Prospects of internally driven growth for Bangladesh
Wednesday, 30 June 2010
Mirza Azizul Islam
The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) has recently published Economic and Social Survey of Asia and Pacific 2010. The Survey, interalia, suggests the need for redirection of policies to promote growth based on internal stimulus, rather than external demand. To quote from the Survey "......... to unwind the global imbalances, many of the developed countries will need to restrain debt-fuelled consumption. The Asia-Pacific Countries, for their part, will therefore need to seek new sources of growth rebalancing their economies in favour of greater domestic and regional consumption".
The logic behind the suggestion: The rationale behind the suggestion is embedded in the macro-economic identity: Y C+I+(X-M) where Y stands for gross domestic product (GDP), C for consumption, I for investment, X for exports and M for imports. Growth in gross domestic product (GDP) therefore is equal to the weighted sum of these components. In follows that one way of accelerating growth is to increase the domestic components, namely, C and I in substitution of (X-M).
Pitfalls in the logic: The fundamental problem in the logic is that the static accounting identity does not capture the interactions among the components in the growth process. To illustrate, if a country already has a high level of domestic consumption, policies aimed at increasing it further would cause a reduction in saving. This, in turn, would most likely reduce investment which is a basic precondition for accelerating economic growth. Secondly, if policies are focused on increasing investment, in countries with little or no capacity to produce capital goods, imports will go up. If the incremental imports can not be met by export growth, net exports i.e. (X-M) will go down exerting negative impact on growth. Thirdly, one of the key justifications for the pursuit of an export-oriented growth strategy is to overcome domestic demand constraint.
Substitution of exports by domestic consumption may not be feasible in countries with high levels of consumption and low levels of per capita income.
Bangladesh scenario: The scenario in Bangladesh suggests that any substantial effort to refocus the economy on domestic demand would be confronted with all of the above problems. An examination of the structure of aggregate demand of seven Asian countries with relatively large populations (Bangladesh, China, India, Indonesia, Philippines, Thailand and Vietnam) for the year 2007 (last normal year before the onset of global financial meltdown and recession) shows that Bangladesh had the second highest consumption/GDP ratio (93%), second lowest investment/GDP ratio (24%), lowest export/GDP ratio (20%) and second highest net negative export/GDP ratio (-7%). In order to achieve the desired economic growth of 8.0% by 2015, the country will have to raise investment/GDP ratio to approximately 32%. That means (i) consumption/GDP ratio has to go down to generate savings for financing investment; (ii) import/GDP ratio will have to increase in view of the country's virtually total dependence on import of capital goods as well as most of the raw materials and intermediate goods. This, in turn, will require enhanced exports. In addition; given the low level of per capital income and high consumption/GDP ratio, there is very little scope for redirecting exports to domestic market.
Comments on specific suggestions: The above analysis does not necessarily imply that some of the specific policy suggestions offered in the Survey to expand domestic consumption have no relevance. In fact, Bangladesh has been already implementing these policies. The suggestions offered are (i) strengthening social protection; (ii) promoting agriculture and rural development; (iii) supporting new engines of green growth; (iv) enhancing financial inclusion. Over 15% of total government expenditure in Bangladesh is devoted to social safety net, while agriculture, local government, rural development and water resources development together account for around 30%.
To enhance financial inclusion, in addition to micro-credit in which Bangladesh is recognized as the world leader, the Government and the Bangladesh Bank have been emphasizing expansion of agricultural credit and loan to small and medium enterprises (SME) sector through formal financial system. The disbursement of agricultural credit grew by 62% in fiscal year (FY) 08, 8% in FY 09 and 16% in FY 10 (July-April period). At the end of March 20 10, SME loans increased by 17%. The Government has been offering fiscal incentives and the Bangladesh Bank has introduced a refinancing scheme for investment in green technologies.
Concluding observations: Bangladesh has been already pursuing policy prescriptions contained in the Survey for internally demand driven strategy. There may be some scope for strengthening these measures in the interest of promoting equity, poverty alleviation and environmental sustenance. But at the current level of high consumption, low exports, low investment and high import dependence, Bangladesh has very little option other than to pursue a strong export-oriented growth strategy. Domestic demand stimulation measures may at best be construed as useful complements to the basic thrust of outward looking orientation.
However, greater reliance on domestic demand may be more feasible in China, India, Indonesia, Thailand and Vietnam with comparatively lower levels of consumption and higher levels of investment, exports and per capita income. The Philippines is similar to Bangladesh in terms of levels of consumption and investment, but it has much higher levels of per capita income and exports.
............................................................
