Hiccups of ‘Bangladesh Development Surprise’

20181031_091336Bangladesh’s economic growth and development performance over the past two decades have been impressive. With the poor quality of institutions, such a performance has often been termed as a ‘development surprise’ or ‘Bangladesh paradox’. But is it at all a ‘surprise’ or a ‘paradox’ – since anything beyond any reasonable explanation can appear as a paradox? Is Bangladesh’s development performance beyond any ‘reasonable’ explanation?

If we look at the quality of institutions in Bangladesh, the performance has been very poor. According to the World Governance Indicators (WGI), in 2016, out of 156 countries, Bangladesh ranked 114 in terms of ‘Voice and Accountability’, 101 for ‘Political Stability’, 138 for ‘Government Effectiveness’, 114 for ‘Regulatory Quality, 101 for ‘Rule of Law’, and 117 for ‘Control of Corruption’. Other indicators of institutional quality also portray similar pictures. For example, in the case of the World Bank’s Doing Business indicator of 2019, out of 190 countries, Bangladesh’s ranking was 176. With respect to Transparency International’s Corruption Perceptions Index of 2018, Bangladesh’s ranking was 149 out of 180 countries. In the case of the Global Competitiveness Index (GCI) of 2017-2018, Bangladesh’s ranking was 99 out of 137 countries.

Against the aforementioned poor quality of institutions, the average GDP growth rate in Bangladesh increased from 3.7 percent in the 1970s to 6.6 percent in the 2010s. Bangladesh has been able to increase the average GDP growth rate by one percentage point for each decade since the 1990s. The country cut down the poverty rate from as high as 71 percent in the 1970s to 24 percent in 2016, became the second largest exporter of readymade garments in the world, and registered some notable progress in social sectors.

How do we reconcile the above mentioned two contrasting scenarios? Difficulty in such reconciliation perhaps has led to the emergence of the ideas of ‘surprise’ or ‘paradox’. However, we can try offering some reasonable explanations to this so-called ‘surprise’ or ‘paradox’. We also argue that, without significant improvements in the quality of institutions, such ‘surprise’ will continue to lead to periodic ‘hiccups’ like the accidents in the RMG sector (several fire incidents, Rana Plaza incident of factory collapse); frequent road accidents; frequent fire incidents in the residential and commercial areas; repeated scams in the financial sector; serious environmental degradation in cities, rivers and forest areas; periodic labour unrest; uncontrolled scams in public examinations; social disintegration among youth in the forms of extremism and drugs; etc.

Now, coming back to some reasonable explanations of ‘surprise’ or ‘paradox’, if we look at the well-known institutional indicators (WGI, Doing Business, Transparency International, and GCI), all refer to the quality of formal institutions. However, in countries like Bangladesh, placed at the lower level of the development spectrum, what governs is a host of informal institutions, and the development of formal institutions is weak and fragile. There are some interesting political economy frameworks to understand the importance of informal institutions in developing countries. For example, Mushtaq Khan’s framework of ‘growth-enhancing institutions’ in contrast to ‘market-enhancing institutions’ elaborates how the role of informal institutions can be critical in developing countries. Some developing countries, especially East and Southeast Asian countries, have been successful in steering the unconventional institutions to drive growth. Another framework, proposed by Lant Pritchett, Kunal Sen and Eric Wrecker, relates to the idea of ‘deals space’. Deals (informal), in contrast to rules (formal), among the political and economic elites, are prevalent in the developing countries. Deals can be open (access is open to all) or closed (access is restricted), and also they can be ordered (deals are respected) or disordered (deals are not respected). According to this view, countries are likely to exhibit high growth when deals are open and ordered.

Informal 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 they are ‘growth-enhancing’ as well as the ‘deals space’ is more ordered (either open or closed), countries can manage a regime of strong growth rate and can also achieve some improvements in the social sector. However, for the transition from a lower stage of development to a higher stage, whether the country can maintain the high growth rate and achieve larger development goals, is depended on the dynamics of how the informal institutions evolve and formal institutions become stronger and functional. Not many developing countries have been able to do this. 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 formal institutions.

In contrast to many other comparable countries of Asia and Africa at the similar stage of development, least developed countries, in particular, Bangladesh has been successful in creating some efficient pockets of ‘growth-enhancing’ informal institutions against an overall distressing picture of formal institutions. This is how the ‘Bangladesh Surprise’ story unfolds. The examples of ‘pockets of efficient informal institutions’ in Bangladesh include the well-functioning privileges and special arrangements for the RMG sector, promotion of labour exports, agricultural research and development related to food security, and microfinance.

