Part One

Looking beyond the Great Recession
Zaidi Sattar
Economy poised for take off
At the close of 2009, the Bangladesh economy is poised for Take-Off, a sluggish global economic recovery notwithstanding. The enormous traffic jams in the capital city of Dhaka is a stark reminder of this stage of growth, though this has not figured in any growth theory. Events of the past two decades will show that Bangladesh has evolved out of the "traditional society" and has met the "preconditions for take-off" in the Rostovian formulation (W.W. Rostow 1960, Stages of Economic Growth). The structural transformation has been taking place as the size of agriculture shrank to 20% of GDP with industry rising to 30%. As we know, the leading sector driving this secular growth process is readymade garments, which has also created a generation of entrepreneurs to take on the industrial diversification momentum for the economy to achieve middle income status over the next five years or so. As we also know, the economy faces a road bump of a major kind - a binding constraint of power supply. The sooner we are able to face off this challenge, the better it is for the economy to transition into the actual take-off. The recent transition to democracy could also be an economic opportunity for higher growth, provided politics is constructive.
Resilience against heavy odds
In 2008-2009, Bangladesh economy suffered three external shocks, in sequence: the global commodity price shock was followed by the financial meltdown which gave way to the deepest recession since the Great Depression - now being described as the Great Recession. It is fair to say that the economy survived the shocks and is now in reasonable shape to ride out the global recovery that is gaining strength. To be resilient against such odds was no mean feat. US investment bank, Goldman Sachs, which dubbed Bangladesh among the Next 11 (after BRIC countries Brazil, Russia, India and China, N-11 includes Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, S. Korea, Turkey and Vietnam) countries with promising potential for investment and growth, recently concluded that Bangladesh has come out of the global crisis "broadly in line with expectations" and was the only N-11 country whose macroeconomic stability improved despite the crisis.
Looking a bit deeper, it is hard to miss the good news-bad news story. The good news of course is that the financial sector came out virtually unscathed in the face of a global meltdown. The commodity price spiral of early 2008 which imposed a heavy terms-of-trade shock to the economy was soon compensated by commodity price decline that yielded terms-of-trade gains to the economy. The Great Recession of 2008-09, however, left its mark, albeit modest by international standards, on the real side of the economy - through trade. Export performance suffered but the impact was more pronounced on the non-RMG exports which tumbled 6% in FY09 though overall exports still registered double digit growth of 10.3%, thanks to the so-called Walmart effect that sustained demand for low-end garments (Bangladesh's specialty) in US-EU markets. Even the global forecasts of a collapse of remittance inflows could not keep remittance from flowing into Bangladesh in record volumes.
The bad news is that it all points to the lack of global integration of the Bangladesh economy - in terms of financial integration, capital mobility, and trade. Capital account transactions are barely 2% of GDP while trade-GDP ratio is at 43% now. What proved to be a saving grace this time around could be a drag in the future as the global financial system recovers from its current predicament and resumes its onward march under a reformed regulatory framework with innovative financial products. Higher growth of 8-10% requires the economy to take advantage of financial innovation and myriad financial products offered by the global financial system. That will be needed to finance the $50 billion infrastructure and other capital investments over the next five years. While capital account convertibility can wait, capital account transactions have to be opened up to facilitate inflow and outflow of capital transactions that support private-public investments in modern industry and infrastructure.
Subdued growth performance in 2008-09
In the end, the Great Recession of 2008-09 did leave its mark on Bangladesh's growth performance, albeit rather modest by international standards. We ended the fiscal year 2009 with a 5.9% GDP growth (Fig. 1), with agriculture growing a robust 4.2%, industry at 5.8%, and services at 6.1%. If quarterly GDP were estimated, despite the global economic downturn that began around September 2008, GDP growth for the first half of the year would have worked out close to 7%, thanks to booming exports which registered a surge of 42% in the first quarter. Around December, the real sector of trade and output began spiraling downward, ending the year with export decline of -0.7% in the final quarter.
Manufacturing was the hardest hit sector in GDP. Having peaked at 10.5% in FY06, its decline was sharp throughout FY07-09, falling to 5.9% in FY09, which was largely the result of poor export performance stemming from the collapse in non-RMG exports. If manufacturing growth was stymied by collapsing global demand, decline in services growth was inevitable. So it did, falling from 6.9% growth in FY07 to 6.1% in FY09 (Fig. 2).
Even prior to the onset of the Great Recession, manufacturing output became anemic during 2007 and 2008, as a fallout of the anti-corruption drive which led to a collapse of new investments. This is evident from the sharp decline in machinery imports which fell 26% between FY07 and close of FY09. The investment freeze combined with export shocks for the non-RMG sector resulted in slowdown of manufacturing value added.
In terms of sectoral share in GDP (Table 2), there has been no change in the structure of GDP over the past two years. Industrial growth is what has been driving structural change over the years. There was little movement in this component over the past year, as manufacturing remained stagnant at 17.2% of GDP for three years running. What is noticeable is the gradual rise in the share of services from 49.1% in FY06 to 49.7% in FY09, largely reflecting expansion of telecommunications and financial services.
The global recession which intensified during the second and third quarter of FY09 sparked enormous speculation about the outcome of Bangladesh GDP with a generous mix of optimism and pessimism. The notable element of FY09 growth performance was its buoyancy despite all contraindications coming from the likes of IMF and World Bank whose analysis yielded less than 5% GDP growth for the year. When the official growth figures computed by BBS were made public with the FY10 budget at 5.9%, it basically validated the projections of government agencies such as Bangladesh Bank and Planning Commission. Actually, the global shock had robbed about 1% of GDP growth which could have been 7% under normal times.
The global recession hurt much harder the emerging market economies of India and China, whose buoyant growth rates took a major hit despite large economic stimulus packages (Fig. 3). According to most analysts, China succeeded in large measure substituting export demand with stimulus backed domestic demand to still come out with an expected growth rate of 8.5% in 2009, compared to India's which was estimated at only 5.4%; but recent reports from India suggest a better performance than that. Vietnam, which has been ahead of Bangladesh in growth performance for the past decade could eke out a rate of 6.2% in 2008 and is expected to achieve no better than 4.6% in 2009. These comparisons put Bangladesh performance in a decent range, particularly when other Asian economies like Malaysia, Thailand and Indonesia did much worse.
Finally, there is wide agreement that Bangladesh economy's inherent potential is to grow at 7-8 percent per annum on a sustainable basis, for the medium-term. Sadly, the first decade of the 21st century is coming to a close without the economy having achieved that milestone, which will have to be left for the next decade. Given past year's difficulties and economic forecasts for the coming year, highly optimistic growth projections for FY2010 will not put it past 6 percent (Table 3). The most likely outcome is perhaps around 5.6-5.8%, (i.e. pessimistic=5.6%, optimistic=5.8%) provided the global economy does not experience a double-dip recession which some analysts are predicting.
Macroeconomic management remains a strong point
The economy withstood multiple internal and external shocks in the past couple of years and yet came out with strong internal and external balances. Fiscal deficit and public debt were within sustainable range while the balance of payments have never looked stronger with the current account in surplus for the past three years running leading to accumulation of foreign exchange reserves which hit an Continued from page 3
all-time record of $10 billion in November 2009, equivalent to 4.5 months of prospective imports. These positive external developments brought new challenges to Bangladesh's monetary management as inflation, which was well contained by mid-year 2009, showed signs of resurgence as the year came to a close.
Bangladesh public finance trends (Fig. 4) reveals the twin perpetual challenges of revenue mobilization and adequate spending to cover public investment in infrastructure and building human capital, among others. The tax-GDP ratio remains among the lowest in the world and shows no signs of improving. A spurt in revenue mobilization, albeit unsustainable, was observed in FY08 when revenue-GDP ratio increased by 0.9% of GDP (10.5% to 11.4%), due largely to the fear factor created by the anti-corruption drive which in turn led to increased tax compliance. Predictably, that trend was not sustained the following year. Any upward movement in tax mobilization is unthinkable without fundamental reforms in tax administration.
Revenue constraints set limits to public spending which has been mired in controversy lately, primarily due to the failure of bureaucratic machinery to implement the ADP. While current expenditures have grown by 2 percentage of GDP between FY06-09, development expenditures have not kept pace. The poor record of ADP implementation (Fig. 6) has raised concerns about what the realistic size of ADP should be. Evidence suggests there is a strong case for downsizing planned ADP. Overall, public expenditures have been stuck at 14-15% of GDP for much of the decade when one would have hoped to see a secular rise in this ratio to reflect the demand pressure on publicly financed infrastructure. The jump in public expenditure in FY08 is explained by the inclusion of off-budget subsidies to SOEs into the fold of the budget.

