Where to find 500 billion taka?

That the COVID-19 pandemic is as much an economic crisis as it is a health crisis is no longer news.  According to the 2020-21 Budget, economic growth for 2019-20 was expected to clock at 5.2%, a full 3 percentage points downward revision from what was expected in June 2019, and much slower than the 7.4% a year pace recorded in the five years to 2018-19.

There is, however, considerable difference of views about the timing, pace, and visually, the shape of the recovery.  The Budget forecasts a V-shaped recovery where the pandemic will have ended presently, and the economy will grow by over 8% in 2020-21 and 2021-22.  International organisations are less optimistic.  For example, the World Bank expects an L-shaped recovery where the economy not only slowed sharply in 2019-20, but the slowdown persists into the next couple of years.  Back in April, the multilateral development bank expected real GDP growth of around 3% in 2019-20 and 2020-21, still not reaching 4% in 2021-22.  Their latest forecasts are even more pessimistic.

With the global pandemic yet to show any sign of ending, and the science and logistics of a vaccine still uncertain, it is useful to do a simple scenario analysis — what would be the fiscal impacts if the recovery reflected the World Bank’s April guesses instead of the official Budget projections?  The table below sets out the scenario that was analysed couple of weeks ago.

Some back of the envelope calculations suggest that if the scenario were to materialise, the government might be facing a revenue shortfall to the tune of nearly Tk500 billion a year (Tk488 billion in 2020-21 and Tk495bn in 2021-22, to be precise).

How could the government make up for such a revenue shortfall?

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.

Hiatus reflections

Blogging went on hiatus in March 2013.  Since then, there has been occasional pieces, notably around the election seasons of 2013 and 2018, and a few forays every now and then on matters serious and not so.  But none of that has been regular.  What have I learnt in this extended time off?  What am I most surprised by?  What is something truly unpredictable from the 2013 vantage point?

The answer is, of course, a lot.  But in the context of Bangladesh, it should be no surprise to anyone that the longevity of the current regime would be the single most surprising development to the 2013-me.

Bangladesh Paradox

 

A new initiative, led by Asif Shibgat Bhuiyan.

Basu’s bizarre bakwas

Bakwas

Rubbish, Worthless, Nonsense, Silliness

(Urban Dictionary)

Upon being asked by a friend whether I had read Kaushik Basu’s recent piece on Bangladesh, my first reaction was — is that the rather lazy piece on why Bangladesh is doing well?

Let me note my gratitude to the friend for pushing me to read the piece. It is, to use the favourite adjective of Bangladesh’s Finance Minister, just bogus.  Out of respect for my personal interactions with the author, I will refrain from using that term.  But this bizarre article should still be debunked.

Jammin until the break of dawn

What do you do during the evenings, after the day’s tasks are done, of work trips?  You might be tired of being up in the air, or just simply tired.  But depending on the jet lag, you might not find much sleep.  I certainly don’t, even when there is no jet lag — I hate hotel beds.  If you find yourself in a hotel that used to be one of Idi Amin’s torture chambers palaces, and your colleagues are fellow political junkies, you will likely talk about politics over a nightcap.  So did we that rain-soaked Kampala evening.  We talked about, among other things, Zimbabwe.

Why didn’t they get rid of him the old fashioned way, you know, APCs on the streets, tanks in front of the presidential palace, radio or TV broadcast by some unknown major…..

An old Africa hand explained why Robert Mugabe wasn’t toppled in a coup.  No, it wasn’t because of his liberation cred.  Kwame Nkrumah or Milton Obote were no less of independence heroes to their respective countries.  Both were ingloriously booted out, not just of their presidential palaces, but also the countries they led to existence.  At least they lived, unlike say Patrice Lumumba.  Clearly being a national liberator figure didn’t make one coup-proof, particularly if one had turned his (can’t think of a mother of the nation top of my head!) country into a basket case, and had faced concerted political pressure from home and abroad.  According to my colleague with years of experience in the continent, the key to Mugabe’s survival was in relative ‘latecomer’ status.

Mugabe came to power much later than was the case for other African founding fathers.  And the disastrous denouement of his rule happened during a period when the great powers saw little strategic importance in regime change in an obscure corner of the world.  The second factor meant there was no foreign sponsor to any coup.  The former meant that any would be coupmaker, and their domestic supporters, knew from the experiences elsewhere in the continent about what could happen when a game of coups went wrong.

Mugabe gave them hyperinflation.  Getting rid of him could lead to inter-ethnic war.  Easier to do currency reform than deal with refugees fleeing genocide….. 

The middle

The Middle is an American sitcom about a middle class family’s struggle in the wake of the Great Recession.  I never watched the show beyond the first episode in 2009.  At that time, it seemed to me to be a poor derivative of Malcolm in the Middle and Roseanne.  Facebook tells me that this will be the final season of The Middle.  Maybe I should watch the show.  Set in the mid-western state of Indiana, the protagonist white family might have been just the type that put Donald Trump where he is.  Aristotle wrote that …those states are likely to be well-administered in which the middle class is large.  Some argue that stagnation of the American middle class lies behind the rise of Trump.  I am not so sure — perhaps tribes matter more than class.

