Accelerating growth performance
Saturday, 12 January 2008
Sadiq Ahmed concluding his two-part article
A clear challenge for Bangladesh is to sharply increase total factor productivity. At the same time the investment rate needs to be increased to finance critical infrastructure and human development. Both are necessary to raise the growth rate to India's level. India's experience supplemented by Bangladesh's own experience suggests that the key to faster investment and productivity growth is policy and institutional reforms. Analysis done by the World Bank and other researchers suggest that major reform priorities include: restoring the macroeconomic stability which has come under severe strain from unsustainable expansion in the deficits of public enterprises; sharply raising domestic public resources to finance much needed public investments in infrastructure and human capital; diversifying the export base through further trade and investment liberalisation and supporting this through improvements in infrastructure, especially power and port services; attracting foreign investment much more aggressively, which is critical for technology transfer, an important source of growth in total factor productivity; and sharply reducing the cost of doing business by reforming the public sector through a massive deregulation drive that redefines the role of public sector away from commercial activities towards mostly public goods, simplifies all business transactions, reduces the discretionary authority of a largely corrupt and inefficient bureaucracy, and institutes public sector accountability.
These reforms are well known. Implementation is constrained by uncertain political climate, resistance from vested interest, and populist debates about the effectiveness and or trade-off between growth and equity concerns associated with some of the policies.
The experience of Bangladesh shows that political uncertainty is a way of life and it is best to internalise this and not let it stand in the way of doing the right things. Bangladesh has implemented many good policies despite frequent political turmoil and change in governments. Remarkably, no government has reversed any good policy initiative of a past government. This is because good policies benefit the people who ensure their continuity. Indeed, a number of bold measures taken by the present caretaker government on the governance and anti-corruption front will likely survive a change in political government because these have the support of the people. In the same spirit, other good policies that help create income and jobs for people based on a solid growth strategy will find wide acceptance and should be implemented now even as preparations are underway for a new political transition.
Concerning vested interest, this is again a way of life and every government faces this. This is where sound leadership counts most. Policy and institutional reforms will inevitably hurt those benefiting from the status quo. Skillful leadership is necessary to engage the various interest groups in dialogue and discussions, agree on mitigating measures where necessary, and then move ahead with implementation. There are important lessons from Bangladesh's own experience that one can draw upon in countering vested interests. For example, successive governments have deepened the market orientation of the Bangladesh economy through deregulation and privatisation even though there were important vested interests (trade unions, bureaucrats, politicians) who opposed this strategy in a variety of ways. The successful closure of the heavily loss-making Adamjee Jute Mills is another example. A yet another example is the liberalisation of the exchange rate in 2003.
The policy debate is a healthy sign of engagement and ought to be welcomed. No individual or institution is a repository of all knowledge or wisdom. When a Bretton Woods Institution provides policy suggestions to a client country these should be carefully reviewed and debated within the country. Indeed, debate and discussions based on solid analysis are key to sound decision making. However, it is not always obvious that the policy debate in Bangladesh is well-founded on good analysis and empirical evidence. Too often one sees a populist approach. In particular, the trade-off between growth and equity is the most tricky issue to resolve. This is one area where emotions run large and the debate is least well grounded in solid research. For example there are perceived notions that trade and investment deregulations hurt the poor by reducing domestic economic activity and employment. This is a major reason for a populist opposition to trade reforms or opening up of the economy to foreign private investment. Some local economists talk of de-industrialisation happening from reduction in trade protection; others fear about foreign investors taking over local enterprises.
To my knowledge I am yet to see solid empirical evidence of these perceptions grounded on the realities of Bangladesh. These views not only are not substantiated with solid analysis, they also tend to ignore the global developments in dynamic economies like China and India where trade liberalisation and foreign investment have provided major impetus to growth. This is not to deny that in the short-term there might be adverse income distribution and or employment effects from policy reforms. Surely, the closure of Adamjee Jute Mills saw the loss of employment of many workers. But this can hardly be a rallying point against the bold decision to close the defunct enterprise. A closer look at the evidence will show that the economy is a net gainer. The workers did get adequate compensation, the national budget gained substantially by eliminating huge financial losses which far exceeded the compensation to workers in net present value terms, and the scarce physical resources released by the closure (both land and skilled workers) got redeployed to other more productive uses. The main point here is that one needs to look at the total picture in evaluating a policy outcome. If there are short-term costs these need to be identified, mitigating measures need to be developed and the costs have to be evaluated against the long term benefits from gains in efficiency, productivity and new investments.
