BANGLADESH CONSOLIDATING EXPORT-LED GROWTH COUNTRY DIAGNOSTIC STUDY ASIAN DEVELOPMENT BANK BANGLADESH CONSOLIDATING EXPORT-LED GROWTH COUNTRY DIAGNOSTIC STUDY ASIAN DEVELOPMENT BANK Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2016 Asian Development Bank 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 632 4444; Fax +63 2 636 2444 www.adb.org Some rights reserved. Published in 2016. Printed in the Philippines. ISBN 978-92-9257-555-7 (Print), 978-92-9257-556-4 (e-ISBN) Publication Stock No. RPT168366-2 Cataloging-In-Publication Data Asian Development Bank. Bangladesh: Consolidating export-led growth. Mandaluyong City, Philippines: Asian Development Bank, 2015. 1. Economic development. 2. Bangladesh. I. Asian Development Bank. The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by ADB in preference to others of a similar nature that are not mentioned. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) https://creativecommons.org/licenses/by/3.0/igo/. By using the content of this publication, you agree to be bound by the terms of this license. This CC license does not apply to non-ADB copyright materials in this publication. If the material is attributed to another source, please contact the copyright owner or publisher of that source for permission to reproduce it. ADB cannot be held liable for any claims that arise as a result of your use of the material. Attribution—You should always acknowledge ADB as the source using the following format: [Author]. [Year of publication]. [Title of the work in italics]. [City of publication]: [Publisher]. © ADB. [URL or DOI] [license]. Translations—Any translations you create should carry the following disclaimer: Originally published by ADB in English under the title [title in italics]. © ADB. [URL or DOI] [license]. The quality of the translation and its coherence with the original text is the sole responsibility of the translator. The English original of this work is the only official version. Adaptations—Any adaptations you create should carry the following disclaimer: This is an adaptation of an original work titled [title in italics]. © ADB. [URL or DOI][license]. The views expressed here are those of the authors and do not necessarily reflect the views and policies of ADB or its Board of Governors or the governments they represent. ADB does not endorse this work or guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. Please contact [email protected] if you have questions or comments with respect to content, or if you wish to obtain copyright permission for your intended use that does not fall within these terms, or for permission to use the ADB logo. Notes: In this publication, “$” refers to US dollars, unless otherwise stated. ADB recognizes “China” as the People’s Republic of China. All photos are from ADB. Contents Boxes, Figures, and Tables v Abbreviations ix Weights and Measures x Preface xi Acknowledgments xii Bangladesh Fast Facts xiii Highlights xiv 1. Growth and Investment in Perspective: An Analysis of Trends 1 1.1 Introduction 1 1.2 Economic Reforms 2 1.3 Growth by Sources and Uses 7 1.4 The Output Gap and Source of Growth 9 1.5 The External Sector 12 1.6 Fiscal Policy and Inflation 13 1.7 Foreign Direct Investment 14 1.8 Poverty and Human Development 15 Appendix 1.1: Addressing Climate Change Challenges and Adaptive Delta Management 17 2. A Diagnosis of Critical Constraints to Growth 19 2.1 Introduction 19 2.2 Is High Cost of Finance a Constraint? 19 2.2.1 Trends and Issues in the Financial Sector 19 2.2.2 Financing Larger Projects and Enhancing Long-Term Savings 24 2.2.3 Could Access to External Finance Be the Problem? 24 2.3 Are Low Returns to Economic Activity a Critical Constraint? 25 2.3.1 Are Poor Geography, Agricultural Land Use, and Water Use Constraints? 25 2.3.2 Is Low Human Capital a Constraint? 27 2.3.3 Are Low Quantities of Physical Capital a Constraint? 27 2.4 Is Low Appropriability for Investors a Constraint? 32 2.4.1 Are Governance-Related Issues Critical Constraints to Sustained Growth? 32 2.4.2 How Much Are Macroeconomic Risks a Critical Constraint? 36 2.5 Is Insufficient Self-Discovery and Coordination a Constraint to Growth? 37 2.5.1 Has the Non-Garment Sector Been Given a Chance to Succeed? 37 2.5.2 Has Technology Been Used to Increase Coordination Externalities? 