Just as we began to think of writing off the critical political experiment underway in Bangladesh, news of its economic rebound (and its renewed political promise) proved again the resiliency of its people and the energy and creativity of its private sectorA year ago when I last visited South Asia, it was the coming economic tsunami — the quickly rising energy and food prices — that worried me most, and Bangladesh’s fragility to such problems was my major concern. Yes, these problems would impact Pakistan also, but I had the impression that Pakistan could withstand them better, particularly if its mostly man-made political problems were brought to quick resolution.
The trouble the President had caused for himself, and the country, in March 2007 with his unwise action against the Chief Justice, and the ensuing lawyers’ revolt had exacerbated the economic softening already apparent and shaken confidence of the business sector. Domestic investment could be expected to go south. But I thought it likely that good sense would prevail and the political problems would be rapidly resolved by political solutions that restore a modicum of confidence and that would restart domestic investment and give demand a boost.
It was not too much to hope for given the government’s respectable economic record. But as it turned out, a rational escape from the political turmoil was an impossible dream. The political uncertainty cast a pall on the economy that has not been dissipated by the results of the February 18 election in which the Pakistani people rejected President Musharraf and his party, as well as the Islamist parties.
Other political factors continue to undermine confidence. The continued encroachment of the jihadis in the west of the country; the seeming inattention of current elected political leaders to this severe challenge to their authority; and the Army’s headlong rush into “peace deals” with those who challenge the state’s writ make economic bets on the future of Pakistan a very risky proposition for its domestic private sector and any foreign investors that still may harbour a shred of interest in the country. This sceptical attitude is spreading among allies and Pakistan’s friends as well.
Energy shortages and rising food prices remain a serious threat to economic and political stability, and the economy continues to unravel. Now the situation is desperate enough to warrant the government calling on the World Bank — once again — to shore up its faltering financial position.
In Bangladesh, on the other hand, there seemed no political solutions to the bad economic news of last summer. Two devastating floods in short order and a cyclone brought predictions of famine and social turmoil. The infrastructural problems of energy and transport appeared ready to bring the export sector to a halt by mid 2007, and the economy looked to be in a steep downward spiral.
The rapid rise of world demand for food pushed the prices of local staples up rapidly creating serious difficulties for the poor. This was among the main causes of political repercussions against the caretaker government, effectively diverting its attention from the political reform it had promised to undertake. The worst of the predictions was that an additional 40 million Bangladeshis would be forced below the poverty line.
In addition, of course, the reform agenda of the caretaker government, especially its anti-corruption campaign, which saw many businessmen connected with politicians being put in jail, had its own serious (and unforeseen) consequences. It stifled confidence in the business sector, and severely retarded domestic investment (which had been healthy and concentrating on local construction). Forecasts of growth nose-dived, some to below 5 percent, from the healthy 6 percent of the previous year.
Just as we began to think of writing off the critical political experiment underway in Bangladesh, however, news of its economic rebound (and its renewed political promise) proved again the resiliency of its people and the energy and creativity of its private sector. Suddenly the fears of a year ago look exaggerated and the future, both economically and politically — the latter not quite as robust as the former — looks almost rosy by comparison with the rest of South Asia. One could say that while its problems were not made in Bangladesh, its recovery was completely homegrown — by Bangladeshis.
Growth may be up, not down, over the past 12 months despite the rough patch in the second half of last year. Minimum estimates now are that the economy will grow by 6 percent, and it could be higher. Across the board, its economic sectors show strength and buoyancy. A primarily rural society, its agricultural sector responded to higher world prices and the setbacks of the floods and cyclone by increasing production of rice, potatoes, and wheat beyond the wildest expectations. The boro rice crop is a record 20 percent larger than last year. Bumper crops of wheat and potatoes have also been produced.
The caretaker government has helped to boost food production through an incentives programme and by providing for a great expansion of credit to agriculture. The official rice stock may double this year, and there is hope that Bangladesh could become a food surplus country. This outlook is so complete a contrast to what was predicted just 12 months ago that one has to wonder if we are talking of the same country.
After being stagnant in the second half of 2007, exports have also soared. Ready-made garments regained their phenomenal growth of previous years. But Bangladesh has unveiled new export products, such as pharmaceuticals and some of its newfound agricultural surplus, that have broadened its export base. The increasing diversity of exports is attracting a wider array of foreign firms looking to invest in the country’s dynamic private sector and low-cost labour.
Domestic demand has been much stronger in the first half of this year than one would have expected. Imports have increased by about 30 percent in the early months of the year. Credit to the private sector continues to expand at a healthy rate. At the same time as domestic demand has shown uncommon strength, inflation is on a declining trend despite upward pressures on prices globally.
Some of this buoyancy of domestic demand is due to the caretaker government’s ability to protect the very poor from the most deleterious effects of the rapid rise in world food prices. About 5 million households — 20 million or so people — have benefited from the Vulnerable Group Feeding programme as well as increased Food for Work programmes. While, in effect, income has been transferred from urban consumers, particularly the poor, to agricultural producers (farmers of one sort or another still make up about 70 percent of the population), most of this income transfer is spent and also adds to domestic demand.
Underpinning the strength of domestic demand, however, is the large increase in remittances from Bangladeshi workers who are going abroad in ever-greater numbers. Remittances grew by something over 30 percent in the past 12 months. It is believed that these go mainly to low-income families who spend almost all of what they receive. Of course, it is the labour intensive sectors — agriculture, export processing — in which the most growth is occurring, and this also contributes to domestic demand and to the alleviation of poverty.
Bangladesh’s amazing economic rebound is far from the end of the story. Its economy will remain fragile and vulnerable to natural disasters as well as global disturbances. High poverty will be its hallmark for a long time, This rebound is important, however, not only as a model for the other countries of South Asia, but because it can set the stage for a successful political transition in the country. The caretaker government has promised an election and return to complete civilian rule at the end of this year.
This will make their task much easier. It is the best news I have heard out of South Asia in several months and shows, perhaps, that good politics makes good economics, and vice versa.
William B Milam is a senior policy scholar at the Woodrow Wilson Centre in Washington and a former US Ambassador to Pakistan and Bangladesh
Source: Daily Times, 11/6/2008