However, the next question is how could Bangladesh create such ‘pockets of efficient informal institutions’ and make the ‘best’ use of them? The explanations include both historical and political economy perspectives. Two historical events strongly influenced the mindset of the political and economic elites in Bangladesh. First, the 1971 liberation war led to the emergence of an independent Bangladesh state which gave unprecedented, enormous and first time independent power to the burgeoning political and economic elites of the Bengali nation of this part of the world. Also, the citizens, in general, enjoyed some benefits of such power. Largely, the entrepreneurship nature of the people of this country is deeply rooted in this feeling of power. The reflection of successful entrepreneurship is seen in the cases of the RMG sector, labour migration, and microfinance. As Bangladesh is not rich in natural resources, elites found the RMG sector as a basis of generation of substantial rents. The sources of rents in the RMG sector include the Multifibre Arrangements (MFA) quota (which no longer exists) and the Generalised Systems of Preference (GSPs), different forms of subsidies, tax exemptions, a suppressed labour regime, and weak compliance. Through large scale employment generation in the RMG sector and its induced effects of poverty alleviation and female empowerment, the elites were also able to draw support from the non-elites for this sector. The second event relates to the experience of the 1974 famine, which led the elites to realize that a country like Bangladesh, with a huge population in a small piece of land, cannot afford anything like this in the future. Therefore, subsequent governments focused on the development of the agricultural sector to ensure food security. All these also helped achieve some notable progress in the social fronts.

Despite the aforementioned achievements, the fundamental question is whether Bangladesh can continue its success and achieve larger development goals with the business as usual processes. There are concerns that the weak institutional capacity of the country may work as a binding constraint as the country eyes to meet the stiff targets of the Sustainable Development Goals (SDGs) by 2030, aspires to become an upper middle-income country by 2031, and visions to become a developed country by 2041. Dividends from the existing ‘pockets of efficient informal institutions’ are on a decline, and the elites have not been able to create any new such ‘pockets’ apart from the ones mentioned above.

How is Bangladesh performing in terms of the transition from some ‘pockets of efficient informal institutions’ to well-functioning formal institutions? This can be answered by looking at how well the formal institutions are taking shape. The trends in the quality of formal institutions between 1996 and 2016, as are manifested by the movements of the World Governance Indicators, suggest that, with some fluctuations, there are deteriorations in the cases of ‘Voice and Accountability’, ‘Political Stability’ and ‘Government effectiveness’, and some trivial improvements in the cases of ‘Regulatory Quality’, ‘Rule of Law’ and ‘Control of Corruption’. As the country is plunged with a number of challenges related to slow progress in structural transformation, lack of economic diversification, high degree of informality in the labour market, slow pace of job creation, poor status of social and physical infrastructure, slow reduction in poverty, and rising inequality, such poor improvements in formal institutions will make hiccups of ‘Bangladesh development surprise’ a rule rather than an exception.

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Governing emerging development challenges: A South Asian perspective

IMG_46412Despite the divergence in economic and political trajectories, South Asian countries share commonalities with respect to the urge for governing emerging development challenges in the wake of the new world and regional dynamics. As far as future economic and social developments are concerned, for most of the South Asian countries, there are four major confronting areas, which are related to inclusive development, global and regional trade integration, financing development programmes, and politics of development.

With respect to inclusive development, the debate over quantity vs. quality of economic growth is prominent in most of the South Asian countries. While South Asia is now the fastest growing region in the world, with India and Bangladesh registering high and stable growth rates followed by Sri Lanka and Pakistan recording modest growth rates and other countries experiencing unstable growth rates, the panacea over the ‘number’ of growth rate overshadows the importance of the ‘quality’ of economic growth. Despite high economic growth rates, the region hosts more than one-fourth of the world’s extreme poor and inequality within the countries is on the rise. Furthermore, there are genuine concerns of ‘jobless growth’ as the pace of employment generation, in most of the South Asian countries, lags behind the pace of economic growth. Moreover, staggeringly high informal employment ratio, low degree of ‘decent job’, poor working conditions, and low female participation characterize the labour market of this region. The growth, employment and poverty challenges of the South Asian countries are primarily aggravated by the nature of development strategies these countries have been following over the past decades. These countries have not been successful in rapid industrialization, and few manufacturing and services sectors have been the major drivers of growth with narrow implications for employment generation, poverty alleviation and inequality reduction. Most of these countries face the challenge of ‘premature deindustrialization’. Also, the lack of preparedness in the context of the 4th industrial revolution can lead to a large-scale job loss. Given the aforementioned longstanding development challenges, the 2030 Development Agenda has created additional pressure on the development task-lists of these countries. However, it can be argued that this 2030 Development Agenda has also created new opportunities for the South Asian countries to get their development trajectories ‘right’.

