Post COVID-19 challenges in international trade in South Asia

COVID-19 has exerted large distressing effects on international trade in South Asian countries. Exports saw a drastic dip in all South Asian countries. Between March and August of 2020, compared to the same period in 2019, exports of Bangladesh, India, Pakistan and Sri Lanka declined by 29.8%, 22.7%, 11.6% and 25.9% respectively. During the same period imports saw a harsh fall too as imports of Bangladesh, India, Pakistan and Sri Lanka declined by 26.4%, 35.7%, 14.3% and 17.2% respectively.

These declines in international trade are unprecedented in South Asia. No doubts, the decline in exports has important implications for foreign exchange earnings, employment generation and economic growth. Also, the massive fall in imports is an alarming sign for dismal consumption demand as well as for highly depressed private sector investment, through the fall in imports of raw materials and capital machinery, which can retard the progress toward economic recovery in South Asian countries. The pattern of different other indicators, i.e., suppressed credit growth to the private sector in recent months, also confirms depressed private sector investment in these countries.  

It is also noteworthy that the participation of the South Asian countries in the international trade, in particular in the global value chains (GVC), has remained narrow and limited. Despite that the international trade orientation increased for most of the South Asian countries over the past decades, effective and meaningful trade integration remains unsatisfactory. There are various reasons for the insufficient trade performances as well as low GVC participation. Also, COVID-19 has exerted additional stress on the South Asian countries in their GVC integration.

The GVC refers to a chain of independent but ordered and interlinked operations that can be carried out within a single firm or divided between multiple firms in various geographical locations to deliver a complete product or a service to final consumers. Studies have shown that participation in GVC can lead to increased job creation and economic growth. The remarkable success of the East and Southeast Asian countries in economic development is a manifestation of their extensive participation in the GVC.

In the post-COVID-19 era, there are several challenges in international trade in South Asia. 

First, the effective GVC integration of the South Asian countries in the post-COVID-19 era is associated with faster economic recovery. While the economic recovery in South Asian countries largely depends on the recovery of the global economy, South Asian countries need to get their domestic fronts right to confront the post-COVID-19 challenges.

Governments in most of the South Asian countries announced unprecedented large volumes of stimulus packages to support the affected economic sectors. However, the management of the stimulus package remains a big problem in these countries. The management procedure involves identification and selection of the affected firms, disbursing credit through the banking or any other channel, and monitoring of the overall process. All these steps, no doubt, suffer from numerous institutional challenges in these countries.  Many eligible firms, especially the SMEs, are feared to remain out of the support. In contrast, firms with powerful lobbying and useful political links may dominate the scenario. Therefore, there is a need for institutional reforms to ensure the formulation and implementation of a broad and comprehensive industrial policy for economic recovery.

Second, trade, industrial and FDI policies of the South Asian countries are not conducive for effective GVC integration. Given the emerging challenges and complexities in the global trading regime, there is a need for re-thinking in the trade and industrial policies in these countries. South Asian countries need to undertake “GVC strategy” in their trade and FDI policies. There is a need to execute an action plan to deal with the non-tariff barriers, trade facilitation and supply-side issues.  

Third, the recently signed China-led Regional Comprehensive Economic Partnership (RCEP) has put additional pressure on the South Asian countries. RCEP is a wide-ranging agreement on trade and investment between the ten member states of the ASEAN and the five States with which ASEAN has existing FTAs. India had been in the RCEP negotiation from the beginning. However, for some economic and political reasons, India left the negotiation in 2019. Though RCEP created significant opportunities for India, as the sole party from South Asia, to integrate with the advanced economies in Asia and the Pacific and to participate further with the GVCs, India failed to avail it.

RCEP has the promises of reducing the overlaps among Asian FTAs, rationalize rules of origin, and promote FDI flows and technology transfers by multinational corporations. However, being the non-members, RCEP has led to some important implications for all South Asian countries. There are concerns that the RCEP will lead to the escalation of bars in standards and trade governance which might work as significant non-tariff barriers for the South Asian countries, especially for the LDCs, while exporting to the RCEP countries. There are also risks of South Asian countries concerning the potential loss of market access from the erosion of trade preferences.

Fourth, the need for regional integration in South Asia is more important than ever. Initiatives for regional integration in South Asia, for various reasons, have not been successful. One of the critical factors behind the weak regional integration in South Asia is the bilateral political relations between countries, for which many initiatives for regional integration remain hostages. However, as the global trade regime is in turmoil under COVID-19, there is a need for rejuvenating the process of regional integration in South Asia. Given the recent experience of disruption in global value chains, it seems appropriate to revisit the need to build strong regional value chains in South Asia.

COVID-19 and the road to recovery in Bangladesh

COVID-19 has generated large distressing effects on the economy of Bangladesh. While there have been some signs of economic recovery, the process of recovering is not uniform across sectors. Also, there are marked differences between economic and social recoveries. When it comes to the question of recovering from the crisis, the dominant discussion in Bangladesh is still on the economic recovery. However, the economic recovery process is not set apart from the social recovery process. There are valid concerns that the recovery processes in the areas of poverty, employment, health and education have become unsettled.

In the case of economic recovery, in recent months there are some positive signs concerning two dominant drivers of growth in Bangladesh – exports and remittances. In the absence of any comprehensive government support during the crisis time, remittances are working as informal social protection for families under distress. This situation is a reflection of the heightened urge to support families at home. There are some reasons for the remittance surge in recent months. Lockdown and downfall of economic activities in the leading remittance-source countries compelled the shifting of the channel of remittances from the informal to formal. Also, incentives provided by the government helped. There are also cases of people losing jobs in the middle-eastern countries and therefore sending back home all their savings.  However, looking at the current economic situations and the projection of the economic growth in economies of the Gulf, Europe and North America, there are concerns about the sustainability of the positive trend in remittances flows in the days to come. Also, in the case of exports, the current positive growth may not sustain as there is a second wave of virus infection in the major export destination markets. This situation may affect these already weakened economies further and thus reduce the demand for our exported items.

