Retrospect and outlook of structural transformation of the Bangladesh economy

The gross domestic product (GDP) is the market value of all final goods and services produced within a country in a year. As per the United Nations (UN) Statistics Division, the Bangladesh's GDP at current price, which is called the nominal GDP calculated by using market price and production of respective year, has increased from $ 9.0 billion in 1975 to $ 28 billion in 1990 to $ 105 billion in 2010. The UN data also shows an increase in Bangladesh's per capita GDP from $ 107 in 1975 to $ 243 in 1990 to $ 624 in 2010. The data of Bangladesh Bureau of Statistics (BBS) reveals that the GDP at constant price, which is called the real GDP calculated by using unchanged price of a base year, has maintained a linear growth rate of 3.73 per cent during 1980s, 4.81 per cent during 1990s and 5.76 per cent during 2000s. Apparently, the Bangladesh economy has made a gradual higher growth performance over the years. Agriculture, industry and service are the three broad sectors in Bangladesh economy. The agriculture sector includes crops, livestock, forestry and fishery, which maintained a steady linear real growth rate of 2.54 per cent during 1980s, 3.22 per cent during 1990s and 3.53 per cent during 2000s, calculated from the data of the Bangladesh Economic Review (BER). The industrial sector is comprised of mining and quarrying, electricity, gas and water, manufacturing, and construction, average growth rate of which was recorded remarkably at 9.08 per cent during 2000s from 6.96 per cent during 1990s and 5.75 per cent during 1980s. On the other hand, the service sector is constituted with wholesale and retail trades, hotel and tourism, transport, storage and communication, financial intermediaries, real estate and renting, public administration and defence, education, health and social work, and social and personal services. The real growth rate of service sector was also found increasing from 3.71 per cent during 1980s to 4.48 per cent during 1990s and to 7.10 per cent during 2000s. Auspiciously all sectors have experienced a steady and gradual higher growth performance. However, the variation in growth performance has resulted in a structural transformation among agriculture, industry and service sectors. The share of agriculture to nominal GDP has declined from 70 per cent in 1950 to only 18 per cent in 2010. Notably, the service sector expanded during 1970s, for which its contribution reached to 37.3 per cent of GDP in 1980-81. Subsequently, its share increased to 49.5 per cent in 1995-96 and to 54.45 per cent in fiscal year (FY) 2009-10, making it the largest of all sectors. However, the share of industry to GDP remained stumpy until 1980s. But the fall precipitated since 1990, when industries started to grow exuberantly. In year 2002, the share of industrial sector rose to 25 per cent of GDP and crossed the share of agriculture. Meanwhile, the composition of GDP changed from a descending pattern of 'agriculture, service and industry' to 'service, industry and agriculture'. How far does our structural transformation differ from the typical pattern of developed economies? Economic historian Walt Rostow shows in his theory of the Stages of Economic Growth that an economy naturally starts with traditional society. The traditional activities are operated under pre-Newtonian technology but acts as the main source of employment. In the Structural Change Theory, the eminent economist Arthur Lewis argued that the traditional agriculture sector would have surplus labor, because the marginal product of labor (MPL) would remain at zero or lower than subsistence wage. He showed the mechanism of transforming the domestic economic structures from a traditional to an industrial economy. If we look at the development pattern in Japan, the dominant agriculture sector contributed 38 per cent to GDP in 1904, which contributed to only 1.5 per cent in 2010. The CIA World Fact Book also adds that the service sector accounts for 75.7 per cent of GDP. Our service sector has become the largest contributor to GDP like many other developed countries. However, the difference is that our economy has bypassed the development of industrial sector. Bangladesh has historical background of economic exploitation behind its poor industrial establishments. The per capita industrialisation index for India decreased from 7.0 in 1750 before the British dynasty to 2.0 in 1913, just before the First World War. On the other hand, the industrialisation index for England increased from 10 to 115 during the same period. The government under the British rule didn't give importance to establish industries in India. After the independence and separation of India in 1947, the Pakistani government was rather more eager to set up industries in the then West Pakistan than in erstwhile East Pakistan (now Bangladesh). The exploitation by West Pakistan could be marked through the disparity ratio of per capita GDP of the then West Pakistan to its farmer eastern part, now Bangladesh. This increased from 1.04 to 1.61 during 1950-1970 as per the Cambridge Economic History of India. Soon after the independence of Bangladesh, the government nationalised most of the industries in 1972. This was done under the principles of socialism. This mechanism was not much different from the abolishing of 'Zamidari' system, by which