Striking the Right Balance between Economic Growth and Equality

There is no doubt that Bangladesh has performed well over the past few years on many socio-economic indicators. One of the reasons why Bangladesh did well is that its development priorities have been reflected in the national development plans. At the core of the development strategies of Bangladesh has been poverty reduction. Bangladesh has successfully reduced its poverty rate to 24.3 per cent in 2016 from 48.9 per cent in 2000.

However, there is another side of the coin. Recently, the growth elasticity of poverty for Bangladesh has declined. Besides, Bangladesh has experienced an increase in inequality. As a consequence, in spite of being one of the fastest growing economies and having moderate growth rate, Bangladesh may find it a difficult task to achieve the goal of inclusive development in the coming years. Therefore, the pertinent question is: “Would Bangladesh be able to sustain the current rate of growth if inequality continues to rise?”

The phenomenon of inequality in Bangladesh is predominantly observed between income groups and regions. The Gini co-efficient, the measure of inequality, was estimated at 0.483 at the national level for 2016, when in 2010 it was 0.458. This indicates that the concentration of income increased during the period of 2010-2016. This statement can be understood better by looking into the share of household income deciles to total income. In the year 2016, the share of deciles 1 to 5 was only 19.24 per cent of total income although they comprised 50 per cent of the population. The share was 20.33 per cent in 2010.

The increasing inequality is observed in urban areas during the period of 2010-2016. The Gini co-efficient was 0.452 for urban areas in 2010, which increased to 0.498 in 2016.

The higher disparity in urban areas compared to rural areas also continues. In 2016, the urban areas had a Gini co-efficient of 0.498 and it was 0.454 for rural areas.

Another key feature of inequality in Bangladesh is the disproportion of income between regions. Though the upper and lower poverty rates went down, they were still higher by 2.1 and 2.0 percentage points respectively than the national rates for rural areas in 2016. Out of eight divisions, five divisions (Barishal, Khulna, Mymensingh, Rajshahi and Rangpur) had higher upper poverty rates than national upper poverty rate in 2016. In the same year, Rangpur (47.2 per cent) had the highest upper poverty rate amongst all divisions.

The scenario is almost similar for lower poverty rate. During the years 2010-2016, even though the poverty rates at both upper line and lower line decreased for urban and rural areas, they were still higher for rural areas (26.4 per cent and 14.9 per cent respectively).

The inequality between delta and non-delta regions should also be considered while discussing the dynamics of inequality in Bangladesh. The delta region comprises of the districts that are at risk of climate change and environmental degradation and inequality makes the people from those districts the most vulnerable.

Despite having mid-term and long-term poverty reduction strategies, why has Bangladesh been unsuccessful in reducing inequality? One of the potential answers can be the Kuznets hypothesis: “As an economy develops, market forces first increase and then decrease economic inequality”. Since Bangladesh is in its development stage, inequality is showing increasing trend. Besides, two major factors for inequality are: (i) absence of focused policies and (ii) weak institutions.

Inequality can hurt the inclusive and sustainable economic growth by hindering human capital accumulation. There is empirical evidence that inequality does have a negative and statistically significant impact on growth. An Organisation for Economic Co-operation and Development (OECD) analysis suggests that rising inequality by 3 Gini points would drag down economic growth by 0.35 percentage point per year. If inequality continues to rise, education opportunities for disadvantaged individuals will be undermined; social mobility will be lowered; and skills development will be hampered and thus, Bangladesh will fail to sustain the current growth rate.

The nature of economic growth for Bangladesh has been inequality-enhancing. The available national statistics affirms that there is inequality at different levels and it is in upsurge. The existing interventions have remained unsuccessful at reducing the regional inequality at an expected level. The income gap between lower and higher income groups is rising.

To sustain the current growth rate, there is no alternative to reducing inequality. To do that, Bangladesh has to emphasise on reforming its development policies and restructuring relevant institutions. The loopholes of the existing interventions have to be scrutinised. The regional strategies, especially for northern region, need to be revisited and reshaped. Under the social protection programme, the tendency to miss targets and leakage problems need to be resolved. Overall, there should be apt policies and institutions promoting demand-side driven skills development and generating more employment.

This was first published in the Financial Express, 8 April 2019



Impact of Fiscal and Monetary Policies on Budget Deficit in Bangladesh

Since its independence, Bangladesh has performed remarkably well in terms of socio-economic development regardless of socio-political obstacles. It is one of the frontline countries who has achieved most of the Millennium Development Goals before the timeline 2015. In the coming years, Bangladesh desires to achieve the Sustainable Development Goals and therefore, a mammoth challenge of inclusive development is waiting for the nation. However, budget deficit may detain the process of achieving sustainable growth. Thus, a sound combination of macroeconomic policies is immensely important to mitigate the unintended burden of budget deficit.