Thus our prudent fiscal deficits - which is a good thing - are the consequence of low revenue and low expenditure profiles - a bad thing. Nevertheless, except for a few years when external or domestic shocks contributed to fiscal vulnerability, external financing appeared to be adequate along with prudent levels of non-inflationary domestic financing of the deficit which remained within modest levels of 3-4% of GDP for much of the decade. With GDP growth on an uptrend, the economy should be able to sustain a higher ratio of public spending and fiscal deficits, and even a moderately higher rate of public debt (Fig.5).
Another vital aspect of macroeconomic management - inflation - is discussed in a subsequent section on monetary management.
Trade performance takes moderate hit
Greater trade openness and progressive integration with the world economy through trade has been an important aspect of Bangladesh's economic transformation. The global economic shock of 2007-08 was transmitted into the Bangladesh economy primarily through trade. First, the commodity price shock - negative and positive - resulted in terms-of-trade gains and losses which eventually evened out by the close of fiscal 2008-09. More lingering was the shock from the global recession which moderated external demand for Bangladesh's principal export of RMG, but led to precipitous declines in non-RMG exports. Yet, when compared to the performance of its peers, Bangladesh comes out almost swinging. RMG exports clocked 15% growth in FY09 - thanks to the Walmart effect - though non-RMG exports declined about 6%, still leaving an overall double digit export growth of 10% (Fig.7).
In 2008 or 2009, double digit export growth anywhere has been a rarity. In terms of numbers, Bangladesh could make the grade because of the robust headstart in the first quarter; that enabled a 19.3% export growth for the first half of the fiscal year (July-Dec). On the whole, the second half (January-June) saw exports pretty much stagnant, growing only by 2%, something that should not be lost sight of in figuring out where our weakness or strength lie. Reflecting on the past year's export results gives one a sense of relief as well as some food for thought. Certainly, there is no room for complacency. The strengths and vulnerabilities of our export basket must be kept squarely in view in facing the challenge of the coming year -- as the recession unwinds, albeit gradually - as well as for the longer term. Export concentration - a source of our vulnerability - only intensified with RMG making up nearly 80% of exports in FY2009. Export diversification suffered another blow as non-RMG exports lost ground partly due to the global recession but as much due to the cumbersome import and tariff regime that stifles emergence of new export ventures.
That said, putting this performance in global perspective gives cause for some relief. Few, if any, non-oil exporting developing countries could show such resilience in the face of the current global meltdown. China, the export and manufacturing powerhouse of the world for decades, saw its exports tumble 22% during the first half of this year, resulting in widespread plant closures and massive job losses. India saw its exports slump 29% for the first half of 2009. Export declines were also experienced by Malaysia (-23%), Thailand (-22%), Vietnam (-24%), and Pakistan (-21%), until June 2009. Germany and Japan, the two leading export surplus developed countries, saw their exports squeezed by falling consumer demand for automobiles and electronic goods in the developed markets. IMF's World Economic Outlook projects export decline of 9% for 2009 against output decline of about 3%.
The outlook for the coming year looks bleak for Bangladesh though much rides on the back of the global economic recovery. A sharp and sustained global recovery could fuel resurgence of exports. A gradual move out of recession will leave exports flat. PRI projections for FY2010 indicate export performance of 8-9%, keeping in context the first quarter export decline of 11.7%. Imports, which typically precede industrial and export performance, have been just as sluggish in the past year with sharp declines in the imports of capital machinery. The economy witnessed import growth of merely 4% in FY09, due to a sluggish manufacturing sector, resulting in a modest decline in trade-GDP ratio for the first time in two decades (Fig.8).
Trade policy in 2009 did not turn a corner. Trade openness, which was making gradual progress over the past two decades faced a setback as average protection rose two percentage points for the first time in many years (Fig.9). For FY2010, a flat regulatory duty (RD) of 5% was imposed across-the-board on all imports subject to the top rate of 25%. That brought the top general rate to 30% in addition to the fact that some 700 of these tariff lines were also subject to supplementary duties (SD) varying from 20% to 100% and above. It was a desperate move on the part of the tax authority to bolster revenues in a slowing economy. Whether or not this will pull up customs revenue depends on the state of the economy and import growth in the current year. What immediately happened was that the ex ante average nominal tariff rose to 23.9%, compared to 20.1% for FY 2008-09. This rise in average nominal protection was a departure from the historical trend of gradual decline since the start of trade liberalization in the early 1990s. Surprisingly, there was no complaint from the business community for the sharp rise in tariffs. That is because this tariff adjustment did more to raise protection to import substitutes than would contribute to revenue.
Thus Bangladesh still leads in terms of average tariffs in South Asia and elsewhere. It might be argued that there is more to trade policy than average tariffs. It turns out that after trade related quantitative restrictions on imports have been eliminated, tariffs and para-tariffs remain the main instrument of trade policy in Bangladesh. So average tariffs pretty much captures the broad direction of trade policy. So what is the problem if the tariff regime helps to protect domestic industries? The truth is that import tariffs hurt exports, first, by distorting incentives between export and import substitute production; second, it raises the cost of exports making them uncompetitive in the world market. Our tariff regime continues to be a major barrier to exports despite the existence of a duty-drawback system which is no match for duty-free inputs. In particular, emergence of new and potential exports - the basis for export diversification - is constrained by this cumbersome tariff regime in addition to an unfriendly customs regime that is still geared to collect the bulk of tax revenues (42%).
Current account surplus and savings-investment paradox
With a reasonable export performance and sluggish imports, the economy posted yet another year of current account surplus, joining the ranks of a few non-oil developing countries running current account surpluses, in contrast to the performance of others in South Asia (Fig.10-11). The picture is likely to be repeated in FY2010 if the global recovery is as indicated earlier. Record remittance inflows, and a combination of sluggish imports and moderate export growth has contributed to the current account surplus, leading to accumulation of foreign exchange reserves which hit $10 billion for the first time in November 2009. For a growing economy like Bangladesh, which is hungry for investment, these current account surpluses signify nothing more than under-spending as is evident from the savings surplus over gross domestic investment (Fig.12).
To be sure, two things were happening in concert. In aggregate terms, the economy was accumulating savings at a faster rate, thanks largely due to a surge in remittance inflow. So, the gross national savings reached a figure of 32 percent of GDP in FY09, from only 18 percent in 2002. At the same time, our gross domestic investment has been stuck at 23-24 percent since 2002. What is striking is the switch in the composition of this investment - a rise in private investment and a fall in the share of public investment, which reached a low of about 5 percent (out of 24 percent) in the latest fiscal year. The savings-investment "surplus" now stands at 8 percent of GDP - resources equivalent to the cost of three Padma Bridges! I know of no other non-oil developing country (except China) that has such a huge savings surplus (Table 4). So much of savings is going waste when the economy is crying for resources to invest in infrastructure, health and education.
First and foremost, it signifies our inability to invest all our available resources. Second, it could be that our financial intermediation is not efficient. Savers and investors are two divergent groups. It is the financial system - banks and non-bank financial institutions - that bring savers and investors together. In a smoothly functioning financial system, such an excess of savings (investible capital) would have reduced interest rates, increased the demand for investment and restored savings-investment equilibrium. That none of this is happening tells us that there is some stickiness or major inefficiency in the financial intermediation process. Third, we have been made aware of the poor performance of ADP implementation in recent years, which has had the effect of reducing the share of public investment in total investment. Problems with power and infrastructure have pulled back potential private investment as well. Lately, the global economic slowdown has compounded the problem. So the overall investment climate has not been conducive to result in an improvement in the investment-GDP ratio, which has remained stagnant for nearly five years and shows no sign of improvement.
Remittance flows challenge monetary management
After record growth in remittance inflows in FY08 (speculated to be the result of job termination in the Middle East), remittance flows remained robust in FY09 ($9.7 billion) and until November this year (Fig.13). There is no sign of slowing down of remittances anytime soon. Coupled with significant current account surpluses, these foreign exchange inflows, in the absence of strong sterilization moves by the Bangladesh Bank, boosted bank reserves (+31% reserve money and 19% M2 growth at close of FY09) resulting in a money market that was flush with liquidity. In the backdrop of global recession, term lending from the banking sector to large and medium enterprises dried up creating a widespread phenomenon of "excess liquidity". A late reaction of Bangladesh Bank to mop up excess liquidity from the banking system through reverse repo operations proved too little too late, as the phenomenon seemed to continue till close of 2009.
In the past year, monetary authorities have faced two challenges stemming from the bulging current account surplus.

First, it put pressure on the nominal exchange rate to appreciate. Strong remittance flows could have created a sort of Dutch disease problem by hurting exports. To forestall that problem, Bangladesh Bank went on a dollar buying binge (to keep the Taka from appreciating) that added to bank reserves that was not sterilized. Next, despite raising commercial banks' open positions (caps on foreign exchange they can hold), ballooning remittances further added to reserves at a time when bank lending was stagnating, leaving the financial system afloat on excess liquidity. There is little doubt that some of this excess liquidity is fueling asset price bubbles, raising risks in real estate and equity markets. The situation remains unchanged till the close of 2009.

Inflation menace returns
The spectre of inflation poses another challenge to monetary management. After suffering from double digit inflation for a full year, from September 2007 through September 2008, largely fueled by the global commodity price shock, inflation appeared tamed as global prices declined (Fig.14). But monetary policy remained accommodative throughout the period leading to the rise in inflation that we now witness from mid-year 2009 (Fig.15). Food price inflation has led the way as untimely rainfall raised concerns about a bumper Aman harvest. Excess liquidity in the system has created the wherewithal for non-food inflation to pick up steam. The next six months will be crucial for Bangladesh Bank to use all the tricks in its armor to contain the monster of inflation. And accommodative monetary policy might not be the answer. That Bangladesh has managed inflation far better than its peers in South Asia (Fig.16) ought to be no ground for complacency.
2010 harbinger of good times
Analysts are cautiously optimistic about the world economy in 2010. Both trade and output growth are expected to be in positive territory after a year in which world output and trade shrank for the first time since 1944. Output was down 3% while trade plummeted 9% in 2009. It is a matter of relief that Bangladesh economy came out of this catastrophe with export growth of 10% and GDP growth of 5.9% with macroeconomic stability in tact to make use of opportunities that will come its way in 2010 as the world economy emerges from the ashes of the Great Recession. The good news is that in spite of all the dark forebodings, there was no repeat of events similar to that of the Great Depression, thanks to the timely and coordinated intervention by G20 nations. Of course, the economic stimulus packages were implemented at huge costs - massive public debts that will have to be serviced and reduced in the years to come. There were hard lessons learnt. Balancing of future global demand has now emerged as a critical issue to be negotiated and resolved among the major economic powers. The weakness of leveraged globalization has been recognized. But solutions to resuscitate credit markets are still being worked out. One thing policy makers around the world will hopefully keep a watchful eye on is executive excesses driven by corporate greed which almost brought the global financial system down.
Equity markets typically lead the way to economic recovery. This time has been no different. Major stock markets around the globe have been on an uptick since April 2009 (Fig.17) signaling that the economic recovery is under way. That is indeed good news for Bangladesh which must continue to rely on export markets to trade its way out of poverty, regardless of what China and India - two super-large consumer markets - can do by focusing on domestic demand stimulation. After performing better than most equity markets in 2008, it is no surprise that Bangladesh stock indexes are once again leading the way since the April resurgence of equity prices.
2010 will be critical for the global economy. The goal will be to avert a double-dip recession. Soon enough, we will know for sure if the world's leading economies fall into a W-type recovery that was experienced during the Great Depression. That would be calamitous. Bangladesh stands to gain most from a V-shaped recovery, which is the forecast of most economists.
Given current trends, two global milestones will have been reached in 2010. China is expected to overtake Japan as the second largest economy of the world. India's manufacturing output will overtake agriculture. No such notable structural transformation is expected for the Bangladesh economy in 2010 when the principal challenge will be to return the economy on a 7% plus growth trajectory in FY2011. The key to that will lie in removing the binding constraint of power. The rest will fall in place and the take-off Bangladeshis are waiting for will be theirs.

Dr. Zaidi Sattar is Chairman of the Policy Research Institute of Bangladesh. He can be reached at zaidisattar@gmail.com




Unaddressed problems make terrain tougher for better economic performance
Moazzem Hossain
Bangladesh's relative "insularity", in economic terms, has otherwise paid some "good" dividends. Its share in world trade is marginal. Though exports and imports in aggregate terms, are slightly more than 40% of the size of its gross domestic product (GDP), Bangladesh still accounts for less than one quarter of one per cent of international merchandise trade. The capital account of Bangladesh, like most other developing and low income countries, is not convertible; outflows from, and inflows into, this account are subject to foreign exchange controls and regulations. Remittance flows to Bangladesh that have, in recent years, shown a marked growth, are yet not robust; informal transactions dealing with remittance funds, as the reports do credibly suggest, are still substantial. Foreign aid disbursements to Bangladesh remain low, less than $1.3 billion on an average annual basis. And foreign direct investments (FDIs) as well as foreign portfolio investments are negligible.
All these indicators, thus, show very low level of Bangladesh's integration with the global economy. Partly because of this, it could escape the wrath of the global recession that began with its full fury in 2008 and persisted, on a varying scale in different parts of the world, in 2009. The crisis, particularly in the global financial world, is, as borne out by the latest figures, now over, though a durable recovery is not yet in place. What has largely facilitated the recovery of the world economy from the crisis? The unquestionable answer is unprecedented government support for the financial sector, alongwith fiscal and monetary stimulus. This has been true not only in the high-income countries but also in high performing developing economies including that of China.
Bangladesh had its own version of stimulus package in response to the global crisis to cushion its economy from its real or perceived impact, transmitted through international trade and remittances. Last April, the first such package amounting to $495 million (Taka 34.2 billion) was announced mainly for exports, agriculture, power and social safety net programmes (SSNP). And then, another allocation of $724 million (Tk 50 billion) was made in the budget for fiscal 2009-10, also for the same areas. Direct budgetary transfers to exports of a few selected items (Bangladesh's export basket is quite narrow), increased subsidies for agriculture and power and enhancement of entitlements under SSNP, have been the operational tools of the stimulus package.
There is no denying that the package has been useful for the Bangladesh economy to blunt the edge of the gnawing global economic recession. The situation could, perhaps, have been worse, without the stimulus package. However, the basic fact remains undisputed about the relative 'insularity' (in economic terms) from, or low level of integration into, the global economy providing the leeway to Bangladesh remain somehow steady, in the face of the most difficult times in the outside world. This situation has not been a matter of deliberate choice. It is circumstantial, as is the case with other low income countries. The stage of development is largely responsible for it.
This cannot be the future of the country, if it is to reach the level of a middle income one by the first quarter of the 21st century. Linkages with the global economy will have to be on a larger scale, if Bangladesh is to see the raising of the standard of living for its teeming millions. There must be more trade, more investments, more funds or capital movements, and so and so forth if it is to achieve economic progress, on a sustained basis, for reaching the higher stages of growth. The level of Bangladesh's economic integration will then be on a higher scale than it is now. The kind or nature of its links with the world economy that we see today, will then be a matter of the past.
In this backdrop, the lessons of the worst crisis that to-day's globalised economy has been through, must be of relevance to Bangladesh. And drawing the right lessons and not reading the wrong signals, as the proxy for the real ones, assume a great deal of importance for all those who want, or would like, to see the Bangladesh economy move forward. In the meanwhile, it would be foolhardy to ignore some of the possible adverse belated fall-outs from the global crisis on the Bangladesh economy, after it has weathered its first-round effects with no major negative impact. There are some worrying signals here - export growth slowing down and remittance earnings not showing a steady rise, in the recent months. Such signals are all the more disconcerting because the full recovery of the global economy from the crisis is most likely to take a relatively longer period. This heightens the need for appropriate "reflex" actions on the part of the policy-makers to enhance the capacity of the Bangladesh economy to absorb or withstand the possible adverse knock-on effects of the global recession at this stage, without causing major dislocations. The macro-economy of Bangladesh remains otherwise stable with relevant indicators still being on a relatively comfortable zone, though the latest global price situation provides some good reasons to be concerned about its likely unfavourable effect on domestic price stability.
So far so good. The key challenge that the Bangladesh economy has been facing over the past several years, long before the global recession had set in, is the low level of investments that has been hovering around 24 per cent of its GDP. The expectation about investments picking up after the return of an elected government is yet to come anywhere near to reality. Public investments, in actual terms, have lately shown to be trailing much behind the projection that was made in the first budget of the elected government after the transition of power from the caretakers, who governed the country under a two-year state of emergency, to a democratic one following the general elections held in December last year. Such public investments, so critically needed in many key sectors of the economy to help crowd-in private investments, continue to be on the downside, mainly because of low implementation capacity. And, private investments are also not showing any uptrend. It does not require a pundit to tell us that jobs and incomes will be impossible to create for the country's teeming millions and to raise their standard of living, without investments rising.
Infrastructural deficit in many areas, human resource development for to-day's technology-driven economy, quality of governance, institutional weaknesses etc., had been Bangladesh's long-lingering problems. These have been straining the efforts to expand the economy's productive capacity, increase productivity and reach higher stages of growth. All would agree that these are no quick-fixes to such problems. But actions-- hard, decisive and well-targetted ones -- do need to come sooner than later to address the same, without giving any signal about policy flip-flops. Unfortunately such actions have not yet come. All concerned would hope that the government that has been voted to power with a massive people's mandate, will appreciate, more in deeds than in words, the need for such firm actions to help overcome the long-persisting critical constraints to accelerated growth of the Bangladesh economy.
This nation cannot afford to waste its time that leads to under-performance of its economy below its potential to reach the stage of a middle-income country. The first decade of the 21st century is about to end. What seemed to be achievable at the dawn of the century within its first quarter, must not be allowed to remain a mere wish-list in the years to come. To-day's actions matter most for making the difference -- a difference that will make it possible for the teeming millions to savour freedom in its true sense as was envisioned by the freedom-fighters during the arduous struggle for Bangladesh's independence long 38 years back.