I don’t want to spend precious time and energy pondering about the plight of the white American middle class.  Instead, let me talk about the role of the middle class in Bangladeshi politics.  The term Bangladesh paradox is now at least half a decade old, and refers to the idea that Bangladesh has been surprisingly good at improving the lives of its poor despite dysfunctional politics and a stunted private sector — that’s from the Economist.  William B Milam, former American envoy to Dhaka and Islamabad and a keen observer of both countries, often talks about another Bangladesh paradox:

….Bangladesh should have become, over the past 25 years, a modernized democracy, knocking on the door of entry into the middle income category of developing countries. Its economy has grown for most of the last two decades around 5-6 % per year, and its social development indices have improved rapidly and now are generally better than most other South Asian countries except Sri Lanka. Instead, over those same two decades, Bangladesh has regressed along the democracy/authoritarian axis no matter which of the two major parties was in power.

Political impact of remittances

Along with the garments industry and the NGOs, there is a broad consensus that remittances have played a key role in Bangladesh’s economic development over the past decades.  Notwithstanding that broad consensus, the economic impact of remittances may be more nuanced than one might think, as I conjectured a long time ago:

Well, how about a stylised, and very speculative, story along this line — while RMG has meant women entering the formal workforce, migrant worker boom has sent a lot of risk-taking men overseas; aided by the NGOs and microcredit, households have smoothed consumption and invested in human capital of their children; but they have not invested in physical capital, avoided entrepreneurial activities, and have not pushed for a more investment-friendly polity.

We would want to explore this story further. We would also want to explore the income side of GDP, and tie it into a political economy analysis.

The remittance boom, for example, should see the labour share of the economy rise. Of course, the question is, what happens to the money that is remitted back? It’s reasonable to assume that unskilled labourers are from the poorer parts of the society. So, in the first instance, any remittance back to the villages is a good thing in that it reduces the direst type of poverty — that is it stops things like famine or malnutrition. But what happens after that? My tentative hunch is that a lot of remittance has been saved but not invested in a productive way, rather they ended up fuelling land/stock prices —this is an area that needs to be explored in detail.

Needless to say, I have not followed up on these questions.  But at least the economic impact of remittances is something people have thought about.  What about the political impacts?  That’s the question Shafiqur Rahman of Oregon University explores.*

Political business cycle in Bangladesh

While looking for something else, I recently discovered that in 2013-14 financial year, Bangladesh government’s current expenditure — that is, money spent on salaries, procurement, subsidies and loan repayments — increased by 0.8 per cent of GDP.  On top of that, government investment also increased by 0.7 per cent of GDP.

That is a lot of spending.

Now, I haven’t been following economic and policy developments in as much detail as in the past, so I may well have missed great policy initiatives that underline the apparent spending binge.  But according to the work of IMF’s Christian Ebeke and Dilan Olcer of Riksbank, rise in government expenditure of that magnitude is not uncommon in election years in developing countries.  More worryingly, they show that this kind of binge usually ends badly.

Surviving the white crow

Nassim Nicholas Taleb popularised the term ‘black swan’ in his 2007 book.  It comes from the Latin expression rara avis in terris nigroque simillima cygno, meaning “a rare bird in the lands, very much like a black swan” — they didn’t have any black swan in Europe, and thought swans must be white.  That notion changed when the Europeans came to Australia.  Taleb pithily summarises his thesis as:

What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme ‘impact’. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

In Bangladesh, perhaps we could think about ‘white crow’ events — our crows are black, we think crows must be black, but of course there are white crows Down Under.

Taleb’s work gained much popular acclaim after the 2008-09 financial crisis.  The thing about black swans / white crows, however, is that they are hard to predict ex ante.  That’s Taleb’s first attribute.  As such, for analysts and policymakers, it might seem that Taleb has little of practical value to offer.

His subsequent work seeks to address this concern.  In a widely read Foreign Affairs article*, Taleb and a co-author argues:

Thus, instead of trying in vain to predict such “Black Swan” events, it’s much more fruitful to focus on how systems can handle disorder—in other words, to study how fragile they are. Although one cannot predict what events will befall a country, one can predict how events will affect a country. Some political systems can sustain an extraordinary amount of stress, while others fall apart at the onset of the slightest trouble. The good news is that it’s possible to tell which are which by relying on the theory of fragility.

…..

For countries, fragility has five principal sources: a centralized governing system, an undiversified economy, excessive debt and leverage, a lack of political variability, and no history of surviving past shocks.

How does Bangladesh look through the prism of Taleb’s theory?  I’d argue we should be at least concerned about the possibility of things falling apart, though there are also things to be hopeful about.