THREE LONG TRANSITIONS

Banghladesh well poised to be an MIC in a decade - II Xian Zhu and Sandeep Mahajan

As noted in the first part of this article last week, management of three long-term transitions will be essential for Bangladesh to achieve the objective of becoming a middle-income country (MIC) by 2016 or soon thereafter. These are: (1) A shift in the economic structure from agriculture to labor-intensive manufacturing. (2) Deepening of integration with global markets. (3) Unleashing the growth potential of the major urban centers.
   The first one, already in transition, already underway in Bangladesh, as in other fast-growing developing countries, would be driven by a globally competitive private manufacturing sector, firmly plugged into global supply chains and a productive, diversified, and commercially-oriented agriculture sector.
   Improving the productivity of the manufacturing sector, according to analysis in the World Bank's 'Bangladesh: Strategy for Sustained Growth' report, will require particular attention to: (i) addressing the burgeoning energy supply constraints; (ii) improving Bangladesh's attractiveness to FDI; (iii) strengthening export competitiveness; (iv) improving the skill levels of the labor force; and, (v) strengthening law and order.
   
   Matching rural progress
   A drive to boost industrial productivity needs to be matched by initiatives to do the same for agriculture. Rice production, where only half the cultivated area uses the HYV rice variety in the aman season, has much scope for further improvement. Ultimately, raising agricultural incomes will require diversification into higher-valued crops and increased output of the livestock and fishing sub-sectors. Bangladesh needs to especially capitalise on its long-term competitive advantage in inland aquaculture. The government's important but limited role includes a significant expansion in agricultural research and extension. Institutional reforms to increase the stability of funding and strengthen research management are also crucial, as is sustained public investment in rural marketing infrastructure, particularly roads, bridges and telecommunications.
   (2) Liberalising trade for export competitiveness and diversification. The considerable, if uneven, progress since 1991 has lowered import tariffs and eliminated trade-related quantitative restrictions and import licenses. Driven by the success of the ready-made garments (RMG) sector, merchandise exports to GDP ratio increased from 6 per cent in 1990 to 17 per cent in 2006, contributing to the acceleration of GDP growth. However, with the RMG sector now accounting for close to 75 per cent of total merchandise exports, diversification of the export base is important. For this, the relatively liberal import regime enjoyed by RMG has to be extended to other sectors as well. This calls for a well-thought out sequence of policy actions, key elements of which would include: (i) merger of para-tariffs with customs duties to have one tariff rate for each tariff line; (ii) establishment of a low and uniform tariff rate, following interim steps that reduce the dispersion and average level of nominal protection, simplify the import tax regime, and provide greater clarity to the Import Policy Order; (iii) elimination of all end-user tariff exemptions and concessional tariffs; (iv) revamping and automation of the duty drawback system.
   (3) Unleashing the growth potential of the major urban centers. Dhaka, whose economic dynamism is a magnet for migrants, is fast reaching choking point. Real estate prices have skyrocketed while traffic congestion has worsened and infrastructure and service delivery have become woefully inadequate. If unresolved, these issues put at risk Dhaka's ability to continue being the engine of growth. The main underlying cause, poor urban management, has also pervaded other cities, preventing the emergence of viable urban alternatives to Dhaka. A well-reasoned national strategy is needed to bring more balance and energy to urban development across the country. In particular, it would be important to devolve key services to city governments, and more clearly delineate duties and accountability chains among the various actors (federal and municipal) involved with urban management functions and between service providers and citizens. Devolution, however, has to be carefully sequenced with enhancement of city governments' own revenue sources and technical and administrative capacities.
   
   Key transitions
   The three key transitions mentioned are long-term endeavours. The management of these, in turn, will require better economic governance and business environment without which FDI will continue at low levels; continued macroeconomic stability; a commercially viable energy sector that supports the economy's vast energy needs; deeper and more efficient financial sector, and; a greater emphasis on the quality of education and labor skills.
   Strengthening governance is essential. Weak governance undermines prospects for the accelerated growth Bangladesh seeks. Bangladesh is widely perceived by potential investors - foreign and domestic - as an expensive and risky place to do business. The toughest challenges lie in the core governance areas - the confrontational nature of politics, flawed revenue administration and financial accountability, and distrust of supposed rule-of-law guarantors. Only strong political leadership supported by a constituency that demands change can advance reforms that cut across a wide range of institutions and threaten powerful vested interests.
   Bangladesh has a proven record of macroeconomic stability and this must be sustained. However, the rising inflation trends need to be contained with sounder monetary management to maintain this record. The fiscal situation is also under some stress due to the perennial problem of low tax mobilisation and the large losses incurred by energy-sector, state-owned enterprises (SOEs), mainly due to underpricing of energy products in domestic markets, which also undermines the financial positions of the nationalised commercial banks (NCBs) that are directed to finance these losses.
   
   Infrastructure
   The most serious and immediate of the infrastructure constraints is the widespread and growing shortage of electricity. With over US$1.5 billion in new investment needed annually to build utility-scale plants that can catch up with demand, the critical issue of efficient pricing is top priority. Over the longer term, addressing the major governance problems, especially the lack of transparency in the procurement process for new power plants, in the sector is a must. Recent government efforts to begin addressing some of these concerns are encouraging and need to be sustained. Bangladesh's drive toward export competitiveness is hostage to major bottlenecks at the ports and underdeveloped transport networks. Introducing private service providers, as initiated in recent months, would serve as a catalyst for the requisite improvements.
   Effective expansion of the financial system will require a more substantial change in the role of the government, from an operator and arbiter to a facilitator. The ongoing move to a privately-owned banking system is an important one, although international experience also advises caution (but not necessarily delay) in the privatisation process. Moving forward, it would be important to de-politicise the entry of banks by subjecting licensing to objective, non-political standards, institute market monitoring of banks, and reform the exit process. The government would especially need to move away from implicit guarantees against bank failures and rely more on markets to monitor and discipline banks. Similarly, development of (currently miniscule-sised) capital markets requires strengthening of information disclosure by incorporated companies and allow market monitoring and disciplining, weaning the Securities and Exchange Commission (SEC) away from excessive intervention.
   Under the right conditions, labour, Bangladesh's most precious resource, could power the kind of rapid transition toward prosperity that resource-poor East Asian economies have made. A focus on market-oriented vocational skills and good quality secondary and tertiary education are essential not just to consolidate earlier gains in primary education but to boost productivity and, with it, global competitiveness.
   
   The Way Forward
   Despite serious weaknesses in governance, Bangladesh has achieved good growth since 1990. What some observers call the "Bangladesh paradox" actually reflects a mixture of weaknesses and strengths such as the positive resolve that produced a series of first-generation economic reforms, which, in turn, stimulated the positive growth response. Building on its achievements, Bangladesh can reasonably strive to become an MIC in a decade or soon thereafter; thereby ensuring that the government will meet its goal of reducing the poverty rate to 25 percent by 2015. To achieve that, Bangladesh will need to tackle a new set of challenges with deeper political commitment. The measures that are needed are not simple steps but Bangladesh has already shown an impressive capacity to implement policy innovations. There is every reason to believe it can continue that performance.
   *Xian Zhu is the World Bank Country Director in Dhaka; Mahajan, lead author of the report and senior economist, World Bank..

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