Risks are always associated in the time of policy formulation. Risks may appear for different reasons such as misjudgment of the economic scenario, external shocks or any sort of random errors. Therefore, as a rule of thumb, policy-makers do not always solely rely on single instrument rather they focus on a combination of instruments to mitigate the risks as much as possible. This is also known as policy balancing. Given this information, the prime objective of this study is to empirically investigate how budget deficit responds when a combination of monetary and fiscal instruments is being considered in Bangladesh.

A simple linear model has been constructed where budget deficit is the objective variable. Two groups of explanatory variables have been considered and these are fiscal instruments (public expenditure and tax revenue) and monetary instruments (inflation and exchange rate). Multiple sources have been considered for collecting annual data set (FY1993-1994 to FY2017-2018) namely Ministry of Finance, National Board of Revenue, Bangladesh Bureau of Statistics and World Development Indicators. According to the results of robust econometric techniques, it has been found that the proposed model is stable. From the long run estimation results, it is evident that both fiscal and monetary instruments have a significant impact on budget deficit. Public expenditure positively affects budget deficit whereas, tax revenue is negatively associated with budget deficit. In contrast, inflation has a positive relationship with budget deficit where the exchange rate is inversely correlated with budget deficit. The results of this empirical investigation call for different policy measures.

As it can be seen that monetary instruments affect budget deficit, it is highly recommended that inflation and exchange rate should be kept under strong monitoring so that any unpleasant divergent from the current situation can be avoided. On the other hand, budget deficit and public expenditure are positively associated. However, implementing contractionary fiscal policy may disrupt the development process. Bangladesh rather has to emphasize on increasing the public spending, especially in the areas of health, education and skills training. Such upsurge in spending has to be met mostly by tax revenue. Tax-GDP ratio for Bangladesh is one of the lowest in the world and it has to be improved. Otherwise, the budget deficit will increase at an even increasing rate. Therefore, the focus has to be given on increasing tax revenue by widening tax base, introducing different types of taxes and building responsiveness through tax awareness campaign. and

This article was first published in Thinking Aloud, 1 February 2019

Some Distinguished Features of GBM Bangladesh Delta: An Analysis Using the Input-Output Table

The article sheds light on the socio-economic and biophysical contexts of GBM Bangladesh delta. At the end, it comes up with some relevant policy measures based on the analysis.

You can find the full article at Thinking Aloud, 1 December 2018.


Climate Change Threat to the Bangladesh Economy

Bangladesh, as an economy, has performed remarkably well in the recent decade regardless of socio-political obstacles. It has maintained an average economic growth of 6% per annum and performed well in reducing the poverty rate to 24.3% and extreme poverty rate to 12.9%. Bangladesh desires to reach upper middle-income status and eliminate extreme poverty by the fiscal year 2031. Although the stable growth rate and positive outlook of the future make us optimistic about the targets Bangladesh is aiming at, climate change challenges may impede such growth aspiration.

Ganges-Brahmaputra-Meghna (GBM) Bangladesh delta is one of the largest deltas in the world and is highly vulnerable to natural disasters because of its geographical position, population density, illiteracy and lack of institutional setup. Evidence suggests that the regular occurrence of natural disasters such as flood, cyclones, salinity intrusion, rise in sea level, river bank erosion, rising temperatures, high humidity, etc. has been a real threat to the overall economic development scenario of Bangladesh. Due to the deltaic formation of the country, natural disasters and climate change, Bangladesh has been ranked as the 6th most suffered country from extreme weather events for the period 1997-2016. During this period, Bangladesh lost 0.68% of GDP annually and experienced an average 0.44 deaths per 100,000 inhabitants each year (Global Climate Risk Index, 2018). Climate change and global warming data of NASA depicts that the sea level rises by 3.4 millimetres per year with the increasing global temperature of 1.7°F each year. Such climatic changes will make it further difficult for Bangladesh by damaging food security, hurting the economy’s growth and harming the poverty reduction effort unless they are managed comprehensively.

The climate factors affect several sectors and lead to economy wide substantial losses. Agriculture is the most vulnerable sector. In the future, climate change, especially, high temperature, humidity and radiation could reduce yields of high-yielding varieties of rice at a significant level. The increase in soil salinity will also contribute to the contraction of agricultural production. Agriculture will also suffer because of the frequent flooding caused by climate change. The forestry and ecosystems of the country will also be affected. The sea level rise (SLR), higher temperatures, an increase in cyclone intensity will damage the forest resources and the diverse ecosystem. Additionally, the SLR will result in permanent inundation of a significant part of dryland. The land quantity shock will lead to the fall in production in all sectors and ultimately, would lead to a fall in real GDP. The climate change could affect the economy of Bangladesh adversely by incurring an average loss of 2% of GDP per annum by 2050 and it may increase to 9.4% by 2100 (ADB, 2014). The majority of the working age population from the South West region of Bangladesh earns their livelihood by working in the agriculture, forestry and fishing sectors. Therefore, the overall unemployment rate may increase due to the reduction of agricultural production. There is a positive correlation between the intensity of natural disasters and poverty rate. Hence, climate change will play a role in deteriorating the poverty status, especially, of the disaster-prone areas since majority of the coastal districts that are most exposed to natural disasters show poverty rates that are higher than the national average.

