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“Liberalization and Economic Growth of Bangladesh: an Analytical Study with Reference to Lucas Model

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“Liberalization and Economic Growth of Bangladesh: an Analytical Study with Reference to Lucas Model 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, India 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 World Bank and Asian Development Bank 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 economy of Bangladesh. 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 Asia. 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 textile 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 India is 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) Economic History (1971-1990) - After liberation, Bangladesh witnessed a major problem of high rates of Inflation. 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 public sector 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 gross domestic product 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 private sector. 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.
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