Bangladesh

What Bangladesh did right and India could not

Ahsan H Mansur is Executive Director of the Policy Research Institute of Bangladesh. In an exclusive interview with Eresh Omar Jamal of The Daily Star, Dr Mansur talks about the recent revelation by the IMF that Bangladesh is set to surpass India in terms of per capita GDP, and other factors relating to Bangladesh's growth.

According to the International Monetary Fund's latest World Economic Outlook report, Bangladesh is set to surpass India in terms of per capita gross domestic product (GDP) in 2020. How significant is this achievement? And what are its major ramifications?

We can take some pride in this because India is a big economy, and even though India has many problems, it has always been ahead of us in terms of GDP. We have somewhat overcome that and reached a parity, which is a big achievement. This has happened because of two opposing developments—while Bangladesh has consistently recorded good economic growth, India's growth performance faltered in recent years.

The two main positive developments for Bangladesh have been: (i) consistently accelerating economic growth over the last 20 years; and (ii) much more stable exchange rate of the Bangladeshi Taka compared with the Indian Rupee, underpinned by much better macroeconomic management by the Bangladesh government.

If we look back at what happened in India, until the Modi government came to power, India was substantially ahead in terms of per capita GDP in dollar current terms. Why India couldn't maintain that differential included the following factors. First, Modi government's mismanagement through demonetisation, which was very costly and not carefully thought through and which turned out to be an economic disaster. Second, the Indian economy and society, driven by politics, has been going through a period of increased social division, induced by religious riots, lynching, and regional communal and other issues like the unilateral move on changing the status of Kashmir. Once a society gets divided and the government's attention remains focused on socially divisive issues, it is proven that the economy suffers—India being a poster-perfect example of that. Finally, the Indian government's Covid-19 management has been very harsh in the sense that they suddenly declared everything to stop on the same day—railways, airlines, road transportation, everything came to a standstill. As a result, more than 60 million migrant workers were economically dislocated thousands of kilometres away from their village homes without work, income and transportation. Working class people, particularly those already close to the borderline of poverty, suddenly found themselves free falling to the bottom.

The damage done to the Indian economy during the Covid-19 outbreak, together with the other two factors mentioned above which already weakened investment and growth momentum in the economy in many ways, led to the worst contraction in economic activity in the world. This itself was the big contributing factor for India to fall behind Bangladesh. Yes, we have performed better in some sense, but that does not mean we can afford to get complacent. We are still below the USD 2,000 per capita GDP mark. And countries like Vietnam, who started below us in the 1980s, are way ahead. China and South Korea, who were at par with us in the 1950s, are even further ahead. So we have performed well among South Asian countries, but not so much in comparison to the East Asian economies.

Nevertheless, we should take pride from this, and it is particularly interesting because in the recent Indian political narrative, many influential political leaders labelled Bangladeshis as termites and alleged that poor Bangladeshis were invading India by migrating en masse. That is a myth and fearmongering that some politicians have created to make political gains. And this projection by the IMF, an independent global organisation, is definitely going to create a new narrative debunking that myth.

Some Indian writers have suggested that Bangladesh surpassing India in terms of per capita GDP is a result of India underperforming, rather than Bangladesh performing well. What is your take on that?

I fully agree with that assessment. India has really underperformed in the last five years, since it was at least 20 percent ahead of Bangladesh in per capita terms five years ago. The main contributing factors are the ones I have already mentioned. I would also like to underscore and recognise that Bangladesh's performance in terms of exports, remittances and balance of payments stability have been consistent, and that its macro-stability has been stellar in the context of South Asia.

Is there any chance of these figures being skewed by rising inequality, and their calculation being based on nominal GDP rather than on GDP based on purchasing power parity?

Absolutely. That is also a factor. India is still significantly ahead of us (in per capita income) in terms of purchasing power parity. And for ordinary people, it is the PPP based measure that matters—because although our dollar income has been higher, on average, our citizens can buy less than what an Indian citizen can afford. Prices in Bangladesh are higher than in India for most categories of goods and services.

