Can Bangladesh avoid a middle-income trap?

Highlights -

• Tax-GDP ratio in Bangladesh is less than 10% in contrast to 15%-18% among other developing countries
• Bangladesh's weak institutional capacity may hold it back from its targets of meeting SDGs by 2030, and becoming an upper middle-income country by 2031
• Countries of South Asia, Asean and East Asia import $4,920b worth of goods, but Bangladesh's share in the imports is a mere 0.1%

Bangladesh might fall into the middle-income trap with a poor institutional governance in terms of business environment, bureaucracy, human rights and democracy, an international conference was told Tuesday.

For example, Bangladesh ranks 101st in rule of law, 102nd in land administration among 105 countries,  said Dr Selim Raihan, an economics professor and executive director at South Asian Network on Economic Modelling (Sanem).

The governance of Bangladesh is similar to that in other low-income countries as the trend of corruption has seriously increased and the government has failed to prevent extreme rent-seeking owing to a lack of resources, he also said while addressing the second day of the virtual international conference organised by the Centre for Policy Dialogue (CPD) on Tuesday.

The think-tank organised the four-day event on the occasion of 50 years of Bangladesh's independence and Mujib Borsho.

Professor Mustafizur Rahman, distinguished fellow at the CPD, presented another paper anticipating that Bangladesh might face the middle-income trap owing to poor governance, increasing higher-interest commercial loans in the absence of concessional loans, rising costs for debt services.

Dr Raihan in his paper titled "Institutional challenges in Bangladesh's economic transformation"  said economic growth and development performance over the past few decades have been impressive, largely driven only by the apparel sector and overseas remittances, and faces serious questions because of increasing pressures on the growth sectors and from a seeming inability to develop others.

Paradoxically, improvements in economic and social outcomes have not been accompanied by institutional development, and Bangladesh's institutions remain weak, some rankings amongst the lowest in the world.

In the face of such weak institutions and economic pressures, the challenge that Bangladesh faces in plotting a new and sustainable development path is daunting.

Institutional weaknesses in Bangladesh resemble those in low-income and lower-middle income countries, the economist said, adding that the trend of corruption is relatively more serious in Bangladesh than elsewhere and an effective obstacle to economic progress.

The tax system is highly inefficient and able to resist reforms, against the will of the government, despite the repeated government statements about the need to increase taxes – which is now less than 10% of GDP in Bangladesh in contrast to 15%-18% among other developing countries.

He also said the VAT reform was blocked by businesses in 2012 and all of the reforms activities in that field failed in the presence of an anti-reform coalition of tax system employees, actual and potential taxpayers, and, presumably, top members of the ruling party.

Anti-reform coalitions and stable corruption equilibria were also found in some other areas too, such as the health sector and the judicial system, he added.

He linked corruption to the elite entrepreneurial class, weakness of labour organisations, lack of resources and skills in the public sector, inadequate laws, poor capacity of administrative organisations and unaccountability.

Despite the achievements so far, he expressed concern if Bangladesh can continue its success and achieve larger development goals with the business-as-usual processes.

The economist said there are concerns that the weak institutional capacity of the country may work as a binding constraint as the country eyes to meet the stiff targets of the SDGs by 2030, and aspires to become an upper middle-income country by 2031 and a developed country by 2041.

He urged the government to ensure proper reforms in critical economic and institutional domains, asking, "Is there a political will to undertake such reforms?"

Presenting a keynote titled "Bangladesh transitioning from LDC to post-lDC future: Challenges and the next steps", Professor Mustafizur Rahman, distinguished fellow at the CPD, said Bangladesh will have to face a significant number of challenges after graduating from the LDCs in 2026 beaune of a loss of international support measures in trade, such as  the free market access.

It will be more difficult to overcome the challenges as the flow of concessional loans is reducing with the country having graduated to a lower-middle income status from the lower-income income, he also said.

The economist also said many countries, having made the transition to the middle-income status, tend to fall into the middle income trap – either in lower-middle income trap or upper-middle income trap.

Stressing utilising untapped opportunity of lower-cost regional trade, Prof Mustafizur said markets in neighbourhood regions have remained largely unassessed although the countries in regions of South Asia, Asean and East Asia are the drivers of the Asian Century.

"Countries of the three regions import about $4,920 billion worth of goods, but Bangladesh's share in the imports is a mere 0.1%," he said, explaining the share of exports from Bangladesh regarding its total export increased to only 12%, which was 10% a decade ago.

He urged the government on proper preparation to meet the post-LDC challenges with increasing negotiation skills, signing free trade agreements.

"Given the current initiatives to establish multi-modal transport linkages, triangulation of investment, multi-modal transport linkages and trade will become crucially important to reduce lead time and raise competitiveness of exports'" Mustafizur added.

Presenting a paper titled "Synergies and inflection points: Policy actions, market responses and the dynamics of economic growth in Bangladesh", Syed Akhtar Mahmood, former lead economist at the World Bank, said Bangladesh's economy grew at a steady rate from the early 1980s after a period of fluctuations in the 1970s when the economy was recovering from the dislocations of the 1971 war of independence.

While the major economic variables, such as GDP growth, agricultural and industrial production, and export earnings, largely show a steady upward trend since the early 1980s, there are several inflection points where the growth rate of the variables accelerated leading to a shift in the growth trajectory.

He identified the expansion of private sector credit in late 1070s, development of rural roads in early 1990s, export earnings in 1980s, remittances in the late 1990s, mobile phone subscription in 2000s, mobile financial services and power generation as the inflection points of growth in Bangladesh economy.

In another session, PPRC executive chairman Dr Hossain Zillur Rahman identified six transformational achievements Bangladesh has made so far; Bangladesh's becoming a disaster victim to a good disaster manager, managing population, cushioning food security and integrating into global economy and emergence of women as a major socio-economic actors.

Bangladeshi people moved from a fatalistic mindset to aspirational, which was one of the major drivers of those transformation, he pointed out.

But marginalization of political opposition, official complacence of development and disregard for reforms are among the concerns, he said.

Transparency International Bangladesh (TIB) executive director Dr iftekharuzzaman also referred to deepening politicization of democratic and national integrity institutions resulting in a culture of impunity and corruption.

Prof Geof Wood, Emeritus Professor of International Development at the University of Bath moderated the session on "Towards just society." Just society is not a matter of governance, it is a shared value of the society, tolerance and mutual respect, he said.

Prof Rehman Sobhan, Prof Rounaq jahan, Prof MM Akash, BIDS director general Dr Binayak Sen, Prof SR Osmani and Dr M Sayeduzaman were among the discussants.