Unfortunately, the government as an institution seriously lacks a capacity to do good analysis of policy options. One important step forward will be to rethink the role of the Planning Commission, away from bureaucratically-oriented project approval machinery to an institutional think tank that does strategic thinking and analysis on core policy and institutional issues. Additionally, the government could also procure good analysis from the non-government sector. Many countries do that. For example, in India the government frequently uses national research institutions to do policy analysis. There are a large number of policy research institutions that Indian policy makers might turn to. These include the National Council for Applied Economic Research (NCAER), the National Institute of Public Finance and Policy (NIPFP), the Indian Council for Research on International Economic Relations (ICRIER), the Rajiv Gandhi Institute, and the Centre for Policy Research. There are others as well. A systematic approach in Bangladesh to step up policy analysis will be a major step forward. Indeed, investment in domestic capacity for policy analysis is a worthwhile endeavour that Bangladeshi policy makers may want to pursue urgently.
The road ahead for Bangladesh is long and challenging. Yet the people of Bangladesh have shown over the past 35 years that they have the courage, will and determination to fight against many odds and move forward with the development agenda. The fight for raising the growth rate of national income is critical to lift the quality of life for the large majority of the Bangladeshi citizens. This is a winnable battle and all must join forces to make this possible. It is a time to think and reflect, to think out of the box how to position Bangladesh over the next 10 years. Should the citizens be happy to move along the present growth path and scream for help every time a predictable natural disaster hits the country or should they get together to carve out a road map that allows them to move to a much higher growth path that also provides financial flexibility to finance long-term solutions to management of natural disasters and other development challenges?
(The writer is with the World Bank in Washington D.C. The views expressed in this article are those of the writer and do not necessarily reflect the views of World Bank group. Concluded)
A clear challenge for Bangladesh is to sharply increase total factor productivity. At the same time the investment rate needs to be increased to finance critical infrastructure and human development. Both are necessary to raise the growth rate to India's level. India's experience supplemented by Bangladesh's own experience suggests that the key to faster investment and productivity growth is policy and institutional reforms. Analysis done by the World Bank and other researchers suggest that major reform priorities include: restoring the macroeconomic stability which has come under severe strain from unsustainable expansion in the deficits of public enterprises; sharply raising domestic public resources to finance much needed public investments in infrastructure and human capital; diversifying the export base through further trade and investment liberalisation and supporting this through improvements in infrastructure, especially power and port services; attracting foreign investment much more aggressively, which is critical for technology transfer, an important source of growth in total factor productivity; and sharply reducing the cost of doing business by reforming the public sector through a massive deregulation drive that redefines the role of public sector away from commercial activities towards mostly public goods, simplifies all business transactions, reduces the discretionary authority of a largely corrupt and inefficient bureaucracy, and institutes public sector accountability.
These reforms are well known. Implementation is constrained by uncertain political climate, resistance from vested interest, and populist debates about the effectiveness and or trade-off between growth and equity concerns associated with some of the policies.
The experience of Bangladesh shows that political uncertainty is a way of life and it is best to internalise this and not let it stand in the way of doing the right things. Bangladesh has implemented many good policies despite frequent political turmoil and change in governments. Remarkably, no government has reversed any good policy initiative of a past government. This is because good policies benefit the people who ensure their continuity. Indeed, a number of bold measures taken by the present caretaker government on the governance and anti-corruption front will likely survive a change in political government because these have the support of the people. In the same spirit, other good policies that help create income and jobs for people based on a solid growth strategy will find wide acceptance and should be implemented now even as preparations are underway for a new political transition.
