Development

Trade Liberalization and Development in Bangladesh


Osiur Rahman*

Famagusta, April 12, 2014 (Alochonaa): Bangladesh is a poor country in South Asia known for its large population, garments manufacturing sector and microfinance pioneered by Dr. Muhammad Yunus. However, recently it has also been the subject of discussion for reaching the 2015 Millennium Development Goals (MDG), and improving the social health sector.

 

In order to understand the origin of its misfortune, and also its recent development success, it is necessary to take a deep look into its economic system. In this paper I look at the Bangladeshi experience since its birth in 1971, until the 1990s, the period in which Bangladesh transformed from a virtual closed economy towards a relatively open market economy against the backdrop of changing domestic and international political settings.

 

The 1971 to 1975 period in Bangladesh could be labeled as the pre-liberalization period, and from 1975 onwards liberalization had begun in limited scope, and peaking in the 90s.This transformation was mainly carried and controlled by domestic regimes, but considerable pressure came from the World Bank and the IMF throughout the process. In fact, today Bangladesh has become a favorite success story for the World Bank, in terms of its contribution and development schemes in developing countries of the world.

 

1972 – 1975: Bangladesh in the pre-liberalised period

Bangladesh became independent from Pakistan in 1971 following a nine-month long bloody war, with the state adopting its first constitution in 1972. There were four basic principles of the state of People’s Republic of Bangladesh, and one of those four principles was Socialism, revealing a lot about that period. The socialist policy in Bangladesh involved nationalizing all its industries, which inadvertently faced her with a serious lack of expert management, technicians and skilled labor. In addition, there was the wartime effect on crops and agriculture. Bangladesh’s largest export good, jute, faced serious challenges in the international market from synthetic fibers. Due to dwindling exports, there was a foreign reserve shortage and 1973’s oil price exacerbated the woes of an already paralyzed economy.

 

A significant portion of the large, yet unskilled labor force remained unemployed. Bangladesh also did not have any natural resources to export, except natural gas. Inflation, especially for essential consumer goods, ranged between 300 and 400 percent as the war of independence had crippled the transportation system. Hundreds of road and railroad bridges had been destroyed or damaged and rolling stock was inadequate and in poor repair. On top of that, the newborn country was still recovering from a severe cyclone that hit the area in 1970 and causing some 250,000 deaths. Given the scenario, it would not have been easy for any government to perform well economically. However, a lack of expertise and corrupt nature of the political regime fueled the failure of the system which resulted in the Great Famine of 1974.

 

Due to virtually zero export earnings, the economy suffered from a lack of foreign currency reserve and thus, the trade policy consisted of significant import controls. The major administrative instruments employed in implementing the import policy during that period were the foreign exchange allocation system and Import Policy Orders (IPOs). Under IPOs, it was specified whether items could be imported, were prohibited or required special authorization. With the exception of a few items, licenses were required for imports. The argument behind the import-licensing system was that it would ensure the allocation of foreign exchange to priority areas as well as protect vulnerable local industries from import competition. However, the system was criticized for not being sufficiently flexible to ensure its smooth functioning under changing circumstances. Moreover, it was characterized by complexity, deficiency in administration, cumbersome foreign exchange budgeting procedures, poor inter-agency coordination, rigid allocation of licenses and time-consuming procedures.

 

Liberalization period since 1975

On 15th August 1975, there was a military coup in Bangladesh in which then President Sheikh Mujibur Rahman was killed. After 1975, the socialist economic policies were abandoned and replaced by a relatively liberal market agenda. Bangladeshi leaders began to develop new industrial capacity and rehabilitating its economy. “Beginning in late 1975, the government gradually gave greater scope to private sector participation in the economy, a pattern that has continued. Many state-owned enterprises have been privatized, like banking, telecommunication, aviation, media, and jute. Inefficiency in the public sector has been rising however at a gradual pace; external resistance to developing the country’s richest natural resources is mounting; and power sectors including infrastructure have all contributed to slowing economic growth”.

 

During the 1980s, moderate import liberalization was introduced under the Military regime. In 1984, the biggest change came in the import policy when the government abolished the import licensing system and started allowing imports against letters of credit. Since 1986, significant changes were made to the import procedures and IPOs with regard to their contents and structure. Whereas, prior to 1986, IPOs contained a lengthy Positive List of importable goods, in 1986 it was replaced by two lists – the Negative List (for banned items) and the Restricted List (for items importable on fulfillment of certain prescribed conditions). The import of items outside of these lists was allowed. These changes may be considered as significant moves towards import liberalization, since no restrictions were imposed on imports of items that did not appear in IPOs. With the aim of increasing the elements of stability and certainty of trade policy, IPOs with relatively longer periods replaced the previous practice of framing annual import policies. In 1990, the Negative and the Restricted Lists of importable items were consolidated into one list, i.e. the Consolidated List.

 

However, this process of liberalization was not as smooth as it may seem today. The political situation of Bangladesh forced the government to carry out a calculated liberalization process. Despite the debate about the pace of trade liberalization, the World Bank’s view is that, “Measured against other liberalizing countries of the world, Bangladesh’s trade reforms over a period of 8-10 years do not appear unusually fast. Many countries in South East and East Asia and in Latin America, and even some in Africa achieved significant cuts in average tariffs and reduced the spread between their lowest and maximum rates in 5-8 years’ time.”

 

The Washington Consensus:  

 

Main Policies Recommended and Supported by the Washington Consensus were:

 

1-    Exert fiscal and monetary discipline to limit or stop inflation.

2-    Reduce public expenditure and tax rates.