37 2.6 Conclusions 39 Appendix 2.1: Addressing Transport Demand Management in Dhaka: The Foundation of Sustainable Urban Living 40 3. Raising Living Standards for All: Maintaining and Propelling Inclusive Growth 45 3.1 Introduction 45 3.2 Poverty and Inequality 46 3.3 Health and Human Capital 48 3.3.1 Health 48 3.3.2 Education 53 3.3.3 Technical and Vocational Education and Training 55 3.4 Labor Force Characteristics and Employment Opportunities 57 3.5 Leveling the Playing Field 60 iii Contents 3.5.1 Access to Infrastructure 60 3.5.2 Land Distribution 64 3.5.3 Access to Credit and Microfinance 65 3.6 Social Protection 69 3.7 Conclusions 72 Appendix 3.1: The Bangladesh Pension System: A Must-Have 73 4. The Energy Challenge: A Critical Constraint to Growth 81 4.1 Introduction 81 4.2 Overview of the Power Sector 82 4.2.1 How Did This Problem Come About? 83 4.2.2 The Government Plan 84 4.3 Demand-Side: Energy Consumption Needs 86 4.3.1 Power Demand Forecasts under the Power Sector Master Plan 88 4.4 The Genesis of the Supply-Demand Gap 88 4.4.1 Natural Gas Supply and Use and its Economic Importance in the Economy 88 4.4.2 Domestic Coal 93 4.5 Challenges and Options for Tackling Them 93 4.5.1 Rationalize Energy Pricing, Subsidies, and Power Tariffs 94 4.5.2 Mandate Energy Conservation and Energy Efficiency Programs 96 4.5.3 Attract Investment in Exploration and Infrastructure 97 4.5.4 Accelerate Reforms in the Regulation of Electricity Generation and Distribution to Attract Investment 98 4.5.5 Embrace Regional Electricity Trading Markets 101 4.6 Conclusions and Policy Recommendations 108 5. Economic Diversification for Sustained Growth: Does Bangladesh Need to Switch Gears? 110 5.1 Introduction 110 5.1.1 The Ready-Made Garment Sector in Bangladesh: Huge Success but Challenges Ahead 111 5.1.2 Advantages of the Textile and Garments Industry 112 5.1.3 Garment Sector’s Place in the Global Economy and the Fashion Industry 115 5.1.4 RMG Operations in the Global Apparel Value Chain Context 117 5.1.5 Measuring Comparative Costs 120 5.2 Economic Diversification and Agglomeration 127 5.2.1 Is lack of Diversification and Concentration in RMG a Problem for Bangladesh? 128 5.2.2 Exports Don’t Explain Everything 129 5.3 Linking Goods and Services 131 5.3.1 Input-Output Linkages and Agglomeration 132 5.3.2 Capital and Labor in the Productive Economy 133 5.3.3 Use of Capital and Skilled Labor and Insertion into Global Value Chains 134 5.4 The Role of Current Policies in Diversification 139 5.4.1 Background on the Trade Regime 140 5.4.2 Implications for Resource Allocation: Effective Rates of Protection 141 5.5 Conclusions, Recommendations, and Policy Options 142 5.5.1 Main Recommendations 143 Appendix 5.1: Bangladesh Indicators of Productivity, Linkages, and Competitiveness by Sectors 146 Appendix 5.2: Indicators of Revealed Comparative Advantage 148 Appendix 5.3: Input-Output Linkages and the Export Potential of an Economic Sector 149 Appendix 5.4: How Linked is Bangladesh to Global Production Chains? 165 6. Conclusions and Policy Recommendations 168 6.1 Conclusions 168 6.2 Policy Challenges and Information Requirements 169 6.3 Productive Development Policies: Structuring Ideas for Intervention 172 References 176 iv Boxes, Figures, and Tables Boxes 1.1 The Recent Five-Year Plan: Progress and Prospects 4 2.1 Growth Diagnostic Framework: Conceptually Identifying Binding Constraints to Growth 20 2.2 Governance, Access to Land, and Investment Uncertainty 34 3.1 Rangpur—Distinct Features of a Lagging Region 48 3.2 What is the Probability of Being Poor in Bangladesh? 58 4.1 Renewable Energy 92 4.2 Power Sector Institutional Structure, Legal, and Regulatory Framework 99 4.3 Lessons from Other Regions’ Experiences 103 5.1 Bangladesh Special Economic Zones 113 5.2 Made in Bangladesh and the Pulse of Consumer Demand 120 5.3 Bangladesh Leather Industry: Prospects and Issues 136 5.4 Bangladesh Pharmaceutical Industry: Prospects and Issues 137 Figures 1.1 Bangladesh’s Population and Projection, 2015 and 2050 2 1.2 Bangladesh GDP, 1973–2014 3 1.3 Per Capita GDP of South Asian Countries, 1985–2014 7 1.4 Growth Rates of GDP, Manufacturing, and Other Sectors, 1980–2015 8 1.5 GDP by Expenditure Components in South Asia, 2014 9 1.6 Bangladesh: Weather-Related Disasters and Potential Output Gap, 1988–2014 10 1.7 Bangladesh Contributions to Growth, 1980–2013 11 1.8 Bangladesh and Selected Countries Contribution to Growth, 2006–2013