Continued growth in Bangladesh puts pressure on certain key resources
Tuesday, 28 October 2008
World Bank in its 2nd Investment Climate Assessment (ICA) report finds continued growth in Bangladesh has put a pressure on certain key resources - electricity, finance, land, and skilled labor - which are essential for private sector growth, reports UNB.
The micro, small and medium firms are particularly constrained by poor allocation of resources, despite their significant potentials for productivity gains, employment generation, and poverty reduction.
The report, titled `Bangladesh Second Investment Climate Assessment (ICA): Harnessing Competitiveness for Stronger Inclusive Growth', evaluates the constraints faced by the private sector and assesses the competitiveness of firms in Bangladesh.
The report was jointly launched by the Board of Investment (BoI), the World Bank, South Asia Enterprise Development Facility (SEDF), and Department for International Development (DFID) at a function at Sonargaon Hotel today (Monday).
Finance Adviser Dr Mirza Azizul Islam was the chief guest at the launching ceremony with BoI executive chairman Kamal Uddin Ahmed in the chair.
The 2nd ICA Report discusses how a more enabling business environment would promote stronger and faster economic development.
Currently, only the big well-established companies are able to adequately procure basic facilities. Smaller and younger firms are frequently left behind. So are most businesses outside of the Dhaka-Chittagong corridor. Weak financial markets also prevent resources from flowing to more productive smaller firms.
The report indicates that public-private partnership for power generation and distribution would lead to faster economic growth.
Modernised lending methods combined with diversified lending instruments would boost growth for smaller and upcoming entrepreneurs.
Improvements in land administration would increase access to serviced land and help new firms enter the market.
A particularly promising area for economic growth is the non-farm sector in areas outside Dhaka and Chittagong, which can improve the livelihoods of the poorest.
This sector could be stimulated by linking it to existing markets, providing services and infrastructure. The most effective support to rural non-farm activities would focus on forming business and growth clusters, at first only a few well-endowed locations, those with the highest potential for growth.
In the report, the World Bank said that macroeconomic stability has been broadly maintained, though high and rising inflation was the main concern. Political stability and good governance have proven to be critical factors affecting the health of the Bangladeshi private sector, it added.
According to the report, the structure of the economy had been moving away from agriculture, with industry becoming the second largest sector in the economy in 2001. Growth in the manufacturing sector has been robust at 11.4 percent in FY2007. Rising incomes in Bangladesh are spurring consumerism and the services sector, which is further fuelled by urbanization and remittances. Urban and rural areas display vastly different characteristics, strengths, and issues, suggesting the need to avoid a one-size-fits-all approach.
Productivity growth before 2003 was below potential, with inefficient allocation of resources even within the most productive sectors. For example, whereas most resources are channeled to larger and older firms, who are also more likely to enjoy economies of scale and learning by doing, analysis shows smaller and younger firms to be more productive in spite of more adverse investment climate conditions. Older and larger firms are less productive as they are protected from competition and face little incentive to innovate and improve.
The top five investment climate constraints, in the opinion of metropolitan firms, are electricity, political instability, governance, access to land, and access to finance.
Some of the key investment climate areas are overviewed below:
Electricity supply has struggled to keep up with demand spurred by solid economic growth. The private productive sector reports significant losses as a result of power scarcity. The issue is particularly detrimental to MSMEs who cannot afford generators.
Estimates put the cost of electricity shortages to Bangladesh at as much as two percentage points of annual GDP growth.
The Bangladesh Energy Regulatory Commission (BERC) is operational and needs strengthening. The recent unbundling of distribution companies, and their corporatisation is expected to bring improvements.
The railway network is facing increasing competition from a developing road network and high-capacity trucks, and needs improved financial and operating efficiency. Competition is strong in inland water transport, where services are provided mainly by small private operators.
Non-metropolitan enterprises identified inaccessibility of roads during certain seasons as a major constraint.
In sum, to sustain and increase growth, recent rising inflation must be addressed, FDI and export competitiveness must be stimulated, stronger investment and productivity increases are needed, and the pressure must be eased on the country's infrastructure and factor markets for land, skilled labor, and financing for long-term investment and for Small and Medium Enterprises (SMEs).
To stimulate both domestic and foreign investment sustainably, improvements in the business environment are needed, including property registration. contract enforcement, and governance, as are power infrastructure and land enabling policies.
For productivity, labour skill and innovation would need to be deepened. The financial sector would need to step up its term transformation role, and develop new lending products suitable for the SME sector.
The report said that the investment in the country is reasonably high; however, the efficiency of utilization of resources is under question. Capacity utilisation was low on average, primarily due to electricity shortages, working capital shortages and suppressed demand.