the government confiscated the land of 'Zamidars' or landlords, who were created under the Permanent Settlement Act 1793. In this regard, nationalisation of industries reduced confidence level of industrialists as the confiscation was practiced in its history earlier. The nationalised industries were running with substantial inefficiencies since after their inception. In the mid-1980s, the government began relaxing its policy through, among others, denationalisation to attract investments. While it provided support for setting up new industries, an opportunist group of industrialists and politician-cum-industrialists availed the facility, who were subsequently engaged in capital flight under artificially created sick-industry syndrome. However, in the process of gradual relaxations of policies in light of capitalism, the private sector was encouraged to make investment since the early 1990s and the private sector-led industrialisation expanded significantly during 2000s. In economic literature, the expropriation risk influences the confidence level of industrialists and business firms. It is an index that measures risk derived from confiscation and forced nationalisation, the value of which ranges between zero and ten. The confiscation is a practice of seizing private property without compensation. On the other hand, expropriation is practised in capitalism where compensation is to be given. In case of outright confiscation, the value of expropriation risk tends to zero. During nationalisation in 1972, the expropriation risk index was very low in Bangladesh. However, the index was found 5.14 for the period 1982-1997 as per the Harvard School of Economics. The risk of confiscation declined with an increase in index to 5.88 during 1995-2007. The possibility of outright seizing has almost disappeared and the confidence of private investors regained much in the recent years. Let us now look at the structural shift of employment from agriculture to other sectors in the economy. Using the data of World Bank and Bangladesh Bureau of Statistics (BBS), it is calculated that a single per cent employment (of people above 15 years) in agriculture contributed to about 0.6 per cent to real GDP in the early 1980s, whereas the same employment contributed to 1.5 per cent and 2.0 per cent in industry and service sectors, respectively. Any shift of employment by 3.0 per cent from agriculture to service sector contributed to 1.0 per cent additional growth in real GDP compared to that to the industry. Notably, the same types of effects were found for nominal GDP. Consequently, the service sector employment increased from 24 per cent to 38 per cent during 1980-1995. However, in the late 1990s, a single per cent employment in agriculture contributed to 0.5 per cent to real GDP, whereas the same contributed to 1.9 per cent and 1.3 per cent in industry and service sectors, respectively. Here, a 3.0 per cent -- shift of employment from agriculture to industry contributed additional 2.0 per cent growth in real GDP compared to that to the service sector. This has resulted in an increase in employment from 13 per cent to 18 per cent into industry sector during 2000s. Notwithstanding the fact that the industrial sector failed to create jobs earlier, the recent trend of shifting employment to industrial sector will be continuing in coming years. Meanwhile, the Bangladesh economy failed to maintain the typical pattern of development from agriculture to industry and then service sector. During the expansion of service sector during 1980s and 1990s, some low-productive activities like rural transport, small-scale trading etc., became saturated. Professor Moinul Islam of Chittagong University identified in late 1990s that shifting of employment to service sector created disguised unemployment. However, the service sector in the 2000s grew with a huge amount of private investment in telecommunication, education and banking. The BER statistics has shown a declining real contribution of small-scale industries during 1980s, -- the period of stagnation in the share of the industrial sector in GDP. However, the garments and large-scale manufacturing witnessed its expansion in the early 1990s and grew remarkably during 2000s. In addition, the government has planned for a huge amount of investment for electricity and construction. Good news to compliment here is that a market for value-added industrial product has already been created. Our vision of becoming a middle income country is not just an expectation; rather it is supported by the projection of the International Monetary Fund (IMF). As per the IMF, the GDP of Bangladesh will reach at $ 150 billion and per capita GDP at $ 820 in 2015. On the other hand, the government wants to attain at 8.2 per cent growth rate by the year 2015 with adequate development of infrastructures and industries under a favourable investment climate. Moreover, a trend analysis depicts that the industrial sector would cross the service sector after two decades. With gradual expansion of labour intensive industries, it would be able to absorb the disguised unemployed people from service sector, too. Obviously, the country will remain a service sector-dominated economy but after proper development of industrial sector. The writer is Associate Professor, Department of Economics, Comilla University. He may be reached at email: akanda_ai@hotmail.com