Monetary policy dilemma
Excess liquidity building up stock bubbles
Ahsan Mansur
Bangladesh economy is currently passing through an interesting episode on the macroeconomic front. On the one hand, the soft patch that the economy is experiencing is largely due to the slower export demand and lower private sector investment resulting from the ongoing global economic crisis. On the other hand, the balance of payments (BOP) position of Bangladesh has never been so strong in its history with record high current account surplus and foreign exchange reserves. Slower domestic demand calls for an easy monetary policy. But the large BOP surplus is causing a rapid expansion of domestic liquidity, calling for a tightening of the monetary policy stance. This paper describes the sources of slower domestic demand and their impacts, the factors contributing to the monetary expansion and the extent of the problem, the authorities' policy response so far and what would be the appropriate policy mix under the current circumstances.
Weakness in Key Components of Domestic Demand
While domestic consumption (comprising household and government consumption) is the largest component of domestic demand, in recent years much of the growth in demand in the domestic economy originated from fast growing exports and private sector investment in manufacturing activity. In part, the fast growing export demand, coupled with remittance fueled domestic demand, contributed to higher investment and a corresponding expansion in domestic manufacturing activity. However recent data point to a significant weakening of both export and investment in manufacturing activity in recent months (Figure 1).
The index of manufacturing activity, after growing at a very fast pace in FY07 slowed down markedly. In particular, manufacturing growth slowed down further in the second quarter of FY09 due to the global recession and slowdown or decline in exports.
Private sector investment in capital machineries, as measured by disbursement of term loans for the banking system, also appears to have declined significantly (Figure 3).
Following a very strong growth in net disbursement of term loan in FY08 net disbursement collapsed in FY09 (Table1). There has been a moderate recovery in term lending in the final quarter of FY'09, although doubts remain about its sustainability. This softening of investment started with the deterioration of external economic environment and is not likely to change until the global economic outlook improves significantly.
External Sector Developments and Monetary Impact
In a normal situation, the weakness in various indicators of domestic demand would call for an easing of the monetary policy stance, in particular to boost domestic private sector investment. However, the combined effect of a collapse in domestic import payments (Figure 4) and continued strong inflows of workers' remittances has contributed to a record high current account surplus. The resulting surge in the net foreign assets (NFA) of the banking system has contributed to record high excess liquidity and a collapse of interbank interest rates. In the first half of 2009/10, fiscal year through December 2009, the external current account surplus is projected to be more than $2 billion and foreign exchange reserves already crossed $10 billion mark at a record pace (Table 2).
For every dollar increase in the NFA, domestic money supply increases by almost Tk 70, fueling liquidity expansion at a very fast pace.
In the absence of strong credit demand, the increase in NFA contributed to a corresponding expansion in reserve money. The resulting excess liquidity in the banking system caused a collapse of the interbank interest rates. Reserve money expanded by more than
31% in FY09 from an average of 20% in FY08. In the absence of active liquidity management, call money rates collapsed in this fourth quarter of FY09 to less than 1 percent. Clearly, such an outcome was not desirable from monetary management perspective.
Threats Posed by the Excess Liquidity in the Economy
Excess liquidity and the resulting collapse in interbank interest rates may appear harmless on the surface. It may even be tempting to view the low interbank rates as a welcoming development in support of higher domestic demand and thus it is not surprising that Bangladesh Bank initially adopted a policy of benign neglect. In reality, however, if such excess liquidity is not sterilized through central bank monetary interventions, the excess liquidity may tend to create inflationary pressures in both commodity and asset markets with much undesirable effects on the economy and the society.
Excess liquidity is like pouring water in a sink. If the faucets are open and the drains are clogged or blocked, very soon water will spill over the sink and run through the floor and carpets, destroying or messing up many things in the house. The excess liquidity in the financial system, with very low returns through interbank rates, will eventually spill over into the real economy with inflationary pressures in the good and asset markets.
Some of the signs of such pressures are already visible. Banks and investors of financial assets are generally tempted to direct the excess liquidity to the stock market. Therefore, it is not surprising that Dhaka stock exchange general index has crossed 4400-mark for the first time in its history (Figure 5). It is well established that excess liquidity in the financial system has contributed to numerous bubble episodes in the stock markets in many countries, and what we are observing in Bangladesh today may be a precursor to that. Domestic inflationary situation in Bangladesh has remained subdued in recent months due to the recent commodity price collapse in the global market (Figure 6).
However, this changes rapidly if excess liquidity in the economy persists and if food prices rebound due to global environment. The recent surge in food inflation in India to (19%) due to a very dry monsoon is also a matter of concern for Bangladesh. The spike in inflation in the middle of October may also be seen as a manifestation of this excess liquidity problem.
The Authorities' Policy Response and its Adequacy
It took some time for the Bangladesh Bank to realize the extent and duration of the surge in the NFA due to growing balance of payments surpluses. The Monetary Policy Statement of Bangladesh Bank announced in July 2009, misjudged the direction and size of capital inflows entirely and essentially projected that the NFA of the banking system would decline by 4.1 percent in FY10. The monetary policy stance accordingly, did not contain any active or special intervention program for sterilizing the surging liquidity expansion. In reality, during the first three months of the fiscal year, the NFA of the banking system increased by 47.7percent, and the growth of reserve money remained high at 24.8% in the first quarter of FY10, following a 31% increase in FY09 (Figure 7). In an environment of slower credit demand by the private sector, the resulting excess liquidity contributed to a collapse of the interbank interest rate.
After some initial hesitation, Bangladesh Bank started to become more engaged in monetary management through activation of its reverse repo operations and through that pushed the overnight interbank interest rates somewhat upward. This activation of the reverse repo operation has helped contain the expansion of reserve money at 24.8 percent level and helped push up the overnight money market rates to [3.5%- 4%] range. The inverse relationship between the growth rate of reserve money and the call money rate is clear from figure-8. However, the current high growth rate of reserve money at about 25% range is still a matter of concern.
Some Concluding Thoughts
It is perhaps for the first time that Bangladesh is facing this policy dilemma. In the past, inflow of external resources (including workers' remittances) used to be matched with increased demand for imports essentially serving as an automatic monetary sterilizer. This time around, however, with import payments declining, the BOP surpluses are growing every month. How long this situation will last is difficult to predict. The outcome will depend on the duration and strength of remittance inflows and how soon import demand picks up. A rebound in global commodity prices with strengthening of global economic recovery may also reduce the external BOP surplus to a more manageable level.
There is also the possibility that the strength of the remittance inflows are not necessarily attributable to workers' income but with repatriation of some of their assets held abroad due to higher rate of return in Bangladesh. In that case, the surplus in the BOP may be a more lasting phenomenon and the policy response would need to be different.
On the likely scenario that the special circumstances contributing to this monetary expansion is a temporary phenomenon with import demand picking up and remittances slowing down in the second half of FY10, the task is somewhat easy and manageable. Under this scenario, Bangladesh Bank should prevent a significant appreciation of the Taka by maintaining its de facto exchange rate peg but it should engage in more proactive monetary management to fend of inflationary pressures in the good and asset markets in the coming months. We hope that the next Monetary Policy Statement of the Bangladesh Bank (scheduled to be announced in January 2010) will be cognizant of these considerations and realistic in setting its targets for monetary aggregates.
The stated targets would also need to be backed by proactive and forceful monetary management. There will be a sizable sterilization cost associated with this policy, entailing a reduction of profits of Bangladesh Bank. This stance of monetary policy would indirectly reduce the transfer of Bangladesh Bank profits to the Ministry of Finance (as non-tax revenue) and the government should absorb this within the budget. A sharp reduction of profits should not prevent the Bangladesh Bank authorities from engaging in large scale sterilization operations. Under any circumstance, it would not be advisable that the cost of sterilization operation lead to a reduction of the capital base of Bangladesh Bank and cause a deterioration of the quality of its balance sheet.
It would certainly be helpful if monetary policy is supported by an expansionary fiscal stance to boost domestic demand. The slow pace of Annual Development Plan (ADP) implementation and the delays in implementing the procedures for Public-Private Partnership (PPP) framework do not bode well for an acceleration of investment in the much needed infrastructure sector. This is the time when public investment needs to be boosted along the lines envisaged in the budget. It is regrettable that TK 25 billion allocated in the budget for catalyzing much higher PPP investment has remained untouched and not likely to be utilized at all in this fiscal year. Under these circumstances, the government may reallocate during the mid-year budget assessment a large part of the PPP allocation (say Tk 20 billion) to a special infrastructure fund for spending on roads and bridges. A special task force may be established to utilize the funds to the identified projects with special procurements policy for speedy implementation.
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Dr. Ahsan Mansur is executive director of the Policy Research Institute




