Bangladesh is now considered one of the most remarkable economic success stories in Asia. A country soon after its birth in 1971 was described as an “international basket case” by Ural Alexis Johnson, the former US Under Secretary of State, and the country also faced nearly insurmountable challenges. Bangladesh now with a GDP of US$ 409 billion ranks as the 37th largest economy in the world with a per capita income of US$ 2554. It is to be noted that GDP is an aggregate country-level measure of income, it does not necessarily tell how average individual benefits from GDP growth.
The Bangladesh government’s vision 2041 stipulates to eliminate extreme poverty and secure upper-middle-income country status by 2031 and achieve the high-income country status by 2041. In pursuing such a vision, Bangladesh needs to be careful that the country does not get stuck into the lower-middle-income trap like India and Indonesia to enable the country to have a smooth transition towards a high-income country.
Over the last decade and a half, Bangladesh averaged an annual growth rate of 6.5 percent. The growth has largely been driven by RMG exports and overseas remittances. But that is not the whole story, over the last 30 years or so tremendous social changes have taken place in the country which has helped propel the country’s rapid economic transformation, in particular starting with the increasing empowerment of women.
According to the World Bank (WB), 36 percent of women aged 15 or over were economically active in Bangladesh compared to 21 percent in India in 2019. 71 percent of women above the age of 15 are literate in Bangladesh while 66 percent are so in India.
Despite high population density, decreasing arable land and frequent natural calamities such as cyclones and flooding, Bangladesh has made significant progress in achieving food grain self-sufficiency and reducing poverty. According to the latest Global Hunger Index, Bangladesh moved up by 13 notches to the 75th position among 107 countries. The value of agricultural output has increased faster than most of Bangladesh’s peers at 3.54 percent per annum in the two decades from 1999-2019.
Bangladesh also stands out among the least developed countries in terms of life expectancy, child mortality, and access to water and sanitation. The literacy rate including female literacy has increased substantially over the last three decades, so much so that the country has done better than many middle-income countries. Bangladeshis now enjoy an average life expectancy of 73.4 years, higher than in India and Pakistan.
According to the Household Income and Expenditure Survey (HIES) Report, 2016, the proportion of people in poverty fell from 31.5 percent in 2010 to 24.3 percent in 2016. The percentage of the population living in extreme poverty also fell from 17.6 percent to 12.9 percent during the same period.
Bangladesh will officially graduate into a lower-middle-income country in 2026. This economic transition is primarily a result of Bangladesh’s ability to harness the opportunities created from the emergence of a global production network and global value chain since the mid-1980s.
Much of Bangladesh’s economic growth in large part continues to be driven by exports and continuing remittance inflows which now account for 6 percent of GDP. Since the mid-1980s, it is estimated that more than 10 million Bangladeshis (6 percent of the total population and close to 10 percent of working-age population in the age group 15-64) now work overseas whose remittances now constitute the single largest contribution to foreign exchange earnings of the country. During the fiscal year 2020-21, Bangladeshi workers abroad sent US$24.77 billion.
Exports from Bangladesh have recorded an annual average growth rate of about 11 percent since 2001. Bangladesh exported US$40.5 billion in 2018-19 but that declined to US$33.7 billion in 2019-20, a decline of 16.8 percent from the previous year due to a slow down in global trade flows caused by the Covid-19 pandemic. However, exports bounced back in 2020-21 to US$ 38.75 billion. The Bangladesh government has set a target for exports amounting to US$51 billion in the fiscal year 2021-22.
For more than forty years Bangladesh is heavily reliant on relatively low value-added ready-made garments (RMG) for fueling its exports growth accounting for about 84 percent of merchandise exports now. Such a very high dependence on one single product RMG for exports (SITC841-846) and a very limited number of markets leave Bangladesh vulnerable to external shocks. Bangladesh has also failed to use RMG as a springboard to diversify into more value-added products as many other East Asian economies did in the past.
More importantly Bangladesh so far even failed to diversify within the RMG industry from low value-added products to high value-added products. The economic complexity of Bangladesh trade slipped from 77 in 1991 to 123 in 2019. The exports-to-GDP ratio also fell from 20 percent in 2012 to 15 percent in 2019.
The RMG industry now faces challenges from other cheap labor alternatives in other parts of the world and increased automation. The country’s graduation to become a lower-middle-income country will cause it to lose duty-free access to developed country markets.
While Bangladesh also has pharmaceutical, footwear, processed food, jute goods, and shipbuilding industries, they are primarily domestic market-focused and their contributions to exports remain fairly marginal. Research studies suggest that Bangladesh enjoys a competitive advantage in RMG, jute goods, tea, seafood, and leather, but only RMG has further enhanced its competitiveness over time while others stagnated.
Bangladesh is also the only country in South Asia that continually increased the manufacturing share of GDP as measured by the widely used measure of “share of value added by manufacturing” in GDP over the last twenty years. But Bangladesh still remains a capital-scarce country. Inward foreign direct investment (FDI) as a percentage of GDP stands at 1.1 percent.
Despite such successful industrialization, Bangladesh has experienced sharply deteriorating terms of trade (ToT). Between 1980 and 2019, the average value of ToT for Bangladesh with the base year 2000 stands at 99.91 percent with a minimum of 57.47 percent in 2011 and a maximum of 162.26 percent in 1985. The latest value in 2019 was 65.4.
