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Fifty years of economic transformation

What has happened to employment and wages?

Rizwanul Islam | November 24, 2021 00:00:00

A worker is busy cleaning an old tyre at a repairing shop in Dhaka — FE Photo

What kind of transformation is expected in an economy is a moot question. Economic growth is important for all countries irrespective of the level of development, but it needs to be accompanied by productive and decent employment because that is the way in which the benefits of growth can reach common people. This is particularly the case for those whose only or the main source of income is labour. Hence, employment should be added to the criteria for measuring success in achieving development.

In dual economies where a small modern sector coexists with a large traditional sector, employment can grow in the modern sector without a substantial rise in real wages. In such a situation, it can be expected that economic growth will be accompanied by growth of productive employment in the modern sector, and that process will continue until surplus labour available in the traditional sector is fully absorbed. After that stage, further expansion in employment may lead to a rise in real wages. This kind of growth will result in structural transformation of the economy involving decline in the share of agriculture in total production and a rise in the shares of modern manufacturing and services. At one stage, the share of manufacturing starts declining and that of services starts rising.

The process of development described above is not limited to theory. The experience of countries that have been successful in development, e.g., South Korea, Malaysia, China and Taiwan-China, corroborates this theory.

The story of economic growth: The story of development success of Bangladesh is by now quite well-known. But an important question is the extent of transformation that has taken place in the economy and the labour market. How successful has the country been in absorbing surplus labour and raising real wages of workers through an expansion of the modern sector?

Before coming straight to possible responses to the above question, it may be useful to look at the story of economic growth itself. During the first couple of decades after the independence of the country, GDP growth remained rather stagnant, and at a low level. And growth during that period was primarily driven by agriculture. One may recall that the decade of the 1970s was the time of green revolution in agriculture. In Bangladesh also, growth in agriculture was powered by high- yielding varieties of seeds, fertilizers, pesticides and irrigation. As that technology was labour-intensive, its adoption led to an expansion of employment opportunities in agriculture.

The manufacturing sector was small and characterized by the dominance of a few traditional industries like jute and cotton textiles, cement, paper, and fertilizers. Apart from jute goods, the others were basically oriented towards the domestic market. But growth of manufacturing industries during the 1980s was slower than during the 1970s. In other words, rather than the kind of economic growth that was expected to take place in a dualistic economy, the opposite seemed to have happened.

There was an acceleration in the growth in the economy as a whole (i.e., in GDP) during the 1990s, and this time both agriculture and industry played a role. In fact, starting from the decade of the 1990s, growth has accelerated in all the subsequent decades. Moreover, industry started becoming a driver of growth. But the question from the point of view of employment is whether growth consistently led to the expansion of productive employment and the absorption of surplus labour.

The ready-made garment (RMG) industry started its journey during the second half of the 1980s and developed continuously during the following decade. Indeed, in a dual economy with surplus labour like that of Bangladesh, this is the pattern of industrialization that is expected to take place. But, in the case of Bangladesh, only one such industry grew. Although a few other industries like drugs and medicines, furniture, shipbuilding etc developed, their shares in output, export and employment remain rather small.

Kind of transformation seen: At the time of independence, almost half the GDP was contributed by agriculture. During the two subsequent decades, that share fell to almost one-third. But the share of industry did not rise noticeably during that period; from 10.2 per cent in 1975, it went up to only 11.3 per cent in 1994/95. Two sectors whose share rose noticeably were construction and public administration.

Since about mid-1990s, the share of industry in GDP had been on an upturn, and the pace of increase accelerated after 2009-10. By 2019-20, the share of agriculture in GDP had declined to below 10 per cent, and the share of industry grown to 23 per cent.

Changes have taken place in the sectoral shares of employment as well, but that is not as noticeable as in production. From 79 per cent in 1974, the share of agriculture in total employment fell to 59 per cent in 1983-84 and to about 48 per cent in 2010. In 2016-17 (the latest year for which data on employment are available), this figure came down to about 41 per cent. On the other hand, the share of manufacturing rose from 8.8 per cent in 1983-84 to 9.55 per cent in 1999-2000. In other words, there had been very little change in the share of manufacturing during that period of 16 years. The change was more noticeable during the following 16 years - a rise to 14.42 per cent.

What can be said on the basis of the figures mentioned above? On the one hand, despite a substantial decline in the share of agriculture in GDP, its share in total employment has not declined in a commensurate manner. Likewise, although the share of manufacturing in GDP doubled, the rise in the share of employment was much slower. In other words, the gap between labour productivity in the two sectors has widened.

