South-South Cooperation: Addressing development finance in Bangladesh

Neaz Mujeri and Mustafa K. Mujeri | Wednesday, 23 November 2022

Bangladesh -- which became a lower middle income country (LMIC) in 2014 -- faces a key challenge of increasing the availability and ensuring more effective use of development finance to support, encourage and catalyse the expansion of public and private investments in all dimensions of development activities. Development finance in Bangladesh covers a wide range of issues including planning and allocation of resources, investment decisions and choice of programmes/projects, management of finance and external sources, and financing trade and the external sector.
In Bangladesh, development finance needs to address at least two issues simultaneously: (i) adequacy of finance to provide for sufficient public expenditures to meet desired social and economic investments; and (ii) conditions for required long-term financing to allow the economy to grow and develop to its full potential. From a structural perspective, development financing in the country can be broken down into four components, each of which contributes to both objectives of meeting needed public finance and external financing for growth:
• Revenue earnings of the government (these also reduce external financing needs when public savings go up);
• Concessional development assistance, both external grants and concessional credits, that funds public or development expenditures, or catalyse growth-enhancing private financing;
• Non-concessional loans taken out (or guaranteed) by the government, from international financial institutions or private sources, typically used for infrastructure or other revenue generating projects;
• Private external finance, in the form of foreign direct investment (FDI) and other portfolio flows, mostly aimed at growth objectives rather than social objectives.
The past pattern of development finance in Bangladesh reflects widespread weaknesses in generating the required domestic resources creating an increasing need for external finance including the flow of foreign assistance. In Bangladesh, the practice is to implement development finance activities through the government's annual budget comprising two components -- the revenue budget and the development budget. Until the mid-1990s, the country's development budget remained largely dependent on external assistance.
It may be highlighted that Bangladesh has a long record of failure to generate adequate financial resources for development from domestic sources largely because of weaknesses in the tax system, which is characterised by a number of rigidities. It has a narrow tax base, low tax elasticity, weak tax administration, fairly low tax-GDP ratio, and low direct-to-total tax ratio. The tax system is inequitable due to numerous exemptions that create opportunities to abuse the fiscal incentives. Nearly two-thirds of the tax revenues come from indirect taxes on goods and services, where the share of value added tax (VAT) predominates and external aid finances about half of the import trade. While imports in Bangladesh have been growing at rates higher than exports, dutiable imports have remained largely unchanged because of the depreciation of domestic currency (BDT) against foreign currencies and growth of the average effective rate of import duty.
Foreign finance -- a major source of development finance in the country -- meets the country's trade and savings gaps, finances procurement of critical inputs like machinery and capital equipment, industrial raw materials, energy and fuel, and provides technical know-how. Further, foreign aid contributes significantly to making better use of domestic resources. The fairly long history of overwhelming dependence of Bangladesh on foreign aid in financing development programmes seems to have undergone some changes in recent years as the share of domestic resources in financing the development budget has started rising. The contribution of internal resources to funding the annual development programme (ADP), the development budget of the government, has exceeded more than 50 per cent in recent years.
In the 1970s, food aid accounted for a large share of foreign assistance followed by commodity and project assistance. Such a pattern was the reflection of a situation in which the country was meeting a large share of consumption requirements from external resources. However, the structure of foreign aid inflows to Bangladesh has changed significantly over time. The average share of food, commodity and project aid in total aid flows during 1971-1990 were 21.4 per cent, 31.8 per cent and 43.8 per cent respectively, of the total estimated flow of foreign aid in Bangladesh. In recent years, project aid alone comprises almost 98 per cent of the total foreign aid disbursed to Bangladesh. This implies that most of the foreign aid is now directed to meet development requirements.
Development activities in Bangladesh are undertaken in most part in the form of projects and programmes within the framework of ADPs and in line with the goals and objectives set in the Five Year Plans and other policy documents. Within the framework, problems in project management have a direct bearing on attaining the goals of development finance, including poverty reduction, improvements in the standard of living, and increase in productivity in different economic sectors. Historically, some major problems which emerged at the macro-level include policy and management inconsistencies; weaknesses in project approval and implementation processes; and delays in project designing, approval, implementation, monitoring and evaluation.
In addition, there exists some 'tension' with respect to Bangladesh's development status vis-à-vis external development finance. As mentioned earlier, Bangladesh has reached LMIC status in terms of World Bank income classification, but it is still a member of the least developed country (LDC) grouping of the United Nations (UN) and is likely to be graduated to a developing country in 2026. The latter shows enduring development needs (e.g. inclusive growth, equity, good governance, sustainability) despite past achievements in economic and social development.
