The price of everything

There is a major difference of views among the official prognosticators about Bangladesh’s economic recovery from the pandemic recession. The 2020-21 Budget projected return to 8% GDP growth in the current financial year, while the World Bank doesn’t see even 4% growth in next financial year, with the IMF and the ADB being somewhere in between. No such difference, however, when it comes to inflation projection. All three international financial institutions expect inflation to hover around 5.5-6% range over the forecast horizon, not too dissimilar to the 2020-21 Budget (Chart 1). 

Further, thus far, actual inflation has remained very much within that range (Chart 2, source: CEIC Asia database). Contra fears, food price inflation, while experiencing a modest uptick, remains moderate compared with the rates experienced in 2013 or 2017. Globally, food and energy prices remain low. As Tyler Cowen, an American economist, puts it: It is not likely that the next major macroeconomic problem will be inflation. 

Nothing to worry about inflation then?

Well, maybe, but…..

Diagnosing a crisis

As the COVID-19 pandemic fanned out of China, emerging and developing countries around the world were hit by a pandemic of capital flight.  Since January, about $100 billion left these countries ­ — an unprecedented sum, three times in magnitude than was the case in the equivalent period in late 2008.  Stock prices stumbled, while the yield on emerging market bonds rose sharply.  Investors fled the emerging markets seeking the safe haven of US dollar denominated assets, without discriminating between the countries they were fleeing.

In more recent weeks, a sense of calm seems to have returned to the markets.  Capital outflows have subsided, and bond yields have stabilised.  Bangladesh was spared the worst in March-April.  As markets start differentiating risks again, the question arises: how vulnerable is Bangladesh to a currency crisis?

A debilitating currency crisis is to an economy what a cardiac arrest is to the human body.  Just as there is a sudden stop of the flow of blood in the latter, in the former there is a sudden stop in capital flow into an economy (or sudden withdrawal of capital).  In both cases, the sudden stop could lead to disastrous consequences.  Neither is precisely predictable — if enough of the symptoms are visible, then a sudden stop is likely being experienced.  But in both cases, we can look at the underlying fundamentals and judge how much at risk the patient is.

The good news is that with luck, Bangladesh may well avoid the worst should there be another outbreak of capital flight.  For example, a recent analysis by the Economist judged that Bangladesh is not at risk of an imminent currency crisis.  The bad news is that we failed to tackle a range of issues during the good times, leaving us more vulnerable than might be recognised.  There isn’t any cause for panic, but there is much to worry about.

Perfomance anxiety

Under Article IV of the IMF’s Articles of Agreement, a team of Fund staff visits each member country once a year, collects economic and financial information, and holds extensive discussions with officials on policy matters.  This is then published in its website.  The latest Article IV report for Bangladesh came out in September, stating that Failure to effectively address the problems in the banking system, including high non-performing loans pose a medium likelihood risk to the economy, with a medium-to-high impact in the near term if it hit — High and increasing non-performing loans and low capital adequacy would hamper the banking sector’s ability to finance business investment, add fiscal burden, and hamper growth.

Let’s unpack this.  In doing so, we are going to look at official data.  Yes, there is considerable scepticism about the veracity of official figures.  But official data is all there is to go on, and nihilism of trust nothing but one’s gut instincts is not analysis. As it happens, even official data tell a potentially scary story.

What to expect if you are expecting?

In just a few days, Bangladeshis might have a chance to vote.  I have no idea whether the election will be free and fair.  Nor can I venture a guess about the winner.  For all we know, the government will follow the path of Pakistan over India — that is, it will rig the election following ZA Bhutto’s 1977 example, and not accept defeat in a free and fair election like Indira Gandhi did the same summer.  However, one can always hope, and expect.  If you were to expect a Jatiya Oikya Front victory on 30 December, what should you expect for the economy for the next five years?

As with anything to do with economy, the answer is mixed.

On the one hand, even if Mrs Hasina Wajed allows a free and fair election, accepts defeat, and peacefully hands over power, there is a significant risk that she will still have left the new government with a Pakistan-like situation.

Pakistan too had an election earlier this year.  The previous government claimed, with some justification, to have tackled the country’s electricity and other infrastructure problems.  Pakistan economy seemed to have turned a corner.  However, the government’s books were a mess, and there was a risk that the country couldn’t meet its external liabilities.  The incoming government had won the election promising good governance on a whole raft of fronts.  But the new prime minister Imran Khan and his finance minister have spent most of their time travelling the Washington DC, Beijing and Riyadh with a begging bowl.  And all the grand promises seem to be melting into thin air.  If you are expecting a triumph of democracy on 30 December, you would do well prepare for a Pakistan-style crisis in 2019.

On the other hand, if they can avoid a crisis that would be Mrs Wajed’s parting gift, there is much to look forward to a Oikya Front government for.  And a crisis is not a fait accompli.  A train wreck can be avoided if you see the locomotive rushing towards you.  The thing about expectations is, if you know what to expect, you could adjust your actions to avoid the worst possible outcome, and temper your expectations to face the situation in a stoic manner.  I suspect the would be econocrats of the Oikya Front are well aware of the mess they might inherit.  They will need to take a few steps to diffuse any looming disaster before launching their longer term tasks.  And if they can get to it, judging by its manifesto, and BNP’s Vision 2030, a new government will attempt an ambitious but realistic programme.

Let’s unpack these step by step.