How successful has the economy been in generating productive employment?: By now, it is quite well-known that the success of the economy of Bangladesh in accelerating growth has not been matched by its performance in the area of employment. Figure 1 makes this clear. Although growth in GDP has risen, the rate of employment growth has fallen over time. And the gap between the two started to widen in 2005-06. And yet, there was acceleration in GDP growth during that period -- till the time the economy was hit by the adverse effects of the pandemic caused by COVID-19. During 1995-96 to 1999-2000, 1.0 per cent of GDP growth was associated with an employment growth of 0.5392 per cent. But during 2010 to 2016-17, this figure went down to 0.2861, thus implying that the employment-generating capacity of the economy has declined. And that raises the question whether the country has been experiencing jobless growth.

One could of course say that a rise in economic growth with a decline in employment growth implies a rise in labour productivity which should be a welcome news. However, the worry is that this has happened in Bangladesh before surplus labour could be fully absorbed and large numbers are still engaged in very low-productivity activities, especially in the informal sector. Until the entire surplus labour has been absorbed in high- productivity modern sectors of the economy, growth in employment and labour productivity has to happen simultaneously. In fact, that was the experience of the countries of East and South East Asia (mentioned earlier) who were successful in combining high rate of economic growth with high employment growth. An important question, therefore, is why employment growth in Bangladesh fell before surplus labour could be fully absorbed.

A number of factors may have been responsible for this. First, in agriculture, although the adoption of HYVs led to an expansion of employment during the early stages of green revolution, some degree of mechanization (especially in tillage) started taking place at some stage. And now mechanization of harvesting is also being encouraged.

As for manufacturing, growth of labour-intensive export-oriented industry basically remained limited to the RMG industry. There is no doubt that this industry made a significant contribution to employment generation, but the rate of employment growth in the industry seems to have started to fall for a variety of reasons. On the one hand, there has been a structural change within the industry - like increase in the share of knit segment which is less labour- intensive compared to the woven segment. On the other hand, labour-saving machinery has started to make inroads into both the segments.

We are often told that industries other than RMG are also growing in Bangladesh, and mention is made of industries like drugs and medicines, shipbuilding, furniture etc. But the share of these industries in total output and employment is still very small. Moreover, except furniture, the other two are not labour-intensive, and even with high growth, are unlikely to be able to generate employment on a scale that is required in the country.

During 2013-14 to 2017-18, the share of the medicine industry in total GDP of the country was between 1.83 per cent and 1.86 per cent. According to the Labour Force Survey of 2016-17, the industry employed 177,000 workers in that year which was 2.1 per cent of total employment in the manufacturing sector (85 lakh). In 2019-20, total export from the sector was worth 136 million US dollars which was less than 1 0 per cent of the country's total exports.

One often hears about developments in the transport- equipment industry, especially of shipbuilding and motorcycles. Although these two industries attained high rate of output growth during 2009-10 to 2018-19, total employment in those two industries was 54,000 in 2016-17.

The experience of five decades of industrialization shows that growth has remained limited to a small number of industries. The emergence of RMG and medicine industries in the 1980s and 1990s did herald the beginning of a new era, but that was not followed by any further structural change worthy of note. Some of the new industries mentioned above have attained high growth, but their shares in total output and employment remain rather minuscule (except the furniture industry where total employment was 777,000 in 2016-17). This remark would get further corroborated with detailed data on various industries, but it's not possible to do so within the limited space and scope of the present article.

If one looks at the growth of employment in manufacturing as a whole, one would see that it fell from 9.09 per cent per annum during 1999-2000 to 2005-06 to 5.15 per cent during the following five years and further to 3.15 per cent during 2010 to 2016-17. As a result, there was a gradual decline in the growth of employment in the economy.

Is the growth in service sector indicative of structural transformation?: To recall, during the early stages of economic growth, the share of industry is expected to rise, but after a certain stage, this share may fall and that of services starts to rise. What has been happening in Bangladesh?

During the first three decades after independence, growth of the service sector was lower than in manufacturing, but it was either higher than or close to GDP growth. After 2000, there was acceleration in the growth of the sector and generally exceeded GDP growth. Thus, it seems that the sector is playing an increasingly important role in driving economic growth of the country.

The share of services in GDP rose from 36.5 per cent in the 1970s to 48 per cent by the middle of 1990s. But that was the early phase of economic growth in the country when such a rise in the share of services was not expected. An expansion of the manufacturing sector would have been more natural. Interestingly, the share of the services sector did not rise much in the decade after 1994-95.

The service sector in Bangladesh is quite heterogeneous with a mix of modern and traditional sectors. And the important question in that regard is whether the share of the modern segments is rising. Although it is not possible to provide a full answer to this question, it may be noted that both types of activities are growing. For example, while the share of traditional activities like transport and minuscule trade and miscellaneous services has risen, the shares of modern sectors like financial institutions, public administration etc. have also increased. Thus, the service sector is assuming a dual character -- with one part catering to the needs of survival of the poor and another part playing a dynamic role that is characteristic of a modern developing economy.