The challenges related to integration with global and regional trade remain critical for the South Asian countries. As far as integration with the global trade and value chain is concerned, there are now emerging pressures, in the wake of growing scepticism in the globalization and trade integration process, as reflected by Britain’s BREXIT, escalated protectionism in the United States, and trade war between the United States and China. Furthermore, as China is going through a major economic rebalancing, the impact of this rebalancing goes beyond China’s national borders due to China’s integration with other Asian countries through manufacturing, trade and investment links. There are enhanced opportunities for Asian developing countries to take advantage from China’s economic transformation, as changes in China’s supply and demand will have spillover effects on other economies in the region and industries might shift concentration to other countries in the region. However, there are concerns whether South Asian countries have sufficient skills and capacity to take advantage of transferring or emerging industries or develop new businesses to meet the growing demand. While South Asian countries encounter the uphill tasks of diversifying their export baskets and moving into high value-added product space, these countries also have been less successful in extracting the benefits of regional integration and regional value chains. One of the major factors behind the weak regional integration in South Asia is the hostile political relation between India and Pakistan, for which many regional integration initiatives remain hostages.

Financing development goals has been a critical challenge for most of the South Asian countries. Given the changing global scenario, for financing development goals, South Asian countries will have to rely more on domestic sources, and this is, no doubt, an uphill task. The tax-GDP ratio remains low for most of these countries with heavy reliance on indirect taxes and import duties. The patterns of public expenditures on social sectors in this region suggest that, the averages of the shares of public expenditure on education, health and social protection in GDP in South Asia are only around 2.5%, little over 1%, and less than 2% respectively which should be increased to more than 5%, 4% and 10% respectively to meet a large number of development goals. In addition to the social expenditure, the countries need to spend substantially on developing their physical infrastructure, which most of these countries are seriously lagging behind. It is obvious that with the low tax-GDP ratio it is difficult to finance the aforementioned large development goals. However, the question is how to mobilize the required amount of resources domestically when these countries suffer from weak institutions and inadequate tax-infrastructure. It is also important to note that a mere generation of resources would not ensure implementation of the development goals if institutional and governance-related aspects are not addressed properly. Finally, there remains a big challenge in getting the priorities in spending ‘right’. One example of the wrong priority is the high spending on military affairs in some of these countries, especially in India and Pakistan, while these countries incur a very low level of spending on social sectors.

In order to govern the new challenges, the South Asian countries require the ‘correct’ politics of development. The past development trajectories of these countries are largely characterized by ‘crony capitalism’ with a high degree of rent-seeking activities, suppressing the elements of ‘developmental states’. Weak functioning of economic and political institutions and the dominance of informal institutions are prevalent in these countries. In the coming days, to implement the development goals, efforts need to be something extraordinary, and strong political commitments are needed to make a significant departure from past practices.

[Based on the presentation made by the author at the 4th SANEM Annual Economists’ Conference on “Governing New Challenges: Inclusive Development, Trade, and Finance’, held in Dhaka on 16-17 February 2019]

Bangladesh’s macroeconomic challenges

imageedit_2_8238428477There are six major macroeconomic challenges for the Bangladesh economy. First, accelerating economic growth and maintaining high economic growth over the coming years will remain a big challenge. Two major drivers of economic growth in Bangladesh have been the readymade garments exports and remittances. The dividends from these drivers of growth are likely to decline in the future. There is a need to find new drivers of growth through diversification of the economy and developing productive capacities. In these contexts, stimulating private investment in diversified economic sectors and ensuring efficient public investment remain uphill tasks.

Second, containing inflation is a critical challenge. Bangladesh has been able to avoid high inflationary pressure since 2011. The overall inflation rate has remained below 7%. In recent years, the inflation rate is less than 6%. However, there are three concerns with respect to the inflation situation in Bangladesh: (i) the overall inflation rate hides the sudden as well as intermittent steep rise in food prices, especially the price of rice, which affects the poor people; (ii) as the overall inflation rate is a weighted sum of the food and non-food inflation, there are concerns that the non-food inflation in Bangladesh is underestimated due to inappropriate representation of the non-food items and their prices in the calculation of inflation rates; (iii) the overall low inflation rate at the national level may not reflect the true picture of the high inflationary pressure faced by different low-income groups as their consumption baskets and related prices are likely to be different from the national averages. Given these concerns, containing inflationary pressure for low-income people will remain a challenge for Bangladesh in the wake of further growth acceleration.

Third, the management of the exchange rate is a crucial area of concern. Though, for long, Bangladesh has been able to maintain a relatively stable exchange rate regime, the exchange rate in recent times is alleged to be over-valued. In recent years, while Bangladesh’s major competitors in the global market, such as China, Vietnam, India, and Sri Lanka, have experienced significant depreciation of their currencies against US dollar, Bangladeshi taka remained quite stable. The analysis of the real effective exchange rate in Bangladesh also shows a misaligned exchange rate regime which, together with high tariff rates on imports, leads to significant anti-export bias. In other words, the current exchange rate and trade policies are not favorable for rapid export expansion in Bangladesh. However, one important point to note here that, while the importance of the correction of anti-export bias for export promotion and diversification cannot be undermined, such correction alone cannot by itself be sufficient to trigger ‘auto’ large supply response in terms of expanding export volumes and diversifying the export basket. A number of supply-side constraints, in terms of weak infrastructure, the high cost of capital, lack of access to credit, and lack of skilled human resources can prevent local producers from expanding exports, and the lack of an enabling business environment can strangle entrepreneurship and innovation. Therefore, the policy options and support measures for exports are much more difficult and involved than the mere correction of anti-export bias.

