Barriers to Economic Growth in Bangladesh Essay

“For a developing country of your choice, identify and critically evaluate the barriers to growth and development. How can public policy attempt to lift those barriers? ” This piece will look to identify and evaluate barriers to growth and development in Bangladesh, and then suggest ways of overcoming those barriers. Bangladesh has achieved significant results in her economic sector since her independence in 1971. Through the Nationalization Order of 1972, all key industries including jute, cotton textiles and sugar were vested upon the public sector.

The wholesale nationalization of industries resulted in a low growth of the economy. The Gross National Product (GNP) per capita of the country grew at an average annual rate of 0. 4 per cent until 1985 compared to 3. 8 per cent for the group of low income countries (The World Development Report, 1989). The low growth performance of the economy put pressures on the government to privatize major industries and to undertake economic reforms. The economy has improved dramatically in the 1990’s, however Bangladesh still suffers from major growth deficiencies in several areas such as foreign trade in the South Asian region.

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Efforts to fulfill Bangladesh’s macroeconomic targets have been complicated mainly due to various factors including the country’s large population (Bangladesh is the most densely populated country in the world), and corruption within the government to name just a few. Other major obstacles for Bangladesh to overcome in order to achieve growth include the inefficiency of state owned enterprises, inadequate power supplies and slow implementation of economic reforms.

Even though Bangladesh has made some progress improving the conditions for foreign investors and liberalizing the capital markets, foreign investors in a range of sectors are still increasingly frustrated with the politics of confrontation, the level of corruption, slow rate of reform and privatization and deregulation of the public sector and the lack of basic infrastructure. Mauro (1995) studies how corruption and other institutional factors affect economic growth.

Using several different indices of institutional quality and the extent of corruption he found that corruption and bureaucratic inefficiency has a negative effect on the rate of domestic investment. Corruption lowers the rate of investment and thereby undermines the potential for economic growth. One of the most prominent barriers to growth and development in Bangladesh is the high level of corruption. A TIB (Transparency International, Bangladesh) report said that Bangladesh loser nearly 3 percent of annual GDP to corruption.

Global watchdog Transparency International rated Bangladesh the world’s most corrupt nation for five consecutive years from 2001. Subsequently the rating improved, to 10th in 2008, after a military backed interim government took tough anti-graft steps. However, it has been suggested that corruption and government inefficiency cost Bangladesh 450 million dollars a year, truly a tremendous amount of money for an economy that the UN has classified as one of the least developed, Transparency International (2004).

Wei (2000a) studies whether host-country corruption affects the ability to attract FDI (Foreign Direct Investment). Using three different indices to measure corruption, Wei finds that corruption has a significantly negative effect on FDI inflows. Wei also notes that the extent of corruption tends to be correlated with measures of institutional quality. Wei (2000b) investigates the link between corruption and the composition of capital inflows.

The study controls for host-country policies toward FDI and finds that corruption has a negative effect on FDI inflows. Corruption changes capital inflows away from FDI and toward bank loans. An explanation for the widespread existence of corruption in the developing economies can be the low wages of government officials. Since the utility of money is usually assumed to be inversely related to the actual amount earned a state employee with a low salary will benefit more from a given bribe than one with a higher salary.

In South India the earnings connected to corruption for an executive engineer were as much as nine times his salary in the 1970s (Easterly, 2002 p. 244). Increasing the salary of the employees would therefore reduce corruption. With Bangladesh’s high corruption levels and apparent lack of institutional quality, there is certainly scope for more FDI and therefore higher growth and development levels if bureaucratic corruption and institutional quality can be improved. Another major impediment to growth in Bangladesh is a rapidly growing labor orce that cannot be absorbed by the agricultural sector. The agricultural sector is one of the main markets for Bangladesh, and a large proportion of Bangladesh’s FDI is concentrated on this sector. Underemployment is still a serious problem, and an increasing burden for Bangladesh’s agricultural sector will be its capability to absorb additional manpower. This is put into context by Todaro and Smith (2009, p. 94), “Bangladesh has approximately half the population of the United States, squeezed into an area less than half the size of Wisconsin”.

Finding alternative sources of employment will continue to be a daunting problem for future Bangladesh governments, especially with the increasing numbers of landless peasants who already account for about half the rural labor force. The overwhelming levels of manpower in the labor force tie in with another barrier to growth, the poverty trap. The World Bank estimates that 29% of the population lives below the 1$ per day poverty line, Todaro & Smith (2009, p. 92). Fertility tends to fall as social and economic progress increases.

