Bangladesh : Challenge of export diversification: Reforming trade policy


Implementation review of the First Perspective Plan 2010-2021

Shamsul Alam | August 27, 2019

In 2009 soon after assuming power, the government led by Prime Minister Sheikh Hasina recognised that the development challenges for the country were many and progress would require a long-term vision and a systematic approach to development. Accordingly, the government adopted the Vision 2021 that sought to convert Bangladesh from a low-income economy to a middle income economy within the next 10-12 years. It also envisioned a Bangladesh in 2021 that would be substantially free of poverty, where people will be empowered with good health, education and skills that are necessary for securing high-income employment, where economic and social justice will prevail, and where the sustainability of development will be ensured by reducing vulnerability to natural disasters and climate change.

To convert Vision 2021 into reality, the government developed and adopted a 10-year Perspective Plan 2010-2021 (PP2021) that articulated long-term development goals with a range of quantitative and qualitative targets consistent with Vision 2021.  The Perspective Plan (PP) 2021 was sought to be implemented through two 5-year development plans: the Sixth Five Year Plan (6th FYP) running from FY2011 to FY15, and the Seventh Five Year Plan (7th FYP) encompassing FY16-FY20.  Each of these plans was to be developed with detailed development targets, financing plan, and policies and institutional reforms. Both plans also incorporated a Development Results Framework (DRF). 

The objective of this Mid-Way Review is to provide a broad assessment of the progress made during the first half of the PP2021, which corresponds to the completion of the 6th FYP.  The DRF of the 6th FYP provides a solid reference point for many of the development objectives and targets for the mid-term review of PP2021. The conclusion of the assessment is that considerable successes have been achieved in accelerating growth, improving human development, reducing poverty and laying the foundations for securing upper middle income status in the coming years along the lines envisioned under PP2021.  However, there are several areas where stronger progress is needed, especially in mobilising revenues, accelerating private investment, improving governance, establishing strong public institutions and ensuring sustainable development. 

PROGRESS IN MACRO-ECONOMY: At the macroeconomic level, the foremost objective of the PP2021 is to secure middle-income status for Bangladesh by FY2021. Results show that Bangladesh crossed the threshold of lower middle income as defined by the World Bank in 2015. This is a remarkable progress that was achieved by accelerating the GDP growth rate to the 7 per cent range by FY2015 and exceeding 7 per cent during FY2016-18. The average GDP growth was 6.3 per cent in the first half of PP2021 (FY11-15), which was slower than the planned 7.3 per cent average growth rate but constitutes an excellent performance by international standards and with reference to Bangladesh’s long-term historical growth performance. The average GDP growth accelerated to 7.3 per cent during FY2016-18. The growth effort was fueled by the manufacturing sector and services. Consequently, the GDP share of manufacturing increased and that of agriculture fell. As a result, there was a steady transformation of the production structure as Bangladesh moved away from a primarily agrarian and rural-based economy towards a manufacturing and modern services based economy.

The commendable growth performance of the manufacturing sector (9.9 per cent per year) was ably supported by a surge in manufacturing exports, primarily from the readymade garments sector. Manufacturing exports grew by an amazing 13.6 per cent during FY2010-15.  The rapid growth in exports along with expansion in remittances (growing by an average of 6.6 per cent over the period) led to a strong balance of payments position and supported acceleration in foreign reserves from $10.7 billion in FY2010 (5 months of import cover) to $33 billion in June FY2017 (8.3 months of import cover). The comfortable balance of payments situation allowed foreign borrowing and debt service to be kept at a modest level. Along with external stability, Bangladesh also achieved domestic macroeconomic stability by keeping fiscal deficits and monetary expansion at prudent levels.  Inflation rate briefly accelerated to double digits in FY2010-12 but soon stabilised and fell to 6.8 per cent during FY2012-15. Inflation rate came down further during FY2016-17 to 5.7 per cent.

The stability of the macroeconomy has been a hallmark of macroeconomic management during the first half of the PP2021. This stability has been preserved over the past three years FY2016-18, but there are some worrisome signs of fragility in the banking sector since 2016 that has to be carefully watched.  Also, while fiscal deficit is under control, the tax to GDP ratio is stagnant that could create financing problems for the budget in the coming years. On the export front, two major concerns are: heavy dependence on RMG and slowdown in the growth of exports during FY2016-18. A major reason for this is the heavy bias against exports due to trade protection. Additionally, the sharp appreciation of the real effective exchange rate has hurt exports. The government will need to address the export diversification challenge through reforms in trade policy and better exchange rate management. 