Mirza Azizul Islam, Ph.D. is former Adviser to the Caretaker Government, Ministries of Finance and Planning. This write-up in the form of a paper was prepared to initiate discussion on the ESCAP Survey 2010 in a workshop organized by the Economic Research Group ERG) and the Macroeconomic Division of UN-ESCAP at Sheraton Hotel, Dhaka, on June 26, 2010
The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) has recently published Economic and Social Survey of Asia and Pacific 2010. The Survey, interalia, suggests the need for redirection of policies to promote growth based on internal stimulus, rather than external demand. To quote from the Survey "......... to unwind the global imbalances, many of the developed countries will need to restrain debt-fuelled consumption. The Asia-Pacific Countries, for their part, will therefore need to seek new sources of growth rebalancing their economies in favour of greater domestic and regional consumption".
The logic behind the suggestion: The rationale behind the suggestion is embedded in the macro-economic identity: Y C+I+(X-M) where Y stands for gross domestic product (GDP), C for consumption, I for investment, X for exports and M for imports. Growth in gross domestic product (GDP) therefore is equal to the weighted sum of these components. In follows that one way of accelerating growth is to increase the domestic components, namely, C and I in substitution of (X-M).
Pitfalls in the logic: The fundamental problem in the logic is that the static accounting identity does not capture the interactions among the components in the growth process. To illustrate, if a country already has a high level of domestic consumption, policies aimed at increasing it further would cause a reduction in saving. This, in turn, would most likely reduce investment which is a basic precondition for accelerating economic growth. Secondly, if policies are focused on increasing investment, in countries with little or no capacity to produce capital goods, imports will go up. If the incremental imports can not be met by export growth, net exports i.e. (X-M) will go down exerting negative impact on growth. Thirdly, one of the key justifications for the pursuit of an export-oriented growth strategy is to overcome domestic demand constraint.
Substitution of exports by domestic consumption may not be feasible in countries with high levels of consumption and low levels of per capita income.
Bangladesh scenario: The scenario in Bangladesh suggests that any substantial effort to refocus the economy on domestic demand would be confronted with all of the above problems. An examination of the structure of aggregate demand of seven Asian countries with relatively large populations (Bangladesh, China, India, Indonesia, Philippines, Thailand and Vietnam) for the year 2007 (last normal year before the onset of global financial meltdown and recession) shows that Bangladesh had the second highest consumption/GDP ratio (93%), second lowest investment/GDP ratio (24%), lowest export/GDP ratio (20%) and second highest net negative export/GDP ratio (-7%). In order to achieve the desired economic growth of 8.0% by 2015, the country will have to raise investment/GDP ratio to approximately 32%. That means (i) consumption/GDP ratio has to go down to generate savings for financing investment; (ii) import/GDP ratio will have to increase in view of the country's virtually total dependence on import of capital goods as well as most of the raw materials and intermediate goods. This, in turn, will require enhanced exports. In addition; given the low level of per capital income and high consumption/GDP ratio, there is very little scope for redirecting exports to domestic market.
Comments on specific suggestions: The above analysis does not necessarily imply that some of the specific policy suggestions offered in the Survey to expand domestic consumption have no relevance. In fact, Bangladesh has been already implementing these policies. The suggestions offered are (i) strengthening social protection; (ii) promoting agriculture and rural development; (iii) supporting new engines of green growth; (iv) enhancing financial inclusion. Over 15% of total government expenditure in Bangladesh is devoted to social safety net, while agriculture, local government, rural development and water resources development together account for around 30%.
To enhance financial inclusion, in addition to micro-credit in which Bangladesh is recognized as the world leader, the Government and the Bangladesh Bank have been emphasizing expansion of agricultural credit and loan to small and medium enterprises (SME) sector through formal financial system. The disbursement of agricultural credit grew by 62% in fiscal year (FY) 08, 8% in FY 09 and 16% in FY 10 (July-April period). At the end of March 20 10, SME loans increased by 17%. The Government has been offering fiscal incentives and the Bangladesh Bank has introduced a refinancing scheme for investment in green technologies.
Concluding observations: Bangladesh has been already pursuing policy prescriptions contained in the Survey for internally demand driven strategy. There may be some scope for strengthening these measures in the interest of promoting equity, poverty alleviation and environmental sustenance. But at the current level of high consumption, low exports, low investment and high import dependence, Bangladesh has very little option other than to pursue a strong export-oriented growth strategy. Domestic demand stimulation measures may at best be construed as useful complements to the basic thrust of outward looking orientation.
However, greater reliance on domestic demand may be more feasible in China, India, Indonesia, Thailand and Vietnam with comparatively lower levels of consumption and higher levels of investment, exports and per capita income. The Philippines is similar to Bangladesh in terms of levels of consumption and investment, but it has much higher levels of per capita income and exports.
............................................................
Mirza Azizul Islam, Ph.D. is former Adviser to the Caretaker Government, Ministries of Finance and Planning. This write-up in the form of a paper was prepared to initiate discussion on the ESCAP Survey 2010 in a workshop organized by the Economic Research Group ERG) and the Macroeconomic Division of UN-ESCAP at Sheraton Hotel, Dhaka, on June 26, 2010