Defending free economy and growth
Thursday, 3 June 2010
Enayet Rasul Bhuiyan
The World Economic Freedom Index (WEFI) in 2007 listed Bangladesh in the 143 place among the countries sampled by it. This was notwithstanding the fact that Bangladesh has been fast liberalising its trade and remains a front runner in this regard among its South Asian neighbours. But Nepal with its 121 position, Pakistan with the 89th and India with the 104th place, were seen in that rating as relatively freer economies compared to Bangladesh.
The reason for this could be that while Bangladesh has certainly taken a march over its neighbours in liberalising its external trade, it could not do the same in respect of other areas such as inviting foreign direct investments (FDIs), exchange controls, etc. Thus, cumulatively in the list of economic freedoms, Bangladesh appeared to have fallen behind. But this was no ground for despair. Lacking institutions and capabilities to carry out substantive liberalisation throughout the economy, Bangladesh has taken the cautious path in decontrol and this path is not without merits in the present context of Bangladesh. However, this does not exempt the policy planners from taking moves in right earnest for further freeing the economy in all respects because as free economies are clearly better off than the regulated ones.
In the latest ranking of WEFI in 2010, Bangladesh's overall score was 51.1, which is 3.6 points higher than that of the last year, according to the report jointly prepared by USA-based think tank Heritage Foundation and the Wall Street Journal. Bangladesh has been ranked as the 137th freest economy in the world which marks its progress by six notches from the 2007 score. In the Asia-Pacific region Bangladesh has been ranked 29th out of 41 countries. "The gains reflect Bangladesh's improvements in trade freedom and investment freedom," according to the report. In the index, the country for the first time graduated itself from the 'Repressed' category .
Praising the country's performance in last five years, the report said, "Bangladesh has enjoyed impressive economic growth of around 6 percent per year over the past five years driven mainly by its limited but growing services and industrial sectors."
The objectivity of these findings and views is seen from Bangladesh's own experiences as well. Bangladesh was a strongly inward looking economy until 1986 when it adopted trade liberalisation policies as part of the structural adjustment programme. It was found that during the period of extensive trade liberalization from 1992 to 1996, fiscal deficit declined, inflation rate fell, current account deficit declined, foreign currency reserves increased, real effective exchange rate depreciated and dependence on foreign aid significantly reduced. The trade liberalisation policies have continued since then and only seemed to add to the economy's gains. The import of machinery and raw materials at cheaper prices as a consequence of trade liberalisation gave a boost to internal production of all sorts and gave a particular thrust and competitiveness to the export-oriented industries. Thus, industrialisation and exports have surged for Bangladesh in recent years and these developments are certainly linked to making its economy more open and from relaxing regulations.
To reap the maximum advantages from deregulation and decontrol, the challenges are mainly to address issues connected to investments both local and foreign. Bureaucratic red tapism, excessive caution and sometimes even delaying political obstacles are at work which must be removed. The economic growth of the country can be faster if these disincenives can be eliminated for good and the taking of investment decisions can be rendered free to a greater degree. But it can be also counter productive for a country like Bangladesh to lower the guards excessively and uncaringly. The minimum of regulation must be there. But the regulations need to be absolutely of the right type to ensure protection of the country's economic interests. All excesses of regulations should be done away with. For this purpose, the regulating bodies as well as the regulators themselves will have to work efficiently under the guideline of minimum regulations. Capacities or competence in the regulating agencies will have to be developed but with an eye to eliminating bureaucratic procedures or too many regulations.
Artificial rearing of enterprises is never good. Under a wall of protection, such enterprises never develop the urge, creativity or efficiency to become enterprises in their own right to produce quality goods at competitive prices in a dynamic business environment. Protected industries tend to shelter redundancy, inefficiency and pass on the high costs of their production as well as the poor quality of their products to end consumers. In contrast, enterprises exposed to competition through trade liberalisation policies might be expected to become acutely conscious of their survival and act promptly on their own to take the steps to upgrade or adjust production processes, improve stock control, pay much greater attention to quality factors, etc., in their bid to meet the external competition.
While embracing such changes, the domestic industries improve in terms of efficiency and quality and the same then have a positive influence on the economy as a whole. Some naysayers may say that domestic industries unable to rise to the challenge posed by trade liberalisation might die. But this can be no excuse to rear white elephants such as the ones that exist among the public sector industries in Bangladesh or their molly coddled equivalents in the private sector.
While undue protection is the last thing that should be extended, what the government can do rightly in looking after the legitimate interests of domestic enterprises and enhancing their competitiveness in relation to external competition involves large-scale infrastructure development in support of industries through public sector investments and in helping to much reduce the costs of doing business that frustrate enterprise or new industrial investments.