Fourth, the surged balance-of-payment deficit in recent years remains a big concern for the stability of the macroeconomy. Over the past two years, the economy has been witnessing high growth rate in imports, while the growth rates in exports and remittances have been subdued and unstable, which has led to widening trade deficit and current account deficit. Though the current volume of foreign reserve can meet the import demand of around five months, the volume of the foreign reserve has been on a declining trend since the financial year of 2017. Given the projections of high import demand for construction and industrial raw materials in the coming days on the one hand and unstable global trading environment, thus creating uncertainties for both export and remittance growth, on the other hand, managing a stable balance-of-payment regime will remain a big challenge for the Bangladesh economy. One important lesson, Bangladesh can learn from the experiences of the successful countries from southeast Asia, is that attracting large scale foreign direct investment (FDI) can ease the pressure on balance-of-payment. Bangladesh is yet to be successful in attracting large-scale FDI. The amount of annual FDI inflow in recent years is only around 2.5 billion US$ while the country needs more than 10 billion US$ FDI annually to achieve many of its development goals. Therefore, enabling the environment for ensuring large-scale FDI remains a critical task ahead.

Fifth, while the monetary policy by the Bangladesh Bank has been, in general, able to maintain a so-called stable ‘status quo’, it has failed to generate a big push for accelerating private investment. A number of banking scams and escalation of non-performing loans show a major institutional weakness of the financial sector and pose a threat to macroeconomic stability. The high cost of credit is a reflection of the inefficient banking system which discourages inclusive financing. Therefore, the challenge of the monetary policy is more of an institutional issue rather than any narrowly-focused effort to lowering of the interest rate.

Finally, though the country has been able to maintain a stable fiscal deficit of around 5% of GDP over a long time period, in a regime of low tax-GDP ratio of around 10%, this has only been possible through keeping the vital social expenditures, like public expenditure on education, health and social protection, at very low levels. However, as the country aspires to achieve stiff development goals in the coming years, public spending on education, health and social protection has to be raised substantially. There is no denying that with such a low tax-GDP ratio many development aspirations will remain unrealized. Though the country has undertaken several reforms to improve tax collection, they have remained unsuccessful due to various institutional weaknesses and vested political patronage. The fiscal policy process thus needs a strong political commitment to simplifying tax systems, strengthening tax administration, and broadening the tax base under a wider reform agenda.

Creating new opportunities for employment in Bangladesh

image_1353_334851Bangladesh’s economic growth and development experience over the past four and half decades, since the Independence in 1971, have generated a lot of interests among the academics and development practitioners both from home and abroad. From an war-torn economy in 1972 until now, Bangladesh has been able to increase its per capita GDP by more than 17 times (from as low as around US$ 100 in 1972 to US$ 1751 in 2018), cut down the poverty rate from as high as 71 percent in the 1970s to 24 percent in 2016, became the second largest exporter of readymade garments in the world, and registered some notable progress in social sectors. In 2015, Bangladesh graduated from the World Bank’s classification of the low-income country to lower-middle income country category. Bangladesh has successfully met all three criteria for LDC graduation in the first review in March 2018. It is expected that Bangladesh will be able to meet the graduation criteria in the second review in 2021 and will finally graduate from the LDC status in 2024.

In the context of the aforementioned development path, there are six major labour market and employment challenges in Bangladesh. These are the creation of jobs (the quantity), ensuring decent jobs (the quality), acceleration of economic growth and economic diversification, increasing female labour force participation, enhancing youth employment, and raising the productivity of labour.

In terms of the number of new jobs, there has been slower growth in job creation in recent years in Bangladesh. Between 2013 and 2016-17, while the average annual GDP growth was 6.6%, the average annual growth of jobs was only 0.9%. The number of manufacturing jobs declined by 0.77 million, and more importantly, female manufacturing jobs declined by 0.92 million. Also, manufacturing’s employment share declined in recent years: from 16.4% in 2013 to 14.4% in 2016-17. The slow growth in job creation is also reflected in the declining employment elasticity over the last decade. The overall employment elasticity with respect to GDP growth declined from 0.54 during 1995-2000 to 0.25 in 2010-2018. While the SDG 9.2 highlights the target of doubling industry’s (primarily manufacturing) share of GDP in the LDCs by 2030, with the changing nature of manufacturing, leaning towards automation, increasing the number of new jobs, especially in this sector, will remain a big challenge.