The first ICA was done in 2003. The Second ICA takes a more comprehensive look at the business environment by extending beyond Dhaka and Chittagong. For the first time, the 2nd ICA report looks beyond manufacturing to the services sector.
The micro, small and medium firms are particularly constrained by poor allocation of resources, despite their significant potentials for productivity gains, employment generation, and poverty reduction.
The report, titled `Bangladesh Second Investment Climate Assessment (ICA): Harnessing Competitiveness for Stronger Inclusive Growth', evaluates the constraints faced by the private sector and assesses the competitiveness of firms in Bangladesh.
The report was jointly launched by the Board of Investment (BoI), the World Bank, South Asia Enterprise Development Facility (SEDF), and Department for International Development (DFID) at a function at Sonargaon Hotel today (Monday).
Finance Adviser Dr Mirza Azizul Islam was the chief guest at the launching ceremony with BoI executive chairman Kamal Uddin Ahmed in the chair.
The 2nd ICA Report discusses how a more enabling business environment would promote stronger and faster economic development.
Currently, only the big well-established companies are able to adequately procure basic facilities. Smaller and younger firms are frequently left behind. So are most businesses outside of the Dhaka-Chittagong corridor. Weak financial markets also prevent resources from flowing to more productive smaller firms.
The report indicates that public-private partnership for power generation and distribution would lead to faster economic growth.
Modernised lending methods combined with diversified lending instruments would boost growth for smaller and upcoming entrepreneurs.
Improvements in land administration would increase access to serviced land and help new firms enter the market.
A particularly promising area for economic growth is the non-farm sector in areas outside Dhaka and Chittagong, which can improve the livelihoods of the poorest.
This sector could be stimulated by linking it to existing markets, providing services and infrastructure. The most effective support to rural non-farm activities would focus on forming business and growth clusters, at first only a few well-endowed locations, those with the highest potential for growth.
In the report, the World Bank said that macroeconomic stability has been broadly maintained, though high and rising inflation was the main concern. Political stability and good governance have proven to be critical factors affecting the health of the Bangladeshi private sector, it added.
According to the report, the structure of the economy had been moving away from agriculture, with industry becoming the second largest sector in the economy in 2001. Growth in the manufacturing sector has been robust at 11.4 percent in FY2007. Rising incomes in Bangladesh are spurring consumerism and the services sector, which is further fuelled by urbanization and remittances. Urban and rural areas display vastly different characteristics, strengths, and issues, suggesting the need to avoid a one-size-fits-all approach.
Productivity growth before 2003 was below potential, with inefficient allocation of resources even within the most productive sectors. For example, whereas most resources are channeled to larger and older firms, who are also more likely to enjoy economies of scale and learning by doing, analysis shows smaller and younger firms to be more productive in spite of more adverse investment climate conditions. Older and larger firms are less productive as they are protected from competition and face little incentive to innovate and improve.
The top five investment climate constraints, in the opinion of metropolitan firms, are electricity, political instability, governance, access to land, and access to finance.
Some of the key investment climate areas are overviewed below:
Electricity supply has struggled to keep up with demand spurred by solid economic growth. The private productive sector reports significant losses as a result of power scarcity. The issue is particularly detrimental to MSMEs who cannot afford generators.
Estimates put the cost of electricity shortages to Bangladesh at as much as two percentage points of annual GDP growth.
The Bangladesh Energy Regulatory Commission (BERC) is operational and needs strengthening. The recent unbundling of distribution companies, and their corporatisation is expected to bring improvements.
The railway network is facing increasing competition from a developing road network and high-capacity trucks, and needs improved financial and operating efficiency. Competition is strong in inland water transport, where services are provided mainly by small private operators.
Non-metropolitan enterprises identified inaccessibility of roads during certain seasons as a major constraint.
In sum, to sustain and increase growth, recent rising inflation must be addressed, FDI and export competitiveness must be stimulated, stronger investment and productivity increases are needed, and the pressure must be eased on the country's infrastructure and factor markets for land, skilled labor, and financing for long-term investment and for Small and Medium Enterprises (SMEs).
To stimulate both domestic and foreign investment sustainably, improvements in the business environment are needed, including property registration. contract enforcement, and governance, as are power infrastructure and land enabling policies.
For productivity, labour skill and innovation would need to be deepened. The financial sector would need to step up its term transformation role, and develop new lending products suitable for the SME sector.
The report said that the investment in the country is reasonably high; however, the efficiency of utilization of resources is under question. Capacity utilisation was low on average, primarily due to electricity shortages, working capital shortages and suppressed demand.
The first ICA was done in 2003. The Second ICA takes a more comprehensive look at the business environment by extending beyond Dhaka and Chittagong. For the first time, the 2nd ICA report looks beyond manufacturing to the services sector.