The economic features and problems confronting the new nation Economic policy and planning

After West Pakistani owners of industrial enterprises fled in 1971, the government of Bangladesh seized their plants as abandoned properties.

The government suddenly found itself managing and operating more than 300 medium- and large-scale industrial plants, which represented nearly 90 per cent of the value of all such enterprises in the new nation. It organised public corporations to oversee the major industries: jute, textiles, sugar, steel, paper and paperboard, fertilizer, chemicals, pharmaceuticals, engineering and shipbuilding, minerals, oil and gas, food and allied products, and forest products.

With government control over major industries and massive inputs of foreign aid, the economy gradually returned to the levels of the late 1960s, but it was still among the world’s poorest and least developed countries. The main government institution responsible for coordinating national rehabilitation and development was the Planning Commission.

Sheikh Mujibur Rahman (Mujib), the first president of Bangladesh, led the formation of the national-level Planning Commission, which prepared plans that directed economic priorities for five-year periods. The First Five-Year Plan covered the period July 1973 to June 1978. It was succeeded by a two-year plan, covering the period July 1978 to June 1980, which was followed by a year­long hiatus.

The Second Five-Year Plan (1981-85) and the Third Five-Year Plan (1985-90) put the planning process back on track. The broad objectives of the Third Five-Year Plan were to reduce poverty, bring down the rate of population growth to 1.8 percent annually, increase exports by 5.9 per cent and domestic savings by 10 per cent, attain self-sufficiency in food production, and realise an annual growth of the gross domestic product of 5.4 per cent.

These ambitious goals went well beyond the previous actual performance of the economy. Five-year plans are financed through the development, or capital budget, which was separate from the government’s revenue, or administrative, budget.

The Third Five-Year Plan envisaged a tota’ outlay of more than US$12 billion, approximately 65 per cent of which was destined for public sector projects. About 55 per cent of the needed funds were to come from foreign sources, including private investment, the aid programs of international financial institutions, and bilateral donor nations.

Foreign commitments in the early and mid-1980s were around US$ 1.7 billion per year (exclusive of external private investment, which in any case was not significant). The portion of the development budget to come from domestic sources (45 per cent) represented a substantial increase from the 15 to 20 per cent of earlier development budgets. The Planning Commission translates the multiyear development plan into public investment through the Annual Development Programme.

The commission also ensures that public programs and policies are in conformity with its long- term strategy through its project approval process and through its advisory position on the country’s highest economic decision-making bodies, the National Economic Council and its Executive Committee.

The National Economic Council in the late 1980s was chaired by the president of Bangladesh and included all government ministers plus the governor of the Bangladesh Bank and the deputy chairman and members of the Planning Commission.

The Executive Committee of the National Economic Council made most of the decisions on major development projects and development issues in general. The committee included the ministers of key economic sectors (finance, planning, industries, commerce, and public works) and, according to the agenda, any other sectors concerned. A third organisation involved in the planning mechanism is the Project Evaluation Committee, which monitors the progress of five-year-plan programs.

External Dependence

Bangladesh’s economy is heavily dependent on foreign aid. The dependence is not a recent origin but that can be traced to the days of pre-liberation. At that time it was a net exporter of capital to West Pakistan and a net importer of foreign aid.

After independence, the war ravaged economy made Bangladesh to depend on foreign aid. What initially began as a necessity for their habilitation of millions of refugees displaced by war soon became a pattern of dependent development.

For more than a quarter century Bangladesh has been receiving aid bilaterally as well as multilaterally. Normally aid is received in the form of grants, loans, food aid, commodity aid and project development aid. Main donors include Japan, US, Canada, UK, Saudi Arabia, Germany, Netherlands and India. Japan is the largest bilateral aid donor. All these states account for nearly fifty per cent of aid Bangladesh receives.

Bangladesh also receives aid from multilateral agencies such as the World Bank, Asian Development Bank, OPEC and the European Union. Between 1971 and 1989, it received $19 billion in aid and loans.

The external aid is about nine per cent of GDP, and 116 per cent of annual development plan. About 55 per cent of the funds for the Third Five Year plan (1985-90) came from foreign sources, including private investment, the programs of international financial institutions, and bilateral donor nations.

In spite of massive aid flow, there appears to be little discernible improvement in the economy. It not only failed to improve the standards of living of people, eradicate poverty but its external dependence seriously distorted the development pattern.

This in turn widened the gap between rich and poor. The increasing dependence on external aid resulted in the decline of domestic savings. When per capita foreign aid went from TK 840 in 1981 to TK 2,720 in 1987, domestic savings went down from 3.4 per cent in 1981 to 1.1 per cent in 1988. It is also alleged that the conditions attached to aid are curtailing Bangladesh’s sovereignty and freedom to be self-reliant.

The media calls the dependency as “neo-colonialist”. According to some studies, external aid helps the donors more than the receivers as most of the money goes back in some form or the other. Shoban Rehman and Ifftekharuzzaman have estimated that 75 per cent of aid goes to the donors in the form of costs for procurement of project inputs and consultancy fees to foreign experts.

