Thoughts on Economics 7

Thoughts on Economics
Vol. 19, No. 0 1
Challenges for the Bangladesh Economy:
Priority Economic Agenda for the New Government
Ayubur Rahman Bhuyan
1
[Abstract: The newly elected Government will need to adopt strong measures to
reduce poverty and accelerate the rate of economic growth sufficiently to attain the
status of a middle-income country by 2021 This broad ob!ective will re"uire
meaningful measures to raise resources for development# accelerate production in
real sectors# improve macroeconomic management# control inflation# diversify
e$ports# develop physical and human resource infrastructures# and improve
governance in economic# political and institutional fronts# which are essential to
long-term economic growth and sustained poverty reduction in the country %urrent
problems confronting the economy are identified and the tas&s needed by the new
Government to solve these problems are indicated in the paper'
! ntroduction
Bangladesh has made some convincing progress with economic development
during the years since its independence see Ta!les 1 through "#. The
responsi!ility o$ the newly elected %overnment will !e to accelerate the pace
o$ past progress and put the economy in trac& $or still $aster economic growth.
'nce du!!ed as a !ottomless !as&et, Bangladesh is now poised to !ecome a
middle income country !y (0(1 when its per capita income will !e e)pected to
rise to *1000, which is one o$ the criteria $or graduation $rom the status o$ a
least developed country. To $ul$il this income criterion, Bangladesh %+, will
need to grow at an annual rate o$ at least - percent during the ne)t 1. years.
/chieving such a high growth rate and sustaining it at that level in the $ace o$
the deep recession in the developed countries may not !e an easy tas&, !ut
!uilding on record o$ good economic per$ormance in the past years as well as
drawing on lessons $rom wea&nesses in certain areas o$ the economy the new
%overnment should !e a!le to adopt the right policies and strategies that are
needed to accelerate the pace o$ economic growth.
The economy has achieved some nota!le successes in the $ollowing areas,
which will o$$er opportunities to the new %overnment to prepare its policies
and programmes $or growth in the coming years0
1
1ormer ,ro$essor o$ Economics, 2niversity o$ +ha&a.
- 3hallenges $or the Bangladesh Economy ...............
i# The %+, growth increased $rom the average ..4 percent in the 1970s
to a!ove 4 percent in the 1990s, and a!ove 5 percent since the middle
o$ the (000s.
(

ii# ,er capita income has e)panded !y more than three6$old in the past .0
years.
iii# The country is now e$$ectively sel$6su$$icient in $ood e)cept in years o$
natural calamities.
iv# The growth o$ e)ports and remittances has remained healthy.
v# 1oreign e)change reserves are at a satis$actory level.
vi# E)cept $or the recent increase in the rate o$ in$lation, the economy can
!e said to have !een per$orming well with reasona!le macroeconomic
sta!ility.
vii# 7ome improvement has occurred toward achieving the millennium
development goals 8+%#, in particular in poverty reduction, net
primary school enrolment, gender parity in primary and secondary
schooling, and in child mortality.
.
9hile these are signs o$ positive progress, there are also wea&nesses in certain
areas o$ the economy, some o$ which are :uite serious.
i# /t *44", per capita income is low even !y 7outh /sian standards.
ii# +omestic savings and investment remain stagnant. ,roductive
investments are limited to only a $ew sectors.
iii# E)ports are concentrated in a $ew products and also to a $ew
destinations.
iv# The !alance o$ payments depends heavily on remittances.
2
%overnment o$ Bangladesh, 8inistry o$ 1inance, Economic /dviser;s 9ing. Bangladesh
Economic "urvey, 19-0, 1990, (00-.
3
The 2N 8illennium +eclaration (000 lays down eight speci$ic time6!ound goals 8+%s#
to !e achieved !y (014. The goals are a# halving poverty, !# universal primary education, c#
gender e:uality and women empowerment, d# reducing child mortality, e# improving
maternal health, $# com!ating malaria, <=V etc., g# environmental sustaina!ility, and h#
esta!lishing partnerships $or development !etween rich and poor countries#. Bangladesh has
achieved partial success in achieving the $irst $ive o$ these goals, not all.
Thoughts on Economics 9
v# ,overty is rampant even though it has declined considera!ly.
vi# 8ost indicators o$ human development, despite recent improvements,
are low even !y standards o$ low6income countries.
vii# 8a>or governance constraints have emerged, which threaten the
sustaina!ility o$ past progress.
The development challenges are daunting, !ut they are not insurmounta!le.
'ver the past three decades, Bangladesh has gained a lot o$ e)perience and
learnt lessons, !oth positive and negative. ?ising $rom the ruins o$ a war6
ravaged economy in 1971, the nation has shown that with concerted e$$orts
constraints can !e overcome and progress with development is very much
possi!le.
The economic agenda o$ the newly elected %overnment are laid down in clear
and unmista&a!le terms in the government party;s election mani$esto. The
people have welcomed the %overnment party;s pre6election commitments and
pledges as outlined in the mani$esto and have given the new %overnment a
resounding mandate to carry out its economic agenda. =n order to $ul$il the
commitments, which are also reiterated in the ,rime 8inister6elect;s post6
election press and media !rie$ing, the new %overnment will !e e)pected to
underta&e tas&s in the $ollowing areas0
i# ?educing income poverty through accelerated economic growth@
ii# Boosting agriculture sector growth@
iii# E)panding the industrial sector@
iv# =mproving macroeconomic management@
v# 3ontrolling in$lation@
vi# +iversi$ication o$ e)ports@
vii# ,romoting physical and human resource in$rastructure@ and
viii# /ddressing pro!lems in the sphere o$ governance.
Needless to mention, the new %overnment;s tenure !egins at a time when the
world economy has plunged into a deep recession, and hence it will need to
adopt strong stimulus measures to !oost economic activity and try to minimiAe
any adverse impact o$ the glo!al economic crisis on the domestic economy.
8a>or challenges con$ronting the new government right a$ter assuming o$$ice
will !e to &eep the rate o$ in$lation at a low and sta!le level, remove
in$rastructural !ottlenec&s, especially the power shortages, and improve
10 3hallenges $or the Bangladesh Economy ...............
overall governance, all o$ which are critical $or accelerated economic growth,
poverty reduction, and improving e)ternal competitiveness. 7ome o$ the core
pro!lems the economy currently $aces and the tas&s the new %overnment will
need to underta&e to solve these pro!lems are highlighted in the remainder o$
the paper.
! Poverty Reduction
,overty remains widespread despite recent progress made possi!le !y
signi$icant agricultural development and lauda!le N%' and government
e$$orts during the past two decades. 2nemployment and under6employment is
rampant, which, according to the (004605 Ba!our 1orce 7urvey, was,
respectively, ".(C and (".4C o$ the country;s la!our $orce. =ncome poverty, as
measured !y the 3ost o$ Basic Needs 3BN# method, declined $rom 4-.-
percent in 1991D9( to "-.9 percent in (000, and then to "0.0 percent in (004
Ta!le .#. =ncome poverty declined $aster !etween (000 and (004 than
!etween 1991D9( and (000.
Bangladesh;s Ea!solute poverty; in (004, as measured !y the +irect 3alorie
=nta&e +3=# head6count ratio method, was "0." percent, and Ehard6core
poverty; was 19.4 percent Ta!le "#.
#
=t is worth noting that while !etween
(000 and (004 the percentage o$ population in hard6core poverty declined !y
0.4 percent, the a!solute num!er o$ population !elow the poverty line
increased in (004, although their num!er is lower than what it was in 199169(.
The rate o$ decline in poverty rate also slowed down somewhat !ecause o$ the
two $loods and cyclone 7idr in (00760-.
The $undamental challenge $or the new %overnment will !e to reduce poverty.
,overty reduction e$$orts must stri&e at the root causes o$ poverty, at the top o$
which is the slow growth o$ %+,. / high and sta!le rate o$ economic growth
in e)cess o$ - percent# will !e needed in the coming years to trigger an e)it
$rom the endemic poverty situation. /mong other causes o$ poverty is the
$alling pu!lic e)penditure on social sectors, the !ene$its o$ which largely
accrue to the poor, growing ine:uality in income distri!ution, une:ual access
to productive assets, and poor access to pu!lic services.
<igh %+, growth is essential $or poverty alleviation, which is why poverty
alleviation strategy is o$ten e:uated with development strategy. %rowth is not,
4
1ood inta&e o$ less than (1(( &ilo6calories per person per day is treated as /!solute ,overty,
and $ood inta&e !elow 1-04 &ilo6calories per person per day is considered as <ard6core
,overty.
