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. 

Ray at 100

When Shashi Kapoor passed away a few years ago, my Facebook was abuzz (or should I say alight?) with clips of “mere paas maa hai” — the retort of an honest police officer to the taunts of his gangster brother flaunting his ill-gotten wealth in the 1970s blockbuster Deewar.

I wanted to post about Kapoor as my favourite childhood hero. I was sad to find no clip of Kissa Kathmandu Ka — Satyajit Ray’s small-screen adaptation of his Feluda caper in Nepal. Granted, the TV movie wasn’t Ray’s finest, but all sorts of weird and improbable stuff can be found online — why not this, I wondered.

My mind then wandered to why Ray cast Kapoor and not Amitabh Bachchan, the only tall man in India, for the role of the towering Bangali detective. Perhaps it was because Bachchan was, by then, too busy with politics. But that leads one to wonder why Ray hadn’t made a Hindi Feluda earlier.

Trendspotting

Bangladesh’s economy, already slowing before the Covid-19 recession, is yet to show any sign of a durable recovery. Production measures appear to have bottomed out, but perhaps not quite so for household demand. While labour income is recovering, food prices spikes point to problems in the farm supply chain. Policies are supportive of growth. Stock market appears to be optimistic.

Still the guitar gently weeps

It was the first Bangladeshi wedding of its kind in that city — two “young” people meeting, falling in love, and marrying, with no family in the continent, friends were all they had to share their joys with. The night before the wedding, there was a little get-together at the groom’s apartment. There was a lot of nostalgia, fuelled by intoxicants of many kind. 

And then the music came on — Bang-la-desh, Bang-la-desh … followed by a wailing guitar — there were no dry eyes in that room.

The Unmentionables

On Saturday over dinner, I was discussing with a dear friend and a prominent Bangla political analyst / facebooker what might happen if a major corruption scandal implicating the Bangladeshi Prime Minister broke.

Say it comes out in the New York Times? He asked. It might have an impact, right?

I was more sceptic. After all, the Padma Bridge scandal was pretty big back in 2011-12, certainly bigger than anything that was charged against the infamous Hawa Bhaban. Back then, I thought it would have an impact. It didn’t. If something else surfaced, what exactly do we think would happen?

Well, now we have the Al Jazeera documentary. What do we think will happen?

Since restarting writing back in late 2019, I have consciously tried to avoid the latest noise. But once a while one must note events with a marker, even if the marker is a tentative thought. This post is of that nature.

So, what do I think?

I think that it’s a very well researched programme. While the look and feel of the documentary drew comparisons with Bollywoood gangster films starring Sanjay Dutt or Ajay Devgan, and inevitable comparisons were drawn with the Netflix hit from last year, I kept thinking about The Untouchables.

Fifty years of Bangladesh in charts

To mark fifty years of Bangladesh, this series will present a set of charts each month to show the country’s economic evolution since the 1970s.

We begin with GDP per capita — a common, albeit imperfect, correlate of living standards over time and across countries. For example, couple of months ago, there was considerable media hype about Bangladesh overtaking India in GDP per capita. However, according to the World Bank’s World Development Indicator, GDP per capita was about a quarter higher in the then East Pakistan than India in 1970 (Chart 1). The same data also suggests that GDP per capita in Pakistan’s eastern wing was less than two-thirds of that of the west in 1970, a relativity that had almost reversed by 2019. Finally, the chart also compares Bangladesh with other countries in tropical Asia. 

The problem with Chart 1, however, is that this measure does not take into account prices differences across time and between countries. Splicing together official data from the Bangladesh Bureau of Statistics with that of WB WDI, Chart 2 shows real GDP per capita. In 2018-19, according to the official data, every Bangladeshi on average produced (alternatively, earned) goods and services worth around 154,000 taka. This compares with average production, and income, of about 50,200 taka in 1970. That is, after accounting for changes in prices, there has been a threefold increase in average income — on average, a Bangladeshi today is about three times as well off than their grandparents were on the eve of the Liberation War. 