The above also raises important issues related to future roles of the government as well as the country's development partners. While, by becoming an LMIC, Bangladesh may have to redefine the role of development finance received from its traditional donors, the country will also have to increasingly look forward to the larger framework of 'new development compact' between the countries of the South, rather than exclusive North-South exchange of the earlier periods often with the imposition of conditionalities for Bangladesh.
Several principles govern the South-South Cooperation (SSC), such as mutual gain, non-interference, collective growth opportunities and an absence of conditionalities. Moreover, this modern concept of a development compact provides for development assistance that works at five different levels: trade and investment, technology, skills upgradation, lines of credit (LoC), and grants. Obviously, fuller engagement of Bangladesh with other Southern countries will provide a major pull factor for wider engagement across the above five elements, providing a comprehensive framework for supporting the country's development.
BANGLADESH -- ISSUES IN DEVELOPMENT FINANCE: International cooperation is crucial to improving development outcomes, especially in an LMIC like Bangladesh. One form of cooperation occurs through developing partnerships; which lead, stimulate, and facilitate action on development challenges through programming, advocacy, and technical support. Over the years, there has been a shift in philosophies and attitudes at the global level towards partnership-building. In recent times, partners increasingly seek mutuality of benefits, including two-way flow of energies, expertise, and knowledge to justify investments.
In the context of development partnership and SSC, partnership arrangements between a developing country (such as Bangladesh) and its partners for achieving common goals depend on two complementary considerations - development strategies of the domestic and international stakeholders including the governments, civil society organisations, and the private sectors; and funding availability and arrangements on both sides. Further, the nature of these partnerships is likely to be determined by the country's development status. For example, as countries advance through the product cycle from labour surplus production to more capital-intensive production processes and ultimately to the knowledge-based economy, its economic and social characteristics also evolve, as do the country's needs of development finance. Consequently, the roles of development partners are also likely to change.
Regardless of the level of external financing needs, private capital, especially FDI, has recently emerged as the major source of external financing worldwide. Grants and other private financing for social financing, like health and nutrition, also make a notable contribution to Bangladesh. It may, however, be noted that private capital accounts for over 80 per cent of long-term flows to developing countries since 2000. It is the dominant source of external capital for the middle income countries, and even in Bangladesh, FDI is larger than concessional development assistance (CDA). In Bangladesh, future planning of development finance must take into account these changing global contexts. The country's investment needs are sharply rising and growing at rapid rates; which requires large inflows of external capital, especially to take full advantage of growth-enhancing investments and innovative technologies.
SOUTH-SOUTH COOPERATION (SSC) IN BANGLADESH: In addition to DAC member countries, Bangladesh has a rather strong development cooperation with many non-traditional donors, such as India, China, Kuwait, Malaysia, Saudi Arabia, Turkey, the United Arab Emirates (UAE) and other countries. In practice, Bangladesh adopts several mechanisms for pursuing SSC:
Regional Trading Arrangements. The South Asian Association for Regional Cooperation (SAARC) is one of the first few major regional integration initiatives in South Asia. The South Asian Preferential Trading Arrangement (SAPTA 1995) and South Asian Free Trade Area (2004) offer capacity building in trade-related issues through training, export promotion, trade policy formulation and support to related areas.
The Asia Pacific Trade Agreement (APTA) offers tariff concessions on specified products by member countries (Bangladesh, China, India, Lao PDR, Mongolia, Nepal, the Philippines, South Korea and Sri Lanka). Under the Agreement, Bangladesh has received 100 per cent tariff concessions on several items from China and South Korea.
Under the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), in the case of fast-track products, non-LDCs have opened up their markets for the products of LDCs and LDCs will do the same for non-LDCs within a stipulated time period. Bangladesh, being an LDC, enjoys special and differential treatment.
The Preferential Trade Agreement (PTA) among the D-8 Organisation for Economic Cooperation countries is an arrangement for development cooperation among eight member countries: Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan and Turkey. The D-8 was established by the Summit of Heads of State/Government in Istanbul on 15 June 1997. Through PTA, Bangladesh can improve its position in the world economy and diversify and create new opportunities in trade.
Bangladesh has Joint Economic Commission (JEC)/Joint Commission (JC) agreements with several countries e.g. China, India, Indonesia, Iran, Kuwait, Malaysia, Nepal, Pakistan, the Philippines, South Korea, Romania, Saudi Arabia, Sri Lanka, Thailand, Turkey, Vietnam, the UAE, the EU and several other countries. The prime objectives of JEC/JC are to enhance bilateral cooperation and instill effective measures in order to achieve comparative advantage of each country. The expansion of regional trading arrangements has also led to increases in the FDI inflows from the Southern countries.
