November 10, 2008 - Since1990s, Bangladesh's economic growth has been phenomenal. The country has made convincing progress with economic and human development following independence in 1971.
Sadiq Ahmed, Acting Chief Economist for World Bank's South Asia region said Bangladesh could join the ranks of middle-income countries (MICs) within a decade (by 2016) or soon after. In his book, “Transforming Bangladesh into a Middle Income Economy,” Ahmed proposed “in order to sustain this high growth, however, Bangladesh needs to diversify the economy and improve the environment for foreign direct investment.” He also pointed out that Bangladesh's impressive record of economic growth and social development has been achieved despite apparent weak governance. Bangladesh often ranks near the bottom in cross-country comparisons relating to governance.
Manzoor Hassan, Director at the Centre for Governance Studies, BRAC University in Dhaka, believes better governance is essential to achieve higher economic growth. “If we could increase the level of political accountability in Bangladesh, then the situation could dramatically change and instead of 5 to 6 percent average growth rate, we could easily reach a growth rate of 8 to 9 percent.”
According to Ahmed, Bangladesh has made good progress in improving the transparency and competitiveness in public procurement, including the new Public Procurement Act was made effective from January 31, 2008. “With greater awareness, all public procuring entities have started following this law including the complaint redress mechanism by independent review panels, publication of bid notices and contract award on web sites.”
Can Bangladesh continue to grow despite weak governance?
In a new policy paper, Ahmed (co-authored with Wahiduddin Mahmud and Sandeep Mahajan) said the governance-growth nexus needs to be understood in the individual country contexts, in which institutions, historical and cultural settings, and the stage of development will matter. Although it is quite evident that Bangladesh’s economic performance has been negatively affected by some of the adverse governance factors, Ahmed said “the more interesting question relates to why the country’s economy has performed in the way it has despite wide-ranging governance failures?”
Anatomy of Growth
To understand Bangladesh’s growth paradox, one needs to analyze the economic growth process and focus on the main drivers behind accelerated growth, Ahmed said. “The acceleration of growth of the Bangladesh’s economy since the early 1990s has been underpinned by strong export growth, especially the garment industry.”
The garment industry has flourished in Bangladesh because of the following reasons:
- Preferential access of Bangladesh’s garment exports in the major western markets; - Flexible exchange rate policy and other policies adopted by the government in supporting the industry; and - Abundance of low-cost female labor.
Once the growth of the industry gained momentum and became the main foreign exchange earner, it became more efficient and was able to shape government policies in its favor.
Strong export growth has contributed to GDP growth both directly and indirectly by providing growth stimulus to other parts of the economy. Besides garment export, growth impulses have come from workers’ remittances and from growth in agriculture and in small-scale industries and services. The growth of the urban centers, foremost among them Dhaka, has greatly contributed to economic growth. Very rapid expansion of microcredit since the early 1990s has also played an important part in this growth process.
Why Governance matters?
Ahmed argued that “the government of Bangladesh has shown genuine commitments to improve social development indicators, such as child mortality, primary school enrollment, and the adoption of modern birth control.” While the existing governance structure may have been adequate in the past, it is increasingly proving to be a barrier for the higher growth needed to transform Bangladesh. Ahmed noted that “economic reforms in Bangladesh have not been matched by progress in building the institutions of political and economic governance.”
Compared to the first generation reforms, there is a need for deeper and more complex policy innovations to deal with the emerging constraints to growth, such as inadequate electricity and infrastructure, acute skill shortages, and limited successes in attracting foreign investments.
Future growth will need a better-functioning regulatory framework and improved infrastructure. The governance agenda is large and cuts across a wide range of institutions and threatens powerful vested interests, Ahmed said. “Bangladesh’s economic growth prospects will ultimately depend on the viability of its core systems of political governance.”
Additional Resources
- Bangladesh: Strategy for Sustained Growth Bangladesh could join the ranks of middle-income countries (MICs) within a decade (by 2016) or some time soon after. This will require raising GDP growth to and sustaining it at 7.5% or more. (Read More »)
- Whispers to Voices: Gender and Social Transformation in Bangladesh Bangladesh has achieved impressive gains in women’s status and gender equality, but access to reproductive health services, labor markets, physical security and role in decision-making need urgent attention. (Read More »)
- South Asia: Development Data A wide range of social and economic measures on South Asia, including links to the World Bank's most important online development databases. (Read More »)
- South Asia: Analysis and Research Compilation of all the World Bank's publications on South Asia, with 'search' options and links to analysis and research on other South Asian countries. (Read More »)
- World Bank Program in South Asia Launching pad to all information on World Bank activities in Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.(Read More »)
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