Once again annual forecast has been made by the Bangladesh Government and three multi-lateral institutions regarding the growth rate of Gross Domestic Product (GDP) well before the half-way mark of the current fiscal. Though it is possible to make such forecast based on performance of the economy in the past year and on the basis of partial data available for a fraction of the year long period, the urgency or rationale for the annual ritual of making projections has never been spelt out which has given rise to speculations that sometimes verge on suspicions. An explanation for this exercise may point out to its role as a sign post to the future state of the economy for the guidance of investors to make decisions before the end of the fiscal year but it would be an weak argument. Investment decisions are not made in Bangladesh, and for that matter anywhere else, on the basis of growth rate of GDP for the current year. Rather it is the GDP growth rate of previous year that usually act as one of the guides for decision making of investors. Be that as it may, the die is cast and forecasts on GDP growth rate for the current fiscal are now available in the public domain. Naturally, it behoves observers of economic news to make an attempt to discuss and ferret out the significance of the forecasts made.
The first forecast, as usual, has been made by the government of Bangladesh following the past precedence. According to the Bangladesh Bureau of Statistics (BBS), Bangladesh GDP will grow by 8.13 per cent at the end of the current fiscal. This does not appear to be a very high jump from the past year when the corresponding for GDP growth was 7.90 per cent. Predictably, forecast by three multi-lateral institutions, the Asian Development Bank (ADB), the World Bank and the International Monetary Fund (IMF) followed in quick succession. The ADB in its Annual Development Outlook (ADO), for 2019 was the first to follow suit in making its projection according to which the Bangladesh will post 8 per cent growth in GDP for the current fiscal which is almost the same as that of the BBS. What is more remarkable is that the ADO, 2019 of ADB has been very effusive about the performance of Bangladesh economy as embodied in the projected growth rate saying it is likely to be the fastest growth in Asia and Pacific this year. The ADB Country Director in Dhaka said to the press that Bangladesh is already a role model and probably can be a bigger role model. Mentioning that Bangladesh economy has had a good year so far, riding on the back of good crop outlook, prospect of increasing volume of exports and a steady flow of remittances by wage earners, he said if good infrastructures are continued to be built then 8 per cent growth rate of GDP can be moved to even 10 per cent in the near future. As regards the projection of 8 per cent in GDP growth during 2019 -2020 the contributory factors identified by the ADB in the ADO, 2019 are: (1) robust private consumption (2) increased public investment (3) strong export performance (4) expansion in industrial output (5) steady flow of remittance (6) good agricultural crop outlook and (7) sound macro-economic management.
The ADB Country Director, while releasing the ADO, 2019, said that for Bangladesh to reach beyond 8 per cent growth in GDP there is need for skill development, infrastructure network, increasing investment, use of newer technology, diversifying exports, sound debt management, lower cost of doing business, investment of human capital, inclusive development, continued sound macro-economic policy decisions and a good governance framework. As regards the challenges and downside risks to the achievement of the projected rate of GDP growth, fiscal deficit resulting from underperformance in revenue collection and instability of banking sector in the form of erosion of capital base and non-performing loans (NPL) have been identified in the ADO, 2019 of ADB.
The World Bank in its 2019 edition of Bangladesh Development Update has tipped the Bangladesh economy to grow during the current fiscal (2019-2020) at the rate of 7.3 per cent, which is much below the projections made by the BBS and the ADB. The World Bank Update has, however, applauded the performance of Bangladesh economy saying that sound macro-economic management to keep the budget deficit below 5 per cent of GDP, sustained domestic demand supported by a low inflation rate at 5.5 per cent have led to growth in manufacturing productivity, particularly in export-oriented industries and in the construction sector on the supply side. On the demand side, growth is being propelled by private consumption and exports, the World Bank Update said. It has been pointed out that after a modest performance last year, export earnings and remittances have bounced back, helping the growth of the economy. In addition, GDP growth rate has been stimulated by substantial improvement in electricity generation and bumper agricultural harvest, the Update has noted.
Though a rather conservative projection has been made by the World Bank compared to that by the BBS and the ADB, its Update, 2019 has placed Bangladesh among the five fastest growing economies in the world this year: (1) Bangladesh-7.3 per cent (2) India-7.5 per cent (3) Bhutan-7.6 per cent (4) Rwanda-7.8 per cent and Ethiopia-8.8 per cent.
