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Sunday, February 28, 2016

Growth rates and instability

Faaria Tasin

An interesting trend can be observed when one takes a look at the Gross Domestic Product (GDP) growth rates of the country during the past few years. If GDP growth rates are plotted according to year, it has a resemblance to a wave, containing a peak and a trough. The dips in the economic growth rates can be seen during election years where rates start to decline in the years preceding the election years.  
We have seen that every election brought along with it an element of political violence. This violence in turn disrupts normal economic and social activities. So when the economy got a respite from the political violence of 2013, many of us may have breathed a wary sigh of relief. This, however, was very short-lived as the economy faced another gust of political violence since the beginning of this year.
One of the key drivers of economic growth is investment in Bangladesh. Total investment as a proportion of GDP has been hovering around 26% - 28% for the last five years. One reason for lower public investment is inadequate tax resources; for private investment, the main binding constraints are energy, land and transport.  In the face of these existing constraints, political violence certainly makes the investment environment even more stagnant.
So why can't the country afford to compromise with investment at this stage? One reason is that the country is currently experiencing a 'demographic dividend' (a rise in the proportion of people in the working age population accompanied by a decline in dependent age population), and 1.8 million people are entering the job market every year. Without adequate expansion, the economy will not be able to absorb all the people entering the workforce.
If we look at the information available for private sector credit growth, we will see that between June 2014 and November 2014, growth rates on average were 12%. This was lower than the projected rates and was done for a period when political instability was not as intense as it is currently.
Another problem of low investment and GDP growth rates is that a decline in GDP growth rates also implies that many people are deprived of a chance to move up the poverty line. One group that bears the biggest brunt of political instability is that of the daily-wage earners. On one hand their daily incomes fall and, on the other, disruption in the transport system leads to a rise in food prices, causing their real income to decline further.
Wholesale shops and shopping malls experience a fall in sales during periods of political instability. Although businesses have different coping strategies to make up for some of the loss due to instability, however, what the industry most certainly cannot make up for is the clear signal of an unreliable market. Skepticism regarding the economic health of the country may discourage foreign investors from investing as there are other countries offering competitive factors and better political environment.
According to Dhaka Chamber of Commerce & Industry's (DCCI) calculations, losses stand at around Tk. 22.77 billion ($285 million) a day. In addition to economic costs, there are social and human costs associated with political instability. Students are faced with missed classes and postponed exams, which adversely affects their performance and hampers future prospects. Human costs exist in the form of lives lost and injuries; however, social and human costs are harder to quantify.
As far as GDP growth rates are concerned, growth rates climbed up steadily after election years. What lies for future growth rates of the country at this point is uncertain and will be revealed with time.

The writer is the head of research at The Daily Star.

The Daily Star, 14 February 2015