The transition blues

….nearly every country that experienced a large democratic transition after a period of above-average growth  ….  experienced a sharp deceleration in growth in the 10 years following the democratizing transition.

That’s from the Pritchett-Summers paper covered in the last post.  Let the sentence sink in.  Then, if you’re interested in Bangladesh, read on.

Leaders

If only we had the right leader….

If only Bangabandhu (or Zia) had lived….  

If only we had a Mahathir….  

I am sure you can finish the sentence with all sorts of claims about how Bangladesh would have been, or could still be, a much better place with better leadership.  Never mind the fact that all things considered, Bangladesh might actually have done more-than-okay.  To many of our chattering classes, we’re doomed because we haven’t been blessed with the right leader.

How much does leadership matter?

Illiberal development

A few years ago, Vietnam was the rage among the Bangladeshi chatteratis who hobnobbed in the development circle.  Look how they have forged ahead under a strong, patriotic leadership, while we languish behind because of our corrupt, venal political class — that was the refrain.  Of course, anyone who knew anything reasonably detailed about both countries would have their eyebrows raised by that.  I have vague recollection of writing something for Zafar Sobhan on this, but can’t find any link anywhere.

In any case, who cares about facts in Bangladesh?

Decoding The Bangladesh Paradox — A Research Agenda

The macroeconomic fact is, in the last decade, under all three governments, per capita GDP have grown by around 4½ per cent a year. At that rate, average real (that is, inflation-adjusted) income doubles in 16 years. …. This is impressive stuff, for which every recent government deserves some credit.

That’s the conclusion from the post on real GDP per capita growth under different governments. Of course, real GDP per capita is a means to the end, not the end in itself. What we really care more about is the standard of living that higher real GDP per capita entails —that is, it’s the development record, and not just the growth, under different governments that we want to know.

This, however, raises two questions. First, how do we attribute to any particular government the growth and development record when policies under any particular government are likely to have long term consequences? And second, how do we explain the Bangladesh Paradox:

The belief that growth brings development with it—the “Washington consensus”—is often criticised on the basis that some countries have had good growth but little poverty reduction. Bangladesh embodies the inverse of that: it has had disproportionate poverty reduction for its amount of growth.

That quote is from a November 2012 Economist article. That article, and accompanying editorial, had a go at explaining the paradox. Joseph Allchin had a crack more recently at the NY Times. The suspects are usual: garments, remittance, NGOs. But we economists are a parsimonious lot, or so we like to think. We would like to know exactly what contribution each of these factors made, what was the channel through which the factors affected growth and development, what role, if any, did government policy play, and what all that means for future.

I haven’t seen a comprehensive analysis of the Bangladesh Paradox. And no, I am not going to provide the answer in this post. Rather, over the fold is a research agenda on how to analyse the Paradox.

Governance reform in a patron-client democracy

Some time ago, I wrote about Prof Mushtaq Khan’s take on democracy in a country-like-Bangladesh.  He describes the reality quite depressingly well:

What political factions seek is not the construction of a coalition that can mobilize votes to allow a transparent renegotiation of taxes and subsidies, but a coalition that can mobilize organizational power at the lowest cost to the faction leader, to achieve a redistribution of assets and incomes using a combination of legal, quasi-legal, or even illegal methods. The organizational power of the faction is then used either directly to capture state power or to force an accommodation in the form of payoffs from the factions who are currently controlling the state. The faction’s access to economic resources either in the form of revenue or in the power to grab valuable economic resources legally or otherwise is then used to benefit faction members all the way down the pyramid, though the payoffs may be very unequal for different levels of the faction.

While factions may use generalized arguments based on class, region, or interest in its public discourse, no-one in society is under any illusion that the faction is out to look after itself at the least cost in terms of paying off voters and others who need to be mobilized occasionally. When factions do not deliver on these generalized aims, broader social constituencies may grumble but they do not really expect anyone to deliver on the publicly stated general social goals. However, if factions cannot deliver acceptable payoffs to faction members, the leaders are likely to get into serious trouble. Factions rarely fear a general public revolt, given that no other political organization can deliver what the public wants. What factions actually fear is that their sub-factions may be bribed away by other factions and that the coalition may crumble. Indeed, this often happens and accounts for the frequent changes of government in developing countries that usually lead to no discernible changes in government policies, but do lead to different sets of individuals making money in turn. Given the opportunistic nature of factional membership and the shifting offers and counter-offers made by different factional leaders, it is possible to explain the extreme volatility in the factional politics of developing countries in a context where government policies are often remarkably constant.

The question then is, how does a country like Bangladesh escape this patron-client democracy?  Khan’s implicit message is that one needs an important capitalist sector for there to be functioning democracy. But there is nothing in Khan’s story about the dynamics that produces the capitalist sector.

Turns out that Khan believes government has a role to play in kicking off that capitalist transformation.  It’s just that his prescription for reform is quite different from the traditional Washington Consensus stuff.

Shariahnomics 2 – Islamic finance during the crisis

I discussed the theory of Islamic finance in the last post on this subject.  Here is a nice summary of the difference between Islamic and conventional banks’ approaches to risk.

The above is from work done by Maher Hasan and Jemma Dridi, two IMF economists, on how Islamic banks performed during the global financial crisis (and the period leading up to it).  In a 2010 working paper, they use bank level data from 120 Islamic and conventional banks from eight countries* over the period 2007-10 to explore why Islamic banks might have performed differently during the crisis.