The World Bank has pointed out that in spite of impressive growth rate of GDP, Bangladesh faces several short and long term development challenges. For the short term, the first term foremost risk is the very high volume of NPL of commercial banks compounded by an eroding capital base that pose financial stability risk. Elaborating on this problem that has been flagged red by the World Bank, it has been pointed out that directed lending, poor risk management and weak corporate governance and poor oversight by the Bangladesh Bank are the main causes behind the crisis in the banking sector. At the same time the practice of loan re-scheduling with very easy terms and frequent write-offs have put further stress on banks, the World Bank Update said. Among other short term challenges to the achievement of the projected GDP growth rate, the World Bank has mentioned below target collection of revenue and stress of foreign exchange reserves stemming from high import bills and lower export earnings. The World Bank has strongly recommended reform measures to address the above challenges. Particularly, recommendations have been made for boosting private investment and diversification of exports. The Bank has cautioned that unless necessary reforms are made and action taken the macro-economic can be derailed.
For the medium term the World Bank has mentioned that Bangladesh will require huge investment in physical infrastructures, human capital development and technological innovation to become upper middle income country by 2031 and attain high income country status by 2041.
Coming on the heels of the ADB and the World Bank, the IMF World Economy Outlook, 2019 has given almost unconditional endorsement to Bangladesh's `extraordinary growth momentum'. It said Bangladesh will be among the three fastest growing economies of the world with Rwanda registering 7.8 per cent, Bangladesh posting 7.3 per cent and India chalking up 7.3 per cent growth rates in GDP.
According to IMF, among the contributory factors to the increase in the rate of GDP growth in Bangladesh sound macro-economic management deserves special mention. It has kept inflation below the target at 5.4 per cent against 5.6 per cent during last fiscal. On the external side narrowing down of current account deficit to 1.9 per cent of GDP, improving from the negative balance of 2.8 per cent during last fiscal, has been held out by the IMF as another important positive development.
All the three reports by the multi-lateral institutions on the performance of Bangladesh economy have acknowledged that the country is one of the fastest growing economies in the world today. The ADB report has also described Bangladesh as a role model of development. All the three institutions have identified more or less the same factors contributing to the stellar performance of Bangladesh economy during the period covered. Though in the case of IMF the number of factors attributed for the economic performance have been fewer than the other two institutions, its appreciation of the sound economic management tallies with the others. But what is more important than the credit given to sound economic policies and sectoral performance is the caution made by the multi-lateral institutions about the downside risk posed by the problem in the banking sector, particularly the growing incidence of NPL. It has been pointed that unless this and other challenges facing Bangladesh economy are addressed in right earnest actual achievement at the end of the fiscal may fall short of the projections made regarding GDP growth rate.
What is most glaring in the reports of all the three multi-lateral institutions is the absence of any concern expressed over growing income inequality. That it may derail the trajectory of Bangladesh economy's growth is missing in their reports. Perhaps this silence is symptomatic of the development philosophy held by them that sets a great store on achievement of economic growth.
The discrepancy among the various estimates and projections of GDP growth rate for the current fiscal is of a piece with the past practice. As usual the estimate and projection by the BBS is higher than those of the rest. Only ADB's projection comes closure to that of the BBS. However, the gap between the BBS projection at 8.13 per cent and those made by World Bank (7.3 per cent) and IMF (7.3 per cent) is very wide and cannot be ignored. All the four institutions use the same data, those collected by the BBS. Obviously, varying projections are because of different interpretations made of the data. But it is puzzling that using the same data for the same purpose should lead to such wide divergences in estimates and projections. The GDP growth rate as projected at 8.13 per cent by the BBS and 7.3 per cent by the World Bank and IMF 7.3 per cent are so widely varying that it requires explanation from the multi-lateral institutions. Since they are mainly using data collected by the BBS it should not be too much to expect some co-ordination between them. This consultation should take place before the projections are made public by the multi-lateral institutions, not so much to arrive at a consensus but to make the exercise transparent.
It has been suggested by some quarters that the growth rate projected by the BBS is badly inaccurate. Worse still, the projection is suspected to be deliberately inflated. These speculations, which have become routine every time BBS announces figures for GDP growth rate, require some scrutiny. The BBS projection of GDP growth rate can be inflated or be inaccurate because of any of the following reasons: (a) inclusion of some sectors in the calculation of GDP for which there is no justification; (b) Overrating the contribution of some sectors, deliberately or mistakenly; (c) Showing higher productivity of factor of production than is warranted; (d) Use of wrong base year for calculation of GDP.