In the case of ensuring decent jobs, there are concerns about a high degree of informal employment in Bangladesh. The share of informal employment in total employment in Bangladesh remains well above 85%. A study by SANEM, using the Labour Force Survey data and a recent household survey conducted by SANEM, classified jobs into three different categories: ‘good enough’ jobs, ‘good jobs’ and ‘decent jobs’. The analysis of this study shows that the share of decent jobs in total jobs in Bangladesh increased from 10% in 2010 to only 12% in 2018. Therefore, there is an immense challenge to register a significant headway from such slow progress in ensuring decent jobs. In this case, both the government and the private sector have important roles to play.

Further acceleration of economic growth, enhancing the quality of economic growth, sustaining economic growth and economic diversification all have important implications for the labour market and employment challenges in Bangladesh. Though Bangladesh has been able to maintain an annual average real GDP growth rate of over 6% during the past decade, there are concerns with respect to the quality of growth. One of the major aspects of job creation and ensuring decent jobs is the need for economic diversification. However, economic growth, so far, has not been associated with significant economic diversification. Despite some progress in raising the manufacturing shares in GDP and employment during 1990 and 2018, Bangladesh has not been successful in moving to the next phase of industrialization. The manufacturing sector in Bangladesh is highly concentrated around low value-added readymade garments, and the country has not been yet able to move successfully to the next generation of manufacturing, especially to high value-added manufacturing. Though the private sector has the dominant role to play, the private investment-GDP ratio has remained stagnant over the past decade. Therefore, energising private sector investment for achieving the aforenoted objectives remains a critical challenge for Bangladesh. For this, the effective remedy of both the policy-induced and supply-side constraints will be imperative. A number of supply-side constraints in the form of weak infrastructure and the high cost of doing business need to be addressed within a short time span. Bangladesh has not even been able to attract much foreign direct investment (FDI) even by the LDC standard. In 2016, the FDI share in GDP in Bangladesh was only 0.9% against the LDC average of 3.3%. Weak infrastructure and poor business environment are critical problems for Bangladesh to attract both domestic private investment and FDI. According to the 2019 Doing Business index of the World Bank, Bangladesh ranks 176th among 190 countries. In terms of sub-components of the Doing Business index, Bangladesh’s worst performances are observed in the areas of ‘enforcing contracts’, ‘getting electricity’ and ‘registering property’. There is a need for rapid improvement in these areas. The initiatives taken by the Bangladesh government in setting up 100 special economic zones (SEZ) as well as the development of big infrastructural projects seem to address these issues. However, there is a need for faster and quality implementation of these projects, as delay in implementation, cost overrun, and sub-standard quality of projects are long-standing problems in Bangladesh which discourage private investment.

Over the past three decades, labour force participation (LFP) rate of females has increased. Nevertheless, the LFP rate of female remained stagnant between 33% and 36% during 2010 and 2016-17. We explored both the supply and demand side factors affecting female labour force participation in Bangladesh. Our analysis suggests that issues e.g. child marriage, early pregnancy, coupled with reproductive and domestic responsibilities have not changed much with the economic progress of the country, and these factors constrict female LFP. To explore the demand side factors, especially the role of innovation and technology, affecting firms’ demand for female labour, we used firm-level data from the World Bank’s Enterprise Survey of 2007 and 2013. Female employment intensity, defined as the ratio of the number of female labour to male labour, declined in major manufacturing and services sectors during 2007 and 2013. The overall female employment intensity declined from an average of 20.35% in 2007 to 17.67% in 2013. The econometric estimation suggests a negative impact of innovation and technological upgradation on firms’ female employment intensity. In these contexts, there is a need to provide incentives and remove barriers to the creation of new and higher productivity jobs in the sectors which can generate large-scale employment for females.

Youth employment is a major challenge in Bangladesh. The country is passing through the phase of the demographic dividend, and estimates by SANEM suggest that the country will continue to enjoy this dividend until 2030. However, two critical areas of concerns are there with respect to youth employment. The share of youth not in education, economic activities and training (NEET) increased from 25.4% in 2013 to 29.8% in 2016-17, and 87% of the youth NEET are female. Also, the youth unemployment rate increased from 8.1% to 10.6% during this period. In order to address these challenges, there should be targeted programs for the specific disadvantaged segments of the youth population through skill-development and appropriate labour-market policies.

In the case of raising the productivity of labour, it is important to note that the productivity of labour critically depends on both quality health and education services. However, Bangladesh lags behind significantly in ensuring quality health and education for all. The public expenditures on both health and education as percentages of GDP in Bangladesh are among the lowest in the world. The country, therefore, needs to attach vital emphasis on improving the existing low level of human capital by enhancing investment on education, skill development, and health facilities, and by making such spending more efficient.