Chart 2 also shows that directly as a result of the War, real GDP per person dropped by over 10,000 taka. Pre-war income levels would not be reached until 1991. Pause and reflect on that for a minute — for the post-War generation, freedom must have tasted bittersweet at best! Chart 3 shows that incomes fell by a fifth in the aftermath of the War. By way of comparison, this is similar in magnitude as that experienced in Iraq during 2002-04. This chart also shows that growth has become faster and more durable over time. Reflecting the large agriculture sector, incomes fluctuating widely from year to year even before the War, a trend that continued in the 1970s. Underneath the volatility, real incomes per person grew by 1% a year in the then East Pakistan and 1.5% in the post-War Bangladesh. The pace accelerated to over 2% in the 1990s, and nearly 5% since the mid-2000s. To put that in context, at the then East Pakistani pace, it would take over seven decades for average income (and thus living standards) to double, whereas with the more recent rates, average income has more than doubled since 2003.

So, how does Bangladesh compare with neighbours when price differences are taken into account? Chart 4 shows this by using the IMF’s estimate of real GDP per capita measured in purchasing power parity terms. According to this estimate, the average Bangladeshi produced and earned about half as much as an average Pakistani even in the early 1990s, but the former had caught up with the latter by 2019.

On the other hand, average income was higher in Bangladesh than India in the early-to-mid 1980s, but the media headlines notwithstanding, when measured properly, the average Indian currently have higher income than the average Bangladeshi. Chart 5 presents real GDP per capita in Bangladesh as percentage of that of neighbours as well as a number of advanced economies. The reference year is 2019 so as to avoid the effects of the pandemic. At that time, the average Bangladeshi had an income level, and thus standard of living, that was only about three-quarters of that of an average Indian. Further, the average Vietnamese was about twice, the average Thai nearly four times, and the citizens of the rich countries about ten times as well off as the average Bangladeshi.

Bangladesh has come far from its war-ravaged early days, even though there remains considerable challenge. More importantly, underneath these averages, what has been happening to the distribution of incomes? Have the poor benefitted as much from the growth as the rich? We will explore this next month.

2021 Wishes

If you’re reading this, dear reader, then you have clearly survived. You might be in worse shape —physically, emotionally, financially — than you’d have expected to be a year ago. But you’re still here. And overwhelming chances are that things will get better.

Or more specifically, things will get back to a normal, and that normal will be better than the current. Life has a tendency to find a normal, an equilibrium. Scars heal. Recessions end. Most crisis eventually resolve themselves.

Most, but of course, not all.

There is an iconic Peanuts strip where, sitting on a pier looking out to yonder, Charlie Brown says, ‘Some day, we will all die, Snoopy’, to which the wise one replies, ‘True, but on all the other days, we will not.’

Yes, crises resolve themselves, but on all the days we don’t die, there is a risk that we might settle into a bad normal. Some scars fester into unpleasant gangrene that might lead to amputation, for example.

First wish for 2021, then, is to avoid that painful, nasty equilibrium!

Beyond that, there are reasons to be hopeful. Dear reader, you’re still, mostly, who you were a year ago. Older, of course, and maybe slightly chubbier, perhaps in pain here and there, and possibly financially poorer. But your skills, expertise, and attributes are still, mostly, intact, if not enhanced.

The economy’s productive potential has likely been enhanced by the past year’s innovation, and we may well see the strongest global recovery in generations.

Here is to that brighter possibility.

Pandemic politics

What are the near and long term implications of the pandemic on politics? I don’t particularly mean politics in, say, Bangladesh, but more generally. This is a ‘placeholder’ post to cover vague ideas or notions that could be teased out later.