Thoughts on Economics 11
however, a su$$icient condition, though it is necessary, $or poverty alleviation.
=n the 19-0s, growth rate o$ %+, was !elow " percent !ut the record o$
poverty reduction was !etter than in the su!se:uent decade when growth was
more ro!ust. Thus, in the 1990s %+, grew !y a!out 4C !ut poverty did not
$all to the e)tent possi!le, largely !ecause o$ the growing ine:uality in income
distri!ution. %rowth did not tric&le down as the richer class netted much o$ the
increased income $rom growth.
2ne:ual income distri!ution is thus a !arrier to poverty eradication, which
will not go away on its own. /ctive government intervention in $avour o$ the
poor will !e needed to reduce ine:ualities in income. To that end, a greater
attention should !e given to increasing the :uality o$ social services
education, health# and reaching them to the poor. Emphasis should !e given
to primary and secondary education and primary health care, the ma>or
!ene$iciaries o$ which are generally the poor.
7ince the incidence o$ rural poverty is much higher than ur!an poverty, the
national poverty alleviation strategy should have agricultural and rural
development sectors as its principal targets. 2n$ortunately, lesser and lesser
allocation was made to these sectors in all past $ive6year development plans,
and also in all annual development programmes.
7a$ety6net measures li&e $ood6$or6wor& programmes are desira!le !ecause
they can !ring relie$ to the rural poor, particularly in depressed areas, !ut these
cannot eradicate poverty. The %overnment should &eep in mind that the
o!>ective o$ poverty alleviation e$$orts is not >ust to prevent poverty $rom
rising !ut to pull the poor a!ove the poverty line. This can !e made possi!le
only !y creating opportunities $or new employment.
4

,overty can also !e reduced signi$icantly !y creating opportunities $or sel$6
employment, which will re:uire access to credit on concessional terms and
easier repayment schedules. 9hile the N%'s have played a &ey role in
poverty alleviation in the past years, %overnment is perhaps !est suited to do
this >o! through specialiAed institutions li&e ,F71 and B?+B.
=t will !e inappropriate to rely solely on the N%'s, whose role in poverty
alleviation so $ar has allegedly !een at !est marginal. /ll N%'s there are
a!out twenty thousand N%'s in the country# together reach micro6credit to 5
5
=n one estimate, a!out 1.-1 million wor&ers are added to the country;s la!our $orce every
year. This means that !etween (00- and (011 some 4.". million wor&ers will enter the >o!
mar&et. 'n top o$ that, there are already 1.-- million unemployed people loo&ing $or >o!s.
Thus, new >o!s will need to !e created $or 7..1 million wor&ers !y (011 %'B, (00-#.
1( 3hallenges $or the Bangladesh Economy ...............
million !orrowers. 'ne government organiAation, the B?+B, alone serves as
many clients. 8oreover, while the N%'s o!tain highly su!sidiAed $unding
$rom Bangladesh Ban& and a $ew donor agencies, the cost o$ !orrowing $rom
them is very high, which o$ten e)ceeds 40650 percent. 3ritics suggest that the
large di$$erence !etween N%'s; $und costs and high interest rates charged on
their loans strongly indicates that the N%'s are in $act ma&ing money $rom
micro6credit !usiness. / proper evaluation o$ the role o$ N%'s in poverty
alleviation is there$ore necessary. /$ter all, the %overnment cannot and should
not a!dicate the tas& o$ poverty eradication to N%'s, whose credi!ility is now
!eing increasingly open to :uestion.
! Accelerating Economic Growth
%iven the dominant role o$ $aster economic growth in poverty reduction,
%overnment must decisively move toward raising %+, growth. %rowth
means structural change. =n a low6income agrarian country li&e Bangladesh,
the desired structural change will need to !e in the direction o$ industry and
services, and away $rom agriculture, where, $or o!vious reasons, the potential
$or employment creation is now very limited. 2ltimately, >o!s will need to !e
created in the modern manu$acturing and services sectors as well as in rural
industrial and non6$arm activities $ishery, livestoc&, poultry, and horticulture#
to li$t the people out o$ poverty.
1or achieving accelerated growth, issues o$ utmost importance are those o$
resource mo!iliAation $or investment, economic re$orms, and the development
o$ the private sector.
A$ Resource %obili&ation for nvestment
The most crucial recipe $or growth is investment, which could !e either
mo!iliAed !y domestic savings pu!lic andDor private# or o!tained in the $orm
o$ $oreign direct investment 1+=#. / cause o$ concern $or the economy is that
domestic savings have stagnated in the recent years. =n $act, as a percentage o$
%+,, the domestic savings rate has $allen $rom (0.. percent in 1G(004605 to
(0.1 percent in 1G(00760-. This implies that consumers had to allocate the
incremental share o$ their income toward consumption !ecause o$ the increase
in the rate o$ in$lation.
?eversing the declining trend in the domestic savings rate is a ma>or challenge
$or the economy. / two6pronged attac& will !e needed $or that purpose. ,u!lic
savings will need to !e raised !y improving government;s revenue collection
as well as !y cutting down recurrent e)penditure. ,rivate savings will need to
Thoughts on Economics 1.
!e encouraged and mo!iliAed through a mi) o$ prudent $iscal6monetary
policies that are conducive to voluntary private savings as well as to their
intermediation. The presence o$ a networ& o$ well6$unctioning $inancial
institutions and a disciplined stoc& mar&et is crucially important $or that
purpose. To that end, the government;s responsi!ility shall !e to secure
reasona!le monetary sta!ility so as to ensure that private savings are not
discouraged !y in$lation.
/s in domestic savings, gross investment has also slowed down in the recent
years. /s a percentage o$ %+,, gross investment has declined $rom (".7
percent in 1G(004605 to (".4 percent in 1G(00760-. The main reason !ehind
this decline is the slac& in pu!lic investment, which has remained historically
low in this country. 9orse still, as a proportion o$ %+, it has declined over the
past decade H e.g., $rom 7.. percent in 1G(000601 to 4.0 percent in 1G(0076
0-. <owever, since pu!lic development e)penditure on physical in$rastructure
and human resource development is ac&nowledged to have a signi$icant
crowding6in e$$ect on private sector investment, raising pu!lic investment
should !e a top priority $or the new government.
?aising resources $or investment should not !e a !ig pro!lem, however.
National savings rate in Bangladesh (9.( percent in 1G(00760-# is now much
higher than the gross investment rate (".( percent#. This large gap some 4
percent o$ %+,# !etween national savings rate and gross investment rate
indicates that it is not the availa!ility o$ resources !ut their e$$ective
utiliAation, which is the ma>or pro!lem $or the country.
/ $avoura!le investment climate is essential to attract investment, whether
domestic or $oreign. 1or improving the investment climate, the %overnment
will !e re:uired to ma&e serious e$$orts to strengthen the legal $ramewor&,
create a $avoura!le political environment, improve governance, maintain
policy continuity, reduce the cost o$ doing !usiness !y improving the physical
in$rastructure, removing non6economic constraints li&e poor law and order
conditions, la!our indiscipline, !ureaucratic hassles and corruption, and
enhance the country;s image a!road.
1or attracting 1+=, apart $rom an improved investment climate, it will !e
necessary to remove all discriminations that contravene the provisions o$ the
1oreign ,rivate =nvestment /ct o$ the country.
B$ Economic Reforms
/cceleration o$ economic growth will re:uire a series o$ di$$icult Isecond
generation re$ormsJ that will go $ar !eyond mere consolidating macro6
1" 3hallenges $or the Bangladesh Economy ...............
economic sta!ility to underta&ing tas&s o$ e)panding and developing supply
capacity in ma>or production sectors, overhauling the education system, and
adopting such measures as improving the :uality o$ pu!lic administration and
the $unctioning o$ $inancial and la!our mar&ets.
=n the past, re$orms pursued under donor6driven structural ad>ustment
programmes laid emphasis on economic li!eraliAation, the ma>or ingredients
o$ which were the li!eraliAation o$ trade and e)change rate regimes,
maintenance o$ !udgetary !alance, $inancial sector re$orms stressing
deregulation o$ interest rates and denationaliAation o$ state6owned commercial
!an&s 73Bs#, withdrawal o$ agricultural su!sidies, and privatiAation and
re$orm o$ pu!lic sector enterprises ,7Es#. 9hile the emphasis on improving
macro6economic management !y adhering to mar&et6oriented policy re$orms
has its merits, there should !e a strategic shi$t in the new %overnment;s re$orm
priorities that would contri!ute not >ust to sta!iliAation !ut also to generation
o$ signi$icant supply response necessary $or accelerated growth.