SSC Technical Assistance. Bangladesh receives technical assistance mainly from India, China and Malaysia through scholarships and training programmes under Technical and Economic Cooperation (TEC), Technical Cooperation Scheme (TCS) of the Colombo Plan, SAARC and the Indian Ocean Rim Association.
Southern Multilateral Financial Institutions. Bangladesh receives concessional loans and grants from Southern multilateral institutions, mainly from the Abu Dhabi Fund for Development, Kuwait Fund for Arab Economic Development, Islamic Development Bank, SAARC Development Fund and others.
Emerging Issues. The overall picture that emerges from SSC for Bangladesh is no doubt encouraging; in particular, SSC is rapidly becoming an emerging source of finance with great potential for the country. There are, however, several emerging issues that need careful consideration in order to achieve the full potential of this important source and ensure a better alignment with country priorities.
In the past, Bangladesh experienced difficulties with aligning several main sources of SSC with its country priorities. In reality, a large proportion of SSC is supply-driven. It is seen that most of the investment under SSC is directed towards manufacturing and infrastructure development while some of the priority national development goals (e.g. education, skill development, health, nutrition and others) receive less or no attention. However, the problem is generally not acute for grants, as several countries (e.g. India) give enough flexibility to the government to spend the grant funds in its chosen areas/projects. However, in the case of loans, the initiatives are more likely to be donor-driven and sometimes interested quarters lobby for specific projects for financing.
An important concern with respect to SSC for Bangladesh is, therefore, to improve the value for money, especially for loan-based support from the suppliers. An important step in this direction is to ensure tendering among the suppliers (e.g. in the case of India, Bangladesh can choose the supplier through a tendering process as long as the supplier is from India). Through the process, Bangladesh can achieve a reasonable degree of value for money for projects supported by loans from India as the country has a large and competitive market of quality suppliers. In common with many other countries, a major problem faced by Bangladesh is the availability of quality data and information about SSCs. The lack of systematic analysis and data collection for SSC undermines both the government's capacity to manage these funds properly and their effectiveness. The Southern development partners also face constraints in developing informed perspectives on the results obtained with their cooperation and develop strategies for better outcomes.
FRAMEWORK OF DEVELOPMENT COMPACT & ISSUES IN SSC: The concept of 'development compact' is widely interpreted as an arrangement based on a system of shared responsibility, where all countries could orientate their efforts towards helping relatively poor countries achieve their development goals. While the compact allows the poor countries to claim higher assistance and improved market access from the advanced countries; in return, the donor countries can demand better governance and accountability from the receiving countries. Initially, the concept of development compact was conceived as a contract between developing (South) and developed (North) countries for ensuring development of the low income countries. The new development compact, however, is between nations from the South, rather than the North-South interaction that characterised the earlier arrangements.
Framework of Development Compact. A recent phenomenon in development cooperation among the countries of the South is the concept of 'development compact' between actors of the South, rather than the traditional North-South exchange that characterised the earlier arrangements. The new compact is no longer about the imposition of conditionalities for recipient countries; but more on the principles that govern SSC, such as mutual gain, non-interference, collective growth opportunities and indeed an absence of conditionalities.
The modern concept of a development compact provides for development assistance that works at five different levels, namely, trade and investment; technology; skills upgradation; LOCs, and grants. The engagement of emerging economies with other Southern countries provides a major pull factor for wider engagement across these five elements, which emphasise comprehensiveness in supporting development. From an operational perspective, the new development compact is a procedure based on a system of shared responsibility, where all countries of the Global South could position their efforts jointly towards helping themselves achieve their development goals. The compact facilitates poor countries to strive for higher assistance and improved market access, whilst provider countries and multinational organisations can mandate better governance and culpability in return.
Under the compact, developed countries and international organisations provide assistance essential for the fruitful implementation of development plans in poorer countries, whilst in response developing countries collaborate in the process through reform programmes ensuring better governance and accountability. This envisions a mutual responsibility between developing countries and bilateral donors, international organisations and the UN; it is a country-specific unique procedure, in place of the traditional 'one-size-fits all' resolution applied across the board (such as, the structural adjustment policies of the World Bank/IMF in the late 1980s) to take care of the macroeconomic problems faced by the developing countries.
The present framework of the new development compact has evolved over the years, and unlike previous measures; it is no longer about levying of harsh conditions to the poor countries but relying more on the principles that govern SSC -- for instance mutual gain, non-interference, collective growth opportunities and undeniably a lack of conditionalities ensuring economic growth through human capacity building and consolidation of institutions in the recipient countries. The modern perception of the development compact delivers development assistance that works through five different levels: (i) capacity building; (ii) lines of credit; (iii) grants; (iv) duty-free, quota-free market access (trade); and (v) technology.
