Challenges for Bangladeshi Challenges for Bangladeshi n Becoming a Middle-n Becoming a Middle-

Income CountryIncome Country

PRMED Growth Seminar SeriesPRMED Growth Seminar Series

February 27,February 27, 20082008

Can Bangladesh Become a Can Bangladesh Become a Middle-Income Country by Middle-Income Country by

2016?2016? Gross National Income per-capita of Gross National Income per-capita of

US$470 in 2005 places Bangladesh US$470 in 2005 places Bangladesh in the category of low-income in the category of low-income countries as per IDA classificationcountries as per IDA classification

IDA’s threshold for middle-income IDA’s threshold for middle-income countries was US$870 in 2005.countries was US$870 in 2005.

Can Bangladesh Become a Can Bangladesh Become a Middle-Income Country by Middle-Income Country by

2016?2016? Can Bangladesh become an MIC by Can Bangladesh become an MIC by

2016?2016? Yes, if GDP growth increases to 7.5% a Yes, if GDP growth increases to 7.5% a

yearyear If growth falls to the 3% rate seen in If growth falls to the 3% rate seen in

the 1980s, MIC status will happen after the 1980s, MIC status will happen after 5 decades5 decades

Can Bangladesh Become an MIC Can Bangladesh Become an MIC by 2016?by 2016?

Reasons to be optimisticReasons to be optimistic Good growth record (> 5%) since Good growth record (> 5%) since

19901990 Sound economic fundamentalsSound economic fundamentals A young labor force – demographic A young labor force – demographic

dividenddividend Established entrepreneurial cultureEstablished entrepreneurial culture Substantial improvements in human Substantial improvements in human

developmentdevelopment

An Impressive Growth Record An Impressive Growth Record that needs to be Strengthenedthat needs to be Strengthened

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2

3

4

5

6

7

8

per

cen

t

Annual GDP Growth

An Impressive Growth Record An Impressive Growth Record that needs to be Strengthenedthat needs to be Strengthened

900

1000

1100

1200

1300

1400

1500

1600

1700

1800

PP

P, C

onst

ant I

nter

natio

nal U

S$

Per-Capita GDP: Bangladesh Vs. Median LIC

Bangladesh

Median LIC

Growth Record: International Growth Record: International ComparisonsComparisons

Nig

er

Sie

rra

Leon

e

C. A

fric

an R

ep

Ban

glad

esh

Indi

a

Indo

nesi

a

Chi

na

0

1000

2000

3000

4000

5000

6000

Con

stan

t 200

0 P

PP

U

S$

1975

2005

Growth Matters Over Growth Matters Over Long-RunLong-Run

0

1

2

3

4

5

6p

erce

nta

ge

po

ints

per

yea

r

1981-1992 1992-2000 2000-2005

GDP Growth Poverty Rate Reduction

Can Bangladesh Become an MIC Can Bangladesh Become an MIC by 2016?by 2016?

Challenges to ConsiderChallenges to Consider Target of 7.5% growth is an ambitious Target of 7.5% growth is an ambitious

one. Few developing countries have one. Few developing countries have been able to sustain itbeen able to sustain it

Being an MIC is not just about income Being an MIC is not just about income levels. MICs have more complex and levels. MICs have more complex and sophisticated economic systems which sophisticated economic systems which need to be understoodneed to be understood

What Explain Bangladesh’s What Explain Bangladesh’s Growth Experience?Growth Experience?

Growth acceleration in the early 1990s Growth acceleration in the early 1990s was enabled by major policy improvementswas enabled by major policy improvements macroeconomic stabilization (monetary and macroeconomic stabilization (monetary and

fiscal discipline, and correction of exchange fiscal discipline, and correction of exchange rate misalignment and of external imbalances)rate misalignment and of external imbalances)

Easing of trade and exchange restrictionsEasing of trade and exchange restrictions Relaxation of restrictions on private investment Relaxation of restrictions on private investment

in various Industrial Policy Ordersin various Industrial Policy Orders Launching of the Financial Sector Reform Launching of the Financial Sector Reform

Program (FSRP), deregulating interest rates Program (FSRP), deregulating interest rates and abolishing credit quotasand abolishing credit quotas

Further deregulation of agriculture marketsFurther deregulation of agriculture markets

What Explain Bangladesh’s What Explain Bangladesh’s Growth Experience?Growth Experience?

Contd….Contd….

Govt moved early and decisively to avail of Govt moved early and decisively to avail of opportunities provided by MFA/ATC quota opportunities provided by MFA/ATC quota systems for garment exports – EPZs, systems for garment exports – EPZs, bonded-warehouses, back-to-back LCs etc.bonded-warehouses, back-to-back LCs etc.

Sharply rising workers remittances fueled Sharply rising workers remittances fueled construction and domestic demandconstruction and domestic demand

Early emphasis on human development – Early emphasis on human development – especially women’s advancement – proved especially women’s advancement – proved crucial.crucial.

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1980-89 1990-06 2007-16

GDP growth Capital Stock GrowthLabor (quality adjusted) Growth TFP growth

Source: BBS and staff calculations

Can Bangladesh Become an MIC Can Bangladesh Become an MIC by 2016?by 2016?