C$ Private "ector 'evelo(ment
The %overnment will need to e)pedite institutional re$orms necessary $or the
e$$icient $unctioning o$ the mar&et economy and creating an ena!ling
environment in which the private sector can $lourish. ?ecent deregulation
re$orms will need to !e !roadened and deepened. Bureaucratic red tape, which
e)ists at all levels o$ the policy hierarchy, should !e removed. %overnment
should withdraw $rom all manu$acturing and commercial enterprises where
the private sector can do !etter. %overnment;s role should !e one o$ a
$acilitator rather than a regulator o$ private sector activity.
)! Policies for Agricultural 'evelo(ment
The agriculture sector in Bangladesh lac&s dynamism. =ts undiversi$ied
character and heavy dependence on rice production ma&es it vulnera!le to the
vicissitudes o$ nature. The rice6centric agriculture sector growth may
potentially undermine the country;s long6run $ood security. To ensure $ood
security, a sustained growth in grain production is essential, which will call $or
improvements in the genetic materials, rationaliAation o$ seed production, and
!etter nutrient mi)es. /t the same time, diversi$ication o$ the crop !as&et and
enhancing the scope o$ non6$arm agriculture should !e seen as important
$actors $or the development o$ !oth agriculture and the rural economy o$ the
country.
The $ollowing measures are recommended $or the agriculture sector0
Thoughts on Economics 14
i# ?esearches should !e done aiming at raising crop yield, and
developing crop6 and seed6development technologies.
ii# To raise agricultural value added, steps should !e ta&en to diversi$y
agricultural production away $rom the heavy reliance on rice. This
will also re:uire policy support $or raising agricultural e)ports.
iii# ?egulations and controls that still remain on output pricing and on
mar&eting and supplies o$ inputs should !e removed.
iv# /n e$$ective water management and $lood control policy should !e
put in place.
v# The agricultural in$rastructure should !e improved to encourage
production, raise productivity, and $acilitate mar&eting o$
agricultural products.
vi# / crash programme should !e underta&en $or esta!lishing agro6
!ased industries and also encouraging the development o$ livestoc&,
poultry, $ishery, and agro6related activities.
vii# /gricultural credit on easier terms should !e made availa!le through
the !an&ing system to ena!le $armers improve their land and $inance
inputs.
)! ndustrial "ector Policies
The per$ormance o$ the country;s manu$acturing sector has !een !elow
e)pectations in the recent years. The sector registered an average growth rate
o$ 76- percent during most o$ the nineties. The growth rate pea&ed in (004605
at 10.77 percent !ut has !een stagnating since then at around -69 percent.
There has !een limited investment, little employment increase, and only
modest growth in industrial production, e)cept in the readymade garments
sector. =n particular, there has !een little investment in e)port industries
outside o$ te)tiles. The causes o$ sluggish industrial growth are many.
1irst, the nationaliAation o$ industries in the early years a$ter independence le$t
a legacy o$ la!our militancy, over6employment, corruption, and management
ine$$iciency, all contri!uting to heavy $inancial losses and a severe de!t
overhang in the industrial sector.
7econd, the response o$ the manu$acturing sector to the e)tensive deregulation
measures adopted in the span o$ the past two decades has !een very wea& due
to pro!lems in $inancial sector, wea& in$rastructure, and poor law and order
conditions.
15 3hallenges $or the Bangladesh Economy ...............
Thirdly, tight monetary policy pursued in the recent times, coupled with
growing !udget de$icits $inanced chie$ly with !an& !orrowing, limited the
$unds availa!le $or investment in the private sector.
1ourth, the growing incidence o$ smuggling and dumping has $looded
Bangladesh with cheap $oreign goods with which domestic industrial products
were una!le to compete.
1i$th, there has !een very limited $inancing o$ the important !ac&ward lin&age
industries $or the garment sector. /$ter a spurt o$ investment $rom 1991 to
1995, little more has !een done other than to complete the un$inished pro>ects.
Bast, !ut not the least, there has !een little diversi$ication in industrial
production, whether $or e)port or $or the domestic mar&et. No new industry
has emerged, chie$ly due to wea& in$rastructure that raises cost and reduces
competitiveness, inade:uate availa!ility o$ $unds $or new investment or $or
wor&ing capital $acilities, and high transaction costs owing to administrative
incompetence and corruption.
The $ollowing steps will !e needed to overcome the pro!lems o$ the industrial
sector0
a) Promotion of Exports: <igher growth o$ manu$acturing industries can !e
achieved !y e)port promotion, given the small siAe o$ the domestic mar&et.
The country;s industrial policy should there$ore !e oriented towards e)port
mar&ets. The success o$ this strategy, however, crucially depends on a strong
industrial !ase. To that end, the creation o$ a revolving $und $or promoting
!ac&ward lin&age industries lin&ed with e)port may !e seriously considered.
Te)tile is a prime candidate in this area.
b) Import Substitution: The emphasis on e)port orientation does not mean a
reduced role $or import su!stitution industries in the country;s industrial
growth. E)port mar&ets will !e di$$icult to penetrate !ecause o$ the glo!al
economic slowdown that has started since the out!rea& o$ the (0076(00-
glo!al $inancial crisis. There$ore, while industrial policy provisions should
see& to promote e)ports, these must also provide ade:uate encouragement $or
e$$icient import su!stitution industries to cater to the needs o$ the domestic
mar&et. /t the same time, measures should !e ta&en to prevent dumping o$
$oreign goods and control smuggling with a view to protecting domestic $irms
$orm un$air competition.
Thoughts on Economics 17
c) Small Enterprises: ,romotion o$ small enterprises is o$ $undamental import
to the $uture o$ the country;s manu$acturing sector. /lthough the small
enterprises have great employment creating potential, they have very limited
access to !an& credit !ecause o$ stringent collateral re:uirements. The
technical and management &now6how availa!le to these enterprises is also
insu$$icient. To improve their position, the %overnment may design an
e$$ective credit guarantee scheme $or small entrepreneurs who do not have the
re:uired collateral. %overnment may also see& cooperation o$ private sector
!usiness organisations and trade !odies $or providing technical and
management &now6how to small enterprises.
d) Sick industries: %overnment should devise an e$$ective programme $or
remedying the pro!lems o$ sic& industries. / suita!le mechanism must
somehow !e $ound to aid the ailing >ute sector. =ndustry speci$ic treatment
should also !e meted out to solve pro!lems o$ leather, $roAen $ood, and ?8%
industries.
e) Agro-based industries: %overnment should design an action plan $or
stimulating investment in agro6processing industries, which have su!stantial
e)port potential. The T& . !illion E:uity and Entrepreneurship 1und EE1#,
which was set up to encourage agro6processing industries, was a step in the
right direction !ut it has remained virtually dormant since its esta!lishment
two years ago. =$ made truly operational and e$$ective, the EE1 could
contri!ute signi$icantly to the growth o$ agro6!ased industries in the country.
f) Industrial Finance: Easy availa!ility o$ $unds $or long6term investment and
$or meeting wor&ing capital re:uirements needs to !e ensured. 9hile the stoc&
mar&et can !e an important source o$ long6term capital, there is perhaps no
alternative to !an& $inance $or meeting wor&ing capital needs. <owever, the
cost o$ !an& credit remains very high in the country. Nowhere in the world is
the cost o$ loans as high as in Bangladesh. The loan de$aults have crippled the
!an&ing sector.
5
=nvestors; con$idence in the stoc& mar&et should !e increased
and the !an&ing sector pro!lems must !e overcome i$ the incoming
%overnment genuinely wants the economy and the industrial sector to grow at
a $aster pace.
g) Averting the Impact of lobal !ecession: The ongoing glo!al recession
may adversely a$$ect the country;s manu$acturing sector. To prevent that
6
/ large non6per$orming loan N,B# port$olio has !een the ma>or predicament o$ !an&s,
particularly o$ the state6owned commercial !an&s 73Bs#. /s o$ +ecem!er (007, the ratio o$
73Bs; gross N,Bs to their total loans was (9.9 percent. 1or the !an&ing system as a whole,
the ratio was 1..( percent Bangladesh Ban&, (00-#.
1- 3hallenges $or the Bangladesh Economy ...............
possi!ility, the new government must adopt !usiness6$riendly monetary and
other policies that will encourage investment, !oost production and raise
employment. '$ $oremost importance is the need $or cutting interest rates, a
policy that is now !eing pursued !y countries all around the world to arrest the
economic downturn. =n such a situation, the =81;s advice to Bangladesh Ban&
to tighten money supply which will invaria!ly raise interest rates on loans# on
the plea o$ cur!ing in$lationary pressure is ill6>udged and should !e ignored.