Adapting climate actions such as developing the resilience capacity of communities, building emergency cyclone shelters, enhancing the capacity of government agencies to respond to emergencies, intensifying river embankments and coastal polders, reducing saline water intrusion in agriculture-dependent areas, executing the early warning and emergency management systems, etc. could be a possible way to avoid the worst impacts of climate change on the macroeconomic indicators. The diversity and universality of the problem will make the task trickier in future. The successful implementation of well-coordinated long-term adaptation and mitigation policy measures will be the key in the way of ensuring the sustainability of agriculture, food security and livelihoods. Moreover, the amount of financial and technical support received by Bangladesh will determine how well Bangladesh deals with climate impacts and their subsequent effects. Therefore, the incremental financial support from private sector and innovative alternatives (i.e. carbon tax) for climate financing will be crucial to accommodate the total demand of financing the climate projects.

This article was first published in Thinking Aloud, 1 September 2018 

Long Stay of Rohingyas: Discomfort about Sustainable Development

Bangladesh has shown the valor by giving shelter to a large number of persecuted Rohingya people. Bangladesh is one of the most densely populated countries in the world with limited resources. Hence, it has its own struggles and challenges to overcome. This large number of refugees, who apparently are stateless, may need to stay in Bangladesh for a period longer than we can guess right now. Of course, we have to show diplomatic shrewdness and ask the international community to put pressure on Myanmar so that they take the Rohingyas back to their country. Besides, it is important to realize that this additional population may impede the process of sustainable development if Bangladesh does not work on a concrete plan to handle the upcoming social, economic and environmental challenges.

In today’s world, we talk about the sustainable development and Bangladesh is not an isolated land. The effort from Bangladesh to ensure growth with sustainability is evident. As a part of that exertion, South Asian Network on Economic Modeling (SANEM) has recently done a research work for General Economics Division, Planning Commission of Bangladesh in order to estimate the additional cost for achieving the Sustainable Development Goals (SDGs) for Bangladesh and assess the potential financing sources. The study shows that the total additional cost for implementing SDGs in Bangladesh will be 928.48 billion USD for the rest of the SDG period (FY2017-FY2030). The study also unveils that more than 85% of this additional cost will be financed by domestic resources. Thus, emphasizing on building own financing capacity is going to be one of the pre-requisites for attaining SDGs. High GDP growth and redistribution of existing domestic resources are going to be key here. It is a huge task. Now, the addition of Rohingyas may make the job huger.

Only feeding Rohingyas thrice a day is not going to be enough. The other things will come if they stay for a longer period. We can definitely argue that the foreign aid will come for the Rohingyas. But will the volume of aid be enough to help them? Will they come for the endless period? At the end of the day, we may need to help them with our own resources. Therefore, we may need to re-redistribute the domestic resources.

We will need to give Rohingyas health services. As a result, we will see a reallocation of our existing medical resources. They will compete with our labor force for employment (mostly in informal sectors). The increase in labor supply will lower the wage level and consequently, reduce the income level of the poorest section of the society. This will boost the inequality level. Moreover, we may need to appoint our own resources to educate their children in the future.

The government has an ambitious target of achieving 9% GDP growth by the FY2030. The main driver of this high level of economic growth will be the investment by the private sector but the lack of security in Cox’s Bazar and Teknaf may help to lose the volume of private investment in that area and contribute to the reduction of total private investment.

Moreover, the environment is going to be affected adversely by the surge of Rohingyas if appropriate measures are not adopted by the authority. The impact is already visible in Teknaf and Ukhiya. A total of 2,000 acres of forestland have been allocated to accommodate the incoming refugees and the immediate result is deforestation. If this continues, it may contribute to undesirable climate change (i.e. increase in CO2, raise in sea level, etc.) and make our task of achieving SDG13 difficult. It has economic effect as well. The degradation of the environment may contribute to loss of agricultural production in that area.

Furthermore, the possibility of decline in law and order is another concern. The crime like drug smuggling, hijacking, etc. can increase and overall law system can worsen. This kind of deterioration has both social impact and economic impact. We will observe the depletion of social values. The young people from that region will get directly involved with the unlawful activities and many will be drug addicted. Moreover, the downfall of law situation will attract a lower number of tourists and result in a decrease of contribution by tourism sector to GDP.

A small economy like Bangladesh does not have the capacity to absorb all the effects caused by the influx of Rohingyas completely. In the long run, we will have to give them medical services, house to live, land to cultivate or job for a living, education, etc. Nevertheless, we can use the right tools and minimize or eliminate the negative impacts. We have to shift this huge additional population to a safe place as soon as possible so that we can avoid issues such as deforestation, degeneration of environment, etc. Besides, it will be important to keep a record of Rohingyas coming to Bangladesh and maintain proper tracking of their movement in order to avoid any kind of unpleasant event or anarchy.