Global financial crisis and Bangladesh
Footprints, recovery and beyond
Mustafizur Rahman
Footprints of the crisis
Inspite of some indications of global economic recovery, signs of which have started to become visible over the third and fourth quarters of 2009, there is a general agreement that the year 2010 is going to be a bumpy ride for all countries-developed, emerging and developing economies, north and south of the equator. The related discourse with regard to the crisis has now shifted from 'where did it all originate' and 'who were the main culprits' to 'what are the possible consequences', 'how the adverse impacts should be best addressed', and 'how to be appropriately prepared if and when the expected recovery gets off the ground'. By all accounts, evidence suggests that the worst of the crisis is, by now, behind us - major economies such as those of the US, Japan, Germany and France are showing early signs of recovery. China and India, as also Brazil, are on course for high growth, albeit at somewhat lower rate than the pre-crisis period. In technical sense (negative GDP growth over successive two quarters) the recession is over. However, fact remains that for most of the developed countries, the recovery is yet to be reflected in the job market, consumer behaviour and business confidence. Many economists are apprehensive about the nature of recovery and the time it will take for the economies to reach the pre-crisis levels. The prospect of a jobless growth, with its attendant implications and ramifications, allude to disquieting developments in the year 2010.
To address the challenges of the global economic crisis, developed as well as developing economies have earlier set in motion various policy initiatives in the form of bailout measures and stimulus packages. The objectives of such initiatives were primarily five-fold: (a) to stimulate domestic demand, (b) to create new jobs, (c) to stabilise financial markets, (d) to support domestic industries, and most pertinently, (e) to safeguard export interests. In view of the recovery seen in recent months, it will be
reasonable to say that a number of global initiatives including the USD 750 billion funds created to support IMF's efforts to address balance of payments (BoP) problems in various countries have eased the situation. However, needs to be noted is that some of the developed countries have taken recourse to a number of protectionist measures in view of the crisis, something they often sermonise developing countries to avoid by all costs. On the other hand, the crisis, and the consequent pressure from domestic stakeholders, are also having a restraining impact on strategies being pursued in negotiations by developed countries in various global fora. This does not bode well for multilateral negotiations on issues of interest and concern to developing and low income countries including those related to trade and climate change. The recently held WTO Seventh Ministerial Meeting and Climate Change Conference may be cited as examples in this connection.
As is evidenced by cross-country experience, the crisis had left behind its footprints on overall macroeconomic performance of countries, commodity prices, profitability of business, performance of export-oriented goods and services sectors, BoP position, and employment situation in 2009. How these indicators will evolve in 2010 is something which is worrying policymakers as well as common citizens and consumers, business and labour. How best to strategise in view of the challenges and opportunities in 2010 is a critically important question confronting all countries, particularly low income countries such as Bangladesh.
Impact on Bangladesh Economy
Bangladesh's increasing integration with the global economy through trade in goods and services is indicative of the likely impact of the global crisis on the economy. However, thankfully, Bangladesh was spared the worst consequences of the ongoing crisis in FY2008-09. When the early signals started to blip on the radar screen in 2008, Bangladesh Bank took speedy and energetic steps to safeguard the country's reserves. Since foreign portfolio investment accounted for less than three per cent of market capitalisation in Bangladesh, capital market did not witness the sort of volatility that was experienced by stock markets world over, including those of the neighbouring India. With hindsight, it also proved to be a blessing in guise that in the past the SEC and the Bangladesh Bank did not succumb to pressure by various quarters to allow trading in exotic but toxic derivatives in the country's share market. That Bangladesh did not go for capital market convertibility of her currency also proved to be a saving grace.
During FY 2008-09 Bangladesh's export earnings posted a growth of 10.31 per cent over the corresponding period of FY2007-08. Although prices were depressed down, increase in volume to some extent compensated for this albeit with lower profit margins. Remittance flow registered a robust growth of about 23 per cent in FY2008-09. The fall in the prices of food, fertiliser and fuel somewhat relieved the burden of import payments. This led to improvement in the BoP situation. Some deceleration in inflation, particularly food inflation, was also visible. GDP growth rate registered a 5.9 per cent growth, which was an outlier, and commendable performance, in the backdrop of the slowdown in most economies.
However, a closer look at the various recent trends concerning some key macroeconomic and sectoral indicators of Bangladesh economy transmits some cautionary notes.
A cautionary note
In recent months, particularly in the first quarter of FY2010, export posted a negative growth of (-) 11.0 per cent, with the leading RMG sector posting a negative (-) 10.3 per cent growth. Even with about 18 per cent growth posted in October 2009, overall growth of export for first four months was (-) 6.0 per cent. The FY2008-09 export growth had been in negative territory for several of Bangladesh's non-apparels items: growth of export of jute and jute goods (-) 13.65 per cent, leather and footwear (-) 19.77 per cent and frozen food (-) 14.89 per cent. Since imports have come down by (-) 18.71 per cent in the first quarter the BoP position, however, had continued to improve. The trend has not been much different in the first few months of FY2009-10. The emerging shipbuilding industry, which received an export order of about USD 400 million in recent years, has experienced formidable difficulties in view of sluggish global trade. Hopefully, there will be an upturn as trade picks up in 2010.
It is to be kept in mind that many of Bangladesh's developed country partners which account for most of Bangladesh's export of goods and a large part of export of services (remittance), have started to recover only recently. Inspite of the signs of recovery seen in the last quarter of 2009, the US economy, which accounts for a quarter of Bangladesh's global export of goods and 17.4 per cent of remittance, is projected to experience a negative growth of (-) 2.4 per cent in 2009; for EU the projection is (-) 4.3 per cent. However, economists are hoping that the green shoots of recovery will gather strength in the US and the EU in 2010- projections are that these economies will be able to post GDP growth of 1.6 per cent and 0.5 per cent, respectively. Despite the gloomy outlook for weak external demand, the IMF is forecasting a strong recovery in global trade for 2010 (5.4% in US dollar terms) which augurs well for countries such as Bangladesh. It is also to be noted in this connection that world trade which registered a rise of 4 per cent in real terms in 2008, according to World Bank estimates, experienced a negative growth of (-) 6.1 per cent in 2009, a first time in recent history.
During the crisis Bangladeshi exporters were able to sustain their share in major markets of Europe and North America by offering discounts, tolerating, in many instances, order deferment and cancellations, and by taking significant cuts in profit margins. Currency devaluation in competing countries such as India, Sri Lanka, Pakistan, to the extent of 10-40 per cent in recent times, have also undermined the competitive strength of Bangladeshi products, including apparels, whilst the BDT held steady over the recent past against the US dollar. It is to be recalled here that the 7.5 per cent cap on growth of Chinese export of apparels to the US market was lifted, as of January 1, 2009. China has also recently reversed a number of measures which were aimed at encouraging producers to move upmarket (e.g. tax on lower end products). Exports of low-end apparels from Bangladesh had earlier benefited from such policies.
Stimulus packages designed in support of producers and exporters in India and China have also started to impact on Bangladesh's competitiveness in the global market. India has come up with three stimulus packages and it has designed a plan to inject USD 4.5 billion into the financial system to help exporters, with the Reserve Bank of India adding another USD 1.3 billion through a refinance operation. China's stimulus package of USD 560 billion was equivalent to about 7 per cent of her GDP and in November, 2008 it announced a package of capital spending plus income and consumption support measures. Bangladesh's backward linkage spinning sector had faced difficulties in the recent past vis-à-vis imported Indian yarn in view of the new price dynamics.
Data for FY2008-09 reveals that growth of import duties was lower (-1.7 per cent) compared to corresponding FY2007-08 (growth of total import related duties was +6.6 per cent). As commodity prices pick up, import duties is also expected to rise, but this may create pressure on the BoP situation.
As is known, over the last two years, in 2007 and 2008, a record number of Bangladeshi workers (1.7 million) had left the country in search of jobs abroad. In 2009, in all likelihood, the number of workers going abroad will be significantly lower, also particularly because some of the new destinations including those such as UAE, Malaysia and Singapore have taken protective measures to counter sluggish economic growth vis-à-vis lower demand for construction and other services (Saudi Arabia and Kuwait have already instructed their embassies in Dhaka not to issue workers' visa). Notwithstanding the continued rise in remittance flow (20 per cent during July-October FY2010), over the last few months, number of people going abroad have come down significantly, by about 40 per cent. This is expected to create pressure on domestic job market. New jobs will need to be created and social safety net will need to be extended. Although no reliable estimates are available with regard to returning migrant workers, anecdotal evidence suggests the need for attention to this issue as well.
Crisis as an opportunity
Every crisis creates opportunities for those few who are willing and able to look for and realise the potential benefits arising from the restructuring that takes place during the crisis. Inspite of the adverse impacts experienced as a consequence of the global economic crisis, there are some encouraging signs which Bangladesh should seize on and try to make it work to her advantage. Thankfully, things have started to improve in recent months. Apparels orders have picked up (particularly in view of Christmas Sales), and the New Year season, remittance flow remains robust (24 per cent growth in the first five months of FY2009-10). Demand for some of the other major items are also experiencing rising trends. Major buyers from Japan, where the imported apparels market is worth about USD 24 billion (Bangladesh accounts for only about USD 70 million out of this), have started to show renewed interest to source from Bangladesh, by diverting imports from other countries (mainly from China). The adverse affects of recession, pressure to appreciate the Chinese Yuan (appreciation of 5.2 per cent over the last one year), wage rates that are about 2-3 times higher than Bangladesh (though productivity is higher in China), has made Bangladesh an attractive destination for major buyers of apparels inspite of China's dominant presence in the global market. For this to happen, there will need to be more emphasis on productivity improvement, reduction of lead time, and pursuing a proactive marketing strategy.
As is known, two committees were constituted earlier by the Caretaker Government in view of the crisis. A Global Financial Sector Task Force was set up which to design strategies to address attendant challenges. Subsequently, two stimulus packages worth about US$ 435 million (in April, 2009) and US$ 750 million (in the budget for FY2009-10) were announced by the newly elected government. In the recent past, the Working Group of this Task Force has come up with a number of recommendations in support of export-oriented sectors in the form of export market incentives, lower export credit rate, waiver of some duties, and other measures of support. The growing reserves which exceeded USD 10 billion in November 2009 (it happened for the first time in Bangladesh's history) and is expected to rise in the coming months if imports do not pick-up and remittance flows sustain, however, should be seen as a double-edged sword. Whilst this will provide Bangladesh with comfortable margins for import and debt payments, it will be a challenge to maintain taka's exchange value vis-à-vis dollar at the current level. This may call for targeted central bank intervention in the forex market, a practice seen in the recent past. At the same time, high comfortable reserves will also provide the central bank more flexibility to make use of the reserves in the form of opening credit lines in foreign currency (which it has already started to do). Prudential management of reserves will be an important aspect of monetary policy to be pursued by the Bangladesh Bank in the near-term future. It will be a challenge to maintain overall macroeconomic stability, particularly in view of the likely inflationary pressure in the economy. Tackling the impossible trinity of maintaining low inflation, exchange rate stability and low real interest rates will be a challenge for monetary sector management in the coming months.
To take advantage of the emerging opportunities, Bangladesh will need to devise appropriate policies to create adequate incentives with the dual objectives to encourage domestic entrepreneurs and attracting foreign investors. Given the emerging situation and in view of the increasing interest of potential investors to invest in Bangladesh, all efforts need to be geared towards creating a conducive business and investment environment in the country. Required investments will also need to be made to enhance the capacity and facilities provided by EPZs and the proposed specialised investment zones. From this perspective, addressing the needs of energy and infrastructure, which have emerged as the twin constraints inhibiting growth and investment of Bangladesh ought to be given top most priority. Speedy implementation of ongoing power projects, including the rental ones, attracting PPPs to this critical sector, through introduction of transparent rules of the same, cost and benefit sharing arrangements, will be of critical importance in this regard. Ensuring good boro harvest, a procurement price that provides incentives to farmers, will also be key to ensuring food security.
Macroeconomic performance in 2010 and ability to attain growth targets for FY2009-10 will hinge on Bangladesh's ability to address some of these aforesaid challenges.
[Prof Mustafizur Rahman is executive director of the Centre for Policy Dialogue (CPD)]