Capacity Building. Capacity building is a component that has attracted the attention of policy makers across all Southern recipients from the very beginning. Almost all participants in SSC include themselves as either providers or recipient partners in training programmes. There are numerous modalities within this category, such as training programme in the host country, sending experts to partner countries, scholarships, third country training programmes, deploying volunteers, conducting feasibility studies, and establishing prototype production and training centres. One of the modalities is that of delegating experts or volunteers to projects in partner countries to meet systemic insufficiency due to a lack of skilled personnel. Capacity building efforts also involve training programmes for creating administration, managerial and decision-making skills.
Lines of Credit (LOCs). One of the mechanisms for assisting partner countries is through providing development finance, which exists for long and attracts widespread acceptance in the South. Goods, services (e.g. consultancy services), machinery and equipment are distributed to partner countries under a contract usually maintained by the corresponding Exim Banks through LOCs. These include concessional loans on interest with or without capacity building component and commercial rates of interest for different time periods. Interest rates on such LOCs also vary depending upon the significance and nature of the projects concerned, along with the time over which loans are approved.
Some of the criteria usually applied to such credits are the creditworthiness of the partner country; ability of the debtor to repay in hard currency; and whether the project concerned will generate sufficient returns for repayment. The debtor also takes into account the project's domestic supply capacity and its capability to create future trade through LOCs.
Grants. Grants are an orthodox practice at both bilateral and multilateral levels in SSC, the amounts of which may also include debt forgiveness and grants in kind. Originally, the amounts granted were miniscule but have increased over the years. At first, grants were extended totally in kind, but provider countries now-a-days have started even extending cash as grants. There are occurrences of LOCs being turned into grants, a process under which minimal cost is adhered to by the partner country.
Duty-Free, Quota-Free Market Access (Trade). The involvement of the South in the way it manages trade and investment within the South over the decades has undergone tremendous changes; this has happened with Northern partners as well. There are two factors behind increased emphasis on Southern trade relationships. First, such trade allows poor countries to achieve inter- and intra-industry economies of scale whilst providing their industries with a degree of protection against Northern competition from developed countries. Secondly, the resemblance in demand patterns amongst Southern countries leading to more intra-South trade in relevant products and technology, which might result in technological change more suitable to Southern countries than those from the North.
The Southern trade and investment initiatives may include duty-free trade preference, trade permits, infrastructure improvement for trade facilitation, trade promotion and trade support services, providing business support services, assistance for improving regulatory capacity, providing investment funds, developing intra-regional supply chains, regional and sub-regional trade agreements, providing freely convertible currency for trade, and tax preferences for foreign direct investment (FDI).
The South has profited from actions taken specifically for encouraging market access by leveraging trade initiatives to its collective advantage. Some trading arrangements between Southern economies have proved far more worthwhile than those with the North. Market access for LDCs through duty-and quota-free arrangements is one vital demand that is yet to be addressed generally by many Southern countries.
Technology. Enhancing the technology and knowledge base of the poorer countries is a vital developing area of engagement for the South. The similarity amongst their economic stages of development and circumstance of adaptation makes diffusion and adaptation a relatively successful field in SSC. To achieve self-reliance, Southern partners have been cooperating in these exchanges on an increasing scale. These initiatives include technical cooperation, joint technical and academic research, turnkey projects, technology transfer with or without component of capacity building, subsidising licensing or exemption from IPR arrangements and similar measures.
In practice, the management of these Southern partnerships differs depending upon the nature of the problems, level of common concern and of expertise, and the resources available. The arrangements may also take various methods; some may be bilateral, others multilateral, and yet others may fall within regional cooperation programmes. The modalities may also include capacity building involving training, technology transfer, cooperation for joint research and development (R&D) in vital areas of science and technology. Such programmes generally aid Southern economies to overcome the high costs of innovation and appropriate technology development.
The poorer countries, being mostly late-comers in the technology race, are more susceptible within the narrowly-defined intellectual property rules; and SSC partnerships aid Southern countries to at least absorb the implications of technological change creating ways to cooperatively identify mechanisms of accessing it. It may be noted that the WTO trade-related intellectual property rights (TRIPS) agreement came into effect at the end of the Uruguay Round of GATT in 1994. But this was jointly confronted by a large grouping of the Southern nations after the Singapore WTO ministerial meeting in 1997. The Group combined their efforts around the issue of access to medicines, an expression of unity that was a major factor in embracing the WTO Doha Development Agenda (DDA) in 2001. Similar expressions of unified opposition also came up at other forums, for example, the Convention on Biodiversity (CBD) and the World Intellectual Property Organisation (WIPO), both of which are vital global platforms.