Bangladesh’s lack of competitiveness is further reflected in the current account balance as a percentage of GDP. Between 1997-98 and 2019-20, the average value of the current account balance as a percentage of GDP for Bangladesh stood at 0.6 percent. This figure reached an all-time high of 3.3 percent in 2009-10 and a record low of -3.7 percent in 2017-18. The data clearly indicates Bangladesh’s lack of international competitiveness.
According to the World Economic Forum’s Global Competitive Index for 2019, Bangladesh ranked 105th, down two points from the previous year. The role of technology and human capital is well recognized in achieving economic growth and both are interrelated. According to the World Bank Human Capital Index (HCI) for 2020, Bangladesh slipped from 0.48 in 2017 to 0.46 in 2020.
In terms of the quality of education, Bangladesh’s global ranking was 84th while the neighboring country India ranked 29th in 2017. These are not very encouraging signs for the country. What the WTO describes as “technology goods”, their share in total exports from Bangladesh usually accounted for less than one percent over the last several decades. There is a strong correlation between the quality of education and economic performance. South Korea and other economically successful Southeast Asian countries have managed to excel in this respect.
To face the challenges Bangladesh will have to boost the productivity of its abundant labor force with investment in productivity-enhancing skills development, efficient infrastructure, machinery, and technology supported by a well functioning and efficient financial system. Bangladesh will also need to rebalance the economy towards domestic demand while export orientation remains in place.
The country also has a cumbersome business environment, it ranked 168th in 2020 out of 190 countries according to the World Bank’s Ease of Doing Business Index. Infrastructural deficits cause long delays in the movement of goods to and from the ports. Bangladesh is also an energy-deficit country. This will seriously hinder the country’s effort to achieve rapid industrialization to diversify its manufacturing base.
Also, bureaucratic delays and cumbersome bureaucratic processes cause increases in transaction costs for exporters and importers. Therefore, it is not surprising Bangladesh has not been much successful in attracting foreign direct investment (FDI) which has averaged only 1.1 percent of GDP over the last two decades. According to Transparency International Bangladesh ranked 146 out of 180 countries in terms of the corruption perception Index in 2020.
The rural population in Bangladesh as a percentage of the total population is estimated to be 65 percent. Agriculture contributes 13 percent to GDP but employs 40per cent of the workforce in the country. But it is the services sector that dominates economic activity in the country accounting for 55 percent of GDP but employs 39 percent of the workforce.
The services sector’s growth has been unsustainable and unpredictable. The sector has been unable to absorb a very large number of educated Bangladeshis, not to speak of a vast number of unskilled and semiskilled rural unemployed. In fact, sustained growth in per capita income may not be feasible in Bangladesh as a developing country relying on a growing services sector and bypassing manufacturing.
According to the HIES Report- 2016, the rate of poverty reduction has slowed down between 2010 and 2016 and during this period income inequality has increased. The report in particular highlighted the dire situation faced by the rural poor. Poverty continues to be largely a rural phenomenon in Bangladesh and it has remained so since the independence of the country.
Although the population growth rate decreased to 1.1 percent, the country remains very densely populated with a population density of 1,278 persons per square kilometer. It is estimated that the country is losing 1 percent of arable land a year to give way to housing and other purposes. Climate change also poses formidable risks and Bangladesh ranks as the 7th most vulnerable country in this respect.
While the country has made steady progress in poverty reduction, poverty has always remained much higher in rural areas as reflected in all HIES reports published since 1974. Extreme poverty in rural areas is three times higher than in urban areas. Covid-19 has now exacerbated poverty by pushing millions who had escaped poverty back into it.
Despite achieving impressive economic growth over the last two decades, one could be forgiven for believing that people in the country are doing well. This is also the message coming from the government — of the ‘trickle-down effect’ from high growth momentum.
While the HIES report- 2016 gives a very buoyant picture in its interpretation of the income data just focusing on the nominal values, the real picture is somewhat different. In fact, household real disposable income appears to be stagnating or in some instances even declining.
Using the HIES data, monthly average household income when adjusted for inflation (using the Consumer Price Index) for the country as a whole between 2005 and 2016 remained almost the same. The rural average household income increased by about Tk 200.
This increase in income for rural households can be largely attributed to overseas remittances. But the average urban household experienced a decline in its average monthly income by Tk 950.
This continued weak income growth or even the decline poses a particular risk to the consumption outlook. The problem can compound further for the indebted households. Any reasonable sweep of history will tell us there is no guarantee even the country’s graduation into a middle-income country will improve anything in the near future. The Covid-19 pandemic further added to the current economic woes.
Despite all the economic achievements, Bangladesh still relies on foreign aid. According to the Organisation for Economic Co-operation and Development (OECD), Bangladesh received US$5.5 billion in foreign aid in 2019.
Bangladesh faces challenges of altering the course to reflect on the shifting comparative advantage in the face of resistance from vested interests that have grown rich and powerful from the status quo. But such a growth performance can eventually be stalled if those vested interests are not reined in.
The growth process also does not have an automated impetus propelled by time. As Bangladesh celebrates its economic achievements in the 50th year of independence, the country faces an economic environment that may be unfavorable over the coming decades.
A foresighted economic strategy based on pragmatic realism combined with its own vision of the economic future is needed to keep the growth momentum continue. Successful implementation of such an economic strategy will depend on political will, institutions to establish good governance, and the economic capacity of the country.
