(introduction...)

How can these lessons be used to interpret Bangladesh's experience and push the country farther down the road to rural industrialization? Before addressing this question, some essential background on nonfarm activities is needed relating to scale composition and distribution. This information is not easy to supply because data are sparse, especially for recent years, and do not specifically demarcate rural nonfarm activities, particularly rural industry.

The most detailed recent source of information is the Annual Economic Survey of 26 nonfarm activities conducted by the Bangladesh Bureau of Statistics (BBS) in 1989-90. It estimated that about 1.5 million households were engaged part or full-time in nonfarm activities. In all, these households contributed four million workers-a tenth of the rural labor force. The nonfarm sector accounted for 13 percent of GDP. Much of the employment was in trade, commerce, and services. Education services claimed the lion's share of the employment -59 percent-and retail trade was the source of 45 percent of the value added (table 22). Other important sub-sectors in this category were wholesale trade, restaurants and hotels. About 1.5 million people were employed in some form of manufacturing, and the rural share of small-scale industries was a respectable 60 percent. Rural manufacturing in Bangladesh is almost synonymous with textile production from handlooms, which absorbs 27 percent of nonfarm labor. Also prominent are wood products, including sawmills, furniture making and bamboo cane products, and food processing, including rice and oil mills and manufactures of sweetmeats, dairy products, baked goods, flour, and gun (Table 23). Because agriculture is still largely unmechanized, repair, engineering, and metal working are limited in scale and oriented toward producing hand tools, blacksmithing, and servicing simple farm equipment.

The absence of comparable data for the mid- 1980s, makes it difficult to gauge how fast nonfarm activities have expanded or see trends in composition. A survey conducted by BSCIC (the Bangladesh Small Scale Industries Corporation) in 1978-80, provides information on cottage and small-scale industries without differentiating by sector. If it can be assumed that the rural-urban distribution of industry changed only modestly over the decade, then growth of these enterprises are indicative of the performance of rural industry. Throughout the 1980s employment in small-scale manufacturing has increased at close to 5 percent per year. Interestingly, the fastest growth was registered by metal products and machinery (9.6 percent), albeit from a small base. Employment in agricultural machinery rose 20 percent, but was still just 1 1,000 in 1990. Oil expelling mills and other food processing industries also expanded at nearly this rate. Another industry that grew sharply was ready-made garments, but this industry is almost exclusively concentrated in Dhaka and Chittagong, having very few linkages to rural 27 manufacturing Likewise, hosiery and knitted fabrics, which has also expanded capacity, remains an almost exclusively urban activity.

Overall, increase in employment since 1980 has been low (tables 24 and 25). Nevertheless, a few industries performed well even though they accounted for a small share of employment. Among these, machinery, bamboo furniture, and jewelry appear to be the most promising for future growth and exports. If urban-based garment producers 29 could be induced to integrate their production with the rural textile industry, it could help to modernize this segment of manufacturing activity, substantially enlarge its domestic market, and possibly initiate overseas sales.

As indicated above, rural nonfarm activities are influenced by the availability of infrastructure, especially transport and communications. The next section analyses the relationship between infrastructure and rural development in Bangladesh.

Rural infrastructure

The pool of available data does not permit any sophisticated hypothesis testing as to how various infrastructure variables affect nonfarm activity, but it allows us to check the plausibility of certain propositions. We regressed three indicators of agricultural output on a handful of independent variables proxying transport infrastructure, rural electrification, human capital availability, credit supply, and water management.

As a first step, individual variables were regressed on agricultural productivity. Such a specification has problems. There is bound to be omitted variable bias and bias in the covariances. Thus any inferences drawn must be treated with caution. The results highlight the importance of the credit and electrification variables: per capita bank advances in rural areas, density of bank branches, and consumption of electricity are all significant at the 5 percent level. Other proxies for electrification do less well. Primary education has little explanatory power, perhaps because the effects of education are subject to long lags. Secondary education has a stronger effect, but is only significant at the 10 percent level (tables 26 and 27).

Predictably, irrigation is closely correlated with agricultural output, as is the density of paved roads. But, total road density is not significantly different from zero, as expected-unpaved roads are virtually impassable during the prolonged rainy season, greatly undermining their economic utility for farmers.

Various combinations of the variables, whose individual significance was established in the first round of regressions, were regressed on land productivity. While the equations estimated are significant overall, that is, at least one of the explanatory variables is likely to be non-zero, standard errors tended to be large coupled with high R squares and insignificant coefficients, all of which point to multi-collinearity. For instance, the demand for credit and the willingness of banks to extend loans is greater in areas that have irrigation, electrification facilitates the use of pumps for tapping subsurface water supplies, and development of a road network stimulates the diffusion of bank branches. With this problem in mind, the independent variables were pared down to secondary education, irrigation, and paved roads. Paved roads are significant at the 5 percent level, but education has the wrong sign and is not significantly different from zero. When bank branches are substituted for education, collinearity renders both roads and credit insignificant.

Finally, the most promising variables were regressed on gross regional production at current market prices divided by the area of individual districts. Again bank branches and the road network prove to be significant. But so is education, suggesting that it has a greater influence on nonfarm activity than on agriculture. Electrification is insignificant, reinforcing some of the findings from other Asian countries.

The message from these simple tests draws attention to road infrastructure and irrigation in explaining the relatively weak effect that agriculture has had on the development of rural industry. Credit availability is also important, although we can interpret the results as saying that once a transport system is in place, the demand for credit will generate the desired supply by way of an expanding banking network.

