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Imbalances in Bangladesh’s economy

Posted in economics by jrahman on February 16, 2011

In 2008, I used to say that Bangladesh faced a short-term economic challenge coming from the global recession, but beyond that things would get better under Awami League.  Turns out I was wrong on both counts — while the global recession barely affected us, AL has proved to be a major flop when it comes to economic reforms.   And this is evident in the ‘imbalances’ in the economy.

Imbalances are how macroeconomists describe developments in the economy that could lead to crises in the future.  In a fascinating article published in the Financial Express on 8 February, M Shahidul Islam of the National University of Singapore’s Institute of South Asian Studies describes how two major imbalances in Bangladesh’s economy are driving problems such as the high inflation or the bubble-and-burst cycle in the share market.  

As bad as these imbalances are, what’s most worrying is that I don’t see anyone in the PMO, Finance Ministry, Planning Commission or Bangladesh Bank who appreciate these issues. 

I strongly recommend everyone reading the article in full.  Over the fold, I summarise the author’s main points, and provide some commentary. 

Imbalance one: rising inequality

Food prices are rising.  Predictably, and wrongly, government (and media) blames syndicates and corrupt businessmen.  I’ve written before about the role of taka-rupee exchange rate.   Shahidul Islam provides a different reason: unequal distribution of the benefits of two decades of solid economic growth.

But what is less discussed is the degree of monetisation of the economy, which has been on the rise due to the phenomenal rise in remittances, and the steady growth of the industrial sector, led by apparel, in the past decade. This is a sign of progress. Indeed, faster economic growth in most parts of Asia and many emerging economies around the world are putting upward pressure on commodity prices.

But there is a mismatch in income distribution that is making a large number of consumers (notably, urban low-wage earners and the fixed income group) worse off in terms of their purchasing power. At the same time, the size of the middle class has enlarged and the extreme poor’s entitlement to food has increased, which is reflected in the decline in abject poverty.

The story here is this: rising inflation is a result of demand consistently outstripping supply; demand rises because of rising prosperity; if the prosperity is evenly distributed, the inflation is not a big problem; but the prosperity is not evenly distributed. 

Note to self: need to explore this story with data.  Pending that exploration, this is definitely an intriguing conjecture. 

Imbalance two: squandered demographic boon

To quote the author:

The working age group has become increasingly dominant in the age structure of Bangladesh’s population. The country’s dependency ratio has declined, from 92 in 1975 to 53 in 2010. More people in the working age group and a lower dependency ratio mean higher savings and investable surplus.

It is no accident that Bangladesh’s gross domestic savings is now over 36 per cent of its gross domestic product (GDP). The higher working-age population and soaring savings partly, if not largely, explain why so much money is chasing too few shares in the stock markets and why thousands of youth are considering equity trading as a profession (though mistakenly). The job creation rate in the economy is falling behind the growth of the working-age population.

The author doesn’t absolve the regulatory failures of the SEC and the monetary policy failures of the Bangladesh Bank. Of course, the flipside of the excess savings is underinvestment, for which ‘fundamental issues, such as poor infrastructure and distortions in the economy (licencing, consortium, tariffs, etc)’ are to be blamed.    

But accepting all of these, the analysis of the underlying demographic changes is a very astute one.  This is exactly the kind of analysis the Planning Commission or the PM’s economic advisor or major think tanks should be doing.

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