3-    Broaden the tax base and cut marginal tax rates.

4-    Ensure that interest rates are market determined.

5-    Adopt floating exchange regimes and let exchange rates be competitively determined.

6-    Liberalize international trade.

7-    Open the nation to foreign direct investment.

8-    Privatize state enterprises.

9-    Deregulate markets except where compelling grounds exist for market intervention to ensure safety, protection of the environment or consumers or to ensure prudential supervision of financial institutions.

10-Ensure legal security for property rights.

 

In the ‘80s, Bangladesh adopted the policy to follow the recommendations of the Washington Consensus. It was mainly because the then current regime was interested in developing the national transport, and Bangladesh as the land of rivers needed World Bank funding to build up hundreds of bridges across the country as well as developing the highways. Nevertheless, there is debate about the pace of the transformation. “The speed of adoption of such reforms has varied widely. While Bangladesh, for example, has instituted most of the types of reform listed above, it has been slow in privatizing public enterprises including its financial intermediaries. However, it moved quite quickly to adopt the macroeconomic stability policies recommended in the Washington consensus”. Therefore, the macroeconomic reforms were quick to be implemented, as “by the end of the 1980s, little microeconomic reform (but significant macroeconomic reform) had occurred, by the end of the 1990s substantial microeconomic reform was evident. By then, possibly Bangladesh had done more than any other South Asian nation to liberalize its economy and integrate it with the global economy”.

 

In the early ‘90s, Democracy was restored in Bangladesh and the Bangladesh Nationalist Party came into power. They carried out significant liberalization and protection of both agricultural and non-agricultural sectors declined significantly in the 1990s. For example, the Government of Bangladesh reports that “Under donor persuasion and the dictates of the Structural Adjustment Program, Bangladesh has brought down its level of public support to agriculture to an absolute minimum. Recent estimates of Aggregate Measure of Support (AMS) to agriculture put this at around one per cent of agricultural output although the permissible level of such support under the Agreement on Agriculture of the WTO is ten per cent. Furthermore, tariff protection fell in the 1990s from an average nominal rate of protection of 89 per cent in 1900-91 to 25 per cent in 1995-96. In addition, Bangladesh moved ahead with full exchange convertibility in the 1990s and with measures to encourage foreign direct investment. Consequently, despite its tardiness in the privatization of a significant proportion of its public enterprises, Bangladesh had gone far by the beginning of the 21st century in implementing the policy recommendation of the Washington Consensus”.

 

Outcome

Since liberalization began in the early ‘80s, Bangladesh experienced a steady growth. There has been GDP growth of 6 percent since the mid-‘90s. The garment sector became the major export industry while other sectors like leather, fisheries, and pharmaceutical exports are also on the rise. Import rates also increased to mainly facilitate exports. The information technology sector is growing with improving education levels and buying capacity of its population.

 

Significant development has been achieved in the public health sector, mainly because of the liberal policies which allowed non-governmental organizations (NGOs) to work in this sector. Improvement in gender equality also contributed to development in the public health sector, which in turn fostered social development. Amartya Sen pointed out an important dimension behind this development:

“The causation of this move towards gender equity cannot but remain somewhat speculative, but its consequences are clear enough. Schools focused particularly on expanding the education of girls: Bangladesh is one of the few countries in the world where the number of girls in school now exceeds the number of boys. Public services, including school teaching, health care, and family planning, employ a much higher proportion of women workers than is the case in most developing economies, including in Bangladesh’s neighboring countries. Women have also entered the economic workforce in plentiful numbers, led by such industries as garment manufacturing that provided easy entry to female laborers. However, neglect of safety at work has been a huge blot in the record of that industry, a serious deficiency that is only belatedly being addressed, and perhaps not yet strongly enough. Women have also received special attention from Bangladesh’s NGOs – from large initiatives like BRAC and Grameen Bank to smaller organizations – and the mobilization of the active agency of women has been a distinctive feature of the vision that has moved Bangladesh forward”.

 

Equally, although the trade policy reform has expanded Bangladesh’s economy’s size and the market experienced increased money flow; there are some major areas of concern as a consequence. There is clear evidence that personal income inequality in Bangladesh increased during the market reform period. While very recent evidence is not yet available, household expenditure surveys for fiscal years 1991-92 and 1995-96 indicate rising income inequality. This is attributed to a large extent by the rising differences between urban and rural incomes.

 

Therefore, liberalization of the economy has resulted in the increase of the economy’s size, but income inequality has also worsened. However, few people are at the receiving end of the benefits of these reforms. Under the undemocratic regimes, urban areas developed mostly at the cost of rural areas. Nevertheless, despite rising inequalities, Bangladesh has stood on its feet and is not considered a “basket case” anymore. Remittance from expatriate workers and female labor force participation has enhanced social security in great pace. Most importantly, through following the suggestions or conditions of the international development partners, Bangladesh has gained necessary funds to develop its infrastructure and has made major strides in educate her people for a better future.

 

*Osiur Rahman is a Masters student in International Relations at Eastern Mediterranean University. He is the President of Bangladesh Student Society in Eastern Mediterranean University and lives in Famagusta, North Cyprus. Also, he writes in various Social Medias in on socio-political issues.

** Guest Editor, Muhammad Shafiullah, a Doctoral Candidate in Economics, Griffith University, Australia

*** Alochonaa.com is not responsible for any factual mistakes (if any) of this analysis. This analysis further is not necessarily representative of Alochonaa.com’s view. We’re happy to facilitate further evidence-based submissions on Bengal history. Please send us your submission at alochonaa@gmail.com 

 

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