Bangladesh's Engagement in External Finance. In general, Bangladesh can access financial resources from two broad sources: domestic and foreign; both public and private. Domestic investable resource sources include household, corporate and government savings. On the other hand, foreign investable resource sources cover funds from foreign companies (e.g. FDI), foreign banks (e.g. commercial short- and long-term loans), international capital markets (e.g. foreign private portfolio investments), bilateral donor governments (e.g. ODA), and loans/grants from multilateral development financial institutions (e.g. World Bank, ADB, and other international organisations).
In practice, Bangladesh adopts a five-pronged action for financing development: (i) mobilising domestic financial resources, both from public and private sources; (ii) mobilising international financial resources including FDI and other private flows; (iii) making international trade as an engine of development; (iv) increasing global and regional financial and technical cooperation including ODA; and (v) adopting prudent and sustainable debt financing (Table 1). For Bangladesh, mobilising external resources is important for augmenting domestic financial resources to meet the huge financial requirements for development. The country needs to explore the full potential of all traditional, emerging and potential sources of external financing.
Throughout the developing world, concessional overseas development assistance (CDA) has risen fast, driven by an expansion of grants which is consistent with the DAC observation that ODA has not only risen rapidly since the late 1990s, but the share of what is called country-programmable aid (roughly corresponding to the actual aid that crosses borders to reach developing countries) has also increased. However, one must also realise that the rise in grants is partly a substitution; as many traditional donors have shifted their operations from concessional credits to outright grants. In the 2000s, bilateral concessional credits have fallen to very low levels, before rebounding as part of the crisis response measures undertaken by the donors that became effective in 2011. In fact, most of the concessional assistance received by the upper middle-income countries has taken the form of credits, rather than grants. Certainly, Bangladesh will increasingly face such a reality as it moves up the lower middle income country (LMIC) status ladder.
Non-concessional public and publicly guaranteed loans from the public bilateral and multilateral financial agencies, including public and publicly guaranteed loans from the private capital markets, serve more as a counter-cyclical funding source rather than a source of financing for long-term investments. In particular, lower middle income countries experience large swings in their access to public non-concessional financing. There are also swings in public and publicly guaranteed loans from private capital markets, although these are less severe than the swings in flows from international finance institutions (IFIs). Bangladesh needs to be aware of the implications of these developments.
WAY FORWARD AND CONCLUDING REMARKS: For SSC to be effective and meaningful for a country like Bangladesh, a comprehensive view on development finance is needed based on four pillars: (i) an integrated market; (ii) seamless connectivity; (iii) financial cooperation; and (iv) addressing shared vulnerabilities and risks. The rationale behind the agenda is that deepening SSC can be mutually beneficial to all countries in South Asia and will be instrumental in achieving key developmental goals including SDGs, if the cooperation framework builds on emerging development experiences in the region.
The wide diversity of South Asia provides significant complementarities in development across countries (including Bangladesh) arising from a number of sources, such as different levels of development and endowment of natural resources, capital, and labour force. Such complementarities can provide the foundation for regional value chains contributing to further strengthening of economic linkages among the countries of the region. Moreover, many underexploited opportunities still exist which can provide important avenues for mutually beneficial SSC. In addition, SSC can assist in making development more balanced in South Asia, with the lagging countries/regions receiving a boost through stronger connectivity with economic growth poles, such as India and China.
One of the key elements that can ensure long term sustainability of the dynamism of Bangladesh's economy is through higher investments in education, health services, social protection, basic infrastructure and other key areas so that all segments of the population, especially the poor, can access productive and remunerative jobs. Countries like Bangladesh need huge investments in infrastructure which would provide a significant source of aggregate demand along with creating a more equitable and balanced pattern of regional development.
The emergence of a large middle class with growing incomes and rapid reduction in poverty in Bangladesh have created the foundation for an expanding market for a growing range of products and services for sustaining high production growth. Such increasing demand has already fuelled rapid growth in regional trade in South Asia, making SSC both viable and desirable for Bangladesh.
Towards More Effective SSC. For realising the full potential of SSC, it is important to ensure improved connectivity and infrastructure. Better and improved land and sea transport, multimodal transport networks connected through dry ports and other avenues of connectivity help spread the benefits of industrialisation to the hinterlands and lagging regions. Connectivity also needs to be extended to energy pipelines, power grids and broadband cables. Moreover, hard physical connectivity needs to be complemented with soft connectivity in terms of state-of-the-art trade and transport facilitation practices. These connections will link lagging regions and countries with growth poles and encourage a more balanced pattern of regional development in South Asia.
