Zaidi Sattar
In the previous segment, I argued that strong export orientation was a driver of high growth. Among developing countries, Bangladesh's growth performance has been notable but not outstanding. It is clearly not in the league of two recognized emerging market economies - India and China. But Vietnam? It is useful to pick Vietnam as a comparator because, though it has a smaller population, it has caught up with Bangladesh in terms of size of the economy - about $100 billion. But Vietnam is growing faster and exporting much more than Bangladesh -- $70 billion in 2010, i.e. 70% of its GDP. History is replete with evidence to show that high growth economies were also strong export performers. No economy has grown at 7-8% or more on a sustained basis without a strong showing in exports, which is arguably the quintessential driver of high growth. Bangladesh will be no exception.
It is no secret that the Bangladesh economy is performing well below potential despite the phenomenal success of RMG exports. Most analysts believe the economy could be growing at rates of 8.0 to 10 per cent per annum
- as opposed to its current 5.0-6.0 per cent growth -- if adequate infrastructure could be put in place and the policy environment was a bit more conducive to private enterprise. Yet that is easier said than done.
Growth acceleration faces a number of serious physical and policy constraints that need to be urgently addressed if drivers of high growth are to play their part. First among these constraints is the assiduous problem of anti-export bias (AEB). AEB is technical jargon for describing a state of industrial and trade policy that is on the whole tilted relatively in favor of import substitute production over exports. The subtleties of this situation are not so easily understood. It occurs when our exports receive no protection in foreign markets where competition is actually fierce. On the other hand, domestic production of import substitutes continue to receive high tariff protection whose effective rate of support has been rising over the past decade as output tariffs (customs duty plus supplementary and regulatory duties) have remained steady while tariffs on inputs have been reduced substantially. RMG, footwear, and exports from EPZ are outside this policy constraint as they enjoy free trade channel for both outputs and inputs. Recently, shipbuilding got the same facility. Without this facility for all exports, anti-export bias will remain a barrier to broad-based export growth. Other exports are not so lucky with the result that they are dis-protected even after some of them receive cash subsidy, duty drawback or other facilities. Research done at PRI and World Bank indicate that despite gradual reduction in anti-export bias since the mid-1990s, there is still some incentive bias in favor of import-substitute production. This undermines incentives for non-RMG export production. We need to understand that acceleration of GDP growth will need sustained and broad-based export growth of 15%+ over the next decade and that cannot ride on just one leg - RMG exports. Recommendations for ensuring neutrality of policy between exports and import substitute production have been made in numerous research papers on trade policy. It is now high time for some discerning action in this area in the forthcoming budget.
Next, research on Bangladesh's growth has shown that it is capital accumulation (investment) rather than rising productivity that accounts for all its growth so far. But the investment rate has been stuck at 22-24% of GDP for much of the past decade. There is no option but to raise the investment rate to achieve higher growth in the near term. So the immediate policy challenge is to break this logjam. One information that has been lacking in the public domain is a detailed breakdown of the composition of investment. BBS has the necessary data to publish this information so that policymakers and entrepreneurs alike could focus on ways to augment the investment rate and break the logjam. The budget ought to set annual targets for raising the investment rate by directing specific policies and resources to this end.
All that requires transformational improvements in the investment climate. While domestic private investment might be able to cut through red tape and other localized impediments, attracting FDI requires offering them better investment climate than our competitors. We are still falling short in this respect with the result that FDI is only a trickle compared to that in Vietnam or Indonesia. The budget must address the policy challenge for improving the investment climate involving a gamut of concerted actions that include business deregulation, labor market policies, financial sector reforms, tax reforms, legal reforms and better governance.
Needless to say, the critical state of the energy crisis warrants priority handling of this growth constraint. There is no way the economy will reach a higher growth rate without a lasting solution of this problem. Addressing trade and transport logistics could ease the infrastructure constraint further and pave the way for higher growth. But infrastructure financing poses a major challenge; this requirement is estimated at an additional 5.0-6.0 per cent of GDP. Such financing cannot easily come from public sector and requires strong public-private partnerships. Improving the investment climate and developing appropriate policy and regulatory framework will be critical to attract private investment in infrastructure.
Being one of the most densely populated countries in the world, it is hardly surprising that land has become the scarcest factor of production in Bangladesh. This is reflected in galloping land prices throughout the country but especially in the metropolitan cities. Future growth strategy must take this binding constraint into account in order to ensure its sustainability. The price of land and the complex land record system is discouraging private entrepreneurs while foreign investors, attracted by Bangladesh's cheap labor, are being driven away by prohibitive cost of industrial land. It is becoming a major obstacle as it may induce foreign investors to invest in other countries with better managed land markets. Unless policies and projects are put in place now to better manage this scarce factor, land, accelerating the growth rate could be in serious jeopardy.
The skills gap poses a severe threat to any attempt at growth acceleration. The successes achieved in garment exports have drained our reservoir of employable labor. Skill shortages particularly in the export-oriented sector have become persistent. Ask any entrepreneur and he will bemoan the lack of workers with minimal skills, not to mention the absence of mid-level managers. A long and arduous road lies ahead. For skills formation, a major challenge is to raise the quality of education at all levels as well as to increase enrollments at secondary and tertiary levels. Additionally, serious efforts are needed to upgrade the capacity to deliver technical and vocational education and skills training. In addition to investment, the education challenge requires improvements in public service delivery through governance and other institutional reforms. How about taking a leaf out of the Singapore secondary educational system - hailed as one of the best in the world. Strengthening public-private partnerships in education is the key. This is a major deficiency that has not received much attention in the past and goes beyond public investment. A true public-private partnership based on experiences in East Asia and other countries can provide inputs to a successful skill development strategy that is responsive to market needs.
(Dr. Sattar is Chairman, Policy Research Institute. He can be reached at zaidisattar@gmail.com)
Budget and challenge of accelerating growth
FE Team | Published: May 15, 2011 00:00:00 | Updated: February 01, 2018 00:00:00
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