What Bengal thinks

Gopal Krishna Gokhale — an early 20th century Indian social reformer, proponent of self-rule in the early 20th century, considered to be a rare liberal voice in the subcontinent’s political tradition — is supposed to have admired Bengal. What Bengal thinks today, India will think tomorrow — he famously quipped.  But when it comes to Hindu nationalism, (the Indian / Hindu / West) Bengal is definitely not a front runner.  While the Hindu chauvinist BJP gained parliamentary strength in New Delhi throughout the 1990s and formed successive governments during 1998-2004, West Bengal continued to vote for communists.  The Left Front ran the state for 34 years to 2011 — the longest stretch of democratically elected communist rule anywhere in the world.  Even as the Modi wave swept the rest of the country, West Bengal held out under Mamata Banerjee’s steadfast opposition to Hindutva. 

Until 2019, that is. 

In last year’s general election, BJP captured 16 of the state’s 42 seats to the Lok Sabha (the federal legislature), up from 2014’s 2, and the highest ever scored by a Hindu nationalist party in the state — see the chart below.   Banerjee’s Trinamool Congress lost ground, but still had more seats in 2019 than a decade earlier.  The Left Front, in contrast, went from 15 seats in 2009, to 2 in 2014, to zero in 2019 — that is, this is the first Indian parliament without a Bengali communist member!

What is going on here?  Did the Bengali communists become Hindu chauvinist in the span of a decade, as might be implied by a straightforward reading of the chart?  Legislative assembly elections are due in the state in 2021.  Is BJP a serious contender?  What might a BJP government in Kolkata mean for Bangladesh? 

Debt pool

…. [T]here are known knowns…  known unknowns …. also unknown unknowns  — quipped the American Secretary of Defense Donald Rumsfeld in the lead up to the Iraq War.  When it comes to the economic ramifications of the COVID-19 pandemic, the only thing we know for sure is that we don’t know how things are likely to play out. 

Pause here for a moment so that this sinks in.  We can never know the future, no forecaster is a prophet and no prediction is certain, but usually there is an appreciation of which scenarios are more or less likely than others.  For the post-pandemic economic outlook, however, even that kind of probabilistic analysis is difficult. 

This uncertainty heightens the importance of scenario analysis.  Specifically, suppose the economic growth turns out to be much weaker and inflation slightly higher than the government’s budget forecasts , along the table below:

The official budget forecasts are for the the nominal GDP — that is, the value of all economic activities in a year without adjusting for inflation — to grow by over 15% a year during 2019-22.  During the same time, revenue is expected to grow by nearly 20% a year, implying an elasticity of revenue to GDP of nearly 1.3 — that is, each 1% rise in nominal GDP is expected to result in a 1.3% increase in revenue. 

In the alternate scenario being analysed, nominal GDP grows by over 9% a year during 2019-2022.  The weaker economy means less revenue than that projected at the Budget — by 488 billion taka in 2020-21 and nearly 495 billion taka in 2021-22.  To put that in the context, expenditure on pay and allowances of public servants was 534 billion taka in 2018-19, and 500 billion taka is about a quarter of the annual development budget in 2020-21.

Faced with this revenue shortfall, what could the government do? 

Raising taxes while the economy is already sluggish is neither sensible economic policy nor plausible politics.  The same goes for large cuts to the public service.  In fact, there might be a need for more government expenditure: households might need to be supported through either cash payments or public relief operations that provide food and other necessities; businesses might ask for bridging loans or other forms of assistance, merits of which would have to be carefully considered; and in the worst case scenario of deglobalisation and prolonged global slowdown, Bangladesh’s low cost manufacturing dependent growth model might become unsustainable, and the government might need to consider policies to ‘build back better’.  Cutting annual development expenditure might cover a 500 billion taka revenue shortfall in 2020-21, but that’s not a sustainable strategy if the recovery proves illusive beyond this year.

The budget is already expected to be in red by 1900 billion taka (6% of GDP) in 2021 financial year.  With a weaker economy and revenue shortfall, budget deficit could blow out to nearly 8% of GDP (chart below).   

How could this extra deficit be financed?  What would be the consequence for public debt?