The =81;s advice, i$ $ollowed, will ma&e credit costlier, s:ueeAe credit $or &ey
productive sectors such as garments, te)tiles, agriculture, and 78Es, and slow
down industrial growth. =nstead o$ containing in$lation, a tight money policy
as prescri!ed !y the =81 will discourage long6term investment and slow down
economic growth.
h) Fiscal Polic" Support for Industries: 1iscal policy support o$ the $ollowing
types may !e e)tended to the industrial sector0
i# =mports o$ industrial inputs and capital goods should !e allowed
$ree o$ duty even i$ it results in relatively high e$$ective rates o$
protection.
ii# Ta) holiday $or 10 years and accelerated depreciation allowance
should !e provided to e)port6oriented industries and also to other
domestic industries on a selective !asis.
i) F#I Polic": The policies $or attracting 1+= need to !e re$ormed. The
$ollowing points need to !e given due consideration0
i# =mportance should !e attached to technology trans$er. 1+=
proposals that do not commit to !ring in new technology should !e
re>ected.
ii# /ll discriminations that contravene the provisions o$ the 1oreign
,rivate =nvestment /ct such as de!arring $oreign investors $rom
investing in certain industrial activities, re:uiring $oreign investors
to o!tain special permission $rom the 33=E $or certain imports, and
re:uiring $oreign investors to o!tain prior permission o$ the 7E3
and the Bangladesh Ban& $or repatriating their capital# should !e
removed.
iii# The Board o$ =nvestment B'=# should !e overhauled to raise its
competence and a!ility to attract 1+= in manu$acturing.
Thoughts on Economics 19
iv# 8ost importantly, there is the need $or accelerating the
development o$ the country;s physical in$rastructure H power, gas,
water, sanitary services, transport, communication, ports etc. H
without which all e$$ort to attract new investment, whether $oreign
or domestic, will $ail.
v# The recommendations o$ the Bangladesh Better Business 1orum
BBB1# to improve the !usiness and investment climate through
increased interaction !etween private and pu!lic sectors should !e
approved and implemented.
$) Privati%ation: The stalled process o$ privatisation should !e restarted with
all seriousness. The recurrent losses o$ the ,7Es have not only !urdened the
national e)che:uer !ut also contri!uted to the erosion o$ the $inancial
soundness o$ development $inance institutions +1=s# and sate6owned
commercial !an&s. The trans$er o$ ,7Es to the private sector may improve
their operational per$ormance. =n the event the ,7Es are not $ound
economically via!le, these should !e closed down. The ma>or areas in which
privatiAation should proceed rapidly are power generation, Bangladesh Biman,
and BTTB in the services sector, and large6scale industrial enterprises,
including the pro$ita!le ones li&e the $ertiliAer $actories in the manu$acturing
sector. /s part o$ the privatiAation process, the %overnment will need to design
and implement a retraining programme $or wor&ers retrenched in the
privatiAation process. The responsi!ility o$ the training programmes should
rest with the ,rivatiAation 3ommission.
k) &abour 'arket reforms: /ppropriate re$orms in the la!our mar&et are
necessary to address la!our pro!lems, which are a !ig hindrance to the
country;s industrialiAation. =t is essential that la!our organisations are not
given political patronage !y any political party. There should !e no national
minimum wage. 9ages should !e strictly lin&ed to productivity. This will call
$or !ringing an improvement in industrial relations, a reduced role o$
government in wage setting, and increasing the use o$ decentraliAed !argaining
!etween entrepreneurs and wor&ers $or wage determination at the enterprise
level. Ba!our disputes should !e settled strictly in accordance with the e)isting
laws o$ the country.
l) (eed for Polic" )oordination: /t present, several ministries e.g.,
3ommerce, =ndustries, Kute, Te)tiles, and 1inance#, %overnment agencies li&e
the Bangladesh Ban&, 3ollectorate o$ 3ustoms and E)cise, the +irectorate o$
3ustoms =ntelligence and =nvestigation, and the NB?#, and constitutional
!odies li&e the Bangladesh Tari$$ 3ommission and the E)port ,romotion
(0 3hallenges $or the Bangladesh Economy ...............
Bureau# are responsi!le $or $ormulating and implementing trade and industrial
policies. There is hardly any coordination among them, which ma&es it
di$$icult $or industrial enterprises to approach the right authorities and see&
redress $or their grievances. /de:uate re$orms are needed to ensure
coordination o$ their activities. 1or that purpose, an institutional $orum named
as the National 3ouncil $or the ,rivate 7ector N3,7# may !e created. The
3ouncil should !e headed !y the ,rime 8inister and consist o$ 8inisters o$
3ommerce, =ndustries, 1inance, Energy, Ba!our, and <ome /$$airs as
mem!ers. The 3ouncil will meet periodically to ensure coordination among
ministries and relevant agencies relating to trade and industry. ?epresentatives
$rom leading trade !odies should also !e made its mem!ers in order to ensure
e$$ective coordination !etween government and !usiness on economic and
trade6related matters.
)! %acro*economic %anagement
The !asic o!>ectives should !e to limit the %overnment;s !udget de$icit,
maintain a low in$lation rate, and ensure that the economy relies more and
more on the mar&et to set prices. To that end, the re$orm programmes o$ the
past one and a hal$ decade in the $iscal and $inancial systems should !e
continued. There is national consensus on the need $or such re$orms and
%overnment should continue these e$$orts.
A$ Government Budget
The !udget de$icit should !e !rought down $rom the current 5 percent to .6"
percent o$ %+, over the ne)t $ive years.
+n the revenue side, the revenue collection e$$ort should !e intensi$ied to
raise the revenue6%+, ratio to 1"614 percent $rom the present low level o$ 11
percent. The current drive to !roaden the ta) net should !e sustained and
improved.
There is a rationale $or cutting the corporate income ta) rates $urther. /lthough
a reduction o$ corporate ta) rates may lead to a temporary loss in revenue, the
loss will !e o$$set !y improved compliance and eventually more rapid revenue
growth through greater investment and larger pro$it generation.
The contri!ution o$ non6NB? ta)es and non6ta) revenues should !e enhanced,
including !y pricing pu!lic utilities at cost and stopping the $iscal
Thoughts on Economics (1
haemorrhage !y ta&ing immediate measures on privatiAation o$ the loss6
ma&ing ,7Es.
7
+n the e-(enditure side, the government should0
i# Feep the growth o$ pu!lic e)penditure !elow the revenue
growth rate@
ii# ,ut a cap on the growth o$ non6development e)penditure,
su!sidies, and grants to ,7Es@
iii# 1ormulate a realistic pu!lic e)penditure port$olio, &eeping in
view the current glo!al economic slowdown@
iv# ?aise the :uality o$ pu!lic spending, which will re:uire !etter
design and implementation o$ pu!lic programmes through
competitive procurement, strengthening audits, involvement o$
!ene$iciaries, and service delivery through private sector
wherever possi!le.
v# 8a)imiAe the use o$ $oreign aid !y designating pro>ects
$inanced !y pro>ect aid as the Ihard6coreJ development
e)penditure@
vi# ?educe %overnment !orrowing $rom !an&s $or $inancing non6
development e)penditure@
vii# 7top pro>ect $inancing with high interest, short6maturity
suppliers; credit $rom a!road.
B$ Ban.ing and %onetary Policy
The main pro!lem in the !an&ing sector is poor governance, which has
resulted in seriously in$ected port$olios o$ the state6owned commercial !an&s
that still dominate the !an&ing sector. Even the private !an&s are not immune
$rom the in$ection. Bargely as a result o$ corruption, a!out 1. percent o$ total
!an& loans, e:uivalent to a!out 4 percent o$ %+,, are non6per$orming. /
9orld Ban& analyst remar&s, I/long with power sector losses and low ta)
compliance, the large magnitude o$ non6per$orming loans is the most telling
7
Net losses o$ the ,7Es in 1G(00760- were T& 4(.77 !illion %'B, (00-a#. Total outstanding
de!t lia!ilities o$ the ,7Es as at the end o$ Kune (00- were T& 554.4. !illion, o$ which T&
"-4.9" !illion, or 7..0 percent o$ the total, is owed to the %overnment. To improve the
%overnment;s $iscal management and !ee$ up its resources $or meeting current e)penditures,
the ongoing e$$ort to !oost revenue collection must !e accompanied !y a strong drive to
recover the large outstanding de!t lia!ilities o$ the ,7Es.