Concerning vested interest, this is again a way of life and every government faces this. This is where sound leadership counts most. Policy and institutional reforms will inevitably hurt those benefiting from the status quo. Skillful leadership is necessary to engage the various interest groups in dialogue and discussions, agree on mitigating measures where necessary, and then move ahead with implementation. There are important lessons from Bangladesh's own experience that one can draw upon in countering vested interests. For example, successive governments have deepened the market orientation of the Bangladesh economy through deregulation and privatisation even though there were important vested interests (trade unions, bureaucrats, politicians) who opposed this strategy in a variety of ways. The successful closure of the heavily loss-making Adamjee Jute Mills is another example. A yet another example is the liberalisation of the exchange rate in 2003.
The policy debate is a healthy sign of engagement and ought to be welcomed. No individual or institution is a repository of all knowledge or wisdom. When a Bretton Woods Institution provides policy suggestions to a client country these should be carefully reviewed and debated within the country. Indeed, debate and discussions based on solid analysis are key to sound decision making. However, it is not always obvious that the policy debate in Bangladesh is well-founded on good analysis and empirical evidence. Too often one sees a populist approach. In particular, the trade-off between growth and equity is the most tricky issue to resolve. This is one area where emotions run large and the debate is least well grounded in solid research. For example there are perceived notions that trade and investment deregulations hurt the poor by reducing domestic economic activity and employment. This is a major reason for a populist opposition to trade reforms or opening up of the economy to foreign private investment. Some local economists talk of de-industrialisation happening from reduction in trade protection; others fear about foreign investors taking over local enterprises.
To my knowledge I am yet to see solid empirical evidence of these perceptions grounded on the realities of Bangladesh. These views not only are not substantiated with solid analysis, they also tend to ignore the global developments in dynamic economies like China and India where trade liberalisation and foreign investment have provided major impetus to growth. This is not to deny that in the short-term there might be adverse income distribution and or employment effects from policy reforms. Surely, the closure of Adamjee Jute Mills saw the loss of employment of many workers. But this can hardly be a rallying point against the bold decision to close the defunct enterprise. A closer look at the evidence will show that the economy is a net gainer. The workers did get adequate compensation, the national budget gained substantially by eliminating huge financial losses which far exceeded the compensation to workers in net present value terms, and the scarce physical resources released by the closure (both land and skilled workers) got redeployed to other more productive uses. The main point here is that one needs to look at the total picture in evaluating a policy outcome. If there are short-term costs these need to be identified, mitigating measures need to be developed and the costs have to be evaluated against the long term benefits from gains in efficiency, productivity and new investments.
Unfortunately, the government as an institution seriously lacks a capacity to do good analysis of policy options. One important step forward will be to rethink the role of the Planning Commission, away from bureaucratically-oriented project approval machinery to an institutional think tank that does strategic thinking and analysis on core policy and institutional issues. Additionally, the government could also procure good analysis from the non-government sector. Many countries do that. For example, in India the government frequently uses national research institutions to do policy analysis. There are a large number of policy research institutions that Indian policy makers might turn to. These include the National Council for Applied Economic Research (NCAER), the National Institute of Public Finance and Policy (NIPFP), the Indian Council for Research on International Economic Relations (ICRIER), the Rajiv Gandhi Institute, and the Centre for Policy Research. There are others as well. A systematic approach in Bangladesh to step up policy analysis will be a major step forward. Indeed, investment in domestic capacity for policy analysis is a worthwhile endeavour that Bangladeshi policy makers may want to pursue urgently.
The road ahead for Bangladesh is long and challenging. Yet the people of Bangladesh have shown over the past 35 years that they have the courage, will and determination to fight against many odds and move forward with the development agenda. The fight for raising the growth rate of national income is critical to lift the quality of life for the large majority of the Bangladeshi citizens. This is a winnable battle and all must join forces to make this possible. It is a time to think and reflect, to think out of the box how to position Bangladesh over the next 10 years. Should the citizens be happy to move along the present growth path and scream for help every time a predictable natural disaster hits the country or should they get together to carve out a road map that allows them to move to a much higher growth path that also provides financial flexibility to finance long-term solutions to management of natural disasters and other development challenges?
(The writer is with the World Bank in Washington D.C. The views expressed in this article are those of the writer and do not necessarily reflect the views of World Bank group. Concluded)