We need to make our economic growth equitable

Achievements that the country can be proud of

We have started a new year, and with that, a new decade as well. That is important for a variety of reasons. In one year's time we will be celebrating the Golden Jubilee of our independence. This decade will also be important for achieving a number of longer-term goals set by the government-- to graduate from lower middle income to middle income status and then eventually to developed country status by 2041. We have about two decades' time between now and then. The terminal year for the sustainable development goals is 2030, which means we have another 10 years for achieving the goals. So, a variety of reasons make this year, this decade and the subsequent decade truly important for the country's development.

Of course, we have achievements which we can be proud of and build on. But we cannot afford to be complacent. Some of the achievements are pretty well known. For example, we have been able to accelerate the rate of economic growth gradually and in the last year we attained 8.1% growth rate. So, from what used to be called a 'basket case,' we have now moved to the status of a lower middle income country. We have also fulfilled the conditions for graduation from the status of least developed country. The process is going on and if everything goes well, we will be able to graduate.  These are notable achievements.

On the social side also, we have important achievements in the fields of education and health. Particularly in the field of primary education, we have made good progress. But we need to make further progress in higher education—secondary, higher secondary and tertiary levels.  

In the area of health, we have some achievements. Life expectancy at birth has improved substantially. In the area of child mortality, the MDG was achieved. But again, there are challenges that we need to overcome. So, there is no room for complacence. We can be proud of our achievements, but we need to build on those and continue to strive for further progress.

Longer-term goals

Coming to the question what should be our longer-term goals, I have identified the following:

Sustaining high growth would be the first major goal.  Because unless we can sustain the high growth that has been attained recently, it would not be possible to attain the goals of moving to the middle-income status and high-income status eventually by 2041.

From the experience of development, we have seen a number of developing countries including some in Asia actually showed promise at lower levels of development; they attained very high growth rates. But at some stage the rate has stalled - a phenomenon known as 'middle-income trap.' They were not able to maintain that kind of growth and they have not been able to reach the status of developed countries. If we look at the data on GNI per capita, we see a number of countries in Southeast and East Asia like Indonesia, Thailand and the Philippines, which have not been able to maintain the high growth that they attained in the 1970s and the 1980s. The most recent example is of course India, which attained high growth but in 2019, their growth declined very sharply. Even China, which attained double-digit growth rate for more than two decades, has not been able to sustain that kind of growth; their growth rate has declined very substantially. So, that is why one has to worry about the danger of 'middle income trap' and strive for sustaining the high growth.

The second challenge, at least in my view, would be to make economic growth more equitable,    because we know that economic growth, although a necessary condition, is not sufficient for improving the standard of our living. But eventually that is the goal that we should pursue for the betterment of the lives of people. Well-known economists like Nobel laureates Amartya Sen and Joseph Stiglitz have expressed this in written form in various public statements. That is something we need to keep in mind -   we need to make growth more equitable. We have to avoid a rise in income inequality, and ensure that the poverty reduction continues at the desired rate, so that we can eliminate poverty within the stipulated time.

And thirdly, we also need to make sure that growth brings productive employment. Better jobs are needed for better lives.

I have talked about poverty in term of income. But in addition to income poverty, we have to also look at human poverty in terms of levels of education and health service that one can get.

The story of growth and convergence

Coming to details, I would start with the story of economic growth and convergence and divergence between various countries. We may consider the gap between various countries. First between developed and developing countries. We expect that the developing countries would be able to attain economic growth at higher rates than the developed countries and thereby reduce the gap. Likewise, there are gaps between developing countries which are at higher levels of development and those which are at lower level of development. Like China and Malaysia are in the former category, while Bangladesh, India are in the latter category.

One expects that high growth would enable the countries with lower levels of development to bridge the gap between themselves and those at higher levels of development. I have looked at this and seen that Bangladesh has been able to reduce the gap with certain countries. But it has not been able to reduce the gap, in fact the gap has widened, with some other countries. If we look at the Asian countries, we see the gap between Bangladesh, and India and Pakistan has narrowed down. In fact, we have been able to surpass the per capita income of Pakistan, and have reached very close to the level of India's per capita income. Likewise, the gap between Malaysia and Bangladesh, and between Thailand and Bangladesh have also narrowed down. But the gap has increased with China, Vietnam, and even with Sri Lanka and Indonesia, because the growth rate of China has been much higher, growth rate of Vietnam has also been much higher over a pretty long period of time. That is why the gap of Bangladesh with these two countries has widened in recent times.