(( 3hallenges $or the Bangladesh Economy ...............
evidence o$ poor governance in Bangladesh with negative conse:uences $or
poverty reductionJ /hmed, (001#.
The large volume o$ non6per$orming loans and huge provision short$alls ma&e
!an&s charge high interest rates on their loans. /nother important reason why
commercial !an&s do charge high interest rates is the high cost o$
intermediation o$ $unds. 3ommercial !an&s have to pay high interest rates on
their deposits !ecause the %overnment raises loans !y selling saving
certi$icates which o$$er higher rates o$ return.
1or overcoming the !an&ing sector pro!lems, $ollowing measures will !e
needed0
i# There should !e easy access to !an& credit $or !oth wor&ing and
venture capital, which are essential $or e)pansion o$ productive
activities.
ii# 3ost o$ capital should !e reduced through recovery o$ classi$ied
loans. E$$orts toward recovery o$ such loans will need to !e
intensi$ied.
iii# The spread !etween !an&s; deposit and lending rates should !e
narrowed.
iv# The interest rates o$$ered on %overnment $inancial instruments
should !e lowered to have any impact on commercial !an&s;
deposit rate structure.
v# %overnance in the !an&ing system shall need to !e improved
through improvements in management.
vi# =ssues o$ privatiAation o$ state6owned commercial !an&s, merging
their operations, and closure o$ their loss6ma&ing !ranches should
!e closely e)amined.
vii# Bangladesh Ban& should !e made truly autonomous and
independent o$ %overnment control, which is necessary $or
enhancing the :uality o$ its supervisory and regulatory $unctions.
The Bangladesh Ban& 'rder 197( should !e amended $or that
purpose.
C$ Ca(ital %ar.et
Vigorous e$$orts will !e necessary to invigorate the capital mar&et. The
$ollowing steps are recommended0
Thoughts on Economics (.
i# The sphere o$ the stoc& mar&et should !e enhanced !y !ringing in
newer instruments such as insurance $unds, pension $unds, etc.

ii#
New $unds need to !e in$used. Ban&s and non6!an& $inancial
institutions NB1=s# do have a !ig role to play in that regard.
iii
#
Ta) rules with respect to capital gains on =,'s and secondary
stoc& mar&et transactions should !e made clear !y the NB?.
iv# ?egulations governing the esta!lishment o$ mutual $unds !y
private $inancial esta!lishments should re:uire transparent
reporting o$ all transactions in order to protect the investors and
to ensure $air competition among mutual $unds.
v# The investors must also !e protected $rom insider lending. The
7E3 should review the mar&et regularly to identi$y any possi!le
insider lending transaction.
vi# The stoc& mar&et needs to !e strengthened through $urther
transparency and e$$iciency o$ the regulatory mechanism H the
7E3.
)! Controlling nflation
The rate o$ in$lation rose $rom less than (.00 percent in (000601 to more than
10.0 percent in (00760-. +espite some recent decline, the in$lation rate still
remains high, threatening the sustaina!ility o$ past achievements in
macroeconomic sta!ility. =nternational prices o$ $uels and $ood items have
come down signi$icantly in recent months !ut domestic prices in Bangladesh
have not $allen correspondingly. Bringing the in$lation rate down should
there$ore !e a crucial tas& o$ the new %overnment.
8easures will need to !e ta&en to stri&e at the root causes o$ in$lation. =t is
now well esta!lished that in$lation in Bangladesh has !een caused largely !y
the scarcity o$ supply rather than !y monetary e)pansion. No wonder,
there$ore, that despite the tight monetary policy pursued !y Bangladesh Ban&
since 8arch (004 to chec& the in$lationary pressure H 3ash ?eserve
?e:uirement 3??# was raised and commercial !an&s were as&ed to raise
their lending rates H the general price level continued to rise. =nstead o$
(" 3hallenges $or the Bangladesh Economy ...............
containing in$lation, the curtailment o$ private sector credit !y commercial
!an&s adversely a$$ected investment and productive activity in the economy.
7upply scarcity having !een the ma>or cause o$ in$lation in Bangladesh, a tight
money policy to cure it is !ound to $ail. 'n the contrary, an accommodative
monetary policy will !e necessary that will ma&e credit easily availa!le to the
private sector, !oost production in $ields and $actories, and !ring down prices.
The only way to ensure that too much money will not be chasing too $ew
goods is to maintain an e$$icient !ase o$ production.
1or a certain period, the %overnment e)perimented to ease down prices o$
some essential products !y such measures as monitoring mar&ets, opening
wholesale centres and retail outlets, and reducing import duties on certain
products, !ut these ad hoc measures $ailed to reduce the price pressures. The
solution o$ the pro!lem will re:uire an e$$ective strategy $or removal o$ supply
!ottlenec&s and increased production in all productive sectors o$ the economy.
/ signi$icant contri!utor to the rising in$lation in the country has !een the high
government !orrowing $rom the !an&ing system to meet its growing non6
development e)penditure. There is a growing realiAation that government
e)penditure results in a higher level o$ prices !ecause these are largely
unproductive e)penditures and do not add to national output. 8oreover,
government e)penditure $inanced !y !orrowed $unds displaces or crowds out
the private investors. This displacement essentially retards production o$
goods and services, which would not !e the case i$ ade:uate credit were made
availa!le to the private sector. / reduction o$ the government;s domestic
!orrowing to de$ray its non6development e)penditure will thus !e necessary to
!ring down the overall in$lationary pressure.
=n$lationary surges witnessed in the past two years were due to several other
reasons li&e the rise in world prices in certain essential products, natural
calamities, increases in the price o$ utilities, and in$rastructural !ottlenec&s
that created di$$iculties in mar&eting. /part $rom the a!ove, criminal activities
such as e)tortion $rom !usinessmen and illegal toll collection !y miscreants
$rom vehicles during the movement o$ merchandise were and still are in a
large measure responsi!le $or raising domestic prices. =t is also alleged that
unscrupulous traders, hoarders, and pro$iteers, mostly having political
connections, ar!itrarily raise prices in the mar&et.
Thus, the in$lation control strategy o$ the new %overnment will re:uire actions
on a num!er o$ $ronts. 7teps will !e needed to remove supply !ottlenec&s !y
encouraging production in all productive sectors as well as !y $acilitating
Thoughts on Economics (4
imports whenever necessary. This will call $or measures to ensure easy
availa!ility o$ credit to the private sector. =t will !e necessary to address the
structural $actors and non6economic constraints li&e in$rastructural
!ottlenec&s, corruption in pu!lic services, and poor law and order conditions
that a$$ect production and raise production costs. /t the same time, there will
!e the need $or e)ercising $iscal restraints such as lower government
!orrowing $rom !an&s and reduction o$ the government;s non6development
e)penditure, and $or other pu!lic policy measures to prevent hoarding and
pro$iteering !y unscrupulous traders, which will e$$ectively contri!ute to
lowering prices.
)$ /rade Policy
The great challenge $or the country is to e)pand e)ports with a view to
improving the current account !alance. The !alance o$ payments can !e
improved !y cutting down imports as well, !ut that would slow down
economic growth, which is hardly desira!le.
3are$ully designed policies will !e needed to diversi$y the narrow e)port !ase,
$or which !oth promotional and even some mild protective measures may !e
needed. Entrepreneurs should !e encouraged to produce and e)port high6value
products that $etch higher $oreign e)change earnings.
/ care$ul handling o$ e)change rate, tari$$, investment, and su!sidy policies
will also !e re:uired $or promoting e)ports.
Kust as the e)port !ase is undiversi$ied, so is the e)port mar&et, which is
concentrated in a $ew developed countries. North /merica and 9estern
Europe currently account $or a!out -4 percent o$ Bangladesh;s total e)ports.
=n the wa&e o$ the present glo!al $inancial turmoil, the growth prospect o$
e)port to these countries has !ecome uncertain. 1or this reason, while
vigorous e$$orts should !e made to retain these traditional e)port mar&ets, the
search $or new mar&ets, in particular in East and 7outheast /sia and in the
new rich 8iddle Eastern countries, should !e intensi$ied.
Trends in manpower e)port $rom Bangladesh should !e monitored and
corrective measures ta&en to prevent any slowdown in remittances.
/ppropriate mechanisms should !e devised to encourage remittances through
the o$$icial channel.
=n addition to the a!ove, the $ollowing steps may !e ta&en to address the
country;s e)ternal sector pro!lems0
i# 8aintain an e)change rate $avoura!le to e)port.
(5 3hallenges $or the Bangladesh Economy ...............
