GDP growth, export boom and rising corruption in Bangladesh

South Asia is ranked very poorly in global surveys on corruption perceptions. As a matter of fact, a handful of countries in the region have grown rapidly without large-scale improvements in corruption in recent years. Bangladesh is a case in point. Two decades ago, Mauro (1995) conjectured that

“….if Bangladesh were to improve the integrity and efficiency of its bureaucracy by a one-standard-deviation increase in the bureaucratic efficiency index, its yearly GDP growth rate would rise by over half a percentage point.”

Yet the country has sustained a relatively high growth rate despite its dysfunctional governance structure. Bangladesh is also widely regarded as an MDG surprise, outranking richer neighboring India and Pakistan in a range of social indicators. The country’s booming economy has once again revived the debate about the role of institutions: are corruption and poor governance fundamental barriers to economic progress?

The growth-corruption relationship is hotly debated in social sciences literature. Some argue that it is not necessary to root out corruption first to spur growth. Corruption was pervasive in the early stage of development but rapid economic growth induced improvement in governance at a later stage in many East Asian countries. If economic growth can facilitate improvement in some aspects of governance including corruption control, is the data for Bangladesh showing a new ‘inflection point’?

Developing country case studies examining the growth-governance nexus is limited. In a paper just published in the journal Third World Quarterly, we revisit Bangladesh’s ‘double paradox’—the poor state of governance and a high level of corruption at a time of sustained macroeconomic growth. The main objective is to assess whether there is any descriptive evidence of growth-mediated improvements in specific dimensions of economic governance. We specifically ask whether the corruption scenario in Bangladesh is improving despite the country’s poor rating in Corruption Perception Index (CPI), particularly in the ready-made garments (RMG) sector, the main engine of industrial growth of the economy and the source of foreign exchange. In particular, are bribes in the RMG sector a case of ‘greasing the wheel’ or do they pose a major barrier in the form of the cost of doing business (i.e. ‘sand the wheel’)?

To answer these questions, we first study Bangladesh’s recent growth and export performance and descriptively compare this to trends in selected investment climate and corruption indicators vis.-a-vis. other regional competitors over the past two decades. A wide range of country-level subjective and objective indicators are used for this purpose. The analysis is then validated using data from in-depth interviews of RMG factory owners conducted in the country’s most industrialized districts and recent media reports on corruption and financial irregularities.

During the period 1990-2017, barring a few years, Bangladesh’s GDP grew at 5.49% which compared favorably to the South Asian average of 6.27%. In the 1990s and 2000s, macroeconomic growth benefited from the rapid expansion of the RMG sector which prospered through a combination of preferential market access and FDI-led production. After 2009, Bangladesh overtook India as the leading RMG exporter in South Asia. The RMG industry now accounts for 75 percent of the country’s export earnings and 25 percent of GDP. However, the expansion of the RMG sector didn’t bring about any noticeable growth-mediated shift in indicators of governance and investment climate.

Bangladesh has ranked consistently poorly in the global assessment of governance and corruption ratings during the past two decades. The quality of public institutions also did not improve significantly by international standards. Poor ranking in corruption perception is consistent with recent trends in the indicators of investment climate such as time and the financial cost to start a new business. The number of days required to start a business in Bangladesh in 2016 was the second-highest in South Asia. In terms of ‘ease of doing business’, Bangladesh ranks almost at the bottom in South Asia. Bangladesh is only 7 points above Afghanistan. In all other South Asian countries, doing business is easier than in Bangladesh. This implies the absence of a “virtuous circle” in the case of Bangladesh whereby higher incomes have not led to further improvements in governance. This was expected given the export-led growth strategy.

It is still possible that the economy’s outward orientation helped adopt global norms of doing business in a sectoral context which is yet to diffuse into the rest of the manufacturing sector. The absence of bribery in the RMG sector may have facilitated the export boom. Existing surveys (e.g. World Bank’s Enterprise Survey) don’t report industry-specific estimates of the cost of doing business. Therefore, we conducted face-to-face interviews with owners of RMG and non-RMG factories.

Several findings follow from the interviews. First, 22.8% of the respondents reported bribes as the most important barrier, while 3.3% held extortion as the most important barrier. Second, 49% named either bribes or extortion as a retarding factor, and the percentage of respondents who consider bribes as a retarding factor for firm growth is 49% as well. Third, businessmen offer bribes for their own benefit (e.g. to avoid tax or duty; under-invoicing an imported item, and so on). Fourth, there are established norms regarding how much to be paid as bribes in import and export activities which are usually fixed by the customs officials.  Fifth, foreign companies also bribe government officials. In other words, both foreign and local companies have accepted the ‘custom’ of bribe payments.

Our analysis of print media content also confirms bribe paid to revenue and customs department officials alongside notable cases of tax and duty avoidance/evasion. The evidence obtained on bribes including financial mis-governance and irregularities is perplexing. In particular, how should one interpret export-sector-specific corruption? The country’s RMG industry growth during the 1990s was driven by enclave-type arrangements (i.e. export processing zones) that helped the export-oriented firms to bypass the governance constraints. However, factories located outside the export zone remains vulnerable to bribery. One view is that it is a predictable but ‘benign’ bribery system. But corrupt officials may also influence the law-making body with a view to extracting bribes in the future. Bribery could be the consequence of the extensive state support to the RMG sector. Part of the state money could be redistributed back to the bureaucrats as payments for institutional support and preferential treatments, a possibility that merits further investigation.

In sum, corruption continues to be the norm in Bangladesh despite decades of sustained growth. The inability to fight bureaucratic corruption at all levels of the government, particularly in the industrial sector, will make further expansion harder as manufacturing industries shift to higher value-added activities and technological upgrading. Regardless of whether the actual impact of corruption is ‘positive’ or ‘negative’ on the Bangladesh economy, however, curbing corruption is also an important end objective in itself – improving governance and combating corruption are key Sustainable Development Goals (SDGs) targets. Therefore, a major challenge for governments in Bangladesh and elsewhere in South Asia is to reduce corruption and bribery in all forms by 2030.

This article gives the views of the author, and not the position of the South Asia @ LSE blog, nor of the London School of Economics. Featured image: Sewing Machine. Credit: Henry & Co., Pexels.

This blog is based on Asadullah, M Niaz and CHAKRAVORTY, N N (2019) “Growth, Governance and Corruption: A Re-assessment” Third World Quarterly. 40(5), 947-965.