A year of hope and introspection
Maswood Alam Khan
At one stage of an altercation over a family dispute on a Friday, a 60-year old man named Lakhkhyan Samaddar of Purba Darshana under Kalkini Upazilla of Barisal district was suddenly hit on his head by a bamboo stick. Fatally injured, Lakhkhyan was transported to the nearby town and admitted in the Sher-e-Bangla Medical Hospital where he breathed his last. Nobody was arrested and no case was filed with any court of law.
The other day, while I was browsing old issues of newspapers in my quest for interesting incidents that had happened in the year 2009 I hit upon this news on an inside page under a small caption "An old man killed in Kalkini" in an old issue dated January 04, 2009 of the daily Ittefaq.
"Will anybody care to observe death anniversary of Lakhkhyan Samaddar?" I just mused.
Hope and Introspection
In retrospect, we find the year 2009 brimmed over with a myriad of unforgettable facts and figures, feats and failures, and joys and sorrows.
If I am asked to give a name to the year 2009, I would love to choose a nametag: "2009: the year of hope and introspection".
A dark, tall and handsome man called Obama emerged in 2009 to radiate hope for people of the world.
"Obama is president of the United States of America"---such a description gives only half of his image; because unbridled passion, fancy and imagination 6.8 billion people of the world harbor about Obama conjure up the other half.
A white or a black man, a Brazilian or a Bangladeshi, a Japanese or an Australian, an African or a European, a North American or a South American, whoever ever came across with Obama on the street of a country or on the screen of a television, found in him a John F Kennedy, a shared cohesion, and a tie of kinship. When Obama delivers a speech his words may represent mostly U.S. interests but the audience hears in his intonation an undertone of assurance that embodies hopes and aspirations of the whole world. When Obama smiles baring his soul, many men and women are heard whispering: "Is Obama a magician?"
As for Bangladesh, 2009 dawned with a mixture of excitement, disbelief, and horror and ended with a sense of redemption. People who even did cast their votes in favor of Awami League couldn't believe that their party would have come up victorious with such a majority of 262 out of 299 seats in the parliament.
Vengeance on BNP supporters was kicked off in different parts of the country. Scores of people were killed and injured in angry backlashes. Stories of extortions by AL activists occupied the major spaces of front pages of the dailies throughout the year. General people started apprehending recurrence of days of violence and lawlessness that once was so commonplace during the last term when Awami League was in power in the late 90s.
The most horrific event that happened in 2009, which will never be forgotten by Bangladeshis, was the carnage perpetrated by some plotters inside the headquarters of Bangladesh Rifles at Pilkhana in Dhaka city. Seventy-six senior army officers were killed by soldiers.
The trial of the carnage has already started. Some of the accused will be awarded capital punishment. But the mystery behind the tragedy will remain shrouded in the mists and dusts of stories and rumors.
The year 2009 will be remembered in Bangladesh as a year of redemption from the burden of guilt. Our nation has at last found the death sentence against the accused killers of Bangabandhu finally upheld by the Supreme Court. The execution of the sentence is now just a matter of days.
The first Test victory of Bangladesh Cricket Team on a foreign soil is a record the year 2009 will bear out, thanks to contributions made by Mahmudullah for his extraordinary spin bowling, Tamim Iqbal for his spectacular century, and Sakib al Hasan, an all-rounder, taking 5 wickets for 70 runs and scoring an unbeaten 96 from 97 balls in the second innings of the last Test match against West Indies. The famous cricket magazine 'Wisden' named Sakib as the Test Player of the Year 2009.
With successes followed by horrors and redemption it is the hour when the leaders of our government took a pause and asked themselves with the minimum of introspection and self-analysis: "what the nation wants to see in the next four years".
Goodies and baddies
With a view to cluing their readers in on what had happened in the year passed newspapers and periodicals are publishing a litany of big events of 2009 where 'dispute with India and Burma over maritime boundary claims', 'Tipaimukh dam on the Barak river', 'awarding contracts to American and Irish companies to explore gas fields in the Bay of Bengal', 'allowing India transit facilities', 'Medal of Freedom Award conferred to Dr Yunus by US president', 'Rasu Khan, the first ever serial killer discovered in Bangladesh' and many more sensational events will be highlighted.
Newspapers in their reviewing of 2009 will remember the goodies in a malleable tone and recall the baddies in a sarcastic tenor.
Sad demises of M. Saifur Rahman, the former finance minister, Shah Abdul Karim, the legendary Baul singer, Dr Alauddin Al-Azad, the scholar in Bangla literature, Dr Noazesh Ahmed, the photographer who used to converse with nature through his lens and many more luminaries will be reminisced with honor and gratitude.
Events that traumatized us in 2009 will not be forgotten in the years to come. Swine Flue and 'Rid Pharma' are two catchwords that still send a chill down the spine of a mother when she finds her baby suffering from fever. The scene of flames spewing from the eighth floor of the Bashundhara City Shopping Mall with helicopters hovering above in the sky is still a vivid memory.
Tears of joys and sorrows
In the international arena the outstanding events that welled up tears of joys were 'Barack Obama taking oath as the 44th President of the United States', 'the International Olympic Committee awarding the 2016 Summer Olympics to the Brazilian capital Rio de Janeiro', 'the longest total solar eclipse of the 21st century that lasted 6 minutes and 38.8 seconds', 'Obama receiving the Nobel Peace Prize' and 'Climate Change Conference held in Copenhagen, Denmark where 192 nations participated'.
The events that welled up tears of sorrows were 'mysterious death of the world's most famous pop star Michael Jackson', 'the deadliest bushfire in Australian history that killed 173 people', 'terrorist attack on the Sri Lankan cricketers' bus killing eight people in Lahore', a cyclone called 'Aila' that hit the southern coast of Bangladesh killing hundreds of inhabitants and making thousands homeless', 'a 6.3 magnitude earthquake that struck near L'Aquila in Italy killing 300 people', 'crash of Caspian Airlines Flight 7908 near Qazvin, Iran, killing all 168 on board', 'crash of an Air France Flight 447 into the Atlantic Ocean killing all 228 passengers', a 7.6-magnitude earthquake that shook coastal area near Sumatra in Indonesia killing around 1,000 people', 'an end of Sri Lankan Civil War with LTTE conceding total defeat', and 'an overcrowded ferry named "Coco" that sank near Bhola in Bangladesh killing more than 1000 passengers '.
Stories unsung
When memories of big events crowd our mind, stories about some small incidents nudge our conscience. On the eve of the new-year 2010 we should also remember the little actors of those small incidents.
Lakhkhyan Samaddar, one life in Kalkini under Barisal, was made extinct. No sequel to his death news was published in Ittefaq or in any other newspaper. Lakhkhyan did not leave behind a diary which could tell us his stories. Nobody has taken note of what Lakhkhyan did experience in 60 years of his life. Nobody may now bother to observe his death anniversary on 02 January, 2010. Lakhkhyan along with his untold tales has been consigned to oblivion.
Everyday hundreds of Bangladeshi people rush to different hospitals and blood donation centers neither for any financial gain nor for any publicity in the media. They heard that a patient had been in desperate need of blood of a particular category similar to theirs. They couldn't wait to donate their blood to such a dying child or an adult they had never met.
They don't want their names to be publicized, they don't care we eulogize them or not. They simply respond to the call of their conscience; they love to remain unsung.
Rupchan, a rickshaw-puller in Dhaka city, on 15 July, 2009, while crossing by the Nilkhet intersection found a bag lying on the road. The bag contained Taka 250,000. Rupchan could easily go home with the bag containing money that was equivalent to his earnings of four and a half years. But, his conscience didn't allow him to take away money that he didn't earn. He returned the bag with money to its owner with the help of police authority.
In a similar incident in Hyderabad in India, an auto driver on 02 December 2009 had returned a bag containing 40 tolas of gold and a good amount of cash to its owner, who as a passenger absentmindedly left the bag in his auto. As like a Hindi film hero, the auto driver named Syed Moinuddin entered the Nampally police station and handed over the bag to the police officials. After getting his gold and cash from police, Chandrakant from Chittapur under Karnataka, the owner of the lost bag, could not believe that a poor auto driver could be so honest to such an extent.
Rupchan of Bangladesh and Moinuddin of India at the time of returning the bags containing gold and cash to the original owners didn't care whether people would eulogize their honesty. They simply responded to their conscience.
There are thousands of Rupchans and Moinuddins whose stories are not published in any media. They are the people who feel shy to tell their tales.
Tales of thousands of such people thus remain untold the way melodic chirpings of millions of birds in deep forests remain unheard and likewise, sweet aromas of trillions of wild flowers remain unscented.
We Bangladeshis have a bad name. Outsiders say we are very emotional. True. But it is our hyper emotion that has taught us how to shed blood to liberate a country, how to donate blood to save a life and how to return a bag full of cash to its original owner.
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Maswood Alam Khan is a freelance writer. His e-address: maswood@hotmail.com