1.
ii#
(.
3onsider e)tending su!sidies on a selective !asis to speci$ic
e)port6oriented industries that $ace severe competition in
world mar&ets.
iii#
..
7top or at least &eep under chec& all import6intensive, low
priority, pu!lic e)penditure pro>ects.
iv#
".
=ncrease vigilance !y 3ustoms to reduce the incidence o$ over6
invoicing o$ imports and under6invoicing o$ e)ports.
v#
4.
7trengthen lo!!ying e$$orts, !ilaterally and through the 9T',
under its 7pecial and +i$$erential Treatment 7L+T#
provisions, $or o!taining :uota6$ree, duty6$ree mar&et access to
developed countries $or e)port products.
vi#
5.
Ta&e steps to &eep the sea ports $ree $rom all trou!les. /ll
types o$ services provided !y the two seaports should !e
declared Iessential servicesJ.
vii#
7.
,rovide !onded warehouse $acilities to new non6traditional
e)port items, including gems and >ewelry industries.
viii#
-.
2nderta&e a comprehensive mar&et survey to identi$y at least
three or $our new products, which have good e)port prospects
in the world mar&et.
i)#
9.
1ormulate an e6commerce policy to give appropriate $ocus and
prominence to e6commerce strategy in the country.
)#
9.
Ta&e initiative to $ully operationaliAe the 7/1T/ agreement to
have mar&et access to 7//?3 countries.
)i#
10.
7trengthen the institutional capacity o$ trade6related
institutions, such as Bangladesh Tari$$ 3ommission, E)port
,romotion Bureau, National Board o$ ?evenue, and the
+E+', and set concrete targets $or these institutions.
)ii#
11.
Ensure coordination among 8inistries and trade6related
institutions.
0! nfrastructure Policy
Thoughts on Economics (7
The picture o$ the country;s in$rastructure is alarming and a signi$icant
constraint to a more rapid e)pansion o$ economic growth. There are serious
de$iciencies in the :uality and :uantity o$ in$rastructure services, which
increase the cost o$ doing !usiness in the country. 1acing acute power crisis,
Bangladesh is see&ing to attract 1+= in power generation !ut the agenda $or
the re:uired sector re$orms are not very clear yet. 8uch o$ the in$rastructure
provision power, telecommunication, railways, ports, road networ&# and their
maintenance are in the ine$$icient pu!lic sector. =ncentives $or attracting
private investment in the country;s in$rastructure are inade:uate and a proper
regulatory $ramewor& $or private provision o$ in$rastructure is sadly lac&ing.
The new %overnment will need to give high priority to addressing these
pro!lems.
A$ Power "ector
Electric power is a !asic in$rastructure o$ present day development !ut
Bangladesh has !een su$$ering $rom an acute power crisis $or several years.
The present production capacity o$ "70( 89 actual production .(79 89# is
$ar short o$ the country;s demand $or 4400 89. +i$$iculties in the power
sector include0
i# 7hortage o$ generating capacity that results in increasing level o$
load6shedding@
ii# <igh systems loss@
iii# 7hortage o$ gas as a $uel $or electricity generation@
iv# /r!itrary $i)ation o$ tari$$ which militates against the manu$acturing
sector@ and
v# Bow relia!ility o$ service.
=n (000, the %overnment declared I,ower $or /ll !y (0(0J as a national goal.
The policy vision envisaged some 465 !illion 27 dollars o$ investment in
power generation !y (004 and $or an additional 14000 89 power generation
that will !e needed !y (0(0. But in the - years that passed since (000 the
country has not witnessed any such investment in the power sector, although
the demand has &ept on increasing at an annual rate o$ "00 89.
/ serious pro!lem $acing the power sector at the moment is its heavy
dependence on natural gas. 3urrently, -7C o$ power generation is !ased on
gas. The power sector consumes "0 percent o$ the country;s gas supply, while
the rest is used in other sectors, in particular in $ertiliAer plants, production o$
(- 3hallenges $or the Bangladesh Economy ...............
captive power, consumption !y households, and production 3N% $or vehicles.
The planning o$ $uture power plants on gas alone will cause a gas shortage $or
these other sectors.
/s gas will !e short supply until new gas $ields are discovered, the use o$ coal,
a relatively cheaper input, $or power generation o$$ers a possi!ility. The
country has now a possi!le coal reserve o$ 1"00 million metric tons, which is
e:uivalent to .7 T31 o$ gas. The use o$ coal to generate power does not have
universal support, however. ,rotests have !een raised saying that mining coal
!y using the open pit method will cause damage to environment. Nevertheless,
the gravity o$ the country;s power crisis demands that the de!ate over how to
mine coal !e :uic&ly resolved.
3oal, li&e gas, is a non6renewa!le resource, and hence alternative sources o$
energy should also !e e)plored. The use o$ wind, tidal, and solar energy has
!een tal&ed a!out !ut these have very limited potential. These sources can at
!est produce 16( 89 o$ electricity at present !ut the country needs
commercial energy plants upwards o$ 1000 89.
Nuclear energy is e$$icient !ut at the same time relatively costly. There are
also ris&s involved in sa$ety procedures and disposal o$ waste materials
generated in nuclear power plants. There$ore, the use o$ nuclear energy can !e
thought o$ only in a very distant $uture when a completely new improved
nuclear technology, research on which is underway in the western developed
countries, will !e availa!le.
/t the moment, there$ore, the new %overnment will need to solve the energy
crisis !y optimising the use o$ availa!le gas and coal resources as well as
e)ploring the opportunities o$ using wind, tidal, and solar energy $or power
generation as $ar as possi!le.
8eanwhile, it will !e necessary to address the &ey pro!lem o$ system loss in
the power sector, which is pro!a!ly among the highest in the developing
world. Estimated system losses, a!out (( percent o$ output in (00760-, are in
large part a re$lection o$ power sector the$t and poor collection o$ !ills. The
$inancial losses o$ the Bangladesh ,ower +evelopment Board B,+B# were
estimated at Ta&a 1..5 !illion in (00760-. /s o$ +ecem!er (00-, power !ills
worth T& .9 !illion remained unrealiAed. The present power sector pro!lems,
thus, can !e signi$icantly overcome !y reducing the systems loss and
collecting the unrealiAed !ills. ?egretta!ly, however, instead o$ giving
attention to improving the revenue situation through recovery o$ dues and
reducing systems losses, the B,+B has su!mitted a proposal !e$ore the
Thoughts on Economics (9
Bangladesh Energy ?egulatory 3ommission to increase the average electricity
tari$$ !y "0C citing reasons o$ increased production cost. 7uch an increase in
tari$$ would cost the productive sectors heavily.

The new %overnment should seriously consider the $ollowing re$orms in the
power sector0
i#
a
2nderta&e an immediate review o$ the physical conditions o$
e)isting plants and carry out maintenance to improve their
operation.
ii#
!
=nstead o$ raising the electricity tari$$ to reduce $inancial losses
o$ the plants, attention should !e given to improve
management, raise !ill collections, and reduce systems losses.
iii#
c
=n accordance with the policy o$ I,ower $or /ll !y (0(0J,
!uild a 8aster ,lan $or raising the production capacity to meet
the country;s present as well as potential demand in the
medium and long term.
iv#
d
7eparate distri!ution $rom generation and transmission, and
turn over the distri!ution system to local authorities. The local
distri!utors shall purchase power $rom the B,+B and collect
!ills $rom their clients, which will thus solve the collection
pro!lem.
v#
e
7elect $oreign investors in the power sector through
competitive !idding. 3ompetitive !idding is important to avoid
pro!lems that countries li&e ,a&istan $aced in the area o$
private power generation.
B$ Ports
,orts in !oth 3hittagong and 3halna are plagued with ine$$iciencies and
la!our pro!lems, resulting in high shipping costs. 1or e)ample, the cost o$
moving a container through 3hittagong ,ort comes to *500 compared to *1406
.00 in neigh!ouring country ports. The high port charges reduce the
competitiveness o$ the country;s e)ports and also raise the costs o$ imports to
consumers and domestic industries. The physical capacity o$ the ports and
their e:uipments is insu$$icient to cope with the rapid growth o$ $oreign trade
and meet the growing demand $or services $rom the port users.
.0 3hallenges $or the Bangladesh Economy ...............