Sustaining high growth

For sustaining higher growth, there are quite a few factors that we have to consider. First, growth depends critically on investment, which comes from public as well as private sources. If we look at the experience of Bangladesh, we saw, particularly in the last several years, that private investment has stagnated. The acceleration in economic growth that we see has been made possible primarily by the growth in public investment. Of course, public investment is important particularly in areas like infrastructure, education and health. But unless private sector investment increases, sectors like manufacturing industries, trade, transport and other services are not going to grow. Unless all these sectors grow simultaneously, it will be extremely difficult to sustain the overall GDP growth. That is why a balance needs to be achieved between public and private sector investment.  Private sector growth has to be encouraged. We have seen that has been stagnated, and credit growth to the private sector has remained stagnant, if not declined. In fact, for some years it has declined. So, we need to find ways of reversing these trends.

There are two related issues here. One is the capacity of the government to raise revenues. Taxation is an important way of raising revenues. If one looks at the data of Bangladesh, one would see that over time there has been a very little improvement in the ratio of revenue to GDP. Actually, this is well known and government policymakers also know that the level is very low.  If one compares this ratio with other countries of South Asia like India, Nepal, Pakistan and Sri Lanka, one notices that it is the lowest in Bangladesh. Also, it has remained stagnant, and in some years, it even declined.

Another issue of importance is investment, both domestic and foreign direct investment. In addition to domestic private investment, a country like Bangladesh at this level of development needs foreign direct investment to maintain economic growth rate. Experience of countries like Vietnam and China will corroborate this point. In that respect also, performance of Bangladesh is rather disappointing. Foreign direct investment has remained at a low level.  Although there has been some increase last year, that was because of a particular sector-- an acquisition by a company. We are not sure whether that will continue next year. The country has not been seen as a good destination for FDI.

I have already talked about 'middle income trap.' One has to look at ways of sustaining GDP growth over a pretty longer period of time. In addition, it is important to look at the pattern of growth. Just looking at growth one would not get a good sense of what is happening in the economy.

What should be the pattern of our growth? In developing countries like Bangladesh, where we see a lot of under-employment, people work in sectors characterized by low levels of productivity and low incomes. They are working, but their incomes are very low. The structure of the economy needs to be changed in a way that more productive sectors will develop and create high productivity jobs. It is extremely important for the economy to undergo structural change: from one sector to another, from low productivity to higher productivity sectors. For example, we have already seen that share of agriculture in GDP has declined and the share of manufacturing industries has increased; but this process has to be much faster. The share of manufacturing industries in total employment has to increase at a much faster rate.

Growth needs to be equitable

Now I come to the challenge of making growth more equitable. The degree of inequality in income distribution is important. If we look at the data, we see that inequality has increased over time. One often uses Gini Coefficient as a measure of inequality. It was 0.36 in 1973-74.  In 2016, that increased to 0.48 at the national level and to nearly 0.5 in urban areas. When Gini Coefficient goes up like that, exceeds 0.4 and approaches 0.5, we consider that country to be a country of high inequality. Bangladesh has already reached that category.

Another aspect of equity is the incidence of poverty. Of course, Bangladesh has attained a degree of success in reducing poverty. It attained Millennium Development Goal of reducing poverty by half before the target year. But if one looks at recent data, one would notice that the rate of poverty reduction has declined. If the trend continues, the goal of eliminating poverty will be difficult to achieve. We have to maintain a high rate of poverty reduction-- at least the kind of rate the country attained in the previous decade.

