Charting Progress 6 – Investment

The current Covid-19 pandemic notwithstanding, in its 50^th year, Bangladesh has an impressive economic record to celebrate. After accounting for changes in prices, the average Bangladeshi earns three times that of their grandparents in the former East Pakistan. Millions have escaped poverty over the past decades. These impressive achievements are reasonably well known.

Less well understood are the mechanics behind the country’s economic development thus far, and the prospects for the coming years. For example, exports of readymade garments have undoubtedly played a vital role in the country’s development. Yet, Bangladesh remains over-reliant on the sector, isn’t particularly open to foreign trade and investment, millions still remain outside the formal labour market, and the average Bangladeshi worker in industry and services sectors remain far less productive than their peers in Southeast Asia.

Unfulfilled potential is one way Bangladesh could be described. And this description appears even more apt when the country’s investment records are considered. 

Over the past quarter century, investment-to-GDP ratio in Bangladesh has risen steadily, to be relatively high compared with the neighbours prior to the pandemic (Chart 1).

To put it simply, investment is deferred consumption. When a family puts some money into a savings account, buys some assets, sets up a business, or spends on education, the family is investing. Instead of spending that money in consuming goods and services today, the money is put to some use such that the family will have more income, and thus more consumption, tomorrow. Similarly, the higher the share of investment –in new machinery and factories, or infrastructure such as roads and bridges or electricity grid ­– in the economy, all else equal, the faster the economy is expected to grow.

Of course, a family only puts aside money for tomorrow only if it believes that tomorrow will be a better day. When a country has a low investment-to-GDP ratio, such as Pakistan for example, it implies that its private sector is not confident about the future, and its government is preoccupied with the troubles of today. It is reassuring that at least from the macroeconomic data it would appear that Bangladeshis have been hopeful about the future.

When it comes to finances, however, hope and confidence can all too often turn into frenzy and bubbles. Similarly, history is full of seemingly productive public investment turning into white elephants of inefficiency and waste. This is why sharp rises in investment-to-GDP ratio can be a cause for concern – such rises are often followed by sudden, painful reversals (such as Indonesia and Thailand in 1997). Fortunately, the investment-GDP ratio had been rising gradually, not suddenly, in Bangladesh.   

Let us pause here to reflect.

Over the past quarter century, both the private sector and the government has been investing steadily, but foreign-direct-investment has been meagre, and the country has not diversified out of garments. What’s going on here?

There are two complementary answers. First, Bangladesh needs to maintain a relatively high level of investment for years, decades, to come. Second, merely investment is not enough to fulfill the country’s potential.

Consider electricity. Electricity consumption per person had grown 30-folds between 1971 and 2014, and yet the average Bangladeshi was not consuming much electricity compared with the neighbours (Chart 2).

That means, a Bangladeshi family still cannot have the amenities that an average Indonesian family can enjoy. And an average Bangladeshi entrepreneur can’t risk ventures that their Vietnamese peers can. Clearly Bangladesh needs to continue to invest in power plants and electricity grids. But that itself will not be enough if it takes four times as many days for a firm to get electricity in Bangladesh than Vietnam (Chart 3).

Or let us consider ports.

Liner Shipping Connectivity Index is a measure of how connected a country’s ports are with global trade, based on the number of ports and their capacities, as well as vessels, their size, and the shipping companies and liners. Others in the region have become more connected with the world in recent years, but Bangladesh has not (Chart 4).

Of course, Bangladesh needs to invest more on ports. And yet, that is not enough. The Logistics Performance Index measures a country’s ability to trade. Countries are rated on a scale of a maximum of five. In 2018, Bangladesh’s score was 2.6 against Vietnam’s 3.3. 

Let us consider a couple of other measures. In 2019, it took 274 days on average for a firm to build a warehouse in Bangladesh. In Vietnam, it took 166 days. In the same year, it took the average firm 400 days to settle a contract. In Bangladesh, it took 1442 days. 

In 2019, according to the World Bank, Vietnam was the 70^th best country to do business in, Bangladesh was 168^th.

Bangladeshis are optimistic about the future, and deserve a more enabling environment.

 

This series marks fifty years of Bangladesh with a set of charts each month to show the country’s economic evolution. First published in Dhaka Tribune.