An important SSC agenda for Bangladesh is financial cooperation which is a pre-requisite for promoting mutual trade and building resilience to financial crises. It is also essential for making better use of resources for investment in infrastructure and other activities for strengthening connectivity and deepening regional economic integration. Moreover, increased mutual cooperation will place Bangladesh in a better position to respond to shared vulnerabilities and risks by increasing resilience to natural disasters and promoting environment sustainability. Options to address these vulnerabilities and risks may include jointly developing technology, enhancing people-to-people contacts to promote better understanding, and sharing development experiences and best practices.
Bangladesh routinely faces a number of shared vulnerabilities and risks, many of which are economic in nature which highlight significant South Asian interdependence and need for regional cooperation and joint action. These include: energy security (for which a number of measures may be conceived, such as linking production and consumption centres through power grids and oil and gas pipelines, joint technology development programmes for non-conventional sources of energy, and development of a South Asian energy market), unsustainable pressure on natural resources (for which the South Asian countries can pool resources to develop resource-saving and low-carbon technologies), food security (requiring responses, such as pooling resources for joint research to enhance agricultural productivity, establishing/strengthening regional food banks, and adopting social protection measures to improve access to food, health and sanitation measures to improve food utilisation) and similar other areas.
Way Forward. For moving forward, what Bangladesh needs is a strong commitment to valuing different forms of knowledge to promote learning about challenges and rethink traditional practices within global systems. Blending global knowledge with on-the-ground innovations will transform future modes of SSC and benefits accrued therefrom to Bangladesh. However, our understanding of innovation diffusion processes is fragile, and the existing literature on the phenomenon is limited.
For example, let us take the case of health services. Some of the important issues are: How can health innovations designed for one Southern country (e.g. India) setting be made best applicable to another Southern country setting (e.g. Bangladesh)? What are the enablers and barriers to health innovation diffusion from one Southern country to another? How can largely unreported experiences of Bangladesh be synthesised with the global knowledge pool? And so on. Therefore, an urgent step in the complex inter-connected research agenda is to develop a standardised method for reporting the flow of health system benefits from one to another Southern country. This is perhaps the single most important component in planning for, and realising, the full potential of SSC.
Key Challenges and Issues. Overall, Bangladesh needs to mobilise all resources -- public and private, existing and new, traditional and innovative -- to move forward in closing the development gaps and exploiting the benefits of SSC. For the purpose, one key responsibility of the government is to pool resources and human capabilities to build in-country capacities and mobilise development finance from all multilateral and bilateral channels, including SSC. While global institutions should accelerate resource transfers and provide more and effective technical assistance through ODA and SSC, the Government of Bangladesh, on its part, will have to put in place effective measures to mobilise more domestic tax and non-tax revenues; capitalise on new financing sources such as, insurance premiums, pension funds and remittances; adopt measures to channel more resources to development activities from the private and business sectors by employing innovative social development models; and re-design financial markets to ensure financial inclusion, especially for the poor and other financially excluded groups.
It is important for Bangladesh to make informed decisions regarding effective measures that can close the existing development gaps and enable it to benefit from SSC. Along with data and information at the national level, the availability of disaggregated and timely data is also critical for taking integrated actions across economic, social and environmental dimensions. The primary source of data for Bangladesh is official statistics produced by the government and other public entities. Along with expanding the scope of data collection to fill-in the critical gaps, a major concern for the country is maintaining trust, credibility and independence of the national statistical organisation (BBS). For building trust and credibility, the statistical process needs to follow professional codes and international standards. In this respect, SSC is important for Bangladesh since this would allow it to exchange information and learn from the successes and mistakes of others.
In addition to mobilising financial resources, a key issue for Bangladesh is the use of enabling conditions and science and technology innovation (STI) in creating the necessary national capacity to benefit from SSC. In this context, it is important to recognise that mobilising financial resources is a necessary but not a sufficient condition for reaping such benefits. Perhaps, an equally important issue is: how Bangladesh uses these resources to benefit and how the country puts itself on accelerated, inclusive, and sustained development path. In addition to political commitment, this requires adequate absorptive and institutional capacities and capabilities, including human resources and skills, to formulate country-focused development strategies. In fact, these capacity building efforts should be made an integral component of mobilising and utilising financial resources for benefiting from the SSC process.