Both remittances and exports generate direct and induced effects on the economy. In the case of exports, the direct-effects include foreign exchange earnings, employment generation and profits for the exporting firms. Similarly, the direct-effects of remittances are the inflow of foreign exchanges and the rise in incomes of remittance-recipient households. The induced-effects of exports and remittances rely on the strengths of the multiplier effects they have in the economy. Empirical studies have shown that the growth-impacts of exports and remittances in Bangladesh come predominantly from these multiplier effects. In this context, one critical concern is that while the direct-effects of the positive growth in exports and remittances on the economic recovery in recent months might be strong, the induced effects may remain weak for long due to the broken or suppressed supply chains in the economy.

The crisis is still on. The second wave in Europe and North America is on the rise. Also, there is a high risk of a second wave in Bangladesh. However, the experiences and learnings gathered so far might help in combating the second wave. Also, countries may not go for a full-scale lockdown this time as they did during the first wave. 

If we look at the two crucial components of aggregate demand, consumption and investment, both are still depressed in Bangladesh. As the recovery process is on, consumers are spending fundamentally on essential items, while the expanded spending on inessential items may remain weak for long. In the case of investment, private investment is showing a slow recovery. The negative growth in imports and low credit growth for the private sector are reflections of the depressed private investment.

When we talk about the recovery, we should keep in mind that the recovery is happening at the cost of inter-generational trade-off. Recovery can be fast, but the adjustment cost of recovery can be high. The adjustment is taking place both at the household and firm levels. Poor people undertake intergenerational adjustments to deal with the crisis when it comes to choosing between current consumption and saving for future consumption or investment. With insufficient government supports, poor people are trying to cope up with the situation using own savings, rearranging priorities (i.e. spending low on education, health, entertainment), downward adjustments of daily intake of food, and support from families and friends. Most of these coping mechanisms, however, require high trade-offs and high opportunity cost. The crisis forces poor-households to assign very high weights on their current survival instead of human capital development of their families in the future. As a result, these households have to sacrifice prospects for better health, better education and a better life. There will be a long-term intergenerational effect on the nutritional deficiency of food intake during the crisis period. Also, when schools and educational facilities have remained closed for months, it is possible that students from distressed backgrounds will face a higher burden, and many of them will be out of the education system permanently. All these are restricting strong induced effects of positive growth in exports and remittances to take place. 

At the firm-level, the adjustment cost can be high in many manufacturing and services sectors and in particular for the SMEs. Many SMEs have lost their businesses during the crisis. Given the complexity of receiving loans and other supports through the conventional process, the recovery path for many sectors and SMEs is likely to remain uncertain. The resonant performance of these sectors is critically important for ensuring strong induced effects in the economy out of the positive growth in exports and remittances.  However, in the absence of such performance, the recovery of the overall economy will be slow.       

The upshots of the abovementioned discussion emphasise on three critical issues for the path to recovery in Bangladesh. 

First, the availability of an effective vaccine and the vaccination of mass people is critical for sustained recovery. While we wait for the availability of an effective vaccine, there is a need for developing proper infrastructure and ensuring the required human resources for the vaccination of mass people. At the same time, the enforcement of the rules and regulations related to hygiene practices is vital. 

Second, the current discussion on the recovery needs to change its focus from the narrow GDP growth rate to broader development issues, i.e. poverty, employment and inequality. The economic and social recovery of the country will be weak and fragile if the recovery process doesn’t effectively address these three critical development challenges. 

Third, an assessment is needed to understand the challenges and constraints in implementing the stimulus packages. As many affected sectors/firms are yet to receive the benefits of the stimulus packages, such an assessment can help re-designing and re-targeting the stimulus packages. 

COVID 19 and development challenges

COVID-19 has brought about an unprecedented crisis in human history in terms of its dimension and scale. This crisis involves not only pandemic related health hazard but also a deep economic crisis, and social distress in terms of large scale job loss, a sharp rise in poverty and vulnerability, and widening inequality. It is also important to note that impacts in some other areas (like education) are still unfolding.

What make the effects of COVID-19 pandemic different from those of past pandemics? What development challenges have been brought out by COVID-19?

First, the health-hazard at the global level has been unprecedented. The virus reached almost all countries in the world. This rapid spread of the virus is due to the globalisation of connectivity and people’s easy mobility through air transport in recent decades. The immediate response from the governments of the affected countries was to impose extraordinary and massive travel restrictions to contain the spread of the virus.

Second, public health systems are in underdeveloped states in most of the developing countries. The public health sector in these countries cannot provide the necessary healthcare because of high deficiencies in financing, efficiency, quality and equity. In COVID-19 crisis-like situations, the private healthcare system also fails.  There is no denying that a large number of developing countries have to invest in their public healthcare capacities in the coming days.

Third, there are numerous institutional challenges in managing health crisis in developing countries. COVID-19 has exposed these challenges to a great extent. Many European and other developed countries indeed experienced high number of infected cases and a large number of deaths due to various factors, and one of the dominant reasons is the age structure of the demography in these countries. However, eventually better management of the health systems in these countries will make a difference, compared to a large number of developing countries, in mitigating the long term adverse health-related effects on their population. In contrast, a large number of developing countries are likely to struggle in this regard. The longstanding health sector reforms in developing countries should include significant enhancement of the allocation of resources to public healthcare, ensuring transparency and accountability in public health spending, and reforming and restructuring the institutions for implementing health policies and programmes.

Fourth, to cope up with the crisis, poor people in the developing countries are making intergenerational adjustments when it comes to the choice between current consumption and savings for future consumption or investment. With varying degrees of government supports, poor people across developing countries are trying to cope up with the situation using own savings, rearranging of priorities (i.e. spending low on education, health, entertainment), downward adjustments of daily intake of food, and support from families and friends. However, while some forms of these coping strategies may work for some people for some more time, for many, things may not be working if the economic recovery is slow and insufficient. Most of these coping strategies involve high trade-off and high opportunity cost. As the crisis forces poor-households to assign very high weights on their current survival instead of human capital development of their families in the future, these households have to sacrifice prospects for better health, better education and a better life. The nutritional deficiency of food intake during the crisis time will have a long-term intergenerational impact. Also, as schools and educational institutes have remained closed for months, students from distressed families are likely to bear a higher burden, and many of them may permanently be out of the education system. All these will also have a long term negative intergenerational implication.

