of the border areas are poorer than the rest of Bangladesh. In addition to helping with policies for better connectivity with growth centers within Bangladesh, steps will also be taken to provide connectivity with regional growth centers in neighboring states of India. Strategic investments, such as the Padma Bridge, will be a key instrument for reducing regional growth disparities. Additionally, public expenditure will focus on human development in these lagging areas to raise labor skills and productivity. Particular attention will be given in the Sixth Plan to offset the geographical disadvantage of the coastal region of Barisal, which has the highest incidence of poverty partly owing to the adverse effects of natural disasters. Through programs in agriculture, environment, climate change and disaster management, the Sixth Plan will seek to reduce the vulnerabilities of Barisal and other coastal belt regions. Chapter 7 provides a detailed analysis of the regional disparity issues and government policies and programs to tackle them holistically during the Sixth Plan.
Bangladesh faces daunting challenges in terms of reducing poverty and creating good jobs. Nevertheless with proper strategies and policies these challenges can be addressed. Against the backdrop of poverty reduction, employment and growth rate targets set in Vision 2021; the Sixth Plan will endeavor to initiate the transition to the higher growth path. This growth path, while ambitious, is achievable through a strategy that transforms Bangladesh from a rural agro-based economy towards an urban manufacturing-based economy. The driving force for the strategy will be the deepening of a labor-intensive export-oriented manufacturing sector, and a much more diversified, commercially motivated agricultural sector. The resulting transformation will create good jobs in manufacturing and organized services while raising productivity and incomes for the remaining but substantially lower percentage of labor force engaged in the farm sector. The strategy will be implemented through an array of reforms encompassing macroeconomic management, tax and public expenditure policies, trade policy, financial sector policies, policies for infrastructure development, and policies for the development of a skilled labor force. Special attention will be given to removing the growth constraints in the lagging regions in terms of human development, infrastructure, and finances can help raise growth prospects in these areas. More and better regional cooperation with neighbors, especially India, can also play a positive role in addressing the lagging regions problem.