This is another indicator that shows why we shouldn't get complacent. Yes we have outperformed India in some way, but in other ways India is certainly ahead of Bangladesh.

Overall, what have been the major factors behind Bangladesh's growth success, and what have been the major impediments?

Bangladesh's growth success comes down to many reasons. One is the steady performance of our exports and remittances. Even though we are vulnerable due to being overdependent on a single export product, our export growth has been better than most other South Asian countries. Remittance performance is also similarly better.

Secondly, Bangladesh's remittances, because our workers are low-skilled and rural based, are aimed more towards the poor and more towards the rural economy. Inflow of workers' remittances to rural Bangladesh has contributed to a vibrant rural non-farm economic base in the country. The other day, I was telling an Indian journalist that no one ever heard of our farmers committing suicide because of economic hardship, which is very common in India. In part, our farmers are doing quite well despite some problems from time to time. They are getting better prices and access to markets. The rural people are also getting a lot of support from internal remittance (from urban to rural areas) and from external remittance (from other countries to rural areas). That helps the rural economy and creates good demand in the whole economy. And finally, this has created a situation where non-farm income is more than the farm income in rural areas. Sixty percent of rural income comes from non-farm sources, which is a very different picture compared to most other developing countries. Most of the people, about 65 percent, still live in rural areas, so that has increased general economic wellbeing. And their wellbeing ultimately determines the wellbeing of the country.

The third factor is that our social indicators have been remarkably good—in part, supported by the strong performance of the rural economy. In social indicators like life expectancy, child and maternal mortality rates, fertility rate of our women, gender parity in education, access to water, better sanitation—Bangladesh is ahead of India, and in some cases ahead of Sri Lanka as well.

Finally, good fiscal management has also contributed to macro-stability and growth performance. Bangladesh's macro-stability has been anchored by good fiscal policy, and that continues to be the case. Despite our unimpressive performance on the revenue side, fiscal deficit and public debt have been contained well below what are considered sustainable.

In terms of impediments, in my opinion, so far what we have achieved are the low-hanging fruits. We have not gone for the fruits which are hanging high. But we must go there. If we want to become an upper-middle income country or a high-income country, which the government and we all aspire to be, we have to undertake fundamental reforms in wide-ranging areas. The tasks ahead will be extremely challenging and multi-dimensional. We have an education system which needs to be completely overhauled and made up-to-date. We have to improve the standards of our public education system and significantly increase the skill level of our workers. Unless we do that, we cannot technologically advance, and without technological advancement and adaptation, we will not succeed. Bangladesh is among the least technologically advanced countries in Asia—in terms of complexity of our products—and we have a long way to go. Technology is becoming ever more important and complex, and unless we combine skills development with technological adaptation and do so without destroying our environment, we cannot even hope to perform well in the future.

Secondly, the country still suffers from significant gaps in infrastructure. We need huge government investment, and for that we need huge revenue to cover the expenses in a sustainable manner. We need investment in physical infrastructure as well as investment in the social sectors like health, education, poverty reduction. But our public sector does not have domestic resources. Our Tax/GDP ratio is extremely low and falling. It was 11 percent of GDP in 2010 and declined to 8.9 percent by 2019. That is not good at all. And the government is really suffering. It couldn't even spend much during the Covid-19 situation and had to depend almost entirely on a bank-led credit expansion and monetary expansion. We need more public resource mobilisation and fundamental reforms in the tax system—in both direct and indirect taxes. Reforms in tax policy and tax administration, including automation, must be a part of it, without which the government cannot help take this country to the next level. But so far, nothing significant has been done on the tax reform front.