Fifth, governments in most of the countries announced some rescue or stimulus packages to support the affected economic sectors. However, the operationalisation of the stimulus package remains a big problem in many developing countries. The operationalisation procedure involves identification and selection of the affected firms, disbursing credit through the banking or any other channel, and monitoring of the overall process. All these steps, no doubt, suffer from numerous institutional challenges in developing countries. Identification and selection of the affected firms can be problematic in these countries. While firms are self-selecting themselves for seeking the benefit of the stimulus package, in the absence of any systematic process of assessment, many eligible firms may remain out of the support. In contrast, firms with powerful lobbying and useful political links, despite that many of them may not need the stimulus package, may dominate the scenario. To counter this likely scenario, institutional reforms in some critical areas to ensure the formulation and implementation of a broad and comprehensive industrial policy is warranted.

Sixth, achieving long term development targets, especially those under the SDGs by 2030, has become uncertain in most of the developing countries. The decade long achievements in poverty reduction in developing countries are under threat. At the same time, inequality is likely to rise during this crisis time. Therefore, there is a need to rethink approaches to attaining SDGs given the new challenges brought out by COVID-19. The situation also calls for a renewed global discussion on development paradigms since the post-COVID-19 world is not going to be the same as the pre-COVID-19 world. 

Seventh, the economic recovery in many developing countries remains to be dependent on some factors and the primary factor being the availability of reliable vaccines for COVID-19. Nonetheless, only the availability of vaccines in some countries would not help recover business and trade confidence worldwide. There is a need for a fair distribution of vaccines across countries. Given the fact that the world trade is heavily dependent on global value chains, unless business confidence rebounds in all segments of the value chains, the world trade will continue to remain depressed.  Finally, as we are talking about the new normal, new production process, and changed lifestyle, COVID-19 has sped up the process of integrating the virtual life, online platform and IT-based services into people’s regular life. However, the access and opportunities from these new features are unequal in most of the countries. This unequal access and opportunities are likely to escalate economic and social inequalities within and between countries.

COVID-19 and challenges of trade: The Bangladesh perspective

The COVID-19 induced economic crisis has affected the export and import of Bangladesh by large margins. The economic crisis exacerbated by the closure or limited operation of businesses during the lockdown phases at home and abroad. In the financial year 2019-20, there was a very high negative growth in exports (17%) – which was unprecedented in the recent history of Bangladesh. Although the situation has improved somewhat since the beginning of the current financial year 2020-21, it is uncertain whether exports will return to normal. There are fears that the economic recession in the United States and Europe, two main export destinations of Bangladesh, is likely to be prolonged, which will slow down the recovery of the export sector in Bangladesh. In the last financial year, there was high negative growth in the import trade (8.6%) too. The plight of the import trade is by no means conducive to investment and business expansion in the days to come.

Despite several rounds of downward revisions, the IMF still hopes for a global recovery in 2021. According to the World Economic Outlook Update in June 2020 by the IMF, global growth will be a negative 4.9% in 2020, which is 1.9 percentage points lower than the April 2020 World Economic Outlook forecast. Though the IMF projects for a positive 5.4% global growth in 2021, it admits that the recovery will be more gradual than previously forecast. Even with a 5.4% growth in 2021, the global GDP in 2020 will be 6.5 percentage points lower than the pre-COVID-19 projections made by the IMF in January 2020. Europe, on average, will experience a negative growth of 10% in 2020 and a positive growth of 6% in 2021.  In the USA the GDP growth will be negative 8% in 2020 and 4.5% in 2021.  

However, the positive economic growth in 2021 remains to be dependent on some factors and the primary factor being the availability of reliable vaccines for COVID-19. Nonetheless, only the availability of vaccines in some countries would not help recover business confidence worldwide. There is a need for a fair distribution of vaccines across countries. Given the fact that the world trade is heavily dependent on global value chains unless business confidence rebounds in all segments of the value chains, the world trade will continue to remain depressed. According to the WTO’s June 2020 estimates, based on a year‑on‑year basis, in 2020 the volume of merchandise trade shrank by 3% in the first quarter and further dropped by around 18.5% in the second quarter. No doubt, these declines are historically large. 

As far as the major export item of Bangladesh, the readymade garments (RMG), is concerned, in the financial year 2019-2020, the earnings from RMG exports declined by 18.12% from the previous year. With a much smaller fall in RMG exports, by around 3%, Vietnam outperformed Bangladesh to become the second-largest RMG exporter in the world. Therefore, the negative impacts of depressed global trade are not uniform across countries. While Bangladesh has been struggling to cope up with the disastrous situation, its major competitors, like Vietnam, are in a better position to combat the crisis. The differences in impacts are primarily due to domestic business enabling factors in which Bangladesh seriously lag behind its major competitors.  

Given the fact that being a small developing country Bangladesh has little to influence the recovery of the global trade, Bangladesh needs to get its domestic business fronts right to cope up during the crisis time and to register a substantial recovery in the post-crisis period.  In this context, there is a need for developments in five major areas:

First, while the government announced stimulus packages for all affected industries, so far, the access and benefit of the stimulus packages have remained unequal. There are complaints that, apart from the RMG, most of the other export-oriented sectors have been facing numerous challenges in availing the stimulus packages. The firm-level survey conducted by SANEM on Business Confidence Index in July also confirms this situation. These challenges include lack of stimulus package for the industry, lengthy procedure, difficulty in bank-related services, difficulty in understanding application procedures, and corruption. There is a need for quick and effective measures to address these challenges.

