A closer look at recent macroeconomic trends

Bangladesh economy was decimated by one-fifth during the liberation war in 1971. But it turned around, albeit at a slower pace, in the aftermath of the bloody war. Growth, however, has been steady and stable over the last decade, even after frequent bouts of natural catastrophes and external shocks. According to a recent assessment of the International Monetary Fund (IMF), the economy has fared well, despite a faltering global recovery. The health of an economy is measured by multiple macroeconomic indicators including inflation, unemployment, investment, budget deficit, national debt, balance of payment and international reserve. Moreover, inequality and poverty situation are crucial determinants. This article looks at the movement and issues on these economic indicators under five heads: (1) inflation and unemployment, (2) savings and investment, (3) public revenue, expenditure and debt, (4) foreign trade, balance of payment and international reserve and (5) inequality and poverty. (1) Inflation and unemployment Inflation is the rise in price level of any economy when so much money is used for so few goods to buy. Here internal pressure may come from the growth of money supply and the currency outside the banking system. On the other hand, external pressure may appear from the devaluation of currency. The rate of inflation reduced from 15.38 per cent to 3.01 per cent during 1981-1994 and again increased to 8.66 per cent in 1997-98. It recorded the least at 1.94 per cent in 2000-01, but peaked at about 9.00 per cent in 2010-11. For such ups and downs, currency outside the banking system is related with a value of correlation coefficient at 0.66. However, the growth of broad money supply which varied from 8.24 per cent to 39.90 per cent over the period 1981-2011, is almost unrelated to correlation coefficient of 0.38. The government until the mid-1990s kept a declining growth rate of money supply, which contributed to lower inflation, but was ineffective since the 1990s and thereafter. In addition, a weak correlation is seen with currency devaluation rate with coefficient value of 0.53. Reverse relation of excessive inflation has even been seen during an appreciation of currency in 2007-08. Under this situation, are the monetary tools enough to fend off inflation? Inflation is highly related to food price with their correlation coefficient of 0.86 over the period 1983-2011. The rate of inflation fell dramatically since the early 1990s from double-digit in the early 1980s. The rate came down below 2.0 per cent in 2000-01, mainly due to controlled food price. However, food price inflation again reached to double-digit in 2010 because of raising the prices of food and fuel. Moreover, syndicated control of several food items such as sugar, onion, pulses and edible oil seems to keep the price at higher level. Obviously, such manipulation is a type of supply-side disruption as reported in a policy paper of the Bangladesh Bank. The situation has become so worse that inflation has appeared be the biggest threat to the low and middle-income groups. However, the government makes frequent declaration on prices being under tolerable limits even after an increase of prices of daily essentials by more than a half in a year. Unemployment being inversely related to inflation is an economic theory presented in the Phillips Curve. The question is how far a rise in inflation contributed to the reduction of unemployment in Bangladesh. The short-run relationship was visible in the late 1990s where the rate of unemployment rose from 3.49 per cent to 4.30 per cent with a decrease in inflation rate from 8.52 per cent to 2.79 per cent. However, common scenario in Bangladesh is opposite to the relationship in Philips curve, showing both inflation and unemployment have increased. Even the expansionary policy could not generate employment through investment, rather excess public spending and credit supply have contributed to inflation. To be sure, excessive inflation and higher rates of underemployment and unemployment are liabilities of the economy. Surplus labour that exceeds one-third of labour force could not stimulate development of Bangladesh in the way it did during the industrial revolution in 18th and 19th centuries predicted by the economists Keynes and Lewis. However, a significant proportion of our labour force has migrated to relatively developed countries because of job scarcity in the domestic market and higher wages abroad. An alarming situation is that the market of overseas employment squeezed in recent years due to the global economic crisis in labour-receiving countries and the unrest in Middle-Eastern and North-African nations. The hunt for new markets for overseas employment has already figured in the government agenda, which demands execution. Turning unskilled labour to skilled manpower is a foremost compulsion for the nation. Meanwhile, the human development index (HDI), which is an indicator considering income, literacy and life expectancy, has increased from 0.166 in 1960 to 0.303 in 1980 to 0.422 in 2000 to 0.500 in 2010. (2) Savings and investment Investment is a means of creating jobs and saving is a source of financing for investment. Developing countries often pursue policies to keep