The World Economic Freedom Index (WEFI) in 2007 listed Bangladesh in the 143 place among the countries sampled by it. This was notwithstanding the fact that Bangladesh has been fast liberalising its trade and remains a front runner in this regard among its South Asian neighbours. But Nepal with its 121 position, Pakistan with the 89th and India with the 104th place, were seen in that rating as relatively freer economies compared to Bangladesh.
The reason for this could be that while Bangladesh has certainly taken a march over its neighbours in liberalising its external trade, it could not do the same in respect of other areas such as inviting foreign direct investments (FDIs), exchange controls, etc. Thus, cumulatively in the list of economic freedoms, Bangladesh appeared to have fallen behind. But this was no ground for despair. Lacking institutions and capabilities to carry out substantive liberalisation throughout the economy, Bangladesh has taken the cautious path in decontrol and this path is not without merits in the present context of Bangladesh. However, this does not exempt the policy planners from taking moves in right earnest for further freeing the economy in all respects because as free economies are clearly better off than the regulated ones.
In the latest ranking of WEFI in 2010, Bangladesh's overall score was 51.1, which is 3.6 points higher than that of the last year, according to the report jointly prepared by USA-based think tank Heritage Foundation and the Wall Street Journal. Bangladesh has been ranked as the 137th freest economy in the world which marks its progress by six notches from the 2007 score. In the Asia-Pacific region Bangladesh has been ranked 29th out of 41 countries. "The gains reflect Bangladesh's improvements in trade freedom and investment freedom," according to the report. In the index, the country for the first time graduated itself from the 'Repressed' category .
Praising the country's performance in last five years, the report said, "Bangladesh has enjoyed impressive economic growth of around 6 percent per year over the past five years driven mainly by its limited but growing services and industrial sectors."
The objectivity of these findings and views is seen from Bangladesh's own experiences as well. Bangladesh was a strongly inward looking economy until 1986 when it adopted trade liberalisation policies as part of the structural adjustment programme. It was found that during the period of extensive trade liberalization from 1992 to 1996, fiscal deficit declined, inflation rate fell, current account deficit declined, foreign currency reserves increased, real effective exchange rate depreciated and dependence on foreign aid significantly reduced. The trade liberalisation policies have continued since then and only seemed to add to the economy's gains. The import of machinery and raw materials at cheaper prices as a consequence of trade liberalisation gave a boost to internal production of all sorts and gave a particular thrust and competitiveness to the export-oriented industries. Thus, industrialisation and exports have surged for Bangladesh in recent years and these developments are certainly linked to making its economy more open and from relaxing regulations.
To reap the maximum advantages from deregulation and decontrol, the challenges are mainly to address issues connected to investments both local and foreign. Bureaucratic red tapism, excessive caution and sometimes even delaying political obstacles are at work which must be removed. The economic growth of the country can be faster if these disincenives can be eliminated for good and the taking of investment decisions can be rendered free to a greater degree. But it can be also counter productive for a country like Bangladesh to lower the guards excessively and uncaringly. The minimum of regulation must be there. But the regulations need to be absolutely of the right type to ensure protection of the country's economic interests. All excesses of regulations should be done away with. For this purpose, the regulating bodies as well as the regulators themselves will have to work efficiently under the guideline of minimum regulations. Capacities or competence in the regulating agencies will have to be developed but with an eye to eliminating bureaucratic procedures or too many regulations.
Artificial rearing of enterprises is never good. Under a wall of protection, such enterprises never develop the urge, creativity or efficiency to become enterprises in their own right to produce quality goods at competitive prices in a dynamic business environment. Protected industries tend to shelter redundancy, inefficiency and pass on the high costs of their production as well as the poor quality of their products to end consumers. In contrast, enterprises exposed to competition through trade liberalisation policies might be expected to become acutely conscious of their survival and act promptly on their own to take the steps to upgrade or adjust production processes, improve stock control, pay much greater attention to quality factors, etc., in their bid to meet the external competition.
While embracing such changes, the domestic industries improve in terms of efficiency and quality and the same then have a positive influence on the economy as a whole. Some naysayers may say that domestic industries unable to rise to the challenge posed by trade liberalisation might die. But this can be no excuse to rear white elephants such as the ones that exist among the public sector industries in Bangladesh or their molly coddled equivalents in the private sector.
While undue protection is the last thing that should be extended, what the government can do rightly in looking after the legitimate interests of domestic enterprises and enhancing their competitiveness in relation to external competition involves large-scale infrastructure development in support of industries through public sector investments and in helping to much reduce the costs of doing business that frustrate enterprise or new industrial investments.