Input prices, subsidies and farmers' incentives
M. Asaduzzaman, Quazi Shahabuddin,
Uttam Kumar Deb and Steve Jones
Policy makers in Bangladesh, as in many other developing countries, face the challenge of trying to keep food prices low for consumers, especially poor people, while ensuring prices are high enough to give farmers the incentive to grow more food.
In the medium-to-long term this problem can be tackled by raising the productivity of farming (e.g., by breeding more efficient rice varieties, improving marketing systems), so that food can be produced more cheaply, benefiting both consumers and farmers. In the short term, government can try to reduce farmers' costs of growing food (e.g., through irrigation and fertiliser subsidies or more efficient fertiliser and water management practices) and/or influence the price of food in the market (e.g., through domestic procurement, open market sales and/or food imports.
Over the last 30 years, Bangladesh has experienced a "green" revolution in rice production, with a tripling of production from approximately 10 million metric tonnes in the mid-1970s to almost 30 million tonnes in 2007/08. It was largely based on the cultivation of high-yielding varieties (HYVs) under irrigation with use of chemical fertilisers.
This "Green Revolution" has enabled Bangladesh to increase food availability to meet the demands of a rapidly growing population. Bangladesh still imports some food grain, especially at times of disaster (e.g., floods, cyclones), but the country is largely self-sufficient.
In the early years, fertilisers and diesel/electricity (for irrigation pumps) were subsidised in order to encourage farmers to try the new technology. Later, they became a key policy instrument to incentivise farmers and encourage them to grow more rice.
The rate of growth in the use of HYVs, fertilisers and irrigation is shown in Figure 1. Over time, the price of fertiliser relative to rice has been kept low, providing the economic incentive for farmers to produce rice.
Fertiliser subsidies and distribution fertiliser subsidies
There are four main fertilisers used in Bangladesh - urea, triple super phosphate (TSP), muriate of potash (MP) and diammonium phosphate (DAP). Urea is produced in Bangladesh using natural gas (60-70 per cent) and imported (30-40 per cent); 15 per cent of TSP is produced in country, but most is imported, while all the MP and DAP used is imported (see Table 1).
The government subsidises fertiliser in a number of ways:
*domestically produced urea is subsidised twice: (a) the natural gas used to manufacture urea is sold to the five fertiliser factories at a subsidised rate; and (b) the ex-factory price fertiliser dealers pay is subsidised at a level lower than the cost of production;
* imported urea is subsidised to make the price the fertiliser dealer pays the same as that of domestically produced urea;
* imported TSP, MP and DAP receives a fixed subsidy which, for many years until late 2008, had been set at 15 per cent of the import cost.
The cost to government of subsidising imported fertiliser obviously varies with the international price (see Fig. 2).
There are a number of problems with the subsidy system:
* It has encouraged inefficiency in the domestic production of urea. Not all factories are equally efficient and the relatively inefficient ones receive comparatively higher subsidy. Thus the subsidy is more than absolutely necessary, leading to waste of resources and a high fiscal cost for Government.
The relatively higher subsidies given to urea, compared to TSP and MP, in recent years has led to unbalanced fertiliser use by some farmers, which has probably depressed yields and may have adversely affected soil fertility. Figure 2 illustrates how relative fertiliser prices have changed since 1999 and Figure 3 shows the rapid increase in use of urea.
Fertiliser distribution system
Until the late 1970s, fertiliser procurement and distribution was a public monopoly of the Bangladesh Agricultural Development Corporation (BADC). Because the system was inefficient and was not able to cope with the increasing farmer demand for fertiliser, the government introduced a series of reforms in the I 980s, resulting in a largely private sector and unsubsidised system by the early 1990s. However, the government took over control and regulation of the fertiliser marketing system, following an unprecedented urea shortage in 1995 caused by (a) poor monitoring of fertiliser demand and availability, and (b) the export of domestically produced urea, despite high demand at home.
The current fertiliser marketing and distribution system is as follows:
*the Bangladesh Chemical Industries Corporation (BCIC) is responsible for domestic production of urea and TSP and import of urea, while the Bangladesh Fertiliser Association (BFA) and the BADC imports non-urea fertiliser;
*fertiliser factories sell fertiliser to 4,800 upazila fertiliser dealers (10-15 per upazila), appointed by BCIC on the recommendation of the government's Fertiliser Monitoring Committee;
* the fertiliser dealers, in turn, serve 14,000 block or union level sale representatives (sub-dealers) who sell to farmers at a rate fixed by farmers;
* farmers are given a certificate by Department of Agricultural Extension staff enabling them to buy fertiliser at the subsidised price in proportion to their fertiliser requirements.
Although there has been no repeat of the crisis of 1995, there are problems with the system:
*farmers frequently complain of fertiliser shortages (due to many factors, including weak forecasting of demand, problems in smooth import of fertiliser and rules that prohibit sale of fertiliser across upazila boundaries);
* the current system involves high-management costs to sustain the policies and controls. A major problem is that local agricultural extension staff are preoccupied with managing and controlling fertiliser distribution at the union level and thus their primary responsibility of providing agricultural extension support to farmers is seriously hindered.
There is clearly scope to improve the current system.
What Happened in 2007 and 2008?
In 2007 and 2008, Bangladesh experienced unprecedented rises and sharp falls in the prices of oil, fertiliser and food. A striking feature of this volatility was that while prices took many months to build up to their peaks in mid-2008, the downturn was very rapid, with prices tumbling by the end of 2008 (see Figure 4 and Figure 5).
Fertiliser
International fertiliser prices doubled between late 2006 and late 2007 and jumped again between October 2007 and March 2008. TSP and DAP prices rose from approximately $400/tonne in October 2007 to almost $1,200/tonne in the following March and urea rose from $350/tonne in October to $750/tonne in August 2008. Prices fell precipitously from August/September 2008 and by early 2009 were almost back at their 2006 levels.
Domestic prices of TSP and MP, which were not heavily subsidised by the Government, mirrored world prices, with a lag. TSP, for example, jumped from Tk 24/kg in 2006/07 to Tk 70/kg in August and Tk 78/kg in December 2008 (see Fig.4). The administered price of urea, on the other hand, remained at Tk6/kg until June 2008 when the Government increased it to Tk l2/kg, though some farmers who could not access urea through official channels paid higher prices. During this period the government paid a very high subsidy of up to $800/tonne on imported urea to maintain a low urea price in the country.
The high prices of urea did not stop importers from bringing in supplies of urea, because they knew they would be compensated through subsidies. In 2007/08 the quantity of urea imported more than doubled and overall availability (domestic production plus imports) increased by 35 per cent.
The situation was different for non-urea fertilisers, which received a fixed government subsidy of 15 per cent. Because of the high international prices, importers were not sure that they would be able to sell what they could import. TSP and MP imports thus declined in 2007/08 causing a shortage in the market and rapid prices rises. The Caretaker Government made efforts to procure more non-urea fertiliser from international sources but supplies were limited. In early 2009, the new Government changed the system, fixing the dealer prices of non-urea fertilisers at almost half the prevailing market price to compensate importers who had imported earlier at high international prices, which they were unable to sell.
Diesel
International oil prices also shot up during 2007/08, peaked in July/August 2008 and then fell precipitously. Because of government subsidies, the domestic price of diesel was lower than the international price and "sticky" in that it was changed from time to time as the government adjusted to the rising international price.
The response of the government to rising diesel prices was to introduce a cash payment for marginal and small farmers who irrigated boro rice using diesel pumps. Taka 2.5 billion was distributed. Although there were some reports of leakage, the programme was reasonably effective. The price of diesel has fallen recently.
Operationalising subsidies
The government can choose to subsidise fertilisers in various ways. These include:
(a) Targeting subsidies to formers according to area cultivated. This approach could reduce the risk of fertilisers being diverted to non-agricultural uses, but would require a survey each season of how much land each farmer is cultivating, which would be very costly.
(b) Targeting subsidies to marginal and small formers. This approach would support those farmers who would find it most difficult to pay for fertiliser and adopt new technologies (e.g., hybrids). However, it would require a listing of farmers and a local system (using extension agents or Union Councils) to verify eligibility, which would also be costly. It would also mean that larger farmers, who produce the surplus production in the country, would be disadvantaged and could result in higher food prices for consumers and poor people.
(c) Providing subsidised fertiliser to all farmers. This "universal" approach would make all farmers eligible to buy as much fertiliser as they need from registered dealers and sub-dealers. So long as the Government ensures that adequate supply is available in the market and quality is regulated, this would mean that farmers would be able to buy all the fertiliser they need to maximise their output and would thus make the biggest impact on farm incomes and food production in the country.
This system would require a listing of all farmers (though this would be less difficult than targeting specific groups of farmers (option (b), above). There could also be leakage if farmers buy more fertiliser than they need and sell it to industries.
Under this system, the subsidy could be paid through administered dealer prices, as is currently done, or as a cash payment to all farmers. The advantages and disadvantages of these two alternatives are given in Table 2.
(d) Providing subsidised fertiliser to a//. This truly "universal" approach would allow anybody who wanted to buy fertiliser, for whatever purpose, to do so from dealers, sub-dealers or shops. So long as Government ensures that adequate supply is available in the market and quality is regulated, farmers and others would be able to buy all the fertiliser they require. This system would involve extra costs (in that industries and others would be able to buy subsidised fertiliser and use it for other purposes) but this would be offset by (a) not needing to pay to maintain a register of farmers and (b) releasing extension workers from managing fertiliser distribution and allowing them to focus on their extension work.
Table 2: Universal subsidies: alternative ways of delivery
Similar systems could be used for diesel subsidies, though there is the extra consideration of equity between farmers who use diesel and more highly subsidised electricity to power their pumps.
Key policy implications
The government can seek to influence farmer incentives by subsidising agricultural inputs (fertiliser, diesel) or by procurement of food grain and Open Market Sales. In recent decades, both approaches have been used but a systematic evaluation of the effectiveness and cost to the Government of each approach has not been undertaken. It recommended that this should be done urgently so that Government can use its funds as effectively and efficiently as possible. This should include both the direct costs (e.g of subsidies on inputs, food grain storage costs, etc.) and the opportunity costs of capital (tying Government funds up in food grain stores) and labour (using government staff to manage input subsidy schemes and food grain stores).
There are currently many shortcomings in the fertiliser procurement and distribution system. A comprehensive assessment of the current system needs to be undertaken, constraints identified and analysed, and policy and operational reforms implemented to contribute towards more efficient, equitable and farmer-responsive fertiliser marketing and distribution system in the country. (M.Asaduzzaman is Research Director, Bangladesh Institute of Development Studies (BIDS); Quazi Shahabuddin is former Director General of BIDS; Uttarn Kumar Deb is Head of Research, Centre for Policy Dialogue, Dhaka; and Steve Jones is an independent consultant.)
The Bangladesh Institute of Development Studies (BIDS), founded over 50 years ago, is a public multi-disciplinary organisation which conducts policy oriented research on development issues facing Bangladesh and other developing countries. The mission of BIDS is to facilitate learning in development solutions by fostering policy dialogue and informed policy making as well as conducting training and evaluation. In that pursuit, BIDS is involved in collection and generation of socio-economic data, carrying out analytical research on current economic and social issues, and dissemination of research findings and knowledge on developmental concerns to support development planning and policy formulation. The Policy Briefs, published by BIDS, are aimed at disseminating research results to the policyrnakers and other stakeholders. The views expressed in these briefs are the authors' and not necessarily those of BIDS or DFID.
M. Asaduzzaman is Research Director, Bangladesh Institute of Development Studies (BIDS); Quazi Shahabuddin is former Director General of BIDS; Uttam Kumar Deb is Head of Research, Centre for Policy Dialogue, Dhaka; and Steve Jones is an independent consultant




