sign in sign up
<<
Home , Economy of India

ISSN- 2394-5125 VOL 7, ISSUE 19, 2020 “LIBERALIZATION AND ECONOMIC GROWTH OF BANGLADESH: AN ANALYTICAL STUDY WITH REFERENCE TO LUCAS MODEL.

Mr. Ashish Chaturvedi1 , Dr Hari Prapan Sharma2

1Assistant Professor, Institute of Business Management, GLA University, Mathura, 2Assistant Professor, Institute of Business Management, GLA University, Mathura, India

ABSTRACT- This paper attempts to analyze the impact of government policies on the economic growth of Bangladesh. The authors have taken the empirical research of Bashar & Khan (2009) as a base and have attempted to fit the policies of the government in Luca’s model. The publically available data provided by Bangladesh Bank, the and has been considered. A detailed analysis of the existing literature has also played a vital role in the analysis. The authors have observed that the post- liberalization policies of the government have contributed significantly in both economic as well as social development. The paper will be of reasonable assistance to all those academicians/scholars/ policymakers who are intended to analyze the trajectory of the .

KEYWORDS- Economic Development, GDP, Foreign Direct Investment, Human Capital, Openness Indicators

I. INTRODUCTION

Bangladesh, which was once considered a test case of “the basket country”, has travelled a long way to become one of the fastest emerging economies of South . The country which came into existence in 1971 has rapidly shown development trajectory for almost a decade. The attempts of the regime to boost the economy by promoting the industry, inviting foreign direct investment, countering terrorism and adopting several welfare measures to promote social upliftment of the masses is evident from the economic data of the country. In a scenario when leading economies of the reason such as facing a potential recession, Bangladesh is displaying a vibrant economy and is forecasted to display the growth of 8.0% in 20201. If we compare this data from the largest country of the region i.e. India, it is a study of contrast since the projected growth of India for the same time period is around 6%.2

This paper attempts to analyze the evolution of the Bangladesh economy while keeping into consideration the reason for the economic growth of the country. An attempt has been made to check the growth in the economy of Bangladesh by validating the existing strategies, practices into

1.1. Bangladesh – A brief history- In 1947, the state of Pakistan came into existence. The newly formed country was divided into two regions namely West-Pakistan and East-Pakistan. The eastern part was carved out of the eastern regions of erstwhile British India. Unlike western Pakistan, which was home to Urdu speaking natives, eastern Pakistan was domiciled to Bengali speaking population. Ever since 1947, the eastern region blamed the dominating western region of discriminating the Bengali natives in administration, defence as well as economy. It finally cumulated in the uprising and eventual crackdown of the population by the military. Finally, in 1971, after almost a decade of confrontations and crackdowns, eastern Pakistan became liberated and a new country named “Bangladesh” was created. India played a vital role as it provided military and strategic support to Bangladesh in its struggle for liberation.

1.1.1) Post-Independence History- The period of 1971-1990 witnessed several turmoils in Bangladesh. After the liberation, the leader of the struggle, Shaikh-Mujib-ur-Rehman was elected as the Prime- Minister. However, his popularity was short-lived. In 1974, a disastrous famine killed almost 1.5 million people in the country. The lack of governance against the backdrop of famine deteriorated the position of the prime –minister. In 1975, Mujib-ur Rehman was assassinated by military officials. The assassination was followed by the military takeover of the regime and the military governed the country till 1990 when finally, democracy was restored.

1.1.2) (1971-1990) - After liberation, Bangladesh witnessed a major problem of high rates of . The period of 1972-1975 witnessed an average annual rate of around 40%. The GDP growth rate was also abysmal as the country was growing at a rate of only 2% per annum. During the crisis, the government blamed black marketing and hoarding for high rates of Inflation. However, it

353

ISSN- 2394-5125 VOL 7, ISSUE 19, 2020 was revealed later that the real reason of high inflation was “liberal money creation”3. Simultaneously, the country was also hit by a massive balance of payment crisis the main reason being the oil price shocks4. The massive famine of 1974 further deteriorated the economic condition5.