The challenging economics of climate change

imageedit_2_8238428477Global climate change has become one of the dominant discourses in the scientific and public policy arena. Studies from scientific research show that the global warming is now a real phenomenon, as there has been an unusually rapid increase in Earth’s average surface temperature over the past century primarily due to the unprecedented accumulation of carbon dioxide resulting from the burning of fossil fuels, together with emissions of other human-induced greenhouse gases. The effect of this temperature rise includes increased frequency of severe weather events (such as heat waves, hurricanes, and tornadoes), proliferated intensity of storms, and sea level rise. These changes, no doubt, pose serious threats to the welfare and existence of mankind and other living things on earth through impacting on the functioning of the ecosystem, biodiversity, and human health.

The economics of climate change refers to the study of the economic costs and benefits of climate change, and the analysis of the economic impact of actions targeting at limiting its effects. However, the economics of climate change is challenging due to the fact that there are huge uncertainties in the estimation of both the costs and benefits related to climate change. The precision of the time horizon, over which benefits and costs of climate change would accrue, is debatable. Also, there are uncertainties over thresholds for climate change impacts and the pace and form of technological innovation that can take shape in the future.

Furthermore, the effects of climate change are not uniform across countries. Different parts of the world are likely to be affected differently: countries closer to North and South poles will experience warmer temperatures and once inhospitable land will experience melting of ice. Small island nations are at risk of extinction due to rising sea levels. Low lying islands and countries are at a greater risk of flooding both from rising sea levels and increased precipitation. Countries near the equator are likely to experience unbearable heat. Some of the countries are already experiencing more frequent events of severe weather.

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The economics of climate change is further complicated by the fact that most of the developing countries can’t afford the costs of mitigation or adaptation of the aforementioned phenomenon of climate change. The 2018 Environmental Performance Index (EPI) of the Yale University ranks 180 countries on 24 performance indicators across ten issue categories covering environmental health and ecosystem vitality. These metrics provide a gauge at a national scale of how close countries are to establishing environmental policy goals. According to the EPI, most of the developing countries in the South dominate in the lower ranking. Among the bottom 10 countries in the ranking, three (Bangladesh, India and Nepal) are from South Asia. Bangladesh’s position is 179 out these 180 countries.

There are also considerable debates in the discourse of climate change with respect to the policies and actions needed to address the challenges. Two instruments are widely referred in the policy discussion. The first one is the carbon tax, which is the mandatory fee charged for the emission of a given quantity of carbon dioxide or some other greenhouse gas. The second one is carbon trading, which is buying and selling of carbon credits, abstract instruments (like money) that each represents the right to emit 1 ton of carbon dioxide or an equivalent amount of other greenhouse gases. The other policies include technology promoting programs. One more instrument, which is less explored but can be effective, is the liberalization of trade in environmental goods (EGs), which can play a crucial role in protecting the environment as well as promoting international trade in EGs. Trade has a positive effect on the environment only if environmental policy advances alongside trade liberalization. However, most of the developing countries are seriously lagging behind in conceptualizing as well as in building national capacities to implement these aforementioned instruments.

One important challenge in the economics of climate change is the political economy aspect of it. Both the global and national political economy factors are critical in addressing climate change issues. The USA President Donald Trump’s unfavorable attitude towards the warning of devastating effects from climate change, and eventually USA’s withdrawal from the Paris climate agreement has created huge uncertainties for a global partnership. At the national level, many developing countries, due to their national priorities of industrialization and lobbying power of different quarters, find it extremely difficult to contain the polluting industries. Therefore, the developing countries have uphill tasks in the future given the aforementioned challenging economics of climate change.

First published in the Thinking Aloud on 1 December 2018

How does public investment affect private investment?

Selim Raihan

The importance of investment in economic growth is well acknowledged both in theory and empirical literature. No country has been able to accelerate economic growth without significantly increasing the investment-GDP ratio. However, there are disagreements among economists and policy-makers about the composition of investment, i.e. the share of private and public investment in total investment. Two views dominate in this regard. One view argues that public investment has a crowding out effect on private investment. That means, with the rise in the public investment the private investment may fall. In contrast, the other view argues that public investment can be complementary to private investment. Thus, the rise in the public investment can be conducive to the rise in private investment. The inconclusive nature of the results of the empirical literature is, however, also driven by the differences in the methodology used in these studies in different country contexts.

The data on public investment share in GDP is available for 91 countries. Figure 1 presents the average percentage share of public investment in GDP for those 91 countries for the years during 2013-2017. With a share of 20.77%, Republic of Congo is at the top of this list, while with a share of 0.98%, Sudan is at the bottom of the list. The top ten countries with the high shares include Republic of Congo, Iraq, Rwanda, Equatorial Guinea, Venezuela, Ethiopia, Timor-Leste, Djibouti, Burkina Faso, and Mozambique. In contrast, the bottom 10 countries include Sudan, Yemen, Lebanon, Guatemala, Russia, El Salvador, Armenia, Serbia, Philippines, and Croatia. Among the five South Asian countries, Bhutan has the highest share (10.86%), followed by Bangladesh (6.82%), Nepal (5.78%), Pakistan (3.74%), and India (3.6%).