The ma>or pro!lems $aced !y the country;s largest sea6port, the 3hittagong
,ort, are the $ollowing0
i# =nade:uate in$rastructures 6 !erth $acility, storage $acility,
including yards $or container storage, container handling
$acilities, and >etties 6 are a ma>or constraint.
ii# Bac& o$ a developed internal multi6modal transport system
ma&es :uic& cargo removal $rom the port di$$icult, thus
creating cargo >ams.
iii# 3omple) and time6consuming rules o$ the 3ustoms
/dministration and the ,ort /uthorities hinder :uic& clearance
o$ the cargo, impeding normal $unctioning o$ the ,ort.
iii# Needless control and intervention !y the 7hipping 8inistry
curtails the authority o$ the ,ort /dministration, which o$ten
o!structs the normal activities o$ the ,ort and create
congestions.
iv# Bureaucratic decision6ma&ing process, red tape and poor
management result in poor delivery o$ service and rent6
see&ing.
v# The in$luence o$ the doc& wor&ers is the most serious
constraint. 8ultiplicity o$ wor&ers unions, which are lin&ed
with one or the other political party and politiciAation o$ the
unions are at the root o$ la!our militancy and turmoil at the
,ort.
%overnment policy needs to !e directed to address these pro!lems. The
proposed setting up o$ a private sector container terminal may $orce the
3hittagong ,ort to underta&e measures $or its improvement, !ut, to !e a!le to
compete with the private terminal, the moderniAation and development o$ its
in$rastructure will !e essential. ,rivatiAation o$ parts o$ the $unction o$ the ,ort
may also improve the e$$iciency o$ the ,ort.
C$ /elecommunications
The country;s telecommunication networ& is inade:uate, ine$$icient and
e)pensive. Top priority should !e given to the rapid development o$ this
sector. To ma&e any real progress, the provision o$ the service needs to !e
handed over to the private sector. The %overnment will !e responsi!le to
Thoughts on Economics .1
regulate rather than operate the system. The $ollowing actions are
recommended $or the new %overnment0
i# ,rivatiAe the newly corporatiAed BTTB.
ii# 3omplete the pro>ects, including the e)pansion o$ the cellular
system, which have !een started to provide service through the
private sector.
iii# E)pand the use o$ the Bangladesh ?ailway;s $i!re optics networ&
to provide improved inter6city service.
iv# E)pand telephone service to the rural areas.
v# Bring uni$ormity in telephone tari$$ o$ private cellular companies.
vi# The tari$$ $or telephone use should !e !ased on cost, and charges
$or land phones should !e !ased on $airness and a$$orda!ility.
0! 1uman 'evelo(ment Policy
+espite past progress, human development indicators in Bangladesh still lag
su!stantially !ehind the levels achieved !y countries at similar level o$
development. Bangladesh has the lowest li$e e)pectancy in the 7outh /sian
region, $alling even !ehind the average o$ the low6income countries. <ealth
standards are poor, re$lected in high in$ant, child and maternal mortality rates.
8alnutrition among children is a serious pro!lem. There are ma>or concerns
a!out the :uality o$ !asic services, including education.
,u!lic sector is the dominant source o$ $inancing human development in this
country. Budgetary $unding has increased over the years !ut remains much
!elow the re:uired level due to severe pu!lic resource constraints. 3ost
recovery policies are inade:uate and there are serious concerns a!out the
e$$iciency and e:uity o$ these services, particularly in the health sector.
,u!lic spending on health services, at only 1 point o$ %+, is grossly
inade:uate. 9hile a larger allocation o$ pu!lic resources is needed $or the
health services, pu!lic e)penditure needs to $ocus much more strongly on
!asic health care as opposed to tertiary care, which should mostly !e le$t to the
private sector. / ma>or policy wea&ness is the lac& o$ an e$$ective regulatory
$ramewor& $or private health care. /s a conse:uence, while a $lourishing
private health care service has emerged in response to demand, there are
serious pro!lems o$ :uality control, accounta!ility and a$$orda!ility. /lso, the
.( 3hallenges $or the Bangladesh Economy ...............
pricing policy $or pu!licly provided tertiary care is inappropriate, providing
huge su!sidies without regard to incomes.
The emerging health pro!lems $rom ur!an environmental degradation, water
pollution, solid waste management, along with the increasing ris&s o$ /=+7
and other contagious diseases li&e dengue $ever have !ecome a cause o$
concern. The a!ility o$ ur!an municipalities to handle these pro!lems is
constrained !y poor governance o$ these institutions. =n rural areas, access to
sa$e drin&ing water has increased !ut the pro!lem o$ arsenic poisoning has
emerged as a serious health haAard.
=n the education sector, the ma>or pro!lem areas are the poor :uality o$
education at all levels, low secondary school enrolment the lowest in the
7outh /sian region#, low adult literacy rate, ine:uity o$ pu!lic education
spending, and inade:uate policy $ramewor& $or private provision. Bow :uality
o$ education is re$lected in low education achievements, high dropouts, and
poor lin& o$ education with the >o! mar&et. The education system is more
geared towards general education than towards science and technology.
Muality pro!lems in education relate to a host o$ $actors involving curriculum,
teacher :uality, inade:uacy o$ teaching materials, and governance pro!lem
relating to a!sentee teachers and corruption related to e)amination and testing.
'verall, the most pressing pro!lem in human development is the low :uality
o$ pu!lic services, re$lected in poor health standards and low education
achievements. /ddressing this concern is a &ey development challenge $or
Bangladesh and thus it should !e given a high priority in the new
%overnment;s agenda.
=n order to address the human development pro!lems, the $ollowing measures
are recommended0
i# ?aise resources to allow e)pansion o$ pu!lic spending on human
development to 465 percent o$ %+,.
ii# /dopt steps to improve the e$$iciency and e:uity o$ pu!lic
spending in health, education, water supply, and environmental
protection.
iii# ,u!lic health spending should $ocus mostly on preventive pu!lic
health services, primary health care, nutritional and population
services to the poor. ,rivate health care within a proper regulatory
$ramewor& shall ta&e care o$ all other services.
Thoughts on Economics ..
iv# The education management, including curriculum, testing and
e)amination standards, needs to !e thoroughly re$ormed.
v# The technological content o$ the curricula needs to !e vastly
enhanced, and graduates or diploma holders should not only have
the theoretical &nowledge o$ the state6o$6the6art in each s&ill !ut
also practical s&ill in respective industries and potential
vocations.
vi# The ongoing arsenic poison mitigation programme should !e
rapidly implemented to ensure sa$e water supply in rural areas.
vii# 8unicipal governance should !e su!stantially improved to ensure
water supply :uality and proper solid waste management.
viii# 'ptions $or private provision o$ water and water management
need to !e seriously considered.
0! Governance ssues
%ood governance H which means that the civil administration is responsive to
citiAens; needs and that the institutions o$ the state are supportive o$ the poor H
is the &ey to long6term economic growth and sustained reduction in poverty.
Notwithstanding some positive achievements !y Bangladesh in the sphere o$
governance such as in reducing the gender !ias, ensuring the li!erty o$ press
and media, restoration o$ democratic government, adoption o$ the ?T=
'rdinance, setting up an independent /33, and separation o$ >udiciary $rom
the e)ecutive, instances o$ governance $ailure on economic, political and
institutional $ronts are overwhelmingly large, which vitiate the overall
economic and social environment and thwart the process o$ economic growth.
a) *n the economic front# governance di$$iculties are re$lected in high $iscal
de$icit, low ta) compliance, ine$$icient pu!lic spending, high losses o$ ,7Es,
power sector the$ts, and the de$ault culture in the !an&ing system. These
indicators show the su!stantial incidence o$ ine$$iciency and corruption in
pu!lic administration.
9ide6ranging re$orms will !e needed to address these pro!lems. =n the $iled o$
pu!lic $inance, the ta) administration should !e improved. The option o$
esta!lishing an autonomous ta) institution with incentive and accounta!ility
may !e seriously considered. The %overnment will need to strictly $ollow the
recommendations o$ the ,u!lic E)penditure ?eview 3ommission to improve
$iscal transparency and e$$iciency o$ pu!lic resource use. / comprehensive
." 3hallenges $or the Bangladesh Economy ...............
solution o$ the corruption pro!lem in !an&ing, power, and ,7Es will re:uire
privatiAation along with regulatory capacity in the pu!lic sector to sa$eguard
pu!lic interest.
b) *n the political side# e)tremely con$rontational partisan politics and poor
law and order situation had hitherto !een a strong indication o$ serious
political governance di$$iculties. <artals, terrorism, and e)tortion, o$ten
perpetrated under political patronage in the past caused severe in>uries to the
economy. The !usiness community considers terrorism and e)tortion as ma>or
o!stacles to e)pansion o$ !usiness, which damages the country;s image
a!road. To the average citiAen, the most pressing governance pro!lem is the
wea& law and order situation, which threatens to erode peoples; con$idence in
the state institution /hmed, (001#. This matter re:uires attention on a war
$ooting and on a strictly non6partisan !asis. Baw should !e applied even6
handedly to prevent crime and handle criminals. The country as a whole and
the civil society in particular must have the determination to raise their strong
voice against such sel$6in$licting in>uries to the economy.