The other aspect of poverty reduction is the regional variation.  The incidence of poverty was 24% in 2016 and according to government's estimates, it has declined further to 21% in the last year. But that is the national average. We often forget that there is a huge variation in poverty between the various regions of the country, between the districts of the country. A recent research by the BIDS shows that 23 districts have witnessed increase in poverty between 2010 and 2016. And that is the period when economic growth actually accelerated. The country has seen an acceleration in the rate of economic growth, while as many as 23 districts or one-third of the country have seen a rise in poverty. There are some districts where the incidence of poverty was already high in the beginning of the last decade and increased from there. Districts like Kurigram, Dinajpur, Lalmonirhat, Bandarban, Khagrachhari, Kishoreganj, Jamalpur, Magura are in that category. And one can see that they are spread all over the country. There is a notion or perception that the northern districts are more under-developed. But the list shows districts with high incidence of poverty are scattered across the country—from north to southeast. Unless appropriate measures are taken, it will be difficult to have all the districts reduce the incidence of poverty.

Another aspect of equity is education. Here again we have attainments to be satisfied about. But it is quite well-known by now that the quality of education varies enormously between institutions, between rural and urban areas, and between income groups. The institutions which offer high quality or good quality education, are by and large located in the urban areas. The rural areas are deprived of good quality educational institutions.  Moreover, good quality education is affordable only by upper income groups. The lower income groups—the poorer and lower middle income people—do not have adequate access to education of good quality.

The same comment can be made about the health services.  Although a framework has been developed for providing health services in the rural areas including the rural poor, the same cannot be said about the urban poor. Also, the quality of health services that the rural poor has access to is questionable.

The final point relating to the quality of growth and equity is the issue of employment. Again, the data that are available from government sources show that there has been a very sharp decline in employment growth. Between 2005-06 and 2010, the overall annual employment growth was 3.3% and that declined to 1.8% during the period of 2010 and 2016-17. That is a very substantial decline in a period when the GDP growth has been substantial. That means that employment growth per unit of GDP growth has declined. That is expressed by economists in terms of a composite measure called 'employment elasticity,' which expresses employment growth in relation to GDP growth. That figure has declined from 0.55 in the period 2005-06 to 2010 to 0.28 during 2010 and 2016-17. It shows that the employment generating ability of the economy has declined sharply. That is a reason for worry because I have already mentioned before that for an economy like Bangladesh structural transformation is extremely important. Sectors that are usually characterized by higher productivity, like manufacturing, have to grow at a faster rate, and have to generate employment at a faster rate. Unless the manufacturing sector can generate employment at a higher rate, it will be difficult to meet the employment requirements of the country.

How can these challenges be addressed?

The development strategy that has been pursued by Bangladesh has been successful up to a point. Up to now the country has been able to accelerate its economic growth, has been able to attain some social goals. But whether this development strategy will be adequate for attaining future goals and addressing the challenges remains a question that needs serious attention from policymakers. In the manufacturing sector, only one industry, viz., the readymade garment industry has performed the role of generating employment in large numbers. But if we look at the experience of countries that have been successful in attaining development and in providing employment in large numbers in manufacturing industries, like South Korea, Malaysia, and to some extent Indonesia and Thailand, we will see that several labour intensive industries grew simultaneously, not just one sector. But that was not the case in Bangladesh.  Policymaking here has remained focused on only one industry. Of course, we often hear pronouncements like thrust sectors, but it is not clear whether they include manufacturing sectors that are capable of generating large-scale employment.

In order to make growth equitable, we need to address the issue of inequality very seriously. Up to now I do not think we have seen serious policy stance in this. We often hear, on the contrary, that a rise in inequality in the early stage of development is not uncommon and that at some stage inequality will start declining automatically. But it has not happened so far in Bangladesh and there is no sign of inequality declining. Also, it is not inevitable that inequality has to rise in the early stage of development. There are examples of countries where inequality did not rise in the early stage of development. I would particularly cite the examples of South Korea, Indonesia and also Malaysia. Malaysia started with high inequality, but has been able to prevent any further rise in inequality and attained some decline in inequality. Another country, namely Brazil, which was characterized by high degree of inequality at some point, has been able to lower its inequality by adapting some social policies.

In conclusion, I would like to say that public policy is extremely important - not just to sustain growth at high levels, but also to attain other goals including equity, poverty reduction at high rates and productive employment generation.        

Rizwanul Islam, Ph.D. an economist, is former Special Adviser, Employment Sector, International Labour Office, Geneva.