the lending interest rates artificially below the market clearing rate to stimulate investment. Such interventions aim to boost investment, but discourage savings, which in turn make the financial institutions weak and corrupt. Bangladesh had a very low investment limited to around 17 per cent of gross domestic product (GDP) until the 1980s. However, it has been increasing since the early 1990s with private sector investment that increased from 55 per cent to 79 per cent of total investment during 1991-2011. Financial reform and business openness policies have encouraged private investment since 1991. However, the declining rate of public investment has serious negative impact on the development of physical and social infrastructure, which is crucial for attaining higher economic growth. The country acquired surplus savings over investment since the early 1990s, which equaled in the late 1990s. However, total investment came lower than national savings since the early 2000s and the difference reached more than 5.0 per cent of GDP in late 2000s. Full investment of domestic resources is crucially important, which increased much during the 2000s because of enough external flow of savings. During early 1990s to mid 2000s, the difference between domestic and national savings was around 5.0 per cent of GDP, which increased to about 10 per cent in late 2000s. Declining ratio of domestic savings during the last two years has become a matter of concern and it forced the authorities to cut interest rate leading to real interest rate nearly zero or negative in some cases. Foreign capital is important for the economy suffering from vicious cycle of capital formulation for its intrinsic low productivity leading to low income to low savings. However, foreign direct investment (FDI) still remains very low in relative term at about 4.0 per cent of GDP. Even with good rating of the World Bank (WB) with 20th rank in protecting investors at Doing Business Report 2011 and with 27th most favourite destination of FDI among developing countries, external financing is unlikely to expand in the coming years because of relative lower facilities and incentives compared to many other developing countries. The sixth five-year plan looks forward to an investment rate of 32 per cent amounting to Tk13.47 trillion at constant 2011 prices to attain an 8.0 per cent GDP growth by 2015. Much of the investment is expected to come from private sector, although public investment will play a bigger role to stimulate private investment in the form of public private partnership (PPP). Bringing private investment is another challenge under the existing problems with energy and infrastructure. Undesirably, remitted money is mostly spent on unproductive sectors. It is essential to channel surplus savings to investment as to fulfill the pre-conditions for attracting investment. (3) Public revenue, expenditure and debt Deficit budgeting is an expansionary public expenditure policy, which is commonly practiced in developing countries. National budget as percentage of GDP was 10 per cent in 1973-74, which grew at a steady rate to 16.5 per cent in 2010-11. On the other hand, total revenue reached 12.1 per cent of GDP in 2010-11 from 3.7 per cent in 1973-74, possibly because of improvement in tax collection system. In this regard, budget deficit, which was about 9.1 per cent of GDP in the early 1980s that declined to about 6.1 per cent in the late 1990s with fluctuation ranging to minimum 3.4 per cent and it remains at 5.0 per cent of GDP in 2010-11. Rising subsidy amount for supplying fuel for petroleum-based rental power plants is an imminent threat to extreme deficit of budget. The allocation for Annual Development Programme (ADP) to GDP ratio gradually deceased over 1980s from 9.0 per cent in 1979-80. However, there was some improvement in mid-1990s, late 1990s and mid-2000s in some pre-election years as political economy worked in this regard. The decline in ADP gets so severe that it went down to its minimum at 3.74 per cent of GDP in 2008-09. Such a decline in ADP and an increase in current expenditure is a bad omen for infrastructure development to support for private sector-led development. The government needs to expand development programmes, which requires strengthening the current efforts of revenue collection and larger budget. Internal and external debts are the two sources of deficit financing. When the government meets the deficit from internal market, it reduces funds available to in-country investors. This results in an increase of interest rate and a crowding-out of private investment. To avoid the crowding-out effect, the government seeks foreign loan and aid. It is regrettable to note that the share of foreign assistance has shrunk in recent years, for which pressure on domestic debt has increased. In 2010-11, the government borrowed about 4.5 times higher from domestic banking sector than that of 2001-02. The borrowing from banking system reached 1.43 per cent of GDP in 2010-11. Such a higher pressure of domestic borrowing has already showed a crowding-out situation in 2008, which is expected to be severe in coming years. Public debt outstanding gradually increased until 1990-91 and recorded at around 50 per cent of GDP during early 1990s to mid-2000s. Now, the