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Bangladesh: Tackling the Problem of Poverty

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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Assessing the impact of economic reforms on the poor

With a per capita income of about $200 in 1991, Bangladesh is one of the poorest countries in the world. More than half the population—50 million people—live in poverty. The most vulnerable groups include small farmers, landless rural laborers, and workers in the urban informal sector. Health care, nutrition, and education standards are low, especially among women and children. The earning potential of most poor people is limited by their lack of skills, assets, and access to credit. Given its limited natural resources, high population density, and frequent natural disasters, Bangladesh faces an enormous challenge in its efforts to reduce poverty.

The only lasting way to reduce poverty is to ensure sustainable economic growth, by implementing policies to promote financial stability and the efficient use of resources. With this in mind, the Government launched a medium-term structural adjustment program in the mid-1980s, supported by the IMF—under the structural adjustment facility (SAF) during 1986/87–1988/89 and the enhanced structural adjustment facility (ESAF) covering 1990/91–1992/93. The Government’s efforts have also been supported by the World Bank, other donors, and nongovernmental organizations (NGOs). This article examines the impact of adjustment programs in Bangladesh on the poor.

With the objective of stimulating growth and investment, the Government has adopted a policy program to (1) spur private investment through financial reform, exchange and trade liberalization, and industrial deregulation; (2) facilitate public investment by raising domestic revenues, curtailing government consumption, and improving project implementation; (3) reduce inflation; and (4) improve human resource development by strengthening social programs. These policies aim at promoting labor-intensive agricultural, industrial, and export production, and economic diversification. At the same time, since the benefits of growth may not reach the poor in the short run, these policies have been supplemented by targeted programs that provide special assistance to the poor.

A fuller discussion of this subject is contained in “Bangladesh: Economic Reform Measures and the Poor,” by Padma Gotur, issued as IMF Working Paper WP/91/39.

The potential impact of a growth-oriented approach to poverty reduction can be illustrated by reference to the “crossover time,” or the time it would take, in the absence of income redistribution policies, for the average poor person to cross the poverty line if his or her income grew at the national average per capita rate. For Bangladesh, the crossover time would be more than halved from the 40 years that would be required if the annual real per capita income were to continue to grow at a 1 percent rate, to 16 years, if annual per capita income were to reach the 21/2 percent targeted under the reform programs.

Impact of relative price changes

While it is generally observed that the poor are hardest hit by changes in relative prices during adjustment, this has not been the case in Bangladesh because price distortions have not been severe. This has not only reduced the need for sizable adjustment but has also allowed the pace of adjustment to be gradual. However, the Government recognizes that, as adjustment efforts are intensified, there could be more pronounced short-term adverse effects on the poor, which would require compensatory measures.

Bangladesh: impact on the poor of price changes under structural reforms(Annual average percentage change)
Price changeIncome loss
Weight in

consumption

(In percent)
1983/84–

1985/86
1986/87–

1988/89

SAF program
1989/901990/91

First year

ESAF
1986/87–

1989/90
1990/91
Ration foodgrain prices33.02.22.3
Rice7.25.98.67.0
Wheat6.95.78.77.0
Petroleum products14.09.80.2–0.985.00.22.52
Kerosene–2.35.891.8
Gasoline–2.4–38.070.7
Diesel oil–0.15.891.8
Liquified petroleum gas13.19.252.7
Railway passenger fare3.07.26.73.815.00.20.4
Electricity2.09.06.67.56.5-16.70.10.3
Natural gas1.0
Household15.311.516.015.00.10.1
Power and fertilizer14.322.315.615.0
Industry12.011.916.715.0
Commercial20.521.97.515.0
Total income loss2.85.72
Sources: Data provided by the Bangladesh authorities; and IMF staff estimates.

Weighted average.

In response to the 92 percent increase in kerosene prices, the poor are expected to substitute less expensive firewood for kerosene, as a result of which the net income loss would be 1.5 percent and the corresponding total income loss would be 4.7 percent.

Sources: Data provided by the Bangladesh authorities; and IMF staff estimates.

Weighted average.

In response to the 92 percent increase in kerosene prices, the poor are expected to substitute less expensive firewood for kerosene, as a result of which the net income loss would be 1.5 percent and the corresponding total income loss would be 4.7 percent.

The main changes in relative prices resulting from the adjustment programs are those stemming from increases in ration prices for foodgrains, prices of energy and transportation, and excise taxes. The direct impact of these changes on the poor varies, depending on the relative importance of the affected items in their consumption and the magnitude of the changes. The poor spend a high proportion of their income on food (about 60 percent) compared with the rest of the population, with more than half of such expenditure devoted to foodgrains. Given this consumption pattern, the changes in relative prices resulting from the program are estimated to have reduced the incomes of the poor by no more than 3–6 percent during 1986-91 (see table).