As regards the first, no one has until now pointed out that the BBS has included sectors in the economy which are not eligible for consideration in calculating GDP. Rather, there are persistent reports that some sectors have been left out of national income accounting (GDP). For instance the household sector does not figure in GDP estimate even though housewives (homemakers) make significant contribution in terms of services rendered. Similarly, many units in the informal sector have not been included for the purpose of calculating GDP because they are outside the realm of taxation. Realizing this lacunae, the BBS has recently carried out survey of sectors left out in their GDP calculation. In future 6 (six) new sectors will be added to 15 (fifteen) traditional sector in the economy to rectify this gap. From this it is apparent that rather than inflating GDP growth rate by including ineligible sectors, quite a few eligible sectors have been kept out of calculations. The allegation of overrating the contribution of some sectors does not hold water either because if data is available for any sector calculation of their contribution cannot be exaggerated. It is only in cases but data is not available or is incomplete that contribution of a sector may be speculated overshooting the actual. But such cases must be few in number and far between in time.
The calculation of growth rate of GDP may be on the higher side if there is wrong assumption about productivity increase. For instance, if it is assumed that productivity in a sector has increased than less investment will be required to produce the same output. Growth being the function of investment and investment level for a certain growth rate being dependent on capital-output ratio i.e amount of capital invest required to produce one unit of output, then it follows that correct calculation of capital-output ratio is crucial for determining the level of investment to achieve the certain rate of growth. To give an example, with 4 to 1 capital-output ratio 32 per cent of GDP will be required in investment to achieve 8 per cent of GDP growth rate. Measuring productivity change through calculation of capital-output ratio is sophisticated exercise and there is room for making error in this respect. It is not known to what extend such mistake is being made by the BBS and how widespread and recurrent is that. Be that as it may, it is a potential risk to which the BBS may be vulnerable. Finally, a base year is used at the interval of 10 years for calculating GDP. After independence the calculation of national income accounts was made using 1972-1973 as the base year. In 1992-1993 fiscal 1984-1985 was used as the new base year. In 1999-2000 a new base year was used fixing 1995-1996 thus. But 2005-2006 was used has base year in 2013-2014, that is after 15 (fifteen) years of the last announcement. The same base year is continuing to be used now. There may be some mismatch in price calculations of goods and services included in GDP because of the long interval between the last base year and the present estimate of GDP. But it is not certain.
After taking all the possible cases for an inflated GDP growth rate there does not appear to be much of a ground to conclude that GDP growth rate has been inflated. But the most important question here is why should the BBS be interested in inflating growth rate? If it is contended that such an inflated rate is politically motivated then it has to be pointed out that voters are not swayed by GDP and its growth rate as they are by inflation and unemployment. GDP does not have to be a hand maiden of the power that be for the sake of popularity. It is the outcome of GDP that matters politically, that is how much goods and services are created in the economy and at what prices. GDP growth rate is red herring in the context of political economy.
So much for Bangladesh narrative on GDP growth rate. Now we may turn to an issue related to GDP that is not unique to Bangladesh but is applicable to all countries.
No sooner GDP was invented by Simon Kuznets, a Russian-born American in early Thirties during the Great Depression in America than a controversy arose over its perceived role which surrounds it until today. GDP has been faulted for its failure to measure welfare for human development. When Kuznets was entrusted with the task of estimating the size of American economy the objective of Roosevelt administration was to determine the counter-depression programme with government spending for which the total national income had to be known. When Kuznets submitted his report to US Congress there was a bombshell in it-it was revealed that the American economy had more than halved during the three years after the onset of Depression in 1932. His report became the basis for drawing up and implementation of the New Deal. So, in this first instance GDP was used for formulating a national policy to address the Great Depression. Soon afterwards, the outbreak of second world war made it necessary to know the resources available for making of armaments. Though Kuznets was against this use of GDP he had to comply with the decisions of the government. Use of GDP for war purposes got a shot in the arm when JM Keynes, on the other side of Atlantic, made a strong case for estimating national income for the purpose of conduct of war. Though initiated by Kuznets the ultimate architect of GDP became JM Keynes. The point that is being made here is that neither at the outset nor afterwards GDP was used for the purpose of measuring anything but national income.
As of now there is no viable alternative to GDP for the estimate of national income. In spite of its drawbacks in some respects, it is indispensable for any country. It cannot be used for the measurement of welfare or human development. However, human welfare can be promoted on the basis of knowledge of GDP. It is the basis means for measuring and promoting welfare. But by itself GDP does not promote welfare in a market economy where income is shared on the basis of ownership of means of productions and wealth. It requires that visible hand of government to take policy decisions for redistribution through taxation and welfare spending.
For quite some time Human Development Index (HDI) has been discussed as a possible alternative to GDP. But the two are not the same. While GDP measures national income, HDI measures welfare and human development. GDP has a role in promoting welfare in so far as it provides the resources for the same. As such HDI needs and should be happy to use GDP for the purpose for which it was conceived and designed. There is no room for confusion here.