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Tuesday, April 5, 2016

Bangladesh's recent economic growth: How inclusive is it?

Mustafa K. Mujeri

Bangladesh's development, especially since the 1990s, is widely treated as a unique story of success on many counts. In particular, the progress in social sectors has been noteworthy with several social indicators showing one of the fastest improvements in the history of development. As opposed to the typical 'income-mediated' (where rapid and broad-based economic growth plays the key role in social progress as in the case of South Korea) and the alternative 'support-led' (in which case high public spending in social sectors is the key mover as in Sri Lanka) pathways, Bangladesh's social development has rested more on a premise where grassroots activism and social organisations have played key roles in bringing about innovative and low-cost solutions to social problems along with pro-active public sector initiatives. The country's economic growth averaged below 4.0 per cent in the 1980s that rose to above 6.0 per cent in recent years. This shows that the country is yet to achieve rapid economic growth as experienced by many of its neighbours. On the other hand, Bangladesh's public spending in social sectors (e.g. in health and education) as a share of GDP (gross domestic product) is also low, which does not compare favourably with the average of the low-income countries.

The above suggests that Bangladesh's significant success in social development can neither be fully explained by high economic growth nor by high social spending; rather Bangladesh's  social transformation has mostly been driven by grassroots programmes of targeting women's empowerment, rapid growth of female labour-intensive garments industry, labour migration and remittances which provided the required thrusts.

The country's rapid social development has also been associated with significant growth in consumption and income thereby contributing to rapid reduction in poverty and deprivations. The real per capita income has more than doubled since the early 2000s and income poverty has declined substantially with less than a third of the country's population currently living in poverty compared with nearly two-thirds in the early 1990s. Following wide-ranging reforms and pursuit of prudent policies, macroeconomic fundamentals have strengthened, economic stability has been restored, saving and investment rates have risen, and the private sector has emerged as the prime mover of the country's economic growth and development. In addition to labour-intensive readymade garments industry, the major stimuli to economic growth has come from a rapidly diversifying agriculture, micro- and small-scale enterprises in manufacturing and services sectors, remittances from the migrant workers, and an expanding  middle class who acts as the pioneers in exploiting innovations and bringing about socioeconomic progress.

TWO CHALLENGES: While the above features can rightly be treated as significant strengths for future development, two important challenges remain: first, how to raise the rate of economic growth to 7-8 per cent and above over the medium term for achieving the middle-income country status; and second, what measures are needed to make economic growth more inclusive for realising the dream of reducing poverty and eradicating extreme poverty within the shortest possible time.

With respect to the second challenge, a key question is: how inclusive has Bangladesh's economic growth been in the last decade?

Unfortunately, there does not exist any consensus regarding specific interpretation of inclusive growth. However, two alternative definitions of 'pro-poor' growth are available in the literature. The first one is that growth can be treated as pro-poor if income of the poor people grows faster than that of the population as a whole which means that income inequality should decline. The alternative is that growth should be considered as pro-poor as long as poor people benefit in absolute terms, as measured by standard poverty measures.

We illustrate the difference between the two concepts using Figure 1. The figure shows the share of income of the richest 30 per cent of the population on the vertical axis and that of the poorest 30 per cent on the horizontal axis. We have used 30 per cent as the cut-off point since the share of the poor in total population is around that number in Bangladesh. For our purpose, we consider the shares in 2000 as the base case scenario depicted by point A.

In terms of Figure 1, the growth strategy followed by Bangladesh has resulted in changes in the distribution of income between the two groups. This has altered their shares in total income as well.  We can term such changes as Pareto optimal if the outcomes fall at any point within the space bounded by BAC. This is due to the fact that any movement from point A to a point say B represents a situation in which economic growth raises the income share of the 30 per cent of the poorest without making the rich any worse off (as their share does not fall). On the other hand, movement from point A to a point like C represents a case where the income benefit of additional growth accrues to the rich without making the poor any worse off in terms of shares in total income.

Similarly, any point located on the 45 degree line divides the income in a manner such that the income distribution does not change; while any point between the horizontal line containing B and the 45 degree line indicates that a larger share of income accrues to the poor relative to the rich and the opposite happens in the case when the point lies between the 45 degree line and the vertical line containing C.

In terms of the two alternative definitions of pro-poor growth mentioned above, the first requires that the changed income shares should lie within the area covered by the 45 degree line and the above-mentioned horizontal line such that the poor benefit more from economic growth. On the other hand, the alternative interpretation suggests that growth will be pro-poor as long as the poor also benefit from growth indicating that the changed situation should lie at any point to the north-east of point A irrespective of any specific location around the 45 degree line.  

INCOME SHARE: Now, the question is: how has the income share changed between the rich and the poor over the last decade in Bangladesh? We examine the issue with reference to Figure 1. The Household Income and Expenditure Survey (HIES) data show that the share in total income of the richest 30 per cent was 62.40 per cent and the share of the poorest 30 per cent was 10.74 per cent in 2000 which changed to 63.29 per cent and 9.32 per cent respectively in 2010. This shows that, in 2010, we have moved to the left of the vertical line containing C (say, to a point like D) such that the share of the poorest 30 per cent has declined between 2000 and 2010 while the share of the richest 30 per cent has increased. This shows that, relatively speaking, the richest 30 per cent have benefited more than the poorest 30 per cent from economic growth during the period. On the other hand, the middle 40 per cent have raised their share in total income from 26.86 per cent in 2000 to 27.39 per cent in 2010 showing their relative gain in terms of accessing the growth benefits.

