Can Bangladesh sustain its growth momentum?

What is the future economic growth prospect of Bangladesh? An analysis of Bangladesh's past economic growth in a comparative perspective can help find an answer to this question. Bangladesh was among the 30 countries in the world to have registered an annual average GDP growth rate of 6 percent or more over a period of 10 years from 2007 to 2016. Bangladesh's GDP growth rate also had been one of the least volatile during this period. Among these 30 countries, Bangladesh ranked third in terms of least volatility of growth rate, and only Lao PDR and Vietnam were ahead of Bangladesh in this regard. Though countries like China and India had average growth rates higher than that of Bangladesh, they experienced much larger volatility than what Bangladesh had experienced. All these suggest that Bangladesh's experience of economic growth over the past decade has been quite remarkable.

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However, there are some apparent contradictions while analysing Bangladesh's past growth experience. Bangladesh is among the top five countries out of those 30 with a very high share of manufacturing exports in total merchandise exports. In 2016, among these five countries, Bangladesh, Cambodia, and China had such shares of more than 90 percent, while India and Vietnam had shares of 73 percent and 82 percent, respectively. Interestingly, from a 66 percent share of manufacturing exports in the total merchandise exports in 1980, Bangladesh was able to increase this share to as high as 96 percent by 2016. Bangladesh's progress in manufacturing exports is only comparable to China and Vietnam's experiences. The apparent contradiction, however, lies in the fact that Bangladesh made such progress without any rapid structural transformation of the economy. Despite a very high share of manufacturing exports in total merchandise exports, the export basket of Bangladesh remained highly concentrated around low value-added and low-complex products.

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A measure of the complexity of the economy is the “economic complexity index (ECI)” of the Center for International Development at Harvard University. ECI measures the knowledge intensity of an economy by considering the knowledge intensity of the products it exports. Among the aforementioned top five countries, Bangladesh performed poorly in the ECI. Between 1972 and 2016, Bangladesh never had a positive ECI value and the country's ECI deteriorated over time. In contrast, China, India, and Vietnam observed positive and growing ECI over the last two and a half decades. Furthermore, Bangladesh also performed very poorly in terms of the cost of doing business as it ranked 177th out of 190 countries according to World Bank's 2018 Doing Business Index. All these suggest that despite slow progress in structural transformation, poor business environment, and weak institutions, Bangladesh was able to keep the momentum of economic growth in the past.

One politico-economic explanation to this apparent contradiction could be that Bangladesh has so far used its “youth bulge” of demographic dividend quite “efficiently” and has also tapped quite “remarkably” on its comparative advantage in low-skilled labour in two major fronts: the readymade garment exports and exports of low-skilled labour. According to the United Nations Population Fund (UNFPA), demographic dividend is the economic growth potential that can result from shifts in a population's age structure, mainly when the share of the working-age population (15 to 64) is larger than the share of the non-working-age population (14 and younger, and 65 and older). One problem with the UNFPA's definition of “demographic dividend” is that the age span (15-64) is quite long and it doesn't capture the “youth bulge” aspect of the demographic dividend. In this case, the share of the youth population (15-24) in the total population would be a more relevant indicator. It appears that among the aforementioned five countries, between 1980 and 2015, the “youth bulge” share of the population increased for Bangladesh while it declined for Cambodia, China, India, and Vietnam. In 2015, Bangladesh's youth-bulge share (19.5 percent) was much higher than those of China (13 percent), India (18.4 percent) and Vietnam (16.9 percent).

With this high youth-bulge of the demographic dividend, Bangladesh also managed to maintain a “labour regime” for long characterised by an “equilibrium trap” of low-skilled labour and low-wage, poor working conditions, and relaxed execution of labour laws defying workers' rights. Despite overall weak governance and weak institutions, there have been supportive “efficient” economic and political institutions in place in maintaining this “labour regime”. The “returns” from such labour regime in the form of “economic and political rents” are so high that these act as a disincentive for further economic and export diversification, moving up for the production and exports of high value-added and sophisticated products, investment in workers' skill development, improvement in working conditions and better execution of labour laws to ensure workers' rights. Apparently, such high rents have also been able to offset much of the loss arising from the poor business environment.

Can Bangladesh sustain the current momentum of its economic growth? From the perspective of political economy, the ongoing economic growth momentum is likely to persist as long as Bangladesh can continue managing the “labour regime” riding on the youth bulge and comparative advantage in low-skilled labour. However, there are concerns that the challenges in the future are likely to be very different from what Bangladesh had encountered in the past. In the coming days, if proper investments are not made on human capital development, Bangladesh will lose much of the larger prospective productive returns from youth bulge and demographic dividend. The country is also in the process of graduating from the LDC status, aims to achieve the SDGs by 2030, and wants to move up to the upper-middle-income country status. Its economic growth strategies, thus, need to be revisited to negotiate the forthcoming challenges