Second, the lack of export diversification remains a daunting challenge in Bangladesh. While there are pro-RMG biases in the policies and programs, inadequate and ineffective policies and strategies for the non-RMG sectors also hurt the non-RMG sectors. Furthermore, the high cost of doing business disproportionately affects the non-RMG sectors. Low public spending on health and education also leads to low productivity and skill development which are not conducive for export diversification. Therefore, this COVID-19 crisis time can give the policymakers the much-warranted opportunity to undertake reform in critical economic domains. No doubt, these reforms should aim at reducing the cost of doing business and establishing a favourable environment for the flourishment of non-RMG export sectors. 

Third, the low FDI orientation also acts as a large barrier for further export expansion and diversification in Bangladesh. The challenges in attracting FDI in Bangladesh include high cost of doing business, unfavourable regulatory environment, bureaucratic red-tape, uncertainty in the reform of policy regime, weak enforcement of intellectual property right, and slow implementation of infrastructural projects including the SEZs. Therefore, reforms should focus on simplifying regulations, enforcing the IPR, and faster and cost-effective implementation of the mega projects and the SEZs.

Fourth, as in a few years from now, Bangladesh will graduate from the LDC status and will thus lose trade preferences in its major export markets, Bangladesh needs to start FTA negotiations with its major trading partners. In particular, Bangladesh should start FTA negotiations with the EU, the UK, India and China for the continuation of the zero-duty trade preference for its export in the post-LDC graduation era. It is noteworthy that such FTA negotiations take a long time, and a lot of efforts and homework will be needed to secure special provisions to safeguard Bangladesh’s interests in these FTAs.

Finally, Bangladesh’s graduation from the LDC status by 2024 will lead to the loss of trade preference in major export destinations and loss of other preferences (i.e. TRIPs waiver for pharmaceuticals). Bangladesh will also face more stringent trade rules as a non-LDC. As the COVID-19 crisis has put Bangladesh into the back foot, there is a need for rethinking the LDC graduation decision. Considering the ongoing crisis time and uncertain future, Bangladesh may reconsider pushing back the transition from the LDC status by three more years.

Anatomy of stimulus package in Bangladesh

The economic crisis induced by COVID-19 is taking a massive toll on the economic and social spheres in Bangladesh. Forecasts by different international organisations suggest that the crisis is likely to drastically reduce the country’s Gross Domestic Product (GDP) growth rate. Since the onset of the crisis in March 2020, all major economic activities in the country have been badly hit. With the global economy going into a deep recession, exports from Bangladesh have fallen down in an unprecedented manner. The remittances, despite some temporary surges, are also feared to be badly hit in the coming days. On the social front, poverty and employment situations in the country have become grave. The crisis is feared to have a long-lasting dent on the development trajectory of the country.

To combat the economic and social crises and to ensure recovery of the economy, the government has announced 19 stimulus packages accounting for around 3.7% of the country’s GDP. The major stimulus measures, taken so far, are as follows: (i) BDT 50 billion for export-oriented industries to pay the wage bill for three months. This comes as 2-year loans to factory owners at 2% interest. (ii) BDT 300 billion for banks to provide working capital loan facilities to the affected industries. While, these loans are at an interest rate of 9%, half of it to be borne by the borrower and half by the government as a subsidy. (iii) BDT 200 billion for banks to provide working capital loan facilities to Small (cottage industries) and medium enterprises. While, these loans are at an interest rate of 9%, 4% to be borne by the borrower and 5% by the government as a subsidy. (iv) A refinance scheme of BDT 50 billion for the agriculture sector. The Bangladesh Bank will charge interest 1% from banks and banks will charge 4% from customers. The loan will be repayable within 18 months including 6 months grace period. (v) Under Back-to-Back LC arrangement, the Export Development Fund of the Bangladesh Bank is increased from USD 3.5 billion to USD 5 billion to facilitate further import of raw materials. The interest rate is fixed at 2%. (vi) BDT 50 billion pre-shipment credit refinance scheme by the Bangladesh Bank for local products and the export sector, under which the Bangladesh Bank will charge interest 3% from banks and banks will charge 6% from customers. In addition, there have been some policy measures by the Bangladesh bank to increase cash flow in the economy. Also, the budget 2020-21 provides some support measures for returnee migrants. There have been some social safety net programmes to address the growing poverty and vulnerability of the population. 

In the context of the developing countries from Asia, Bangladesh’s stimulus package, in proportion to GDP, is much higher than those of South Asian and Southeast Asian countries. It should, however, be noted that large stimulus packages are likely to be ineffective if they are associated with poor execution, unplanned allocation of funds, and weak accountability. All these three issues are extremely important for the effective implementation of the stimulus packages in Bangladesh.

The financing of large stimulus packages in Bangladesh may appear to be a big challenge. The major part of the stimulus package in Bangladesh is credit-based where the government is providing interest rate subsidy. A rough calculation suggests that the amount of this interest rate subsidy will be in the range of 0.2-0.4% of the GDP. Therefore, the burden of the government in financing the stimulus package is expected to be much lower than the total face value (3.7% of GDP) of the stimulus package.

The operationalisation of the stimulus package, however, seems to remain as a big problem. The operationalisation procedure involves identification and selection of the affected firms, disbursing credit through the banking channel, and monitoring of the overall process. All these steps, no doubt, suffer from serious institutional challenges in Bangladesh.

Identification and selection of the affected firms have been problematic in Bangladesh. While firms are self-selecting themselves for seeking the benefit of the stimulus package, there has been no formal or systematic process through which any rapid assessment can be made on the needs of the affected firms. In the absence of any kind of assessment process, many eligible firms may be denied the support. In contrast, powerful firms, with strong lobbying and useful political links, despite that many of them may not need of the stimulus package, may dominate the scenario. In this case, the whole objective of the stimulus package will be lost.

