Macroeconomic trends in Bangladesh

The 1970S were a difficult period for Bangladesh. Destruction of property and dislocation around the time of independence, natural disasters, and persistent political instability led to sharp fluctuations in GDP growth (Table I and Chart 1). But by the end of the decade, the oscillations had begun to subside, and the economy grew steadily between 3.0 and 4.5 percent per year during 1980-1993. In the absence of shocks, the modal growth rate is around 4.3 percent. Only in 1990 did the economy expand at 6.6 percent partly the result of recovery following a downturn during 1988-89.

Although agriculture remains the principal source of support for much of the population, it contributed only modestly to overall growth in the early years of independence with much of the increase in agricultural output coming from an expansion of the area under cultivation rather than an intensification of farming (Alauddin and Tisdell 1995). Since 1985 the economic push from the primary sector has dwindled to insignificance, averaging a fifth or less of economic growth. In fact, much of the growth momentum has come from services, which have increased at an annual average rate of 2.5 percent between 1983 and 1994. For more than fifteen years, Bangladesh's economic performance has been tied to the service sector, which now accounts for 45 percent of GDP. Neither agriculture nor industry have provided a significant impetus, and, most notably, the share of industry in growth has risen with painful slowness (Chart 2). In 1982, for example, industry contributed just 5 percent to overall growth. Ten years later this figure had risen to 20 percent and to an average of 25 percent over 1992-94. In comparison, industrial expansion was responsible for between half and two-thirds of the growth in China, the Republic of Korea, Taiwan (China), and Thailand over the past fifteen years.

Four characteristics of Bangladesh's growth experience stand out when compared with those of a sample of Asian and African economies (tables 2, 3 and 4). Firs´, in terms of variance, Bangladesh is in the class of countries, which includes Sri Lanka, whose growth is exceedingly stable. In some respects stability is an advantage, although it may reflect a lack of risk-taking by the government, a low degree of export orientation, and the limited scale of the manufacturing sector. Stability is a reflection of these conditions, it is an indication of stagnation and ineffectual policy, not the result of deliberate fine-tuning.

Second, Bangladesh has relied far more on services whereas the Asian countries, especially the ones registering the fastest growth, have depended heavily on an industrial engine. Services are also important for East Asia's new and old Tigers but the edge in performance can usually be traced to the substantial increase in manufacturing output driven by investment (Rodrik 1995).

A third, conspicuous feature of Bangladesh's growth dynamics is that the incremental capital-output ratio is low, closer to that of African countries than that of Asian countries. The low value suggests that growth has been extensively concentrated on services, sparing in the development of infrastructure, and largely devoid of industrial deepening. Although the country has obtained respectable returns from its investment, the low level of aggregate investment and the small amount of that investment devoted to industry and social overheads have constrained the pace of expansion and circumscribed its growth prospects.

The fourth aspect of Bangladesh's performance concerns total factor productivity (table 4). This is a difficult indicator to estimate, and the numbers presented should be treated with caution. Nonetheless, they conform to an expected pattern. Bangladesh is in the middle range-its limited development of the more productive manufacturing activities is offset by the frugal and moderately efficient use of resources across all three sectors. In this respect Bangladesh differs from some of the African economies (except Kenya), which show higher levels of resource investment and more meager outcomes. Interestingly, it is on par with the Republic of Korea and well ahead of Indonesia and the Latin American countries. Without putting too much store in these numbers, it is advisable to examine the factors influencing total factor productivity during the 1970s and 1980s. Typically high rates of total factor productivity growth are associated with rapid increases in GDP, led by manufacturing. But not always. In Singapore the speed of industrial transition from light to sophisticated industries slowed the growth of total factor productivity as did heavy investment in infrastructure. Economic instability and a weakly competitive environment may have acted as a brake on Latin America. Whereas an excess of regulation and an inward orientation might have constrained South Asia.