The relationship between trade and FDI is generally complex and can either be trade-creating or trade-replacing; but it is more likely that FDI flows to Bangladesh would be trade-creating due to growing emphasis of the country on export-oriented manufacturing production. The continuing emphasis on liberalisation of trade and investment policy regimes is leading to improvement in the policy environment which favours both trade and investment flows thereby integrating the domestic economy more closely with the global economy. Bangladesh needs to work more closely to strengthen the positive relationship between liberalisation initiatives and trade and FDI growth and identify potential policies which would sustain the dynamic process of the trade-FDI nexus.
For deriving the benefits of SSC, technology will be a key factor for Bangladesh. For using technologies, especially without compromising with the negative consequences, particularly on the environment, Bangladesh needs to reassess its development path to identify specific technologies that can facilitate the reconciliation of economic growth with social and environmental objectives. For effective technology transfer and dissemination, the priority for Bangladesh is to build local capacity so that people and institutions can design technologies that can be diffused in societies. The policy framework also needs to take into account informal technologies and transmission modalities, including indigenous knowledge and technologies.
One useful mode for Bangladesh to benefit from technological innovations in the context of SSC is joint ventures with greater potential for learning and capacity building. Forming strategic alliances and subcontracting and entering into licensing agreements can also be used as a way of building up technological capabilities and accessing state-of-the-art technologies. Bangladesh can also benefit from 'build-operate-transfer' (BOT) and similar models through dissemination of various types of technology, especially in large-scale projects.
Further, for ensuring the best and most productive use of the scarce resources, Bangladesh needs to take into account cross-sectoral synergies and emphasise thematic interventions within the framework of sustainable development covering economic, social, and environmental dimensions. Moreover, since the major development constraints of Bangladesh are in the nature of public goods and services, their intricate inter-relationships are important elements to take into account in development interventions along with thematic considerations, such as gender, equity, and participation. For designing effective policies and interventions, such inter-sectoral influences and cross-cutting factors can be best understood and realised through developing regional cooperation and integration and learning from mutual experiences and best practices across the countries in the region. Bangladesh should also take appropriate measures to address four major concerns relating to deriving the benefits of SSC:
First, it is important for Bangladesh to design necessary domestic policies and institutions to ensure that the benefits of economic growth are more broadly and equitably shared within the society. In this context, although the priorities may differ over time, emphasis needs to be placed on SSC as a useful vehicle to facilitate human resource development, improve both 'hard' and 'soft' infrastructure, promote cottage, micro, small and medium enterprise (CMSME) development, and create necessary institutions for development.
Second, for ensuring success of the SSC process there should be deliberate efforts' for example, Bangladesh can derive greater benefits from the catching-up process. The country needs to explore how the SSC policy can be adapted to contribute to the process. Also there is a need to examine how SSC programmes can be more directly linked to FDI through their emphasis on promoting infrastructure development, moving up the technological ladders, and shifting domestic resources to more efficient uses.
Third, SSC flows into Bangladesh are low and the country faces the challenge of improving its attractiveness as location of FDI in the rapidly changing regional environment. Bangladesh needs to use SSC to move in a technological -- rather than factor-intensive mode of production -- in order to close the development gaps.
Fourth, Bangladesh needs to put more emphasis on policy coherence at both macro and sector levels. As Bangladesh would advance from largely an agriculture-based economy, it is more likely that investments in industry would create the most linkages. In this context, one important element would be to integrate the development corridors and special economic zones (SEZs) as components of growth poles to meet the needs of simultaneous and coordinated investments in many sectors focusing on, among others, infrastructure, regulation, capacity building, and finance depending on perceived constraints to private investment and growth.
To fully realise benefits from the SSC process, several spatial and political economy linkages are important including regional and national spatial linkages through developing infrastructure, energy and ICT sectors. The challenge, however, would be to deliver equitable growth for which three issues should be adequately addressed: coordination, accountability, and risk management and sharing issues. Bangladesh needs to find ways to develop specific areas of comparative advantage for competitive industries, improve productivity, strengthen connections to and among markets and reap the benefits of the SSC process.
Because huge infrastructure needs remain and both the financial and implementation capacity is limited in Bangladesh; hence, a critical issue is how best to use these scarce resources. Obviously, the development of a more sustainable policy process around infrastructure investments could enhance the competitiveness of the private sector. For the purpose, the country needs to seriously explore a number of issues e.g. how best the infrastructure services be provided in a competitive manner; and what instruments (e.g. financial, regulatory, and participatory) can the government deploy to involve the private sector and other stakeholders most effectively and efficiently in the construction and maintenance of specific infrastructure. Bangladesh also needs to continuously probe best practice financial and regulatory mechanisms to attract private financing and servicing for growth initiatives that will advance the export industries to regional and global markets.