A major driver of GDP growth is investment.  PP2021 emphasised the need to accelerate both public and private investment. Results so far show progress in increasing public investment but a substantial shortfall in the private investment. Some increases have happened in foreign direct investment, but compared to the potential, Bangladesh is way behind in attracting FDI.  The major reason for sluggish domestic private investment and FDI is the high cost of doing business. The need to further improve the investment climate by reducing transaction costs will be an important challenge in the second half of PP2021.

AGRICULTURE AND FOOD SECURITY: The Perspective Plan 2021 recognised that continued progress in agriculture and food security was essential to support growing industrialisation and urbanisation. Farm income and productivity growth are also essential to reduce rural poverty. Despite a slowdown in the growth of the crop sector, average agricultural GDP grew at 3.5 per cent per year which is a commendable performance during the first half of PP2021. Some important progress was made in diversification as shares of non-crop agriculture increased. This progress was particularly strong for fisheries. Progress was also made in strengthening food security and nutrition. The incidence of hunger fell sharply, nutrition standards improved and food prices for basic items such as grains and vegetables have fallen in real terms improving affordability. Priorities for the future include: greater emphasis on producing safe nutritious food, sustainable agriculture and diversification, especially in the area of export-oriented farm production (fruits, vegetables, flowers, fish, processed food, and tea); productivity improvements in grain production including rice, wheat and maize; further emphasis on nutritious food (meat, eggs, poultry, dairy products); expansion of forest resources; and climate-resilient agriculture. 

DIGITAL BANGLADESH: P2021 recognised the importance of technology and knowledge as major instruments of competitiveness and human welfare. This found its place in the Digitisation Initiative of PP2021 led by Prime Minister Sheikh Hasina. Considerable progress was achieved since the adoption of PP2021. Rural and remote areas of Bangladesh are now connected through mobile phones and the internet and economic and financial transactions are happening through digital technology at a rapid pace and in low cost.  The efficiency gain through the reduction in transaction costs is immense. The prospects for further progress including for expansion of ICT exports are large. While private investment has taken the lead in ICT development, government policies, especially through the deregulation of the telecommunications sector, have played a major enabling role. This progress needs to be consolidated through a reform of the incentive structure. ICT sector is heavily taxed, which is inconsistent with the policy to encourage this sector and will need to be addressed.  

INFRASTRUCTURE AND URBAN DEVELOPMENT: PP2021 placed major emphasis on quickly improving infrastructure and urbanisation services. Substantial progress was achieved in the power sector in terms of both installed capacity and the spread of electricity connection to the people. Total generation capacity increased by an unprecedented 13.4 per cent between FY2010-18.  Commensurately, access to electricity surged from only 48 per cent in FY2010 to 72 per cent in FY2018. Private investment in power surged and power trade with India has commenced. The efficiency of the power sector has also increased with further reductions in transmission and distribution losses and improvements in billing and collections. However, diversification of primary energy sources to coal, LNG and renewable energy sources has lagged behind and the power sector still depends on budget subsidy. In transport, major new investments in roads, highways, and bridges are underway, although completion rates are slower than expected. Railway and waterway reforms remain low. Consequently, stronger efforts are needed to improve the implementation capacity of roads, highways, and bridges projects and to accelerate reforms in railways and waterways.  

HUMAN DEVELOPMENT, SOCIAL PROTECTION, AND POVERTY REDUCTION: The PP2021 put a strong emphasis on reducing poverty, improving human development and instituting a sound system of social protection. This emphasis on equity and social justice is a hallmark of PP2021. A review of progress shows considerable momentum was gained.  All human development indicators continued to improve under the PP2021 including life expectancy, infant and maternal mortality, total fertility rate, population growth rate, child nutrition, adult literacy, and education enrollment and completion rates at all levels. Life expectancy surged to an amazing 71.6 years in 2015, which is higher than many countries with higher per capita income. However, there are two areas where greater attention is needed. First, the quality of education, and second,  labour skills. The government adopted numerous schemes in both areas in the 6th and 7th Five Year Plans, yet progress is below what is needed to attain upper middle-income status.  A particular constraint is the continued low level of spending on education and training.  At 1.8 per cent of GDP, Bangladesh spends much less on education and training from the budget than in upper-middle income countries. This needs to go up to 3-4 per cent of GDP over the next few years to provide a big push to the quality agenda.