Can Bangladesh achieve the MDG on poverty
Amanullah Khan and Abdur Rahman Jahangir
RAISING the standard of living of the poor has been a major challenge of democracy and development. Bangladesh, among 189 countries, adopted the UN Declaration of in 2000 that set eight goals known as the Millennium Development Goals (MDGs), to achieve by 2015. The goals spell out specific, realistic, comprehensible and attainable targets for the developing countries to pursue. They offer a gleamer of hope for the developing world to come out of poverty and illiteracy.
Eradication of poverty and hunger, the first among the eight goals, envisages reducing by half the number of people whose income is less than one dollar a day, ensuring full and productive employment with decent work for all, including women and the young, and cut down by a half the number of the hungry. Bangladesh is committed to reduce, by 2015, to cut down poverty from 58.8 per cent to 29.4 per cent of the population. Despite initial progress, as the latest available indicators suggest, Bangladesh could miss the goals because of its slow economic growth and inadequate resource base causing unemployment. As a result, more people are slipping back to the fold of poverty.
In Bangladesh, 40 per cent of the population still live below the poverty line. Poverty is more pervasive in rural areas where 56 million people live in abject poverty in Nilphamari, Rangpur and Kurigram districts of Rajshahi division, in north western Bangladesh. Perennial droughts cause `monga,' a near famine, in the districts where people get no work at all in the dry season. Lack of irrigation make, agriculture difficult where poverty can exceed 60 per cent in the region. Of the poor, two out of three are caught in extreme poverty, as measured in 2004 by the Direct Calorie Intake (DCI) method of Bangladesh Bureau of Statistics (BBS). Though the poverty rate has decreased since 2001, the absolute number of poor has remained almost static as a result of the rise in population on a year to year basis. Now, about 71 million people or 44 per cent Bangladesh population, trapped in poverty, face hunger and malnutrition.
The economic growth elasticity of poverty in rural Bangladesh was estimated by the government at -1.9 in 2000 and -1.8 in 1991-1992, while income inequality elasticity of poverty was 0.5 and 0.2 respectively during those periods. The trend continued, more or less, in recent years. In such a scenario, significant poverty reduction will not be possible with the current level of economic growth and income inequality. Poverty can be cut significantly, with higher economic growth and better distributive justice that provide the poor access to increased economic opportunities. The constitutional pledge of the Republic to ensure basic necessities of food, clothing, shelter, education and medical care, employment and social security in cases of unemployment to peasants and workers remains in paper only.
According to Household Income and Expenditure Survey (HIES) 2000, the headcount poverty ratio declined from 58.8 per cent in 1991/92 to 49.8 per cent in 2000. The average annual decrease in poverty was only one percentage point during the period. At this slow rate of improvement, the MDG poverty reduction target of 29.4 per cent by 2015 should be difficult to achieve. According to the MDG Bangladesh Progress Report 2008, though, increases in overseas employment and remittance and a decline in family size have contributed to a fall in urban poverty to match the MDG target, the rate of poverty reduction (3.2 per cent a year during 2000-2005) in the rural areas, where a majority of the population lives, would prove insufficient for catching up with the goal by 2015.
In order to reach the goal, it would be necessary to accelerate pro-poor growth to cut down poverty by 3.26 per cent each year, beginning 2008 to 2015. It poses a big challenge for the policy-makers to adopt a holistic approach to reduce rural poverty, the report predicts. The Communication and Media Research Initiative (Camri), a research organisation, reported, the poor's share in national income slipped from 6.5 per cent in 1992 to 5.3 per cent in 2005, a decline by 18.46 per cent in 13 years. The share of the poor is estimated to fall to 4.9 per cent in 2015, the MDG deadline.
A recent government report comments that the depleting share of the poorer segments of the society in national income and consumption shows that the poor are not benefiting from economic growth. The exclusion of the poor from economic growth undermines the fundamental principles of the state policy enunciated in the Constitution of the Republic. The Labour Force Survey 2005-06 of BBS shows that unemployment rose by 100,000 or 5.0 per cent between 2002-03 and 2005-06. "The challenge is clearly to create employment opportunities at a much faster pace," says the report on the MDG Campaign.
A survey team found at 100-year old Jimkhana Railway Colony under Narayanganj Sadar (police station), about 20km north of Dhaka, nearly 20,000 people, all chronically poor, living in deplorable conditions in the colony dating back to about a century and spread over a land of 10 bighas. Over a dozen respondents in the 10-bigha colony mentioned identical reasons to be responsible for their poverty. They are poor they said, because they were born in poor families, with no ancestral property or assets for which their parents could not afford education for them. They believe even getting paying jobs in the formal sector needs education. For poverty, they also blamed factors like widowhood, divorce or abandonment by husbands, lack of capital, a saturated labour market, low of income, illiteracy, shrinking job opportunities, early marriage, social injustice and poor governance. They say that in their colony, every man and woman wants to work to get out of poverty. But they find work difficult to get.
Rasheda, 35, a mother of two daughters -- one 16 and another 12 -- lost her rickshaw puller husband Solaiman three years ago. "Within a week of the death of my husband, I had to go out in search of work to feed my children. First I went to a number of garment factories. It got no job as I am unlettered. After a long search I got the work of brick-breaking. And I still do it," says Rasheda, who looks much older than her age. Her ill paid work brought her little relief and comfort. She said her paltry earning of Taka 60 or 70 a day is quite inadequate to meet the day-to-day expanses of her family of three. She had to stop sending her daughters to the school. "I am desperately looking for a work that would pay me enough to meet the basic needs of my family," said a disappointed Rasheda.
Many others have no better option than working in garment factories or as domestic help, with earnings jobs not sufficient to maintain families. Most of the children under five, deprived of healthy food, suffer from malnutrition.
Sujan, 28, a father of two children, serves in a restaurant on a monthly salary of Taka 1500. Sujan's wife Rekha works as a domestic help in two houses in the area and earns Tk 1000 per month. The couple finds their income inadequate for the family. "We find it very difficult to satisfy all the needs of our family with these amounts. I have to borrow or cut consumption every month to get along. We have no means to buy nutritious food for our children. Sometimes we can't even afford the basic food for them," Sujan said, adding that their kids frequently fall ill. Sujan, like his other neighbours, appreciate the treatment rendered by a local hospital. But they cannot buy the prescribed medicines, which are not supplied by the hospital.
According to a study conducted by the Bangladesh Institute of Development Studies (BIDS), about 31 per cent of the rural population face hunger and malnutrition, due to chronic poverty. It is estimated between 25 and 30 million of the country's citizens are chronically poor, it said.
Jimkhana Railway Colony community never heard about the MDGs.
With political will and commitment, the government of Prime Minister Sheikh Hasina should be able to rid the country of the stigma of poverty.
The article is a part of a series of community-centered surveys on selected issues under a UNESCO/ AMIC project




Prof. Samuelson: guru extraordinaire
Subramanian Swamy
A chosen student among the many Prof. Paul Samuelson nurtured recalls the teacher's contributions.
If anyone can be called the father of modern analytical and scientific economics, it is Paul A. Samuelson, who passed away on December 13 at 94. Anyone who has read economics, even in the most fleeting way, cannot but recognise his perceptive undergraduate economics textbook. Think of analytical economics, and you think of Samuelson.
When I saw him last when he was 92, he was driving his car near his home in Belmont, Massachusetts - a small elite town in the vicinity of Cambridge which is home to Harvard University and the Massachusetts Institute of Technology - and as alert as ever. He stopped upon seeing me on the sidewalk, pulled over and chatted about how I was. Since 2000 I have been going back each summer to Harvard to teach two courses in economics, and I had been meeting him over a one-to-one lunch at his favourite restaurant at Harvard Square. That year I had not yet called him, and he was disapproving.
Whenever I met him I was just his student, which I had been in 1962-63. At every meeting with him I had to answer his rapid-fire questions about a series of subjects, and even share delightful gossip. On that summer's day at Belmont it was no different.
Later I had become his co-author on the Theory of Index Numbers, published our research in the American Economic Review (1974) and the Royal Economic Society's Economic Journal (1984), but I was still treated as his student, to be cared for, and questioned.
Samuelson's main contribution to modern economics was the use of advanced calculus to show that economics could be structured on clearly stated or observable behavioural assumptions or axioms or objectives, and then by mathematical deduction deriving economic laws that could be tested on real-life statistical data. He thus made economics a subject of scientific inquiry to be truly called a science, in the sense that propositions in economics could be 'proved' with proof, just as theorems in mathematics could be. Mathematical logic and rigour was all; little else mattered. Gone, thus, were the days of John Maynard Keynes' "Shakespearean" economics and John Kenneth Galbraith's art of expression. Felicity in English no more mattered; mathematical methods took its place. Samuelson globalised economics by enabling scholars who knew little English to join in international discourse and collaboration in research and teaching. Economics thus exploded on to the international scene, and became fashionable.
Worked in two dimensions
Samuelson worked in two dimensions throughout his life. In one, he spoke in homely English about the most complicated economic issues. He thus authored one of the most widely used college textbooks in the history of American education. The book, titled Economics, first published in 1948, was the globe's best-selling textbook for nearly 30 years. Translated into 20 languages and updated periodically, it is selling over 50,000 copies a year in its 19th edition half a century after it first appeared.
His second dimension was of mathematical rigour that began with his Harvard Ph.D. thesis-turned-book titled The Foundations of Economic Analysis. This is a gold mine for research even today. When he defended his thesis before a committee of three Harvard Professors, the story goes that the chairman, Professor Joseph A. Schumpeter, asked his two fellow-members after the viva voce: "Gentlemen, have we passed?"
Between the two books, Samuelson redefined modern economics and made it popular, yet a science. For that he became the first American to win the then newly instituted Nobel prize for economics.
Paul Antony Samuelson was born on May 15, 1915 in Gary, Indiana. After receiving his bachelor's from Chicago in 1935, he went to Harvard. He earned his master's from Harvard in 1936 and a Ph.D. formally in 1941. He wrote his thesis in 1937.
In 1940, Harvard offered him an instructorship (the Harvard equivalent of Assistant Professor, which in turn equalled the position of an Associate Professor elsewhere), which he accepted. But a month later the MIT invited him to become an Assistant Professor, that is, the same as Harvard's Instructor. But jealousy and, some suspect, the anti-Semitism of the late-1930s made Harvard deny him a promotion, even though he had by then developed an international following.
Fresh from India with a B.A. Honours in Mathematics and a Master's in Mathematical Statistics, I first met Samuelson in his office in September 1962 wanting to be his student, cross-registering in the most advanced mathematical economics course of the MIT. I had arrived in Cambridge on a Harvard scholarship for a Ph.D. Samuelson selected each year only 20 students, out of about 200 who applied, expecting to groom them as scholars. I wondered whether I would be chosen. I was.
Once while lecturing on the theory of consumer behaviour in class, Samuelson wrote on the blackboard a series of equations to derive a theorem. As a student I raised my hand from my desk and said: "You have one equation wrong, so you will not be able to prove the theorem." There was stunned silence. Samuelson walked to my seat and glowered: "What did you say?" I held my ground and offered to rectify what was a small careless mistake which all geniuses commit on the blackboard in class. He made me go to the blackboard and write out the correct equation - which I did. Then, sternly he said: "See me after class." My classmates thought that was the end of me. One asked: "Have you got your return ticket to India?"
But it was, instead, the beginning of me - and of a relationship. When I saw him after class, he said: "I think you and I should write a joint paper some day." This we did 10 years later, but he me helped in the interim on a number of papers published in my own name, and thanked me in footnotes of his published papers for having corrected him or given him leads. He, and my thesis adviser Simon Kuznets at Harvard, launched my career. I became a Teaching Fellow as a student, an Instructor soon after, obtaining a Ph.D in the shortest possible time of 18 months, and an Assistant Professor, all at Harvard.
I eventually joined politics because my career was blocked in India. I continued to return to Harvard to teach, and got nothing but warmth and welcome from Samuelson each time. During the Emergency, Henry Rosovsky, the Harvard economist, became the Dean and appointed me Visiting Professor. Indira Gandhi sent an emissary to him to cancel my appointment. But Henry was no pushover. By now Samuelson was convinced that I had responded to a higher call. He encouraged me to fight on. He wrote in Newsweek against the Emergency and even signed a petition along with other Nobel laureates to the U.S. President condemning the jailing without trial of 140,000 persons.
Samuelson remained sympathetic from then on to my choice of a political career over academics. Once I called him my guru and explained the gurukul system of the Indian rishis. He said: "Ah! That's what the U.S. needs." Samuelson was already a rishi in the way he treated his chosen students. I shall remember always that I was once his chosen student among the many he nurtured.

Dr. Subramanian Swamy is a former Union Minister of India who is the president of the Janata Party.
Courtesy: The Hindu