The next challenge is the disbursement of the credit to the selected firms through the banking channel in the form of subsidised loans. The banking sector is already under tremendous pressure due to the high non-performing loans and poor governance. The formal procedural issues in the banking sector may also discourage many eligible firms to avail the benefit. This is true for the firms from the non-readymade garment sectors and in particular for the micro, small and medium enterprises (MSMEs). MSMEs are facing numerous challenges in accessing the stimulus package. There is a need for a dedicated window of facilities for the MSMEs sector.

Experiences so far indicate that while many RMG firms have been successful to avail the benefit of the stimulus packages many non-RMG firms have not been. That is why disbursing the BDT 300 billion stimulus package to affected industries, apart from the RMG, and BDT 200 billion for MSMEs has been very slow. While the RMG sector has been efficient in exhausting the BDT 50 billion stimulus package allocated for them, the RMG lobby has also been successful in convincing the policymakers to allocate more funds for them from the BDT 300 billion stimulus package (which is meant for the non-export sectors). This lobbying pressure is likely to escalate in the future as progress in the disbursement of funds for other affected industries and MSMEs continues to be limited. This scenario reflects the RMG-bias in the policymaking process. Therefore, there is a need for a re-orientation of the policies to reflect the challenges faced by many other sectors in the economy.

An ailing health sector in Bangladesh: Any scope for a politically feasible reform agenda?

The ongoing health crisis shows the dilapidated state of government hospitals and public healthcare in Bangladesh. At the same time, it shows a lack of accountability in private healthcare. The health sector in Bangladesh cannot provide the necessary healthcare because of high deficiencies in financing, efficiency, quality and equity.

In 2017, the share of public health expenditure in the gross domestic product (GDP) was only 0.4% in Bangladesh, while the averages for lower-middle countries and South Asian countries were 1.3% and 0.9% respectively. For this reason, the share of out-of-pocket health expenditure in total health expenditure in Bangladesh is one of the highest in the world. In 2017, this ratio was  74% in Bangladesh in comparison to the lower-middle country average of 55% and the South Asian average of 63%. Bangladesh also has a very underdeveloped health infrastructure. For example, the number of physicians per 1000 people in Bangladesh in 2017 was 0.54, which was 0.76 for the lower-middle countries and 0.83 for the South Asian countries.

If we look at some health indicators, starting from a low base, over the last four decades, Bangladesh has made considerable progress in life expectancy, maternal mortality, and infant mortality. The success of Bangladesh in life expectancy, maternal mortality, and infant mortality lies on three factors – use of low-cost solutions to some vital health-related problems, widespread activities of NGOs creating some necessary awareness, and external remittances raising the capacities of the households for high out-of-pocket health expenditure. However, under a critical health hazard like COVID-19, and also for pressures originating from the ageing population, rising prevalence of chronic diseases, and the growing need for intensive uses of expensive still critical health-related equipment, scopes of these three factors in addressing new challenges are deemed to be limited. Financing health-related problems through out-of-pocket expenditures increases inequality within society, as this places an unequal cost burden on the poor people, thus keeping the vicious cycle of disease-poverty-disease alive.

The health sector in Bangladesh has a ‘stable anti-reform coalition’ among the dominant actors in this sector and resultant ‘policy paralysis’. The ‘policy paralysis’ can be described as a situation where critically important and necessary laws and reforms are not undertaken or, even if undertaken, not implemented as a result of lack of commitment from the government or inability of the dominant actors to reach a consensus over the nature of the reform. The ‘policy paralysis’ in the health sector is observed through the continued staggeringly low public spending on health years after years, high prevalence of mismanagement, corruption, and lack of accountability and transparency.

But, why there is the ‘policy paralysis’ and a ‘stable anti-reform coalition’ in the health sector in Bangladesh? Bangladesh has a pluralistic healthcare system, which is highly unregulated and consists of different actors with different interests and degree of power or influence. However, it is worth noting that the actors are interconnected with various degrees of contest and coalition. The identified actors can be grouped into four categories, namely state, non-state, direct and indirect actors. The direct state actors in the health sector are the Ministry of Health and Family Welfare, its Directorate Generals, and in particular, the Directorate General of Health Services (DGHS). The indirect state actor is the Ministry of Finance. The direct non-state actors are Bangladesh Medical Association, private sector hospitals and diagnostics and their associations, and non-governmental organizations led medical service. The indirect non-state actors are the pharmaceutical industry, importers of medicine and medical equipment, civil society, and international organizations. Although the power and influence of the key actors vary depending on the context, a general scenario of the interplay between the interests and influence of the main actors shows that there are missing actors concerning high-interest and high-influence for health sector reform in Bangladesh. Also, there is a strong incentive to maintain the status quo where the generation of rents from the existing system and distribution of such rents among the influential actors perpetuates the so-called ‘stable anti-reform coalition’.

While the eighth target of the third SDG aims to achieve universal health coverage, Bangladesh is way behind meeting this target. Given the aforementioned political economy dynamics, what can a politically feasible reform agenda be for the health sector in Bangladesh? A meaningful health sector reform in Bangladesh should include increasing the share of public health spending in GDP from the current poor level to at least 1.5% immediately and gradually to 3-4% in the next 3-4 years; ensuring full cooperation across government and the Finance Ministry to allocate more resources to healthcare; ensuring transparency and accountability in public health spending, and; reforming and restructuring the institutions through which health policies are implemented. Looking at the power-interplay matrix of the actors involved in the health sector, it is obvious that the existing highly influential actors have little incentives to break the ‘stable anti-reform coalition’. There is a need for bringing in a new actor in the power-interplay scenario. For example, a powerful Health Commission with high-interest and high-influence, overseeing the health sector reform, can be set up, which should be supported by the strong political will of the ruling elite.

COVID-19’s effect on poverty and policy response in Bangladesh

Bangladesh’s success in poverty reduction over the last two decades is noteworthy. From as high as 48.9% in 2000, the poverty rate, using the national upper poverty line income, came down to around 24.3% in 2016 (as per the Household Income and Expenditure Survey of 2016) and further to 20.5% in 2019 (as per the projected estimate by the Bangladesh Bureau of Statistics).