Heavy dependence on aid has its impact on domestic front. Decline of domestic savings resulted in low investments in capital goods sector, and irrigation. It means growth in the productive capacity of the economy-recorded contraction.

The economic growth rate averaged only 4 per cent during 1973 and 1993. This in turn influenced the nature and stability of the political system. Aid has become a soft option for the political leadership to avoid hard decisions on the economic front. Sometimes donors had the dubious distinction of influencing even the political process.

For example, it is reported that in 1990 the Japanese and the British threat to withdraw all aid put additional pressure on Ershad to resign from office. This paved the way for the conduct of elections, which in turn restored parliamentary democracy in Bangladesh.

Liberalisation and Foreign Direct Investment

Faced with a huge external public debt of 37 per cent of the GNP, Bangladesh abandoned the import substitution policies in the late 1980s. In consultation with international financial institutions, Bangladeshi initiated market oriented reforms to revitalise the economy.

These included export promotion schemes, liberalisation of exchange rates, reform and privatization of state owned enterprises, removal of price controls and subsidies, restructuring of the financial sector, and tax reforms. These were aimed at encouraging domestic and foreign investment in the private sector.

In addition, import liberalization was undertaken and an abundance of imported goods were made available to both consumers and producers. Foreign aid in the form of both loans and grants were used to finance these imports.

Though there are infrastructural bottlenecks, the market oriented reforms have resulted in substantial increase in the flow of FDI in the 1990’s. It increased from $ 60.27 million in 1990 to $804 million in 1993-94 and to $2,119 million in 1999-2000. Most of the FDI was in the form of joint ventures. A number of multinational national companies collaborated with local investors to start joint ventures.

Global companies such as General Electricals, Reckit & Colman, Glaxo, Berger paints, Singer, Ptizer, Coca-Cola, Pepsi, Siemens, Philips invested in Bangladesh. Significantly, unlike in the past when foreign investment was dominated by Western nations, the newly industrialized economies (NIEs) of East Asia made significant strides by investing more in Bangladesh in the 1990s.

Most of the FDI is concentrated in the sectors like garments, textiles, and knitwear operating in the export processing zones. It is also observed that the FDI is generating greater employment opportunities, as it is largely labour-intensive because of availability of cheap labour in Bangladesh.

It is said that there are 100 per cent equity, ‘non-equity’ and ‘licensing’ forms of foreign investment. One of the greatest attractions for FDI is the oil and gas sector.

It is estimated that Bangladesh is having 13.74 trillion cubic feet of natural gas. International agencies like World Bank and Asian Development Bank claim that the natural gas reserves range from 30 to 80 trillion cubic feet. To exploit these resources Bangladesh government has shown keen interest in collaborating with India and US in helping it pump its natural gas.

The US too has shown considerable interest in Bangladesh’s energy sector. Its companies have already made investments in the gas sector to the tune of about $250 million. But there is domestic opposition for co-operation with India.

The market oriented reforms are seen as being important in sustaining growth in the future. While the reforms have generated employment, growth, and development in Bangladesh, critics of the new economic policies argue that they have not encouraged an autonomous domestic industrial capability.

The reforms have led to some resource shifts in the economy, but the growth and diversification in the industrial sector has been limited. Given the low per capita income and low purchasing power of the people, the domestic market is not large enough to absorb a substantial increase in industrial output.

The only option is to tap the export markets. However, the country’s access to foreign market is limited and limited to low value added products. For instance, Bangladesh has encouraged the growth of garment industry since the late 1970s.

This industry which is primarily geared to Western market has emerged as a major source of foreign exchange. But reliance on garment industry as a source of foreign earning has left the country vulnerable to the mercy of the same countries which influence international donor agency policies.

A small number of electronic and plastic firms have come up in the export processing zones, but these rely little on domestic inputs or human capital. The lack of a large entrepreneurial base and skilled labour force has been a problem as has been an absence of familiarity with international technology and marketing standards. In the early phase of the reforms, resistance to change has come from labour unions in the public sector and a variety of civil society groups.

The resistance was one of the factors that caused the Ershad government to fall in 1991. When the BNP government came to power and continued the liberalization, it also lost to the opposition led by the Awami League which received support from labour unions and anti-reform groups.

While resistance from interest groups such as selected producer groups or unions remains, today there is a general consensus in the public and media that Bangladesh is too small to be insulated and must integrate with the global economy. However, the nature of this integration is said to be passive, superficial, and with little linkage to the bulk of people and economic activity in the country.

The market reforms undertaken to integrate with the world economy have resulted in reallocation of resources away from public expenditure for the provision of health, education, and other services.

There was a general perception that the earlier emphasis on poverty alleviation had shifted to a more strict focus en market determined economic efficiency, A simultaneous rise in democratic and popular movements has led to a search for alternative approaches to poverty alleviation and the provision of basic needs.

This is gone in the expansion of non-governmental organizations (NGOs), both local and international, which have concentrated on empowerment, health, education, and micro-enterprises. In the long run, better social services and greater participation of the people in development can lead to a greater success of market based policies.