Investment versus economic growth

Investment, one of the key drivers of economic development, has been defined as 'net addition to the existing stock of capital'. Capital is a combination of capital machinery, buildings and transports used for the purpose of production. These elements of production are subject to depreciation, and if the depreciated portion is duly compensated, the stock remains unchanged but new investment is not added. For investment, more capital needs to be added.
After the advent of development economics, three elements were initially considered as most important for economic growth --- savings, investment and capital-production ratio. The Harrod-Domer growth model was developed by linking the above three factors to economic growth.
Production volume is not the same everywhere, even if the same production inputs are used and efficiency of capital utilisation is determined by production achieved per unit of capital. Healthy capital-production ratio is contingent upon quality management and efficient labour.
In Bangladesh, the capital-production ratio is generally 4:1, which means, 1 unit of a product is produced using 4 units of capital. Savings create capital, but that does not mean that all the savings can be utilised as capital leading to investment.
Modern economists have divided capital into four categories. These are material capital, human capital, natural capital and social capital. Concept of capital these days bears a wide meaning. The educated class in a society serves as an example of human capital, because they are a productive force by virtue of their efficiency. Clean air, safe drinking water, biodiversity, greenery, pollution-free environment etc. help develop people's body and mind and thereby play an effective role in making development sustainable. On the other hand, solidarity, fellow-feeling, moral edict, exchange and distribution of knowledge and ideas create the production-friendly environment. This is what is called social capital. The more a society is enriched in these qualities, the more likely it is to achieve steady progress and peaceful environment.
Now where does Bangladesh stand in respect of these different categories of capital? If we start with human capital, the picture is far from being encouraging. In fact, the present state of our science education offers very little towards invention of new technologies. At the same time, there is a clear dearth of human capital, so much so that we have not yet been able to conduct a public examination in a corruption-free manner. The incident of question paper leakage in this year's HSC exams is a glaring example that has turned holding of an exam into a farce. The hearsay is educational institutions offer bribes to get higher numbers of Golden A for their students. Education has become a big business. Rivers and canals are being grabbed indiscriminately by party musclemen. As a result, rivers are becoming increasingly off-limits to fishes. Tube-well water is full of arsenic. Life cycle of crops is in danger due to indiscriminate use of fertilisers and pesticides. Animal feeds are also being adulterated making those animals that depend on them unfit for human consumption. Animals living on adulterated feed are bound to cause health hazards. Innocent people fall prey to such hazards and are made to spend a large portion of their income for medical treatment.
In this way, if we analyse all the reasons behind the scenario, we will find out how huge money invested every year is actually going waste making way for further difficult times. An analysis of total investment and accumulation of capital in our country presents a frustrating picture. The only way to come out of this dismal scenario is to ensure good governance. Whereas the developed countries spend a lot of money in this area, in view of our limited resources, governance of high standard is beyond our reach. We can think of minimum governance at the most. An important aspect of governance is to allow national institutions to operate according to their rules and regulations freely and impartially. Unfortunately, our national institutions, instead of being development-friendly, have turned 'hostile to development'.
In the early days of democracy and capitalism, three important institutions were made inviolable. These are life, liberty and property. In this respect, the first question that comes to our mind is, whether there is a guarantee for life in Bangladesh. Whether there is freedom of expression and freedom of thought. Is there enough protection for the ownership of property? The answer is 'no' to all the three questions and, to make the matters worse, the situation is deteriorating with every passing day. If these three elements cannot be ensured, it will not be possible for someone to do something creative and constructive. We talk about rule of law. But there are many 'black laws' in Bangladesh. If these 'black laws' continue to exist, rule of law cannot be achieved, to say the least. Whether our politicians are conscious of it, or whether they have the time to be so, is not known.     
Of late, much is being said and written about our foreign exchange reserve, which rose to 20 billion US dollars recently and is a formidable amount by our standard. Bankers say foreign exchange reserve has exceeded 20.36 billion US dollars due to lesser import expenditures on food and fuel. The reserve went past 19 billion dollars on February 19 this year for the first time, and March 19 for the second time. After the payment of 960 million US dollars to the Asian Clearing Union (ACU) towards import bills, the reserve went down. Looking behind, we see the amount of the central bank reserve on December 10 2009 at 10 billion US dollars, which went past 15 billion dollars on May 7 last year, and exceeded 18 billion US dollars on December 19 of the same year for the first time. Bangladesh ranks second among the SAARC countries in terms of foreign exchange reserve. India's reserve is 303.67 billion US dollars.
Although the remittance flow in Bangladesh is unchanged, the volume of major imports has gone down. Lesser import of capital machinery means lesser investment, particularly in the private sector. According to the latest report by the Board of Investment (BOI), total investment during the financial year 2012-13 was Tk 666.87 billion against Tk 878.93 billion in 2011-12 fiscal year. This means, total investment in the country has gone down by more than Tk 212.07 billion. Of the total investments, local investment accounted for Tk 446.15 billion in 2012-13 against local investment of Tk 537.76 billion in 2011-12 fiscal. Similarly foreign investment in 2012-13 was Tk 220.72 billion against Tk 346.15 billion in 2011-12 financial year - a reduction of Tk 125.43 billion. That is, total investment has recorded a downward slide by 24 per cent: local investment by 17 per cent and foreign investment by 36 per cent.   
The total number of industries registered during 2012-13 fiscal was 1,676 units against last year's 1,956 units, i.e., a reduction by 280 units (14 per cent). Out of the total units registered, local units accounted for 1,457 in 2012-13 against 1,735 units registered locally in 2011-12. That is, registration of local units fell by 278 units (16 per cent) over 2011-12. The number of foreign units registered during 2012-13 was 219, which was 221 in 2011-12. Downward trend in investment is attributed to inadequate infrastructure, high rate of interest and political uncertainty.   
The uncertainty has increased due to a non-inclusive election and deteriorating law and order in the country. Entrepreneurs do not feel induced to come forward and international organisations are forecasting a lower rate of growth. The fat reserve in Bangladesh Bank cannot be an end in itself; it is only a means to an end. Likewise, excessive liquidity in the banks has created problems for the banks themselves. Since they are not being able to invest, they face an uphill task with regard to payment of liabilities to the depositors.
Our banks and financial system are under big threats. Since all these have happened mainly due to political unrest and uncertainty, it is imperative that the government take appropriate steps to enable the banks to overcome the situation that it is in now. Local investors are interested to invest for which investment-friendly environment is essential. In the same manner, foreign investors are always on the lookout for a favourable place and environment where their investments will be secure, profits will be steady and life and property will be safe.
For this to happen, it is essential for all political parties to shun their differences, be united in national interest and make a concerted effort to restore peace and harmony. Increase in the Bangladesh Bank's foreign exchange reserve alone cannot guarantee an investment-friendly environment.
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