The current health and economic crisis brought by COVID-19 is feared to have a devastating impact on the poverty status of the country. The transmission mechanisms of the impact of COVID-19 on poverty in Bangladesh involve both the supply-side and demand-side shocks. The supply-side shock emanates from the shutdown of economic activities, whereas the demand-side shock comes from falling exports and remittances.

In the labour market, we are fearing a large scale job loss. As more than 85% of our labour force is in the informal sector, this job loss will have important implications for the persistence of the aggravated poverty situation in the future. Also, households, highly dependent on external remittances, are facing a new challenge because of the sudden fall in remittance income. Compared to the non-remittance recipient households, the remittance-dependent households appeared to be more vulnerable to cope up with the current crisis.

How do we understand the poverty impacts of COVID-19 in Bangladesh? There can be two ways. First, through a country-wide primary survey of representative households, and probably this is the best method to understand the poverty impact. However, it is very difficult to conduct any nationally representative household survey under the current situation. Therefore, so far what we have seen concerning some primary surveys in Bangladesh, using mobile phones, have not been nationally representative. Also, another challenge is that questions in these phone-based surveys are related to what is happening on income, whereas the convention of estimating poverty in Bangladesh is to use the household expenditure data as a better proxy indicator of understanding households’ economic status. The income data is also not very reliable for poverty estimation, as, in normal time, people tend to understate their income, and in the crisis time, people tend to overstate their income losses.

From SANEM, we did some model simulations using the Bangladesh Bureau of Statistics’ nationally representative Household Income and Expenditure Survey data of around 46,000 households conducted in 2016 by considering the above-mentioned supply and demand-side shocks. It appears that a 25% negative shock on households’ expenditure leads to a rise in the poverty rate in Bangladesh from 20.5% in 2019 to around 41% now.

This aforementioned rise in the poverty rate has three important implications. First, the success of reduction in poverty over the past one and a half-decades in Bangladesh is under threat now. In 2005, the poverty rate in Bangladesh was around 40% and now in 2020, because of this crisis, the poverty rate goes up to 41%. If the crisis continues, the poverty rate will increase further. Second, a large new set of poor people, who were vulnerable non-poor before the crisis, are now added to this poor population. Third, there is a high risk that a large part of this new poor will fall into long term poverty, and the aggravated poverty situation will persist for some considerable time in the future. 

Given the aforementioned scenario, what have been the policy responses so far from the government? There have been three types of responses. The first one is the stimulus package which has been announced for the readymade garments, the agricultural sector, and other affected sectors. A large part of the stimulus package is credit-based, through the banking system and at the subsidized interest rate. Effective implementation of the stimulus package is important to energise the private sector investment, revive economic activities and get the economy back on the high growth path. This will also help to reduce the magnitude of job losses and assist people to escape from the poverty trap. One important concern here is that the stimulus package is placing additional pressure on the banking sector, which is already very vulnerable because of high non-performing loans, mismanagement, and weak institutions.

The second policy response has been related to expanding social protection coverage through food distribution and cash transfer. However, there is a huge political-economy issue of management of this expansion of the social protection programmes, given the fact that the country spends very low on social protection as a percentage of GDP – one of the lowest in the world. Also, there are huge loopholes in social protection programmes in the forms of leakage, corruption, wrong targeting and mismanagement. During the crisis time, these problems also get worse. Therefore, there is a need for strong effort, especially for making the social protection programmes effective, in terms of identifying the poor and vulnerable population, and ensuring that the support actually reaches the poor people. The financing of the stimulus package and the expansion of social protection programmes is also a challenge. The country’s tax-GDP ratio is less than 9% – one of the lowest in the world, and in this fiscal year, this may be as low as around 8%.

The third response is related to the opening up of the economy from the lockdown situation as the choice of starting economic activities is now preferred to the choice of health safety for people amid the rapidly growing infection number and number of deaths from COVID-19. To begin with, the way the lockdown was imposed in Bangladesh was wrong. It was declared as a public holiday, which gave a completely wrong message to the people. Given the poor public health system in Bangladesh – as the country spends less than 1% of GDP as public health expenditure—it has been a very difficult task to handle this health crisis from the very beginning. Therefore, it is necessary to open up economic activities through proper planning and by phases, considering the health risks and following the health rules. However, unfortunately, without any such visible planning, economic activities have been opened up since May 31, which can significantly increase the level of health risks, and ultimately lead to a large-scale shutdown of economic activities again. This decision, therefore, needs urgent reassessment. The victims of such a policy of attaining the so-called ‘herd immunity’ would mostly be poor people. 

Finally, the lesson we learn from the current crisis is that though the country experienced significant achievement in poverty reduction over the past decades, success remained to be very fragile to external and internal shocks. Therefore, the ongoing crisis can give us an opportunity to rethink our development and poverty reduction strategies.

The political economy of the stimulus package for Covid-19 induced economic crisis in Bangladesh

The economic crisis caused by Covid-19 is deepening in Bangladesh over time. The level of crisis is unprecedented at both the national and global levels. It is now inevitable that the global economy will fall into a deep recession. If the economic crisis in Bangladesh is prolonged, there is also a big risk of social crisis. The health crisis in Bangladesh is also huge. We are already observing worrisome health-related impacts in Bangladesh. The number of coronavirus infected people is increasing at an alarming rate and at the same time, the number of deaths is also on the rise.

Although there is much debate about the country’s economic growth rate during this crisis, there is no doubt that all the drivers of Bangladesh’s economy have been severely affected during this economic crisis. These include the export sector – especially the garment industry, remittances, domestic industries and services, agriculture, poultry, fisheries, and especially small and medium enterprises. This crisis is also having a huge impact on the poor and vulnerable people in the country. SANEM’s ongoing research shows that the crisis could lead to a large jump in the poverty rate in Bangladesh, and that the success of poverty reduction in Bangladesh over the past decades could be lost due to the crisis. However, the depth of impact of the ongoing crisis on the economy of Bangladesh will depend on the duration and the spread of the crisis. Nevertheless, considering the dynamics of the crisis so far, it is obvious to that this crisis is going to leave a big mark on the economic growth and social achievement of Bangladesh.