Increases in foodgrain prices. The Government’s objective of reducing food subsidies and the budgetary cost of food distribution has been achieved, in part, through increases in food ration prices. The availability and cost of food no doubt have a major influence on the standard of living of the poor. Nevertheless, the impact of changes in ration prices on income has been limited because the poor obtain only 20 percent of the foodgrain they consume from the Public Food Distribution System, with the rest coming from production on their own parcels of land and from purchases in the private market. To further reduce even this limited impact, the Government is implementing a differentiated ration price increase for vulnerable groups and for better off recipients.

Increases in administered prices. The rationalization of public enterprises under the adjustment programs has led to increases in administered prices of several public goods and services, such as electricity, natural gas, and transportation. Though these imply higher consumption costs for the poor, the adverse impact on their income during 1986–91 is estimated at an annual rate of only 0.5–3 percent. Increased prices for energy, in particular, have only a limited impact on the rural poor because of their relatively low consumption of these products.

Increases in excises. Increases in excise taxes for sugar, tobacco, natural gas, and certain services result in higher prices. Their impact, however, may not be substantial since these goods together account for less than 10 percent of the consumption of the poor. In recent years, the Government has focused the levy of excise duties mainly on goods and services largely consumed by the higher-income groups, such as bank transactions, telephone services, and luxury goods. Consequently, the reduction in the income of the poor resulting from these price increases is estimated at less than 1 percent per annum.

Production, income, employment

Structural reforms have had a favorable impact on production, incomes, and employment. The poor benefited from the economic gains accruing to the population at large and from measures directed particularly to them.

Agricultural policies. The Government has given high priority to strengthening output growth and ensuring national food security. The main impetus for growth has come from the agricultural sector, which expanded considerably, largely because of improved policies. These policies have far-reaching implications in Bangladesh, where land ownership is the main determinant of rural incomes and about 60 percent of the labor force is employed in agriculture.

To increase foodgrain production, the Government has taken measures to strengthen the role of the private sector in the distribution of inputs, improve research and extension services, and extend the provision of rural credit. These policies have increased the availability of irrigation equipment and supplies of seeds and fertilizer for small farmers. Increased foodgrain production has benefited both consumers and rural landless households by ensuring availability of food at realistic prices as well as employment and income opportunities. In addition, improvements in the Public Food Distribution System—such as aid-financed imports, open market operations to stabilize prices, and improved marketing, transport, and storage facilities—have provided greater support to low-income families.

Tax reform. An important element of adjustment programs is tax reform aimed at improving resource mobilization. This should provide the additional resources needed for development projects, with potentially favorable consequences for output and employment. In Bangladesh, the poor are not likely to be adversely affected by tax reform, as their total income tax burden is estimated at only 4 percent of their household income. As for indirect taxes, these are levied mainly on commodities that are not consumed by the poor.

Public expenditure policies. These policies support poverty reduction efforts by directing resources to human resource development, welfare, and agricultural development. In cooperation with the donor community, the Government aims to fully fund programs to expand primary education and health and family planning services. Additional expenditure on agriculture and water resource management should help create more jobs for the poor in rural areas. Increased allocations for flood preparedness programs, which would strengthen early warning systems, medical services, and food security in the event of disasters, would particularly benefit the poor.

Financial reform, and exchange rate and trade liberalization. Policies in these areas should generate additional employment, especially in export-oriented activities and efficient import substitution. Indeed, during the SAF period, improved competitiveness, resulting from earlier exchange rate depreciation, helped develop the ready-made garment industry, which today employs 500,000 persons, mainly previously unemployed women. Current reforms continue to emphasize labor-intensive export production. Given the potential for exports of electronics, toys, luggage, and leather products, export volume is projected to show strong growth and generate 350,000 additional jobs.

Targeted programs and NGOs

Targeted programs, which initially focused on ensuring food supplies to the poor, have been broadened to include literacy, health, and skill acquisition components. Two programs—the Food for Work program, which provides wages in the form of food for temporary rural works, and the Vulnerable Group Development program, targeted at disadvantaged women and children—were expanded to account for 40 percent of the total amount of the food distributed by the Public Food Distribution System. These schemes have reached about three million persons, including 500,000 women, with at least three fourths of the poor receiving assistance.

Recognizing the budgetary, technical, and administrative constraints that affect targeted programs, the Government has encouraged greater NGO participation in this effort. There are about 400 NGOs operating in Bangladesh—along with 12,000 voluntary social welfare agencies—which assist the poor, especially women, by providing credit, training, primary education, basic health care, nutrition, and family planning facilities. The work of many NGOs has been shifting from emergency relief toward development-oriented programs, especially those aimed at improving employment and income in rural areas.

Conclusion

The main thrust of the Bangladesh Government’s strategy of poverty reduction has been to strengthen output growth and ensure food security. Increasingly, however, its attention has also turned to improving human resource development and the efficiency of targeted programs, with a greater role provided to NGOs. Nevertheless, poverty will remain a pervasive problem. Thus, any progress achieved should be regarded as only the beginning of a major effort that will need expansion in scope, demand greater resources, and continue over many years.

Padma Gotur

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