Thirdly, the economy also needs a lot of investment from other sources. To transform Bangladesh into a high-income country, Bangladesh would need to achieve an average GDP growth rate of 9.5 percent between 2020-2040—that's a huge challenge! That will require our Investment-GDP ratio to be in the range of 40-44 percent of GDP. Currently we are at about 30-31 percent of GDP. We have not been able to exceed the 30 percent level for a long time. Private sector investment is even less buoyant, it has been stuck at 22-23 percent of GDP for the last 10 years. Unless we can mobilise significantly higher private domestic investment along with supporting public sector investment, and also bring in foreign direct investment into the country, we will not be able to become an upper-middle income or high income country. The investment climate has to improve very significantly. Our ranking in terms of the indices like the ease of doing business, productivity index, and logistics index are terrible and we have a long way to go.

Finally, we have to diversify our exports. There is huge potential within the garments sector, we have to exploit those. But we must also diversify, otherwise we are just too vulnerable. And that means, we must give exporters of other products the same incentives that we give to the garments sector. Also, domestic protectionism is extremely high in Bangladesh. And that is very counterproductive for export diversification and allocational efficiency, because it makes production for the domestic market much more attractive than production for exports. That really needs to change.

Has Bangladesh's impressive economic growth benefitted its people fairly?

Economic growth generally helps people for the most part, unless the income distribution is absolutely horrendous. That being said, I will also emphasise that income distribution is becoming a major problem in Bangladesh, and not only in Bangladesh, but in the entire world. The US is the worst case scenario, while Northern European countries are good examples of countries with equitable income distribution and social justice. Bangladesh needs to learn from these good examples.

We have many problems in the income distribution front. One of them is that we have created a class of people who have benefitted by not paying their bank debt, taxes, etc. And what is happening is that they are becoming rich using a crony capitalistic system—and that is an easy way to quickly become rich. Secondly, if you look at the structure of wealth accumulation in Bangladesh, you will see that rich people don't pay taxes. The role of the tax policy as a wealth equaliser—taxing the rich and transferring it to the poor through social and physical infrastructure programmes—has not worked in Bangladesh. A significant part of the wealth here is accumulated through tax exemptions. If you look at the power sector, they are tax exempt. There are other sectors that enjoy huge tax benefits, which together amounts to more than Tk 50,000 crore. The garments sector is another example, they pay very little. So who pays taxes? No one does, except for wage earners, who live on fixed incomes. As well as a few other organisations.

In Bangladesh, most of the assets are accumulated through holding of urban land as the means to wealth creations. Yet, we do not effectively tax the huge capital gains from land. So some people are making hundreds of crores of takas from land assets, but they are not paying any taxes on that wealth that is accumulated.

Thirdly, governance in Bangladesh has surely deteriorated. And the result is that the bureaucracy is exploiting their power structure very much for their own benefit. Even in one urban land register's office or what is generally called sub-register's office, look at how much money is being illegally accumulated there. Everyone is paying tens of thousands of takas for services for which the government fee, let's say, is Tk 200-300. And this is not only happening in the sub register's office, all the Police Stations (thanas) are doing the same thing, all the custom's and VAT offices are doing the same thing, and wherever there is need for a permit or something similar, you will see similar illegal accumulation happening. But who is paying for this? It is the consumers, it is the ordinary people. So huge amounts of accumulation of assets are taking place, using the governance structure. And unless the government itself addresses that, we will not be able to fix this problem.

Along with this, we have political extortion as well. Extortion or Chadabaji, is widely used by local level political operators to become massively rich just because of their membership in or affiliation to different political parties. This way the current political structure has also played a role in increasing income and wealth inequality. Exploitation by the bureaucracy and the political class is leading to massive wealth accumulation, which is often being transferred abroad. In recent months, we have been hearing story after story like that. So the exploitative nature of our system is the biggest contributing factor to the inequality that we have, and that is only getting worse. Without tackling these sources of inequality with strong political determination, we cannot create an equitable and inclusive society and any development that we have, will leave most people behind.

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