The new %overnment will need to accord high priority to com!ating crime and
terrorism. 7tronger and meaning$ul action will !e needed to put an end to the
law and order crisis and esta!lish the rule o$ law, which is a pre6re:uisite $or
the $urther development o$ the country.
c) *n the institutional front# wea& governance encompasses the entire
spectrum o$ the country;s civil administration, and also in local governments
in rural and ur!an areas. Two recent 9orld Ban& reports reveal glaring
institutional wea&nesses and corruption in civil service, pu!lic audit and
accounts, the law and order institutions, and the >udiciary 9orld Ban&, 1995@
9orld Ban&, (000#. The outgoing 3areta&er %overnment adopted signi$icant
institutional re$orms in certain areas viA., in the >udiciary, ,u!lic 7ervice
3ommission, Election 3ommission and the /nti63orruption 3ommission
/33#. The new %overnment;s pledge to eradicate corruption !y $urther
strengthening the /33 and ma&ing it independent has !een highly acclaimed
!y the people. ?e$orms will now !e needed in the civil service and also in
local governments. 7trong local governments with $inancial authority and
accounta!ility $or per$ormance can contri!ute signi$icantly to rural wel$are
and poverty alleviation. Bessons on international e)perience in institutional
re$orms in relevant areas should !e o$ great help to the new %overnment in
their tas&.
Thoughts on Economics .4
RE2ERENCE"
/hmed, 7adi: (000#. IThe ,olitical Economy o$ ,overty ?eduction in 7outh /sia0
?ole o$ %ood %overnance.J 8imeo, 9orld Ban&, 9ashington, +.3.
/hmed, 7adi: (001#. IBangladesh since =ndependence0 +evelopment ,er$ormance,
3onstraints and 3hallenges.J Bangladesh 3ournal of Political Economy, Vol NV,
No. 1.
Bangladesh Ban& (00-#. Annual Re(ort, 3uly 4556 7 3une 4558!
Bangladesh Bureau o$ 7tatistics BB7# (004#. 1ousehold ncome*E-(enditure
"urvey 4559!
Bangladesh =nstitute o$ +evelopment 7tudies B=+7# (000#. Bangladesh 1uman
'evelo(ment Re(ort 4555.
%'B, ,lanning 3ommission (007#. %illennium 'evelo(ment Goals 7 %id*/erm
Bangladesh Progress Re(ort 4556, +ecem!er.
%'B, ,lanning 3ommission (00-#. %oving Ahead 7 National "trategy for
Accelerated Poverty Reduction 455:*11, 8ay.
%'B, 8inistry o$ 1inance, Economic /dviser;s 9ing 19-0#. Bangladesh Economic
"urvey 1:85.
%'B, 8inistry o$ 1inance, Economic /dviser;s 9ing 1990#. Bangladesh Economic
"urvey 1::5.
%'B, 8inistry o$ 1inance, Economic /dviser;s 9ing (00-a#. Bangladesh
Economic "urvey, 4558.
9orld Ban& 1995#. Bangladesh: Government /hat ;or.s 7 Reforming the
Public "ector! 9ashington, +.3.
9orld Ban& (000#. Corru(tion in Bangladesh: Costs and Cures! 9ashington,
+.3., /pril 7.
/able 1: %a<or %acro*Economic ndicators: Bangladesh
tem 1::5*:1 4555*51 4551*54 4559*5= 455=*56 4556*58
%+, growth rate C# ..." 4.15 ".- 5.5 5." 5.(
,er capita %+, 27* (-4 .5. .5( ""7 "-7 44"
7avings6%+, ratio C#
+omestic
National
1".5
19.7
1-.0
((."
1-.(
(.."
(0..
(7.7
(0."
(-.7
(0.1
(9.(
=nvestment %+, ratio C#
,u!lic
,rivate
15.9
4.7
11.(
(..1
7..
14.-
(..(
5."
15.-
(".7
5.0
1-.7
(".4
4.4
19.0
(".(
4.0
19.(
=mport6%+, ratio C# 14.( 19.9 1-.0 (1.4 ((.7 (5.0
E)port6%+, ratio C# 7.. 1..7 1(.5 15.- 17.5 1-.1
E)port growth C# 1(.7. 1(.". 67."" (1.5. 14.59 14.-7
.5 3hallenges $or the Bangladesh Economy ...............
=mport growth C# 67.59 11.40 6-.40 1(.(0 15."0 (4.5.
?emittances million 27*# 75" 1--( (40. "-0( 4979 7914
?emittance growth 0."0 60..0 ...00 (".79 (".41 .(..9
=n$lation ?ate .."0 1.9" (.79 7.17 7.(( 10."-
1oreign E)change ?eserves
million 27 *# --0 1.07 14-. ."-" 4077 51"9
"ources: BB7@ Bangladesh Ban&@ 8inistry o$ 1inance.
/able 4: Bangladesh>s Progress with 1uman 'evelo(ment 1::1*455=
tem 1::5*:1 1:::*55 455=
/dult Biteracy o$ 14O years old# C# .7.0 6 4".0
,rimary 7chool Enrolment rate C# 50.0 6 -7.(
,rimary 7chool 3ompletion rate C# "..0 6 4..0
Bi$e E)pectancy years at !irth# 45.0 5..5 54.1
=n$ant 8ortality rate per 1000 live !irths# 9" 5( "4
8aternal 8ortality rate per 1000 live !irths# 4.7" 6 (.90.
Total 1ertility rate C# 6 ... (."
/ccess to sa$e drin&ing water $or ur!an ,opn C#
/ccess to sa$e drin&ing water $or rural ,opn C#
9-.-
9..1
6
6
99.9
79.0
,opulation !elow the poverty line C#0 3BN method 4-.-P "-.9PP "0.0Q
,opulation growth rate C# (.17 1.-4 1.51O
Note: P ?elates to 1991D9( PP ?elates to (000 Q ?elates to (004 O?elates to (007
"ources: B=+7, Bangladesh 1uman 'evelo(ment Re(ort, 4555@ %'B, ,lanning 3ommission. %illennium
'evelo(ment Goals 7 %id*/erm Bangladesh Progress Re(ort 4556@ %'B, ,lanning 3ommission,
%oving Ahead 7 National "trategy for Accelerated Poverty Reduction 455:*11, 8ay (00-.
/able ?: /rends in ncome Poverty since 1::1@:4
1::1@:4 4555 Annual change AB$
1::1@:4*4555
4559 Annual change AB$
4555*4559
1ead Count Ratio
National 4-.- "-.9 61.- "0.0 6..9
2r!an "".9 .4.( 6(.( (-." 6".(
?ural 51.( 4(.. 61.5 "..- 6..4
Poverty Ga(
National 17.( 1(.- 6(.9 9.0 65.-0
2r!an 1(.0 9.1 6(.4 5.4 65.41
?ural 1-.1 1..7 6(.- 9.- 65."-
"Cuare of Poverty Ga(
National 5.- ".5 6..- (.9 6-.-1
2r!an "." ... 6(.7 (.1 6-.5"
?ural 7.( ".9 6..- ..1 6-.74
"ource: BB7, 1ousehold ncome*E-(enditure "urvey 4559!
/able #: Poverty Estimate on the basis of 1ead Count Ratio under 'C %ethod
Dear Po(ulation below Poverty Eine
National Rural Frban
%illion B %illion B %illion B
Poverty Eine 1: Absolute Poverty GH 4144 calorie nta.e (er (erson (er day
Thoughts on Economics .7
199169( 41.5 "7.4 "".- "7.5 5.- "5.7
1994695 44.. "7.4 "4.7 "7.1 9.5 "9.7
(000 44.- "".. "(.5 "(.. 1..( 4(.4
(004 45.0 "0." "1.( .9.4 1".- "..(
Poverty Eine 4: 1ardcore Poverty GH 1859 calorie nta.e (er (erson (er day
199169( .0." (-.0 (5.5 (-.. ..- (5..
1994695 (9.1 (4.1 (..9 (".5 4.( (7..
(000 (".9 (0.0 1-.- 1-.7 5.0 (4.0
(004 (7.0 19.4 1-.7 17.9 -.. ("."
"ource: /s $or Ta!le ..