In this respect, one interesting aspect is to explore if the situations are different in rural and urban areas. Again using the HIES data, one finds that the income share of the poorest 30 per cent have declined from 12.36 per cent in 2000 to 10.25 per cent in 2010 in the rural areas while the share of the richest 30 per cent rose over the same period from 57.88 per cent to 60.93 per cent. The middle 40 per cent in the rural areas were also losers in terms of income share since their share declined from 29.76 per cent in 2000 to 28.82 per cent in 2010.

In the urban areas, the poorest 30 per cent gained as their income share rose from 8.93 per cent to 9.02 per cent over the 2000-2010 period. On the other hand, the income share of the richest 30 per cent declined from 65.81 per cent in 2000 to 62.72 per cent in 2010. The middle 40 per cent turned out to be gainers who could raise their share from 25.26 per cent to 28.26 per cent over the same period.

The above results indicate that the pattern of economic growth in Bangladesh during the first ten years of this century has not been much inclusive resulting in loss of income share by the bottom 30 per cent of the population. On the other hand, the remaining 70 per cent of the population have increased their shares although the richest 30 per cent have gained the most. The gainers and losers are, however, different in rural and urban areas. In the rural areas, the poorest 30 per cent and the middle 40 per cent are both losers while only the richest 30 per cent are the gainers in terms of income share. In the urban areas, income shares of both the poorest 30 per cent and middle 40 per cent rose while the income share of the richest 30 per cent suffered a decline. This shows that adopted policies and structural features of the growth process during the period had different impact on rural and urban growth in terms of changing the income shares of various population deciles in different ways.          

The empirical evidence on inclusive growth in different countries suggests that no specific growth strategy is uniquely appropriate and the outcome with respect to growth inclusiveness depends on individual country characteristics and its structural features. The general conclusions, however, show that inclusive growth is facilitated by rapid growth in agriculture and the rural economy especially at the initial stages, emphasis on adequate and efficient delivery of essential public services especially health and  education, development of infrastructure, and good governance, all of which are vital for the poor to access socioeconomic opportunities.

SUSTAINED ECONOMIC GROWTH VS INCLUSIVE GROWTH: It is well established that while sustained economic growth is necessary for Bangladesh, it is not sufficient for triggering inclusive growth for which sectoral composition of growth also matters. In the context of Bangladesh, the emphasis on agriculture and the rural economy is critical for reducing poverty and generating inclusive growth. Many empirical studies confirm that growth originating in agriculture generates highest benefits for the poorest households and unskilled workers followed by the construction industry. One study observes that growth originating in agriculture in low-income countries is nearly three times more poverty reducing than growth originating in manufacturing and nearly double that of growth originating in construction activities.

For sustaining inclusive growth, it is important to make adequate public investments in social sectors especially education and health along with other essential services so that the poor can enhance their capacity to avail newly created opportunities. The association between inclusive economic growth and the level of public spending on education and health is well documented. In this context, literacy is probably the most significant factor as it enhances employability. One study reports that, in India, nearly two-thirds of the difference between the elasticity of the headcount index of poverty with respect to non-farm income between Bihar (the state having the lowest absolute elasticity) and Kerala can be attributed to Kerala's substantially higher initial literacy rate. Similarly, infrastructure occupies a central stage in Bangladesh's development. The problem of energy scarcity is just one of the many infrastructure challenges facing Bangladesh. Almost all infrastructures in the country require substantial expansion and upgrading to meet the increasing demands of economic growth.

Bangladesh's public expenditure on health is relatively low and favours the non-poor. At the present stage of development, an urgent compulsion for Bangladesh is therefore to adopt new approaches for extending access to healthcare to its entire population based on equity, affordability, and sustainability. The healthcare planning also needs to take into consideration the ageing factor which will become increasingly vital for Bangladesh. The changes in the age composition of the country's population show that the period between 1950 and 2010 experienced a minor increase in old-age dependency ratio (by only 0.3 percentage point) to reach 7.4 per cent in 2010. Available population projections, however, show that the ratio of the aged population (people older than 64 years) to working-age population (aged 15-64 years) will face a continuously rising trend to move to 11.0 in 2030 and further to 23.1 per cent in 2050 from 8.0 per cent in 2014.

Obviously, the efforts needed to promote inclusive growth would require a major role of the government at all levels to ensure that public actions are effective and efficient. But the perceptions on Bangladesh's business environment and bureaucracy are still not favourable and Bangladesh continues to receive very low ranks in Doing Business and other perception surveys. Needless to say, these low rankings are big constraints in raising productive investments and attracting foreign capital inflows needed for moving towards more inclusive and rapid growth regimes.

This analysis on inclusive growth over the last decade shows that although recent economic growth in Bangladesh has been beneficial to the poor, the income benefits that accrued to the poor are fairly modest. The country definitely has a need and the ability to move towards a more inclusive growth regime. For the purpose, concerted efforts are needed to make the growth process more inclusive through strengthening the sources of inclusive growth and bringing necessary reforms to enable the poor to access a greater share of the benefits of growth.

The writer is Adviser, Institute of Microfinance, Dhaka. 

Source:  The Financial Express, 06 December 2015

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