After the military takeover of 1975, there was a policy-shift in economic front also. The government adopted a selective import substitution strategy. Some undertakings were also sold6. The policies resulted in a significant decline in inflation rates which decreased from 40% to less than 10% per annum (Table 1). The annual also witnessed growth. The country witnessed another regime change in 1982 when General Ershad overtook General Zia-ur-Rehman. The period of 1982-1990 witnessed an inflation rate of around 10% and the economy grew at a rate of almost 4% per annum.

Table 1- Key Macroeconomic Indicators of Bangladesh (1973-1990)

Year The growth rate of Inflation Rate (%) Current account Real GDP (%) deficits(% of GDP) 1973 -0.3 49.0 -1.4 1974 9.6 54.8 -3.6 1975 -4.1 21.9 -2.5 1976 5.7 2.3 -9.2 1977 2.7 4.8 -1.1 1978 7.1 5.3 -4.5 1979 4.8 14.7 -2.9 1980 0.8 13.8 -5.9 1981 4.3 16.2 -4.9 1982 1.2 12.5 -6.9 1983 4.9 9.4 -2.1 1984 5.4 10.5 -1.9 1985 3.0 10.7 -4.2 1986 4.3 11.0 -3.2 1987 4.2 9.5 -2.6 1988 2.9 9.3 -1.7 1989 2.5 10.0 -3.5 1990 6.6 8.1 -3.6 Source- Allauddin & Hassan (1999)

1.1.3) Restoration of Democracy and economic reforms- In 1991, the democracy was restored in Bangladesh. The democratically elected government of Bangladesh also adopted a policy of gradual opening and liberalizing of the economy. In 1991, the government of Bangladesh introduced a new industrial policy which emphasized the growth of the . The government stated that “the government will be a catalyst and not a regulator”7. Several reform measures were introduced such as protection of private sector players from exchange rate fluctuations, tax concessions, incentivizing non- residents to invest in Bangladesh, easier norms on foreign investment etc.

II. METHODOLOGY

The methodology of the paper is inspired by the work of Bashar & Khan (2009) who adopted the testing of Luca’s approach8. However, the key difference is that while Bashar & Khan tested the model on empirical data, the authors of this paper have attempted to fit the liberalization policies of the Bangladesh government into the model. This fit has been identified keeping in mind the existing data which displays the performance of the economy. The sources of the data are Asian Development Bank, World Bank and Bangladesh Bank.

According to Lucas (1988)9, the output is a function of physical capital, labour, human capital and openness indicators. The model can be mathematically expressed as-: Y=f (K, L, H, OI) Where Y= Output K= Physical capital L= Labour

354

ISSN- 2394-5125 VOL 7, ISSUE 19, 2020 H= Human capital OI= openness Indicators

There have been certain scholars, who have taken the help of this framework. It has been established that macroeconomic volatility impacts the welfare of an economy10. One of the major problems of developing and underdeveloped countries is “intrinsic instability of the development process and self-inflicted policy mistakes”11. Therefore, while analyzing data, these things will also be considered.

To analyze the output, the authors have considered G.D.P. data of the country. Foreign direct investment scenario has been considered as openness indicator. Whereas the scenario of education and life expectancy have been considered to check the development in the field of Labour and human capital. Several infrastructural programmes targeted to boost the economy of the country have been considered to observe the performance in physical capital development.

III. ANALYSIS

Keeping in consideration the Luca’s model, an analysis of the economy of Bangladesh has been done on four aspects, 3.1 deals with openness indicators, 3.2 deals with labour and human capital whereas 3.3 deals with physical capital.

3.1) Openness Indicators- Foreign Direct investment is one of the major indicators of openness of an economy as it is an outcome of the liberalized policy of the government. Foreign investment is a key to analyse the economic trajectory of a country as it ensures sustainable and significant development12. While capital collection only focuses on physical capital, FDI ensures comparatively higher effectiveness of human capital which results in sustainable financial development13.

As discussed earlier, the government of Bangladesh started liberalizing the economy in 1991. The FDI inflow data of Bangladesh since the beginning of the century can be analyzed from Table 2.