Challenges to ConsiderChallenges to ConsiderSources of Growth

Bangladesh’s Transition to Bangladesh’s Transition to MIC StatusMIC Status

Agriculture

Labor-Intensive Manufacturing

Closed Economy

Global Integration

Rural

Urban

Transition 1: Transition 1: Agriculture to Labor-Intensive Agriculture to Labor-Intensive

ManufacturingManufacturing

Transition 1 implies a deeper Transition 1 implies a deeper labor-intensive manufacturing labor-intensive manufacturing base and more productive base and more productive agricultureagriculture driven by globally competitive driven by globally competitive

manufacturing firms & productive, manufacturing firms & productive, diversified, and commercially-oriented diversified, and commercially-oriented agriculture sectoragriculture sector

Main Constraints to Deepening Main Constraints to Deepening Manufacturing BaseManufacturing Base

Firm-level analysis suggests that Firm-level analysis suggests that following areas need particular following areas need particular attention to boost productivity in attention to boost productivity in manufacturingmanufacturing Rapidly emerging power supply constraintsRapidly emerging power supply constraints Limited access to FDI for manufacturingLimited access to FDI for manufacturing High remaining anti-export biasHigh remaining anti-export bias Deficiencies in worker and mgmt skillsDeficiencies in worker and mgmt skills Limited knowledge economy baseLimited knowledge economy base Concerns over law and orderConcerns over law and order

Firm Size and ProductivityFirm Size and Productivity

0

20

40

60

80

100

120

140

Firm Sizebetween 1-10

Firm Sizebetween 10-

50

Firm sizebetween 50-

150

Firm sizebetween 150-

500

Firm size500+

Productivity measure of firms sized 500+ normalized to 100

Transition 2:Transition 2:Closed Economy to Globally Closed Economy to Globally

Integrated OneIntegrated One

Transition 2 implies judicious, Transition 2 implies judicious, but not complacent, approach to but not complacent, approach to global integrationglobal integration Bangladeshi firms plugged into global Bangladeshi firms plugged into global

supply chains and country figuring supply chains and country figuring prominently on global investment mapsprominently on global investment maps

Main Constraints to Deepening Global Main Constraints to Deepening Global IntegrationIntegration

High levels of anti-export bias hurts High levels of anti-export bias hurts non-RMG exports and prevents export non-RMG exports and prevents export diversification diversification

Among the highest trade protection in Among the highest trade protection in the worldthe world

Main Constraints to Deepening Global Main Constraints to Deepening Global IntegrationIntegration

0

5

10

15

20

25

per

cen

t

LIC

s

Indi

a

Pak

ista

n

Bde

sh

Average Nominal Protection Rate

Main Constraints to Deepening Global Main Constraints to Deepening Global IntegrationIntegration

High levels of anti-export bias hurts non-High levels of anti-export bias hurts non-RMG exports and prevents export RMG exports and prevents export diversification diversification

Among the highest trade protection in the Among the highest trade protection in the worldworld

Bonded warehouse facility not available to Bonded warehouse facility not available to most sectors. With dysfunctional DEDO, this most sectors. With dysfunctional DEDO, this discourages export diversification.discourages export diversification.

Poor state of trade facilitation – inefficient port Poor state of trade facilitation – inefficient port and various bottlenecks at customs and related and various bottlenecks at customs and related to connectivity with hinterlandto connectivity with hinterland

Transition 3:Transition 3:Rural to UrbanRural to Urban

Transition 3 implies emergence Transition 3 implies emergence of diverse, dynamic urban of diverse, dynamic urban centers, with Dhaka remaining at centers, with Dhaka remaining at forefront of urban activityforefront of urban activity

Managing Rapid Urbanization: Key Challenges

Absence of balance in urbanization – no Absence of balance in urbanization – no viable urban alternatives to Dhakaviable urban alternatives to Dhaka

Dhaka fast reaching choking pointDhaka fast reaching choking point Rising congestion pressures in DhakaRising congestion pressures in Dhaka Provision of infrastructure and urban services far Provision of infrastructure and urban services far

behind demandbehind demand Exorbitant real estate prices in DhakaExorbitant real estate prices in Dhaka

Key issuesKey issues Virtual absence of decentralizationVirtual absence of decentralization Lack of devolution of key services to city governmentsLack of devolution of key services to city governments Lack of city govts’ revenue sources and admin. capacityLack of city govts’ revenue sources and admin. capacity Interregional transport and communication networks Interregional transport and communication networks

underdevelopedunderdeveloped

Long-Term TransitionsLong-Term Transitions

0

5

10

15

20

25

30

35

40%

GD

P

1980 1990 2005

Manufacturing Urban Population Trade

Long-Term TransitionsLong-Term Transitions

0

20

40

60

80

100

% G

DP

Manufacturing Urban Population Trade

Bangladesh China Indonesia Malaysia

Enabling Environment for Enabling Environment for the 3 Long-Term the 3 Long-Term

TransitionsTransitions Strengthening governance and Strengthening governance and regulatory environmentregulatory environment Addressing infrastructure constraints, Addressing infrastructure constraints, with a special focus on powerwith a special focus on power Addressing acute labor skill shortagesAddressing acute labor skill shortages Creating deeper and more efficient Creating deeper and more efficient financial system financial system Maintaining macro policies and Maintaining macro policies and liberalizing tradeliberalizing trade

Key Summary MessagesKey Summary Messages

Continued strong private investment Continued strong private investment and labor force growth will help, but and labor force growth will help, but productivity improvement is key. productivity improvement is key.

Need to implement 2Need to implement 2ndnd generation generation reforms, reforms, and and refocus policy attention refocus policy attention toward hitherto neglected structural toward hitherto neglected structural areas – governance, urban areas – governance, urban management, infrastructure (especially management, infrastructure (especially power and ports) and labor skills.power and ports) and labor skills.

THANK YOU!THANK YOU!