A point that should be mentioned here is the huge difference in productivity and earnings in these various sub-sectors. Some of them yield so little income that it becomes difficult for people engaged in them to escape poverty. Structural change of an economy through the expansion of such activities yielding low earnings cannot be an indicator of real development.

Adverse effects of the COVID pandemic on economic growth and employment: It is by now well-known that the global economy went into a deep recession due to the adverse effects of the pandemic that started in early 2020, and the economy of Bangladesh was not spared either. This happened in two ways. First, the lockdown imposed in order to contain the virus led to the stoppage of most economic activities. At that time, production was interrupted in almost all sectors like manufacturing, trade (except limited retail trade), transport, personal services etc.

Even after the lockdown measure was lifted, economic activities could not return to their normal levels because the pandemic continued in waves of rise and fall in infections. At that time, both the export market and the domestic market were adversely affected. In fact, throughout 2020, growth of exports, especially that of garments, was substantially lower than in the pre-pandemic years. Levels of activities in domestic market-oriented industries and services were also lower than normal. As a result, growth in manufacturing and services fell sharply. Growth of manufacturing fell from 14.2 per cent in 2018-19 to 5.84 per cent in the following year. The fall in the case of wholesale and retail trade was from 8.1 per cent to 5.3 per cent. Growth fell in other sectors like transport, financial institutions, and hotel and restaurants as well. Consequently, the employment situation worsened throughout the economy.

The trend in real wages: One research by renowned economist Azizur Rahman Khan showed that using 1973-74 as the base, the daily real wage of agricultural workers was Tk 6.71 in 1972-73; and in 1979-80, it was Tk 6.79. That implies that throughout the 1970s, real wages in agriculture did not rise at all. If the money wage figure is converted to the equivalent of coarse rice, one gets 2.56 kg for 1972-73 and 2.16 for 1979-80. Seen this way, real wage would appear to have fallen during the 1979s.

During the 1980s and 1990s, there was some rise in real wages although the rate of increase was rather low. A real improvement in this respect came during the first decade of 2000, especially after 2006-07. It may be recalled in this connection that in 2008, prices of food-grains rose sharply on the international market as well as in Bangladesh. As a result, there was additional pressure for raising wages. However, the rising trend of that time did not last long. In fact, real wages fell between 2011-12 and 2015-16. And that happened in both agriculture and manufacturing. Although the trend was reversed after 2015-16, the level of 2008-09 was never regained. Moreover, as a result of the economic crisis caused by the covid pandemic, real wages started to fall again from the middle of 2020.

As for the long-term trend, the following rough and ready figures may give some idea as to what has happened in the fifty years since the independence of the country. Using Tk 500 per person per day as the average daily wage in agriculture for 2020 and Tk 50 as the price of per-kg coarse rice, the rice equivalent of the daily wage that year works out to be 10 kg per person. As mentioned above, the corresponding figure for 1972-73 was 2.56 kg. These figures imply a fourfold rise in real wages during the past five decades. Allowing for inflation during this period, it would appear that during the same period, per-capita income in the country has risen more than four times. In other words, working people have received a proportionately lower share of the fruits of economic growth compared even to the average people of the country. The situation is much worse in relation to those in higher-income groups. Thus, it is not surprising that income inequality increased in the country.

What then is the overall story?: When Bangladesh celebrated the golden jubilee of its independence, it was able to do so with its head high by dispelling the doubts raised by its detractors. Economic growth has attained gradual acceleration over the decades and reached impressive levels. Achievements in terms of several social indicators were also praiseworthy. Unfortunately, the same cannot be said about employment, especially if one talks about jobs that yield decent earnings and are done in acceptable environment.

Although good jobs were expected to come through industrialization, that has happened only to a limited extent. The main reason for this is the dependence on only one labour-intensive export-oriented industry. This industry emerged in the 1980s and flourished in the 1990s. Since then, there has not been any notable change in the structure of the manufacturing sector. Growth of employment started to fall at a time when growth of output was rising.

On the other hand, although real wages of workers rose in some years, the trend was not sustained. Particularly noteworthy is the decline in real wages after 2011-12 when there was acceleration in the growth of output and rise in labour productivity. Thus, performance in both employment and wages remained a major source of disappointment in the pre-pandemic development experience of the country.

Then the economy was hit by the adverse effects of the pandemic as a result of which a number of key indicators like growth and poverty reduction suffered reversal. Employment and real wages took further hit from the pandemic, and challenges that existed even during periods of good performance have become more formidable.

The author, an economist, is a former special adviser, International Labour Office, Geneva.

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