Salehuddin Ahmed
The attention on the small and medium enterprise or SMEs as they are called is a departure from concentrating only on large businesses as the route to generate income and employment opportunities of a significant number of people in a country like Bangladesh. SMEs are typically labour intensive industries with relatively low capital intensity and as such for Bangladesh which is a labour abundant and capital scarce country, SMEs have a natural competitive advantage. In recognition of the importance of the development of SMEs in promoting growth, employment generation and poverty reduction, the SMEs have been declared as a priority sector in the governments' Poverty Reduction Strategy Papers (PRSPs), the Industrial Policy 2005, and the Draft Industrial policy 2009. Despite its importance, availability of finance is thought to be a major constraint to formation and growth of SMEs in Bangladesh. Banks and financial institutions are somewhat reluctant to expand their SME credit portfolio, in case of women SME entrepreneurs this attitude is more visible, because they do not consider SME lending an attractive and profitable undertaking. This paper brings out some major issues on SME financing and highlights the importance of some policy and regulatory reforms to operationalise a "holistic" approach to development of SMEs in Bangladesh.
Premise for SME financing: Finance, though is not the only factor for business, but it is the most vital and basic element for any business to start and continue to stay in business. More than a century ago, the outstanding economist Adam Smith said "Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little" (Adam Smith, 1937: "An Inquiry into the Nature and Causes of the Wealth of Nations", Edwin Cannan (Ed.), The Modem Library/ Random House Inc., New York). It is a well known fact that it is very difficult for the SMEs to get fund from the banks and financial institutions for various reasons.
SMEs have been considered to have significant development potential. SMEs played a vital role in the classic development success stories, like Japan, Taiwan, and Hongkong. Other developed and developing countries have also promoted SMEs which played some positives roles in development.
Several studies in different countries including Bangladesh, have shown the negative micro-economic effects on SMEs due to inadequate/distorted policies/regulations, and lack of SME friendly financial services. Beyond the microeconomic effects, only a few quantitative analyses of macro-economic impacts have been conducted to see the impact on the overall economy. HIID led study conducted by Haggblade et al. ("The effects of policy and policy reforms on non-agricultural enterprises and employment in developing countries: A Review of past experience", EEPA Discussion Paper No. 1, HIID and Michigan State University, 1986) suggested that misguided policies reduced GDP between 6 and 18 percent in 7 countries of Asia, Africa and Latin America.
Support to SMEs is consistent with the global efforts on "financial inclusion" by the formal and semi-formal sectors (MFIs, NGOs), and more specifically SMEs are justified on the grounds of utilisation of resources, employment generation, diversification of industries, development of entrepreneurial & management skill, decentralised-regional development, and foreign exchange earning.
To address the above issues, the access of SMEs to the range of financial services need to be considered in terms of banking of the un-banked. Further , SME enterprises lack of awareness and procedures (which make them hesitant to approach banks and financial institutions) must be removed.
SME scenario in Bangladesh: Definition of what constitutes a small and medium enterprise varies considerably across the countries of the world. The OECD for example, defines SME as independent firms employing fewer than 250 employees. However, a typical SME is much smaller than that. Bangladesh Bank under its refinance scheme, divides SMEs into two broad categories : Small and Medium enterprises covering three types of businesses : Service concern, Trading concern, and Manufacturing concern. In the small enterprise category, depending on the business type, an enterprise should have total assets (at cost) excluding land and building within a range of Tk. 50000 to Tk. 15 million employing upto 50 persons. In the medium category on similar criteria, an enterprise shall have total assets(at cost) with a range of Tk. 5.0 million to Tk. 200 million employing upto 150 persons.
These categorisations provide scope for wide variations in investment and employment amongst SMEs which require calibrated procedures with flexibility and innovativeness on the part of the banks and financial institutions. This is quite a challenging job for all the stakeholders involved.
The Industrial Policy of Bangladesh 2005 recognised four categories of industries: "Large industries" employing 100 or more workers having a fixed asset (excluding land/building) of over Tk.100 million, "Medium Industries" employing between 25-100 workers and having fixed asset ranging between Tk.15-100 million, "Small Industries" employing less than 25 workers with investment of less than Tk.15 million, and "Cottage Industries" which is mainly managed by family members.
The definitions of IP 2005 and the Bangladesh Bank are different which may have created some problems. There is need for adoption of an unambiguous definition of SMEs, which should be resolved by the DIP 2009.
What makes SMEs so vital to an economy, however, is the fact that, although each enterprise is relatively small, their contribution is quite high. SMEs contribute over 55 per cent of GDP in the OECD countries and between 60 to 70 per cent of GDP in middle-income and low-income countries. In Japan, China, South Korea the contribution to GDP are in the range of 47 per cent to 70 per cent. In India, SMEs contribute about 80 per cent of their industrial sector output. The contribution of SMEs to Bangladesh GDP is in the range of 20 per cent to 25 per cent though SME contribution to total employment is about 40 per cent.
It should be pointed out that SME is not a monolithic entity- there is an array of diverse nature of entities, which necessitates calibrated policies and programs, not blanket or omnibus types of policies and programmes.
Improving the Roles of Banks and Financial Institutions: When we look at the issue of SME lending, two sets of problems from the demand side(the enterprise) and the supply side( the banks and financial institutions) interact and as such the solution of the problems has to address both the demand and supply sides.
The major problems from the demand side of SME are::
(a)high interest rate (b)tenure and structure of loan are not appropriate (c)lengthy and complex process to get loans. (d)Lack of information on SME financing. (e)Lack of business advisory services.
From the suppliers' point of view the problems are:
(a) SMEs are risky enterprise (b) Profits from SME loans are not adequate (c) insufficient funds for SME (d) Processing of loans is difficult and supervision cost is high.
These two sets of problems along with policy and regulatory implications, if not addressed in a "holistic" approach , may create what is known as "growth trap". the net effect of which yields a "missing middle" in the financial domain of a country. It must be remembered that the term "missing middle" should not be limited to financial connotation only, the non-financial aspects like marketing, management support, training, supervision and monitoring to expand and improve the efficiency of SMEs should also be considered. In this backdrop, we should attempt to
(a) Motivate the banks and financial institutions to give special emphasis on SMEs. They should put on extra efforts on women entrepreneurs
(b) Find ways and means to minimise costs for management of SME financing (c) Expand refinancing facilities for SME sector
(d) Extend training of officials dealing with SME financing.
(e) Improve supervision, monitoring and customer relationship. (f) Develop SME Data Bank
(g) Establish Risk Fund or Guarantee Fund to cover risks
(h) Expand innovative financial products like factoring, collateral free loan, securitisation
(i) Devise rating of banks by introducing SME financing performance into CAMELS rating of Bangladesh Bank.
Improve information dissemination and business advisory services to the small and medium entrepreneurs.
(k) Expand banking networks through branches, SME Service Centres, Agent Banking in the areas of potential SMEs to increase income and employment opportunities.
(1) Adopt modem IT to introduce "e-banking" to reach the un-banked and poor people.
Policy and Regulatory Measures: SMEs were not seriously considered in the government industrial investment policies during the past three decades. The industrial policies in the early decades centred on public sector and private sector led development. In 1986 Industrial policy, SME was given some priority. The Industrial Policy of 2005 took a big step to formulate SME policy which identified I I industries as "boosters". The Poverty Reduction Strategy Papers (PRSPs) of the past governments identified SMEs as vital activities of a greater part of poverty group. The Draft Industrial Policy 2009, recognises deeper role of SMEs and so considers SMEs for broad financial inclusion. However, it must be pointed out that heavy demand upon scarce development resources precludes providing big direct assistance to the majority of SMEs. Providing an improved policy environment and removing undue policy and regulatory constraints, is f more pragmatic, efficient and implementable..
Over the past three decades, economic policy biases and poor implementation of SME promotion programmes have often put constraints on SMEs growth and might have diminished the positive effects of direct credit or technical support to them. The Harvard Institute for International Development (HIID) led study in 1986 found a complex set of policies affecting small scale enterprises (SSEs). Monetary, fiscal, labour, trade, price and regulatory policies had, in the past, favoured larger enterprises and hindered efficient growth of SMEs.
What then will be the policy and regulatory reform priorities in Bangladesh? There is no straight answer to that because standardised policy - regulatory packages can not meet all needs of all diverse enterprises in the SME sector. But that does not mean we can not follow some guidelines for reforms. The first criterion to pursue the reforms is to address the premise for SME financing discussed in Section 2 of this paper and to pave the way to implement the suggestions made in Section 4. The second criterion for reforms is to eliminate all policy bias against SMEs.
The third criterion for reforms is to have a mix of neutral and targeted policies. Among most important targeted policies may be direct participation in the financial market through state-owned enterprises and selective protection to some categories of SMEs. Such measures may include reducing lending rate for SMEs and devising SME friendly structure and tenure of loan. Since targeting by public intervention is not always inclusive and efficient, the fourth criterion of reforms should be to adopt a participatory and decentralised approach to involve local government entities, private sector, non-government organisations (NGOs), trade bodies, advocacy groups, and community based organisations (CBOs) for dialogue on policies and regulations, and their effective enforcement.
Conclusion: In many countries including Bangladesh SMEs grew without an integrated approach and sound backing from the formal sector. Finances of SMEs in Bangladesh have come either through equity or from informal sources like family and friends. Banks and financial institutions should be SME friendly, flexible and innovative. It is high time, avoiding rhetorics, policies and regulations should be made pragmatic and SME biased. Policy makers should be totally dedicated to eliminate bureaucratic red tape, to simplify tax regimes, to increase access to different types and forms of financing and markets and reduce regulatory burdens. There are already signs of positive stance from the government, Bangladesh Bank, SME Foundation, different trade bodies, NGOs and advocacy organisations. Policy makers and financial institutions should have a common aim, because SME is a vital part of the economy and SME is a good and prospective business. This will lead to speedy and sustainable growth of SMEs in Bangladesh.
Borrowing a quotation from Gillis et al. ("Economics of Development", New York: Norton, 1987) we can conclude that SMEs are expected to " generate more employment, permit greater decentralisation, promote income equalisation, and mobilise latent entrepreneurs " in Bangladesh.

The article is an edited version of a paper presented by Dr Salehuddin Ahmed, former governor of Bangladesh Bank, at a seminar in Dhaka on December 09, 2009




Anti-bribery convention has made a difference
Patrick Moulette in Paris
Bribing public officials to obtain business advantages in international transactions carries a stigma and exposes corporations and their executives to an increased risk of successful prosecution, thanks to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
The treaty, which entered into force in 1999, gave the Organisation for Economic Co-operation and Development (OECD) a powerful tool against corruption. The group plays a leading role in the battle against cross-border graft - a scourge which has raised serious moral and political concerns, undermined good governance and economic development, and distorted international competition. The convention is the only international instrument that focuses on bribe-givers.
Countries that have signed the agreement must make it a crime for companies operating within their borders to bribe a foreign public official in order to obtain or retain international business (such as an infrastructure contract or a mining concession).
The 38 parties to the convention - the 30 OECD members plus Argentina, Brazil, Bulgaria, Chile, Estonia, Israel, Slovenia and South Africa - have implemented national legislation that criminalizes foreign bribery. None allow companies to claim tax deductions for bribe payments, as was the practice in some countries before the end of the 1990s. And all are working to prevent, detect, investigate and sanction foreign bribery cases.
The convention requires that signatories' foreign bribery laws apply to both individuals and companies that promise, offer or actually give a bribe. Bribery conducted through intermediaries and transactions that benefit third parties (such as an official's spouse) must also be included. Countries must consider foreign bribery a crime even where the briber would have been awarded the contract if it had been sought purely on merit. Graft is considered a crime regardless of whether the bribe was accepted or an official actually provided an illicit advantage, or whether corruption is tolerated or even widespread in the country concerned.
Parties to the convention are also required to establish effective and proportionate sanctions in order to discourage bribery.
As a result of the convention, more than 250 cases are under investigation in the 38 signatory countries. During the past 10 years, about 150 companies, including such well-known firms as Lucent Technologies and Siemens AG, as well as individuals including corporate officers, have been sanctioned for committing foreign bribery and related offenses in host countries. Companies have paid millions of euros or U.S. dollars in fines, and some executives have faced jail terms of up to five years.
This is remarkable, considering that before the convention foreign bribery was a crime in only a few countries and most companies considered bribery just a part of doing business internationally.
A key to the success of the convention is its peer-review monitoring process. This rigorous evaluation system is overseen by the Working Group on Bribery, which includes representatives of each party to the convention. The monitoring process motivates countries to honor their commitments under the convention and allows sharing of ideas and good practices.
Raising awareness of bribery in corporate practices and host governments' operations is an essential part of international efforts to intensify the fight against graft. Graft remains a challenge across several countries. Monitoring shows that their awareness campaigns related to anti-bribery laws often are insufficient. Many companies, especially small and medium-sized enterprises, remain ignorant that foreign bribery is illegal. The OECD is starting an initiative to raise global awareness of foreign bribery to support and boost individual countries' efforts to address the problem.
Although enforcement actions have increased since the convention entered into force, the OECD Working Group on Bribery and corruption-monitoring groups such as Transparency International urge more investigations and prosecutions of corporate bribery in overseas markets, particularly in nations that have lagged in cleaning up corporate corruption so far.
To further facilitate the prevention, detection and prosecution of foreign bribery, the OECD Working Group on Bribery signed into action in November a new anti-bribery recommendation. This recommendation provides measures for combating small facilitation payments, for protecting whistleblowers, and for improving lines of communication between public officials and law enforcement authorities.
An increasingly globalized marketplace has made it easier to engage in corruption and more difficult to detect it. Unscrupulous businesses faced with an increased risk of prosecution resort to paying bribes through intermediaries. That is why countries must enforce their laws vigorously, keep up monitoring corporate behavior, and work together across borders to combat bribery in international transactions.
The OECD plans to work toward extending the convention's reach to emerging economies. Key players such as China, India and Russia must join international efforts to combat corporate graft. As these countries conduct more business beyond their borders, the tough standards in the OECD convention should serve as an international benchmark for their anti-bribery efforts.

A feature of the US Department of State's Bureau of International Information Programs.
Courtesy: The US Embassy in Dhaka