Table 2: FDI inflow in Bangladesh 2001-2017 (In million USD) Year FDI Inflow 2001 563.93 2002 400.93 2003 379.18 2004 284.16 2005 803.78 2006 744.61 2007 792.74 2008 768.69 2009 960.59 2010 913.02 2011 779.04 2012 1194.89 2013 1730.63 2014 1480.34 2015 1833.87 2016 2003.53 2017 2454.81 Source: Bangladesh Bank

It is clear from the available data that the post-liberalization foreign investment inflow level of Bangladesh has been impressive. Although it was fluctuating initially, the inflow level since 2008 has been significant. In 2017 the total inflow has been around 1% of the national GDP14.one of the key indicator of development is the switch from the agriculture sector to the and services sector. FDI has certainly moved the economy into that direction. The FDI in the manufacturing sector has been 869.43 million USD whereas in services sector it has been 104.44 million USD. The gap is reasonable owing to the large dependency of Bangladesh on the Textile sector which is the major component of the manufacturing sector. It has been established empirically by several researchers that FDI assists in creating new employment which helps to attain sustainable economic

355

ISSN- 2394-5125 VOL 7, ISSUE 19, 2020 growth and development through the creation of jobs15. Also, it has been established that foreign direct investment leads to economic growth16.

The above analysis of the existing data indicates that Bangladesh has been doing reasonably well in front of openness indicator.

3.2) Labour and Human capital - Investment and growth in education and Life expectancy are some of the common tools of analyzing growth in human capital. Before the economic reforms, Bangladesh was lacking in both of these fronts. However, significant government expenditure on health infrastructure and education has resulted in improvement in both of these avenues.

Figure 1- Life Expectancy Ratio of Bangladesh (In Years)

Life Expectancy Ratio of Bangladesh

80

60

40

20 AGE(In AGE(In years) 0 1975 1985 1995 2005 2015 Series 1 48.313 55.21 62.002 67.773 71.514

Source: - World Bank

From figure 1, it is clear that the life expectancy ratio has seen significant growth. Abhijeet Banerjee in his famous book “Poor Economics” has cited the improvement in preventive as well as curative health services as the main reason for improved average life expectancy17. Another major indicator is the Primary education rate which can be analyzed by the school enrollment rate (Table 3). Table 3: Gross enrollment ratio (Primary)

Year Gross Enrollment (in %) 1970 56.267 1990 83.797 2010 105.975 Source: World Bank

It is clear from table 3 that Bangladesh has done a significant improvement and has achieved a universal primary school enrollment ratio in 2010. The enrollment ratio is backed by improved learning also as the learning outcome is better than that in India18.

3.3.) Physical Capital- The scenario in development of physical capital can be analyzed by the amount of investment in the field of infrastructure. Ever since the liberalization, Bangladesh has seen a massive jump in investment in infrastructure by international development organizations such as IBRD and also by its neighbouring countries especially India and . The country has recently prepared “Vision-2021” road map which states that to acquire the status of middle-income group country; it requires 24 billion USD worth of Investment per year19.

The available data (Table 4) of IBRD/IDA approved operations provides a detailed scenario of investment in Infrastructure in Bangladesh.

356

ISSN- 2394-5125 VOL 7, ISSUE 19, 2020 Table 4: IBRD/IDA approved operations

Year Investment (In USD) 1975 150,000,000 1985 266,000,000 1995 183,800,000 2005 600,000,000 2015 1.924 Billion Source: World Bank

Therefore, from the analysis, we can observe that Bangladesh has been doing well on all the Luca’s parameters namely; openness Indicators, Labour, Human capital and Physical capital. The attempts of the government on these parameters are displayed on the recent economic forecast also in which Bangladesh has been forecasted to be the fastest-growing economy of (Table 5).