Another important consideration for Bangladesh is the issue of adjustment costs to SSC similar to adjustment costs to the process of globalisation. It is more likely that the benefits of SSC will become visible over time while the current burden of adjustments would fall more on Bangladesh. Since the financial and human costs of adjustment are felt in the short run, the country needs to adopt measures to cushion the negative impacts of such adjustments otherwise adverse social and political reaction may cloud longer-term benefits. The argument for SSC rests on a number of compelling reasons: higher growth and improved welfare with an expanded market for both inputs and outputs; more efficient resource allocation across the Southern countries; productivity growth; and increased income and employment. However, focusing only on potential benefits but neglecting the risks and costs of SSC may turn out to be counterproductive.
Trade diversion is another potential danger for the smaller countries like Bangladesh which may originate from SSC. It is argued that when geographical agglomeration effects are at work, regional integration produces unequal net benefits and the less developed countries are disadvantaged. This also relates to the issue of trade-off between trade creation and trade diversion which is used in favour of North-South, rather than South-South, FTAs as the latter are prone to trade diversion. Further, it is argued that economic integration tends to create a larger labour market and increase wage competition among workers thereby increasing inequality in the domestic economy. It is apprehended that regional integration may have a greater effect on income inequality than globalisation as labour market is likely to be more competitive within the region. Although it is difficult to draw definite conclusions in the case of the South Asian region where economic integration is still limited, these adverse effects could be more pronounced in countries like Bangladesh where the welfare system is weak.
While the SSC process is likely to provide opportunities for achieving a more balanced social and economic development in the South through boosting closer connection across countries, especially with the region's emerging growth poles such as India and China, the above discussions indicate that deriving benefits by less developed countries like Bangladesh would require concerted actions on the part of the national government as well as the regional partners. Further, such an integrated approach will provide an additional avenue for complementing national-level policies and programmes for socioeconomic development and poverty reduction in Bangladesh.
Obviously, the key to success of Bangladesh is the good national policies which will improve economic performance and enhance welfare of the citizens. This will also have positive spillover effects on the regional economy. Countries like Bangladesh will seriously commit to the SSC agenda if they are convinced that it is to their advantage to do so, the process will provide new opportunities, there are adequate safeguards to protect their interests from the risks of cooperation, and the process will ensure a fair share of the benefits, with them being the weak partners of the SSC process.
The agenda for Bangladesh should be consistent with the need to turn the SSC framework into a system that maximises the development incentives of the country. For the purpose, four complementary actions may be prioritised: (i) provide support to overcome deficiencies and structural bottlenecks in the country's national development; (ii) ensure that Bangladesh can avoid potential risks of reversal of achievements; (iii) maximise benefits from positive externalities by Bangladesh as a result of progress of other regional countries; and (iv) build a regional framework to deal with common problems faced by individual countries of the region.
Having been in existence for a few decades, it is seen that SSC can play an important role in mobilising additional resources or promoting awareness on certain issues. Rather than being a substitute for the global partnership in development, they can complement global international commitments to foster progress towards achieving the internationally-agreed development goals like SDGs. While SSC makes important contributions, it also has some shortcomings. Due to its more ad hoc nature and focus on short-term issues, partnerships under SSC can have a poor track record in promoting a systemic change; further, It is often difficult to link SSC with national development priorities and coherence across different partnerships, including knowledge sharing.
It is important for SSC to capture the concept of common but differentiated responsibilities across the countries of the South; along with nationally defined priorities to reflect specific conditions of each country depending on its particular contexts. Moreover, along with playing the traditional role of finance, SSC can foster innovative forms of development finance and development assistance that goes beyond traditional donors. The process can actively support the efforts for building a more equitable multilateral trade system, concluding the Doha Round but also addressing supply-side constraints in countries like Bangladesh. In addition to improved access to new technologies and long-term investment, SSC needs to put forward the conditions for an inclusive and equitable global partnership, including an efficient and effective monitoring and mutual accountability system.
The SSC process should probably mainstream market access for the vulnerable Southern countries and enhance their production capacities to bring out transformative changes needed for development. Beyond this, SSC could assist the Southern countries in mobilising domestic resources for financing through providing assistance in combating illegal capital flight, promoting good corporate governance, and improving revenue systems. Moreover, SSC could help promote the flow of targeted long-term investments, including FDIs, from the private sector.

Neaz Mujeri is Executive Director, Center for Research Initiatives (CRI), Dhaka
Dr Mustafa K. Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM), Dhaka. [email protected]