In the context of the ongoing economic crisis, the government of Bangladesh has announced a stimulus package which is a big amount and the amount may increase further in the coming days. However, the success of this stimulus package depends on three things – financing, management and monitoring.

In terms of financing this stimulus package there are four options. The first is that all the unnecessary expenditures of the government, for example various unnecessary development plans and unnecessary projects in the budget, need to be suspended or cancelled immediately. The money saved from it must be utilized for the stimulus package.

The second is to borrow from international organizations like the World Bank and the IMF. We know that Bangladesh, as per World Bank’s classification, has graduated from the low income to lower-middle income country status, and due to this Bangladesh has lost the privilege of accessing loans from World Bank and IMF at a lower interest rate. But in such a crisis time, Bangladesh must try to negotiate with the World Bank and the IMF to find out how to get loans at low interest and easy terms. We do not want any stringent conditions from the World Bank and IMF now.

The third way may not be very pleasant. However, the government will still borrow from the banking sector. We know that despite the current fragile state of the banking sector the government has already borrowed money more than what was planned for the whole financial year. However, if government borrows further from the banking sector, it should be done judiciously with sufficient caution.

If the above mentioned three options are exhausted, then the fourth option and the last resort will be to print money. Printing money without expansion of real sector has the risk of pushing up prices. There may be incentives to print money to finance unnecessary public projects. Therefore, if the government decides to print money, this has to be dealt carefully. In an environment of weak regulation and lack of independence of central bank there is a high risk that without a proper handling printing money may backfire.

A proper management of stimulus package is very important. It is important to note that Bangladesh does not have any past experience of implementing such a huge amount of stimulus packages. The type of crisis we are observing now due to Covid-19 is very different from the crises Bangladesh faced in the past, like cyclones or floods, and handled effectively. Therefore, in this crisis, when such a huge amount of money is being injected into the economy, the success of the stimulus package will depend largely on the management of this package by the government. There are two aspects to the stimulus package. One is to provide assistance to the affected industries and the other is to address the food safety problem of the poor and vulnerable people. In both cases there is a need for efficient supervision  – who will get the money and how. It is important to note that there are many shortcomings of our bureaucracy, and especially the lack of the efficiency of government management. We can’t avoid these problems now. It is important to note that when there is a question of disbursement of huge amount of money of the stimulus package, there will be people to take unfair advantages of it. We have already seen some of signs of these kind of unfair practices. Therefore, it is important to ensure transparency and accountability in the implementation of the stimulus package.

Finally, without proper monitoring of the use and management of stimulus package funds, its purpose will be severely hampered. This requires the immediate formation of a national monitoring committee comprising representatives from government agencies, NGOs, civil society, the business community, and labor organizations.

Regional response in South Asia to COVID-19-driven global crisis

The effects of COVID-19 on the national economies and the global economy are going to be unprecedented. Immediate concerns are public health and related life safety issues. The global economy is facing “a double crisis” in an unmatched magnitude – the danger to public health due to the pandemic, and a growing risk of global economic recession. It is now commonly thought that COVID-19’s blow to the global economy has been stronger and sharper than the global financial crisis of 2008, and even the Great Depression in the 1930s. To be precise, each part of aggregate demand – consumption, investment, and exports – is badly affected in most of the countries. Also, domestic, regional and global supply chains are severely disrupted, which may take a long time to get back to the normal state.

Countries from South Asia are no exception in the aforementioned scenario. This double crisis at the global level can lead to a widespread national setback in most of the countries in South Asia. Most of the countries of this region are vulnerable to the COVID-19 outbreak and may have large humanitarian and economic effects if the situation goes out of control. More specifically, prolonged shutdown – as it is happening in most of these countries, as well as a possible global slowdown, would strike all of the region’s economies very hard. Major sectors in the economy, both the export and domestic market-oriented, are affected. Also, marginalized people and near-to-marginalized people may fall into further deprivation. Even some other sections of people in society may become highly vulnerable.

While national governments in South Asia are in the process of undertaking different policy measures in the wake of this crisis, the situation, however, might and should act as a wake-up call for regional leaders to look beyond narrow national and geopolitical interests. To avert this crisis, countries in South Asia must respond quickly and have concerted efforts. These countries also need to cooperate with international organizations and key global actors to ensure an effective and sustainable strategy.

What kind of actions are needed at the national level? The monetary policy should include lowering interest rates and credit easing. Countries should ease credit to help households smooth their consumption and help firms survive the immediate shock of the outbreak. The fiscal policy should deploy fiscal stimulus, including direct cash disbursements to households and affected firms. Given the size of the economic shock, fiscal deficits in these economies may need to be increased from the levels in usual years.

How can the regional response in South Asia help? In South Asia, despite significant potentials, regional integration and cooperation processes have been low. Historically, there is a serious lack of mutual trust among most of the nations. However, a common crisis, like the one brought by COVID-19, can bring these countries together.

First, public health systems are in underdeveloped states in most of the South Asian countries. In such a crisis, the private health system also fails. While there is no denying that in the medium to longer terms, countries in the region have to invest in their public healthcare capacities, in this crisis-time they can explore the use of the pool of doctors, nurses and medical facilities available in this region to help each other. Under the SAARC process, there is a forum of meeting for SAARC health ministers. In the wake of the widespread threats brought by the emergence of the SARS, an Emergency Meeting of SAARC Health Ministers was held in Male in April 2003 to develop a regional strategy to deal with the deadly epidemic. Between 2003 and 2017, there were six meetings of the SAARC Health Ministers. An emergency meeting of SAARC health ministers on COVID-19 is a necessity of the time now. Countries should explore greater regional collaboration and new cross-border public-private partnerships to expand the production and delivery of essential medical supplies and services, and collaborative medical research. Eventually, a South Asian monitoring centre on COVID-19 can be set up.