These tests show that developing the transport infrastructure can provide a powerful stimulus to rural development. Roads are necessary for the development of markets, which induce farmers to intensify cultivation, diversify their product mix, and pursue nonfarm activities. Past research on Bangladesh has underscored the large benefits from all-weather roads. For instance, Ahmed and Hussain ( 1990) find that villages better served by transport infrastructure had a higher percentage of marketed output, especially paddy output. Use of fertilizer tended to be greater, and the price of fertilizer lower. And infrastructure development increased smaller farmers' access to institutional credit sevenfold. Finally, it influenced human capital by improving health indicators and stimulating acceptance of family planning practices. Other work by Binswanger ( 1992) and Binswanger and others (1993) on Indian districts shows that road density is significant in explaining agricultural output. For instance, the elasticity of agricultural output with respect to road density is 0.20, which is greater than the elasticity of output with respect to price, 0.13%. In addition, building roads facilitated the growth of branch banking-the elasticity of bank expansion with respect to road density was 0.8.

Similar findings have emerged from empirical analyses of rural development in Southeast Asia. In central Java the location of manufacturing activities was strongly influenced by telephone connections and nearness to a highway (Rietveld 1994). Moreover, small-scale manufacturing was able to grow in the rural areas of Taiwan (China) because of the extensive network of roads constructed by the Japanese in the first half of the century (Brautigam 1994).

Building roads and enabling water-borne transport encourage production for the 30 market and reduce the cost of moving goods. The increase in vehicular traffic can generate demand for repair facilities, locally manufactured spare parts, and metal working. Constructing and maintaining roads, culverts and dredging water courses are labor intensive activities that can generate much-needed employment. Further, construction requires materials, which can be produced by rural industries. Bangladesh either imports gravel or manufactures the necessary aggregate from highly vitrified bricks. The countryside is dotted with brick kilns. They employ mainly women workers, who first bake the bricks and then pulverize them into suitably sized aggregate (Novak 1994). Bangladesh is also poorly endowed with sand, and its collection is likewise laborintensive-divers scour the beds of the eastern rivers (Jensen and others 1989). The increase in vehicular traffic can generate demand for repair facilities, locally manufactured spare parts, and metal working.

Mechanical and biochemical technology

Building better transport system and creating mechanisms for delivering larger doses of capital can trigger farm mechanization and diversification into cash crops. In turn, both these can reinforce backward linkages from infrastructure building. Currently, minimal machine inputs are used in agriculture. And given the abundance of labor, such farm practices are efficient. But they have slowed the commercialization of farming and the diffusion of modern techniques associated with rising capital intensity. Before the technology can be adopted mindsets must change. Adopting a new technology has startup costs, but it improves the longer-term prospects of agriculture and the rural economy in general. Farmers who mechanize are equipped to enlarge the scale of operation. Scale not only increases market orientation, it can also start a cycle of continuous technological improvement, incremental investment in water management, and land augmentation. Adoption of mechanical technologies sends ripples throughout the rural economy. It transforms the labor market, it creates a multiplicity of niches that new rural industries can colonize, and it gives rise to pools of capital that are largely absent in Bangladesh and will accumulate only very slowly, even if institutions such as the Grameen Bank continue to inculcate good savings habits. Other East Asian countries have shown that a dynamic agricultural system with a strongly growing nonfarm sector must be market based, capitalusing, and reliant on big-chemical inputs. Farmers in Bangladesh have increased their use of fertilizers and high-yielding varieties, but have made much less headway in the other two areas.

Neighborhood effects

Neighborhood linkage and demonstration effects have proven profoundly important for development in East and Southeast Asia. They have induced countries to become economically competitive, and they have allowed latecomers to draw on their momentum. The economic consequences of growth are reinforced when the electorate begins to see growth as intrinsic to the political agenda and essential for the credibility of the government.

Bangladesh's regional neighborhood has, until recently, been less-than-dynamic. Economic growth in India was only been moderate through the 1980s. Myanmar's economy has stagnated for two decades. Bangladesh's immediate neighbor to the west, the Indian state of West Bengal, averaged an annual growth rate of 2 percent from the late 1970s through the early 1990s, and there has been relatively little industrial deepening. Development in West Bengal has not exerted an upward pull on Bangladesh's economy. Rather, intense competition from Indian enterprises producing textiles, housewares, and food products have, if anything, restrained industrialization in Bangladesh. Not having moved to a higher stage of development, West Bengal has not created space in the lower reaches of the market for manufactures that Bangladeshi firms can compete for. The political rhetoric on both sides of the border has stressed equality over growth and given primacy to workers rights. Rather than inducing a widespread commitment to maximizing economic performance, as measured by growth and exports, regional politics has leaned towards "satisfactory'' growth and an avoidance of worsening inequality. In urban areas this political mood has permitted labor unions to flourish and has imparted a combative edge to relations between workers and their employers. The incidence of strikes is unusually high.

The quickening tempo of the Indian economy, which is spreading to West 32 Bengal, could have favorable consequences for Bangladesh. This quickening may or may not influence local politics. A deliberate effort to "look East" and view Southeast Asia as a second significant neighborhood might be more profitable over the medium term. To bring about such a shift the Bangladeshi urban business community must take the lead by actively seeking markets in Southeast Asia and attempting to attract investment from Malaysia, Taiwan (China), and Singapore. Closer economic links could strengthen the external forces exerting a pull on Bangladesh and could shift political concerns toward the kind of economic goals that have motivated development in East Asia.