Because social and economic progression is still relatively low in Bangladesh, the Bangladeshi rely on having several children for security, rather than having less children whilst saving their money to further invest in education or capital. Todaro and Smith (2009, p. 93) have both deeply researched what a lower fertility rate could mean to Bangladesh’s economy, “more can be invested in each child in health and education, both by families and by governments… thus the higher productivity of the next generation. Furthermore, it is often the case that skilled Bangladesh workers who have been educated often leave for work overseas. Female literacy in Bangladesh is a low 31% with overall literacy being only 41%, Smith, Todaro (2009, p92). This is a major barrier to growth as Bangladesh requires more skilled workers in order to technologically develop and expand its industries which would in exchange create more sources of employment. In this part of the essay the main focus will be on how certain aspects of public policy can be used in an attempt to lift the barriers to growth and development discussed so far.

One fundamental barrier to growth that needs to be lifted in Bangladesh is the problem of low human capital investment (education) and that a low proportion of the population will go on to university and become a skilled worker. More skilled workers are required in order to further develop and expand into different industries. In some developing countries, there have been educational benefit schemes put in place by the government in order to attain higher numbers of children attending school with the long term view in aim of increasing human capital overall.

The theory here is that families have an incentive to ensure their children maintain a high attendance, and the high fertile rate may be reduced due to families not needing the added security. Similar policies have been used by other governments. For example, Smith and Todaro (2009, p. 30) have researched that Costa Rica has a mandatory six year school attendance which can be deemed a success when independent observers rate there effective literacy rate at 95%. Meanwhile Brazil, a country geographically close by and of similar income to Costa Rica has a literacy rate at fewer than 50%.

This shows the improvement that even a small simple policy can have on human development, a vitally important factor in the contribution towards higher growth. Furthermore, Another area where Bangladesh could improve in its bid for more growth is to increase its FDI flow In order to improve the potential for FDI-inflows the Bangladesh government could try to reduce the amount of bureaucratic corruption, one of the major barriers to growth and development in Bangladesh. Of the model variables, the easiest to affect should be the punishment variable.

By making the punishment more severe, the expected cost of engaging in corruption should increase and thereby reduce the amount of corruption. Further this does not bring about any additional costs for the Bangladesh government. Efforts can also be made to increase the effectiveness of corruption investigations. An explanation for the widespread existence of corruption in the developing economies can be the low wages of government officials. Increasing the salary of the employees would therefore reduce corruption levels.

The number of opportunities for bureaucratic corruption can be affected by making the decision making process in the country more transparent and thereby limit the bureaucrat’s opportunities to bypass the law. This would decrease the incentives for engaging in corruption. More recently India introduced the legal and institutional framework to help eliminate corruption. The legal and institutional framework to curb corruption is well developed and the country receives high scores in terms of anti-corruption law and institutions.

The Supreme Court has taken a stronger stance against corruption in recent years, as confirmed by the Bertelsmann Foundation Report 2008. It has challenged the powers of states in several instances. For example, in 2007 in Uttar Pradesh, it challenged the state governor’s powers to pardon politically connected individuals based on arbitrary considerations. In other instances, judges have taken on a stronger role in responding to public interest litigation over official corruption and environmental issues.

In December 2006, in a landmark ruling, the Supreme Court ruled that prosecutors do not need prior permission to begin proceedings against politicians Overview of Corruption in India facing corruption charges. It has also started . addressing corruption in the police by mandating the establishment of a police commission to look into these matters and has ruled that corrupt officers can be prosecuted without government consent. An analysis was conducted by Transparency India in 2007 to identify possible gaps between the UN Convention against Corruption (UNCAC) and the legal and institutional framework in place in the country.

The report confirmed the good quality of the legal framework against corruption in India, with existing legislation in line with most of the requirements of the UNCAC. This illustrates the public policy measures that can have an effect on reducing corruption levels, something Bangladesh must do in its quest for growth and development. Overall it must be said that the economy of Bangladesh has improved a lot in recent years, there are still many barriers it must remove before it can grow and develop its economy significantly.

With high levels of corruption, a low human development index rating, and a massive labor workforce proving too large to accommodate, the scale of the task is extremely large and will only happen over a long period of time. However I believe improvements could be made in terms of the anti-corruption policies suggested as well as an educational benefit system intended to improve Bangladesh’s rank on the Human development index. A government stripped of corruption and an increasingly more intelligent and able population could be the platform Bangladesh needs to overcome its growth problems and develop as an economy.

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