Second, South Asian countries need to share their experiences of the national policy measures to combat the crisis. The SAARCFINANCE Forum, which was established in 1998 as a regional network of the SAARC Central Bank Governors and Finance Secretaries, needs to be reactivated. Though the primary function of the network is to conduct a dialogue on macro-economic policies of the region and share experiences and ideas of the member countries, the forum has been suspended since 2014 with the deadlock in the SAARC process. As the Prime Minister of India, in a video-conference with SAARC leaders on 16 March 2020, proposed an emergency COVID-19 fund for SAARC countries, this is the high time now to revitalize the SAARCFINANCE Forum on how this emergency fund can be created, expanded and used.

Third, given that the global supply chain is broken for a large number of sectors, South Asian countries should explore the use of regional supply chain as much as possible. The current crisis sends a strong message that a heavy reliance on a few countries, both in the cases of exports and imports, is counterproductive. Despite the huge potential of intra-regional trade, South Asian countries have not been able to exploit this potential for a number of reasons which include unfavourable economic and trade policies, underdeveloped regional trade logistics, and political conflicts. The current situation underscores the need for a much greater regional integration in South Asia by addressing the aforementioned unfavourable factors with a positive mindset. Finally, the SAARC process needs to be rejuvenated. The crisis brought by COVID-19 stresses the importance of deeper regional cooperation in South Asia. Countries in this region need to comprehend this need and make extra-ordinary efforts to put aside their differences which forbid such cooperation.

Institutions for development

‘Institutions’ are the ‘rules of the game’ that govern the economic, political and social spheres of any country. The rules of the games can be both formal and informal. In the economic and political spheres, ‘formal’ rules of the games shape the functioning of the ‘organization’ bounded by legal rules, while ‘informal’ rules of the games influence the functioning of the organization beyond any ‘legal’ bindings. Examples of institutions in the economic and political spheres are property rights, quality of bureaucracy, rule of law, the functioning of government regulations, democratic accountability, etc. In the social sphere, institutions appear mostly as social and cultural norms. In this context, an ‘organization’ is an entity comprising a group of people with a particular purpose. The examples of organizations are different types of machinery of the state like courts, police, parliament, etc. and different government agencies.

Institutional economics focuses on the understanding of the process and dynamics through which institutions work. Institutional economics sees economic growth and development process as vastly influenced by the complex interactions among different institutions. Over the past four decades, there have been many variants of institutional economics. But, broadly two variants are prominent: New Institutional Economics (NIE) and non-NIE. The NIE has its root in the neo-classical economics and emphasizes on issues such as transaction cost and interaction among individual and organizations, and highlights the importance of ‘formal’ institutions and ‘proper’ functioning of institutions for economic growth and development. In contrast, non-NIE emphasizes the importance of both the ‘formal’ and ‘informal’ institutions and ‘unorthodox’ type, role and evolution of institutions in developing countries.

Analysis of country experiences, both cross-country and macro-and micro-level studies, lend support to the important contribution of institutions to economic growth and development. Studies indicate that bureaucracy quality, contract enforcement, law and order, protection of property rights, critical degrees of democratic accountability and transparency and control of corruption are associated with the higher level and sustainability of economic growth and development.

The success stories of institutional reform agendas from different countries suggest that success depends on elites’ ability to undertake and execute the ‘unorthodox’ approach, which is suited very much to the country-contexts.

The major channels through which institutions work for economic growth and development include the cost of economic transactions, incentives for economic activities, mode and nature of profitability of investment or ‘economic rent’, mode and nature of the sharing of ‘economic rent’, and mode and nature of the politics of the sharing of ‘economic rent’. Country experiences suggest that there is no ‘one-size-fits-all’ approach and heterogenous experience across countries on guiding institutions for economic development makes the study of institutional economics interesting and challenging.

It is also important to note here that institutional development in a country is not an exogenous process. The economic growth and development processes of a country also provide feedback, either positively or negatively, to the evolution of institutions. In this context, the capacity of the political elites to effectively formulate and implement sound policies, interactions and cohesion among economic and political elites on policies and regulations, and how the citizens of the country respect the institutions that govern economic and social interactions among them, are critically important.

While discussing the importance of institutions in countries like Bangladesh, placed at the lower level of the development spectrum, it should be kept in mind that what governs in these countries is a host of informal or non-conventional institutions, and the status and development of formal institutions are weak and fragile. Informal or non-conventional institutions can have two distinct roles with respect to the stages of development. At the early stage of development, if countries can steer the informal institutions to the extent that they are conducive for economic growth, countries can manage a regime of strong growth rate and can also achieve some improvements in the social sector. Bangladesh is a good example in this case. In contrast to many other comparable countries of Asia and Africa at the similar stage of development, least developed countries (LDCs), in particular, Bangladesh has been successful in creating some functional informal or non-conventional institutions against an overall distressing picture of formal institutions. 

However, for the transition from a lower stage of development to a higher stage, whether the country can maintain the high growth rate and can achieve larger development goals, it is critically important how the dynamics of informal institutions evolve and formal institutions become stronger and functional. Not many developing countries have been able to make this transition. Certainly, the East Asian and most of the Southeast Asian countries are the success stories in using the informal institutions efficiently at the early stage of development as well as making some notable successes in the transition towards functional form of formal institutions. However, when it comes to the current status of institutional development in Bangladesh, there is a big concern whether the country is in the right path of making such a transition.

Finally, there are questions whether a conventional approach to institutional reforms, as suggested by the NIE and thus focusing on a set of reforms targeting primarily the ‘better’ functioning of markets, can be useful in making a successful transition towards functional formal institutions. In most of the developing countries, such market-targeting institutional reform agendas gained little success due to the lack of consideration of the country-specific contexts, lack of buy-in from the political elites, and lack of cohesion between economic and political elites over the reform agendas. The success stories of institutional reform agendas from different countries suggest that success depends on elites’ ability to undertake and execute the ‘unorthodox’ approach, which is suited very much to the country-contexts.