Rethinking the role of the state in private sector development

The state versus market debate of the last century seems quite outdated today.  Events from the fall of the Berlin wall to the Global Financial Crisis brought a realization among economists and policymakers that for economic wellbeing of citizens, the state and market have to play more of a complementing role. Private sector should lead innovation, productivity, job creation, while state should invest in human capital, social safety nets, and provide the infrastructure and environment necessary for the private sector to be more competitive and productive.

As Bangladesh completes its 50 years and more importantly transitions into a middle income country, it is perhaps time to rethink the role of the state in private sector development and jobs. Mariana Mazzucato, a professor of the University College London, argues that there is a need for an entrepreneurial state that does not limit itself to the rank and file bureaucratic task, rather plays an active role in driving innovation, empowering the private sector and making sure that while the risks of innovation are socialized, the rewards are not entirely privatized. In other words, state needs to play a smarter role to enable the private sector to be more competitive, innovative and more importantly fair in sharing the fruits of progress. If we look at South Korea and other East Asian countries, we  see that the state played a big part in creating an environment in which the private sector could thrive. While the private sector remained the key driver of jobs and economic growth, state provided the fuel it needed.

How can this idea of an entrepreneurial state be operationalized in the context of Bangladesh. Here are some policy suggestions:

Creating an ecosystem for innovation

If we want to move away from being an exporter of low value manufacturing products to high value, complex  products, we need to invest in education and innovation. Large scale innovations are expensive and often carry huge risk. For this reason, private sector will not always have the incentive to innovate. However, if we have to transition and move up the ladder like South Korea, Japan or Taiwan did, innovation has little alternative. Mazzucato shows even in the biggest bastion of free market, how technologies like Apple benefited from significant state led research. The strategy here for Bangladesh needs to be twofold: create partnership between public education/research institutes and the private sector, take care of some the risk through cost-sharing, while making sure the fruits of innovation are shared across the industry. Germany, Ireland and Taiwan provide great examples of such collaborative innovation. Innovative financing vehicles also needs to be designed (e.g. challenge funds, cost sharing) to ensure state funds do not end up in the crony pockets and go to support genuine ideas and transformative innovation.

Rethinking education, skills and local development

Traditionally, our education has focused on giving us certain skills. But the way technology is changing on a daily basis, we cannot rely on fixed skills. Instead, we need transferable skills with dynamic learning. Individuals should have the ability to learn, unlearn and relearn on his own initiative and state should enable that lifelong learning. More importantly, we need to tie education, skills  and local development. While our government has invested heavily on special economic zones, success stories from Asia (South Korea, China), Europe (Germany, UK), and South America (Costa Rica) underscore the importance of education and skills to make the most out of such industrial strategy. Particularly, we can learn from the German model of apprenticeship training and academy-industry linkage at the local level. Industry and academia in Germany work together to spur economic activities at the local level, increase efficiency and improve productivity. Similarly, training programs need to be designed and run jointly with the private sector so that the skills can be put to efficient and optimal use.

Improving productivity of the informal firms:

If we look at the bailout packages during the pandemic, most of them went to formal firms and not much was done for informal firms and SMEs. The large firms also have more political capital and they are able to negotiate with the government better, as we have seen repeatedly in case of garments factories. This is  deeply problematic as majority of our firms are in the informal sector and the state must find smart ways to support them (recognizing all the complexities associated with identifying and targeting them). Recent evidence from the World Bank reveals that the impact of formalization interventions undertaken so far have been limited. It is therefore recommended that policymakers go beyond formulating strategies to push formalization and explore alternatives to support and boost the productivity of informal firms that may lead to gradual formalization. One method could be to link formal and informal firms. Other alternatives include enhancing access to technology, improving credit access, encouraging the use of digital tools, and providing easy access to training and incubators.

Leveraging technology for the many

Technology and Digital State are the new buzz words and not only in Bangladesh. But it is important to realize that technology in itself is neither good nor bad, neither inequality reducing nor privilege enhancing. It depends entirely on how we use it. Here again, state has a role to play so that the benefits from digitization are shared widely. Embracing technology would require changing mindset, norms and societal attitude towards work and state needs to invest here and invest smartly. Estonia provides a good example of how a society can be trained to reap the benefit of technology. They teach coding from an early age at school, enforce it on the government agencies to ensure citizens do not have to fill in any information twice, and make sure that  citizens have access to all the information. This process of transparency and convenience have built trust within the society and led to the most successful case in the world of e-governance and digital citizenship.

Diversifying manpower export

Our export of manpower is currently concentrated on the Middle East, which is both unsafe and economically less rewarding. We need to up our game here. Even countries like India, Sri Lanka and Philippines have taken bold initiatives to upskill their manpower and fight for their rights. We will see that in the Middle East, the migrants from India and other countries are doing managerial jobs while we are continuing to work in the most low paying sectors. The next generation of Bangladeshi should not be aiming to go to these countries and not  certainly with the current skill set. To ensure that, we need to redesigned our education and training system. Even after attending a decade of Islamic Studies and English language classes, it is unacceptable how poorly we fare in comparison to Indians when it comes to linguistic abilities. Improved language and communication skills with IT training can go a long way in addressing the dual problem of low wage and insufficient protection that we mentioned at the beginning.

Embracing evidence

At this pointy, we need to  remind ourselves of one thing. State resources are limited and scarce in nature and have very high opportunity cost. The money it provides to a firm or industry could be provided to other humanitarian sectors like healthcare or education, or for the betterment of the widows and orphans. So, the state has to confirm that when it is providing support for the private sector, the return is greater either in terms of job creation, higher export volume or in improved productivity. There should also be impact evaluations of the results of the programmes that have been undertaken for private sector development and ideally they should be done by a third party like development partners or non-governmental organizations, and the results should be made public to ensure accountability.

In terms of measuring success, at the private sector level, we need to focus on productivity growth as opposed to only output growth. At the national level, we have so far focused on GDP growth but I think, we need to revisit the idea of progress and how we measure it. I suggest we look particularly into human capital, natural capital and social capital. Human capital will show the capacity of the individuals or citizens of the country, natural capital will give us an insight into the state of infrastructure and other resources, while social capital will reflect the trust in institutions and systems. Focusing on these would make us assess ourselves more critically and pave the way for sustainable and inclusive development for all our citizens.

Finally, supporting competition but not cronyism
How we design and deliver the state support for the private sector development will largely determine how far we go as a country in the next few decades. Bangladesh has a clear choice here. We have countries like Egypt and Tunisia where  state supported only those connected to it politically. As a result, private sector growth in those countries have been very limited, unemployment soared and unrest broke out. On the other hand, we have countries like Germany and South Korea where competition has been designed – by the government – in a way that pushes, incentivizes and at times forces the private sector to be more competitive. It is important we chose the latter.

Md Abir Hasan has worked on Jobs and Private Sector Development across  South Asia, Africa and the Middle East.