outstanding debt reached 43.63 per cent of GDP where domestic debt amount became higher foreign debt from its portion of around 25 per cent in 1990-91. However, overall trends indicate that Bangladesh's public debt is sustainable, which is relatively lower than that of India and Sri-Lanka. The challenge is the build-up in domestic debt, which has already putting a stress on the macroeconomic stability. (4) Foreign trade, balance of payment and international reserve In the post-trade liberalisation period, the degree of trade openness and the extent of globalisation have increased from 16.8 per cent to 42.5 per cent and 24.9 per cent to 56.3 per cent, respectively during 1990-2009. Both imports and exports grew at much faster rates during the 1990s and thereafter. The average import, export and trade deficit was 12.61 per cent 5.41 per cent of GDP during 1991-1995, which reached to 30.48 per cent, 18.34 per cent and 12.14 per cent respectively in 2010-11. Here the government policy encouraged devaluation of domestic currency to support export and control import. However, the higher exchange rate has increased the price of imported products and resulted in inflation. Such fallacious attempt will keep continuous pressure on rising balance of trade in the country. However, good news is that exports continued to grow but with a change in the composition of items. The share of manufacturing items to total export increased from 68 per cent in 1980 to 91 per cent in 2000. While these changes are apparently significant, it masks the real strength of the export sector firstly because of two-thirds of exports account for ready-made garments and secondly for limited export market to the USA, Europe and Japan. Existing small export market and non-diversified products render the export sector vulnerable to serious external shocks. In case of import trade, nearly a sixth of the total originates within the region, almost exclusively from India. Regional integration is visible in import scenario of Bangladesh, but not in the area of exports. In fact, South Asia remains the lest-integrated region in the world. Even with a steady rise in trade deficit, import financing is yet to be a major problem because of the surge in remittances. Remittances recorded an increase from $555 million in 1985-86 to $1,949 million in 1999-2000 and to $ 11,045 million in 2010-11. On the other hand, current account deficit was $1,003 million in 1974-75 and the deficit continued until the late 1990s. However, this deficit situation changed to a surplus since the early 2000s amounting to 1.91 per cent of GDP during 2006-2010. However, the surplus decreased last year from 3.71 per cent to 0.91 per cent of GDP, thanks to the doubling of fuel imports to feed the rental power plants. Meanwhile, overseas employment has decreased over the last three years, which can have an adverse impact on the flow of migrants' money. Under this situation, export diversification and new market for overseas employment are crucial for sustainability of the economy. (5) Inequality and poverty The Gini-coefficient is a measure of inequality, value of which ranges from zero to one and higher value shows higher level of inequality. The Gini value for income has a mild increase until the mid 1980s and remained same at 0.36 during 1974-1984. But it shot up during the mid-1990s-may be because of expansion of capitalism. Moreover, the coefficient for rural areas increased from 0.35 to 0.38 during 1974-1996, while that for urban areas from .37 to .44. It is evident that income disparity between the rich and the poor widened more in urban areas than in rural areas. However, the Gini value rose to 0.47 in 2005 with a slight decrease to 0.46 in 2010. On the other hand, consumption inequality also increased much from a Gini value from 0.26 in 1991 to 0.30 in 1996 to 0.33 in 2005, but remained almost same in 2010. A static inequality of income and consumption in the last few years is good news for the economy. The Millennium Development Goals (MDGs) count extreme poverty if the income per person remains below $1 per day. Meanwhile, extreme poverty has decreased from 58.8 per cent to 31.5 per cent during 1991-2010, showing a fast progress for the first goal of MDG. Poverty is also measured in terms of food intake. If the calorie intake per capita/day remains below 2,122 kilocalories, it is defined as absolute poverty. On the other hand, hardcore poverty is low food intake below 1,805 kilocalories. During 1974-2010, the absolute and hardcore poverty of the country have declined from 82.8 per cent to 31.5 per cent and from 42.9 per cent to 17.6 per cent, respectively. After food, demand for non-food items increases at a faster rate for any rise in income as per the Engel's Law in economics. The question is whether the rising income of the poor could create effective demand for non-food items? However, static inequality situation can be complemented with the achievement of MDG on gender parity in primary and secondary education. A smooth progress in achieving other goals of MDGs would improve the country's inequality and relative poverty situation. ....................................... Dr. Aminul Akanda, an Associate Professor of Department of Economics at Comilla University, can be reached at: akanda_ai@hotmail.com