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While looking at the pattern of the cross-country differences of the share of public investment in GDP and GDP growth rate, as plotted in Figure 1, it appears that in the recent years (2013-2017), 19 countries exhibit having shares of public-investment in GDP of 5% or more as well as GDP growth rate of 5% or more. Among these countries, 10 are from sub-Saharan Africa, two from Latin America, two from South Asia (Bangladesh and Bhutan), and two from Southeast Asia (Malaysia and Myanmar). If we consider the 6% GDP growth rate as the cut-off mark with public investment share in GDP of 5% or more, there are only eight countries (Rwanda, Ethiopia, Djibouti, Lao PDR, Myanmar, Guinea, Bangladesh, and Cote d’Ivoire). This suggests that the association between public investment share in GDP and GDP growth rate is not straightforward.

Furthermore, the scatter-plot between the ratios of public investment to GDP and private investment to GDP (Figure 2) suggests that there are two different trends as far as the association between the public and private investments in a cross-country context is concerned. For the countries with public investment to GDP ratio of less than 7%, there seems to be a positive association between the ratios of public investment to GDP and private investment to GDP. However, for the countries with excessive public investment to GDP ratio (more than 7%), there seems to be a negative association between public and private investment.

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The aforementioned analysis underscores the need for a discussion on some critical factors which are important to make public investment conducive for private investment. While it is true that public investment is the main channel for the formation of public capital stock, an adequate level of public capital can have a positive impact on economic growth depending on the capacity and nature of public capital to attract or crowd-in private capital. The crowd-in effect can only occur when public investment furnaces such a public capital stock that increases the rate of return of private capital.

One of the critical channels through which public investment may play a role in increasing the rate of return of private capital is infrastructure development. The importance of infrastructure originates from the fact that it provides key intermediate consumption items in the production process for almost all activities in the economy. Therefore, an adequate supply of infrastructure through public investment has the potential to crowd-in private investment. However, when it comes to infrastructure development through public investment, there are two important issues which need to be in order to ensure the crowd-in effect of private investment.

First, not only the quantity but also the quality of the infrastructure is equally important. In many developing countries, due to institutional deficiencies, infrastructural projects suffer from huge cost and time over-run, which can discourage private investment. The high cost of infrastructural projects and uncertainty in the timely delivery of such projects may reduce the rate of return of private investment.

Second, while several supply-side constraints related to weak infrastructure can restrict potential private investments in new and emerging sectors, some of these constraints are broadly ‘general’ in nature and some are critically ‘sector-specific’. Interconnection and complementarities between general and sector-specific infrastructures are key elements for increasing service efficiency, supporting the adoption of innovative technologies, and the promotion of private investment in those sectors. However, there is a tendency in the developing countries to excessively emphasize on the broad general infrastructure, i.e., the enhanced supply of electricity, improvement in roads, improvement in port facilities, etc. that the development of critical sector-specific infrastructure is largely overlooked. Embarking on developing broad general infrastructure are relatively easy, whereas solving sector-specific infrastructure problems involves identifying priorities in the policy-making process and addressing a number of political economic issues. However, failure to deal with sector-specific infrastructure problems leads to a scenario where a large number of potential growth-enhancing sectors may fail to enjoy the benefit from the improvement in broad general infrastructure. This can discourage private investment.

Dr. Selim Raihan. Email: selim.raihan@gmail.com

First published at the Thinking Aloud on 1 November 2018

How do public education and health spending reduce poverty?

Selim Raihan and Mehzabeen Ahmad

In recent decades, the developing world has made important progress in reducing extreme poverty. The data from the World Bank shows that the number of people living below the international poverty line of US$ 1.9 a day dwindled down from 1.85 billion people in 1990 to 768.5 million in 2016. However, the global share of the extreme poor population stands at over 10%, and there is uneven progress across different regions in the world. Therefore, eradicating poverty in all its forms and dimensions, including extreme poverty, remains the greatest global challenge and the most significant hurdle in the path of attaining sustainable development goals (SDGs) worldwide.

A majority of the global decline in poverty is explained by the reduction of poverty rates in East Asia and Pacific and even South Asia to an extent, due to the thriving economic growth experienced by these regions. However, a large population continues to suffer from poverty and a major portion of the rest remains vulnerable and at risk of falling back below the poverty line. A glaring spatial disparity can be perceived, accompanied by low levels of human development. If the qualities of health, education, employment and overall standard of living continually fail to cope with income growth, it may ultimately further hinder the capability of the masses; reinforce poverty and impede the process of growth. A similar picture can be admonished for Sub-Saharan Africa, which currently hosts the largest number of poor compared to other regions. This region’s multidimensional aspect of poverty is reflected in economic, human and social deprivation, explained by the very slow progress in Human Development Index (HDI) from the 1990s and the elevated rate of income poverty. Inequality also remains a significant crisis in the Latin American countries, in the form of chronic and transitory poverty, despite the recent upsurge of economic development in this region.