Progress on the poverty front has been solid. Both moderate and extreme poverty rate fell considerably. In particular, moderate poverty fell from 31.5 per cent in FY2010 to 24.3 per cent in FY2016. The underlying poverty strategy of PP2021 is broad-based with emphasis on rapid GDP growth, employment, human development and social protection as key elements of the poverty reduction strategy. As noted, progress with GDP growth has been substantial. The associated structural change, whereby the GDP shares of industry and services have increased and that of agriculture has fallen, created more jobs in industry and services where productivity and incomes tend to be higher. Real wages economy-wide and especially in agriculture increased. Along with greater employment in higher income jobs and rising real wages, poverty reduction also benefited from the inflow of massive amounts of foreign remittances.  These not only financed the direct consumption of poor families who received remittances, collectively the massive volume of remittance inflows supported the creation of considerable non-farm employment and income opportunities in rural areas.  The spread of micro-credits helped lower poverty by facilitating asset creation for the poor and smoothing their consumption pattern.  Finally, social protection benefits also supported poverty reduction, although major reforms are needed to improve the effectiveness of social protection programmes.

Moving forward, a major challenge is to implement the National Social Security Strategy (NSSS) that was adopted in 2015.  Commensurately, the allocation for social protection excluding civil service pensions must be increased to at least 2 per cent of GDP by FY2020.

SUSTAINABLE DEVELOPMENT: Owing to its deltaic geographical formation and high population density, Bangladesh is highly vulnerable to natural disasters and climate change.  The PP2021 sought to initiate a comprehensive long-term approach to address environmental degradation and climate change through laws, regulations, policies, and programmes. The PP2021 recognised that unless these constraints were integrated properly with the development strategy, the sustainability of development will be threatened.  The implementation approach consisted of laws, regulations, and the adoption of various programmes to improve environmental protection and adapt to climate change. Technical assistance and support from the development partners were sought to help with the adaptation programmes. The review of progress yields a mixed picture. Strategic thinking improved with the integration of the sustainable development agenda in the national plans, especially with the formulation of the long-term Bangladesh Delta Plan. Small-scale adaptation programmes provided important examples of success at the local level but needed to be scaled up.

The implementation of the Delta Plan is of highest priority that will be a game changer in terms of lowering the vulnerability of Bangladesh to climate change and strengthening the sustainability of development. GOVERNANCE AND INSTITUTION: Attaining the milestones of Vision 2021 articulated under PP2021 critically depends on addressing key governance challenges, namely, deficiencies in public administration capacity, shortcomings in economic management, and troubling malfeasance affecting performance across all segments of public administration.

The strategy for institutional development under PP2021 rests on four key pillars: strengthening the civil service, promoting devolution to local governments, strengthening public-private partnerships in public services, and reforming planning and budgetary processes. A quick policy review of the 6th and 7th Plan, reveals that the government did adopt strategies and policies that are better tuned to meet contemporary challenges, so that it can effectively maintain the progress envisioned in Vision 2021 document. The Plans took a focused approach to develop strong institutions in order to substantially improve performance in strategic areas that are central for achievement of overall development goals. These critical areas for intervention include: public administration capacity, judiciary, financial sector, and local government.

Despite all efforts, institutional development is a painstakingly slow process. Policy initiatives are underway in all these areas but a big push is needed to strengthen the underlying institutions. The strengthening of the financial sector is an immediate priority and with a strong political will, this can be achieved. Similarly, decentralisation should be possible as the administrative arrangements in terms of elected local governments are in place.  These now need to be boosted and made more effective through legally mandated responsibilities and accountabilities and sharing of revenues based on a well-thought-out fiscal decentralisation programme.  

Regarding governance, international comparisons show that Bangladesh’s performance improved in 4 of the 6 indicators used: reducing corruption, improving the rule of law, improving the economic regulatory environment and improving political stability and avoiding the threat of terrorism. Additionally, Bangladesh also scored well on macroeconomic management.  These are important areas of progress that Bangladesh can build upon as it pushes ahead with its journey to upper-middle-income status by 2030. The other two areas, government effectiveness and voice and accountability, require careful review and attention with additional efforts to improve performance.

Dr. Shamsul Alam is Member (Senior Secretary), General Economics Division, Bangladesh Planning Commission and is the coordinating lead author of “Perspective Plan of Bangladesh 2010-2021: Making

Vision 2021 A Reality”

The article appeared in the Financial Express on 27 August 2019.