Table 5: GDP growth rate forecast of South Asian Countries (In %) Country GDP Growth Forecast 2019-20(In %) Bangladesh 8.1 Nepal 7.1 India 6.5 Srilanka 2.6 Pakistan 3.3 Bhutan 5.3 6.6 Afghanistan 2.7

Source: Asian Development Bank

IV. CONCLUSION

Bangladesh has displayed tremendous growth ever since the economic reforms. It is a significant achievement for a country which was formed only in 1971 and which has seen years of oppression and dictatorship to emerge as the fastest growing economy of South-Asia. However, to ensure sustainability it is imperative that the four parameters of Luca’s model shall be taken into consideration continuously in its jump from a least developed country to a middle-income group country. The economic growth of Bangladesh is a lesson not only for poor countries to strive hard for development but also for countries such as India and China which have long considered Bangladesh as a “Poor neighbour”.It is also to be noticed that this economic growth is coupled with rapid social transformation such as decreased population growth, increased use of contraceptives, higher and hygiene, increased through the provision of microfinance services through both Joint liability and group liability methods20.

V. NOTES & REFERENCES

[1] The World Bank has projected that the growth rate of Bangladesh for 2019-20 will be 8.1%. [2] The economy of India has been witnessing a slowdown. Recently the growth forecast has been reduced to 6%. [3] Alauddin, M., & Hasan, S. (Eds.). (2016). Development, Governance and Environment in South Asia: A Focus on Bangladesh. Springer. [4] AMIN, S. (2015). The macroeconomics of energy price shocks and electricity market reforms: The case of Bangladesh (Doctoral dissertation, Durham University). [5] Ahmed, R., Haggblade, S., & Chowdhury, T. E. E. (Eds.). (2000). Out of the shadow of famine: Evolving food markets and food policy in Bangladesh. Intl Food Policy Res Inst. [6] Alauddin, M., & Hasan, S. (Eds.). (2016). Development, Governance and Environment in South Asia: A Focus on Bangladesh. Springer [7] Sobhan, R. (1991). An industrial strategy for industrial policy: Redirecting the industrial development of Bangladesh in the 1990s. The Bangladesh Development Studies, 201-215.

357

ISSN- 2394-5125 VOL 7, ISSUE 19, 2020 [8] Bashar, O. K., & Khan, H. (2009). Liberalisation and Growth in Bangladesh: An Empirical Investigation. The Bangladesh Development Studies, 32(1), 61-76. [9] Robert, L. (1988). On the mechanics of economic development. Journal of monetary economics. [10] Loayza, N. V., Ranciere, R., Servén, L., & Ventura, J. (2007). Macroeconomic volatility and welfare in developing countries: An introduction. The World Bank Economic Review, 21(3), 343-357. [11] Loayza, N. V., Ranciere, R., Servén, L., & Ventura, J. (2007). Macroeconomic volatility and welfare in developing countries: An introduction. The World Bank Economic Review, 21(3), 343-357. [12] Hossain, M. E., Sultana, I., Uddin, M. S., Hoq, M. N., & Ibrahim, M. (2018). Foreign Direct Investment in Bangladesh: Analysis of Sector Wise Impact on Economy. [13] Borensztein, E., De Gregorio, J., & Lee, J. W. (1998). How does foreign direct investment affect economic growth?. Journal of international Economics, 45(1), 115-135. [14] Alam, M. M. FOREIGN DIRECT INVESTMENT IN BANGLADESH: Analysis of Government Policy Framework, Sector Wise Impact and Future of FDI Growth. [15] Vyas, A. V. (2015). An analytical study of FDI in India. International Journal of Scientific and Research Publications, 5(10), 1-30. [16] Anowor, O. F., Ukweni, N. O., Ibiam, F. O., & Ezekwem, O. S. (2013). Foreign direct investment and manufacturing sector growth in Nigeria. International Journal of Advanced Scientific and Technical Research, 5(3), 231-254. [17] Banerjee, A. V., Banerjee, A., & Duflo, E. (2011). Poor economics: A radical rethinking of the way to fight global poverty. Public Affairs. [18] Richards, J., & Islam, M. S. (2018). Assessing literacy and numeracy among primary school students: A pilot survey in rural Bangladesh. International Journal of Educational Development, 61, 55-63. [19] Chin, G. T. (2016). Asian Infrastructure Investment Bank: governance innovation and prospects. Global governance: a review of multilateralism and international organizations, 22(1), 11-25. [20] Raihan, S., Osmani, S. R., & Khalily, M. B. (2017). The macro impact of microfinance in Bangladesh: A CGE analysis. Economic Modelling, 62, 1-15.

358