As the gap between the rich and poor widens, across and within nations, it becomes imperative to ensure a sustained resilience and global initiative against all dimensions of poverty. With that aim, the first SDG is assigned to “end poverty in all its forms everywhere” and its seven associated targets focus on various approaches to universal eradication of poverty and inequality, with a special attention to implementing necessary social protection programs, ensuring equal access to basic utilities, mobilizing global resources to extend cooperation towards the developing countries and constructing national and international policy and strategy frameworks.

In order to understand the current state of the cross-country differences in the poverty rates, we compared poverty rates across 72 developing countries (for which data is available from the World Bank’s World Development Indicators database) for the time period of 2010-15. Table 1 and Table 2 present the top 10 and bottom 10 performing countries with respect to poverty rates based on US$ 1.9 and US$ 3.2 poverty lines respectively.

Table1

Table2

Table3

According to Table 1, all the 10 countries with highest rates of poverty, in terms of US$ 1.9 poverty line, are from the Sub-Saharan African region, with Madagascar displaying the staggeringly highest rate of 77.8%. In contrast, the list of top countries with lowest poverty rates is dominated by the European countries, with countries such as Belarus, Poland, and Romania displaying almost no population below the US$ 1.9 poverty line. Few countries from Asia also make it to the top with minimal levels of poverty.

Table 2 provides a similar scenario for poverty rates calculated at a poverty line of US$ 3.2. Most countries on the list of bottom 10 or highest poverty rates remained unchanged. Madagascar and Burundi have almost 90% of the population below poverty line. Among the countries which possess the lowest rates of poverty at US$ 3.2, Belarus again tops the list, while Malaysia and Hungary make an entry in the top 10 rankings.

Table 3 illustrates the situation of all South Asian countries (except Afghanistan, due to unavailability of data), in terms of poverty. The countries have been ranked from the lowest to the highest rate of poverty for US$ 1.9 and US$ 3.2 poverty lines. Sri Lanka and Bhutan top both the lists, while India and Bangladesh stand at the bottom of the list with the highest share of the population living below the poverty line.

It has long been argued in the economic literature that public spending on education and health can be a powerful policy tool in the developing countries to reduce poverty, as these expenditures not only address the symptoms of poverty but also the causes of poverty. Public spending on education and health is argued to contribute to economic growth of a country by strengthening the human capabilities of the poor people. However, empirical literature to support this view has been limited due to the unavailability of time-series data on poverty. In this article, we use a cross-country panel data of poverty, constructed by Raihan (2017), to explore how public spending on education and health can affect poverty. This dataset has been constructed by considering periodic poverty rates (of US$ 1.9 poverty line) and average values of other variables for those corresponding periods. The constructed data has seven periods between 1981 and 2015. These are 1981-1985, 1986-1990, 1991-1995, 1996-2000, 2001-2005, 2006-2010 and 2011-2015. The missing values of the poverty rates have been filled-in using extrapolation and interpolation methods. This constructed data has 72 countries and the source of the data is the World Development Indicators of the World Bank.

The fixed effect panel regression results suggest that the coefficient of the per capita GDP is negative and significant suggesting that increase in the per capita GDP is strongly associated with a reduction in the poverty rate. Also, the ratio of remittance to GDP appears to have a positive and statistically significant association with the reduction in the poverty rate. After controlling for differences in per capita GDP and remittance-GDP ratios, one percentage point rise in the share of public spending on education in GDP is associated with 1.33 percentage points fall in the head-count poverty rate, and one percentage point rise in the share of public spending on health in GDP is associated with 2.4 percentage points fall in the head-count poverty rate. Both the fixed effect coefficients of public education and health spending are highly statistically significant.

Results from the aforementioned empirical exercises have important policy implications. A large number of developing countries, with the incidence of high poverty rates, are seriously lagging behind in terms of ensuring the critical levels of public spending on education and health in proportion to their GDPs. The business-as-usual scenarios of public education and health spending will not help these countries achieve the first SDG of ‘no poverty’ by 2030. There is thus a need for some extraordinary efforts in bringing large positive changes in the business-as-usual scenarios.

Raihan, S. (2017). “A cross-country panel dataset on poverty”, mimeo. SANEM

Dr. Selim Raihan, Professor, Department of Economics, University of Dhaka & Executive Director, SANEM: selim.raihan@gmail.com

Mehzabeen Ahmad, Research Associate, SANEM: mehzabeenahmad@gmail.com

First published in the Thinking Aloud on 1 December 2017