This paper examines Bangladesh’s macroeconomic performance in the light of market-oriented liberalising policy reforms. By looking at the trends in fiscal, external and investment-savings balances, it analyses how, despite falling inflows of foreign aid, Bangladesh achieved macroeconomic stabilisation and an acceleration of economic growth in the 1990s. The paper concludes that for consolidating the transition from stabilisation to growth, improvements are needed in many areas such as revenue mobilisation, the efficiency of the financial system and the overall investment environment.
The macroeconomic scene in Bangladesh, since the early 1970s, has undergone successive shifts in terms of policy environment, often linked with change in the ruling political regime. In the early years following the War of Liberation in 1971, macroeconomic management was primarily aimed at reviving a war-ravaged economy in an overall framework of extensive state control and with an avowed ideology of socialism. The state became the de facto owner of a large number of enterprises that had been abandoned by their Pakistani owners.
After the killing of Sheikh Mujib and the change of government, there was a policy shift towards privatisation and promotion of the public sector. The denationalisation of abandoned enterprises continued with varying speed into the 1980s when a second wave of divestment was initiated under the military government of general Ershad. From the late 1970s to the beginning of the 1980s, there was a short-lived episode of investment boom, with investment in both public and private sectors growing at nearly 15 per cent annually in real terms [Mahmud 1995].
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This was made possible by relying on an increasing flow of foreign aid and adopting a privatisation strategy based on lavish dispensation of cheap credit and provision of other incentives such as highly protected markets for domestic industries. To a large extent, latter-day problems regarding so-called ‘sick’ industries and the large-scale default of bank loans originated from this experiment with aid-dependent state-sponsored private capitalism. 1 There was no mobilisation of domestic savings and the investment boom ended abruptly when he external aid climate severely deteriorated in the early 1980s. A major change of direction occurred in the early 1980s with the adoption of market-oriented liberalising policy reforms undertaken along the guidelines of the World Bank and IMF and implemented under fairly rigid aid conditionality. These reforms were initiated against the backdrop of serious macroeconomic imbalances, which had been caused in part by a decline in foreign aid and, in part, by a preceding episode of severe deterioration in the country’s terms of trade.
The beginning of the 1990s saw the launching of a more comprehensive programme of macroeconomic reforms, which coincided with a transition to parliamentary democracy from a semi-autocratic rule. While the macroeconomic restructuring has had considerable success in stabilising the economy, the long-awaited transition from stabilisation to growth has yet to gather pace, although some beginnings appear to have been made during the 1990s. II Trends in Macroeconomic Indicators The reforms initiated in the 1980s were aimed at reducing fiscal and external deficits to a sustainable level, consistent with the reduced level of aid availability. The trends in various macroeconomic indicators over the last two decades are shown in Table 1. During the 1980s, the fiscal deficit came down from 6. 6 per cent of GDP in the first half of the decade to 5. 4 per cent in the second half, while the external current account deficit was reduced from 6. 7 per cent to 4. 7. But this success was achieved at some cost. The macroeconomic balances were improved not so much by raising revenue or exports, but by squeezing expenditure on the fiscal front and imports on the external front.
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Thus, between the two halves of the decade, the tax-GDP ratio barely increased, while development expenditure as a percentage of GDP declined from 6. 6 per cent to 5. 4 per cent. Similarly, export revenue as a percentage of GDP barely increased, while the import-GDP ratio declined from 14. 3 per cent to 12. 8 per cent. Thus, as in the case of most other early experiments in structural adjustment, the attempt to achieve macroeconomic stabilisation in Bangladesh in the 1980s was made along the contractionary route. The policy reforms in the 1980s included mainly the withdrawal of food and agricultural subsidies, privatisation of state-owned enterprises, financial liberalisation, and withdrawal of quantitative import restrictions. The reforms of the early 1990s were particularly aimed at moving towards an open economy – such as making the currency convertible on the current account, reducing import duties generally to much lower levels, and removing virtually all controls on the movements of foreign private capital.
Besides, fiscal reforms were undertaken including the introduction of the value added tax. The launching of wide-ranging policy reforms in the beginning of the 1990s was followed by some positive developments in the macroeconomic scene. There was a marked improvement in the government’s budgetary position, particularly in terms of increased revenue mobilisation in the early 1990s. While the net inflow of foreign capital further declined to around 2 per cent of GDP, both investment and saving rates steadily improved, thus paving the way for superior growth performance.
The ratio of investment to GDP, which had stagnated at less than 17 per cent in the 1980s, increased to about 23 per cent towards the end of the 1990s. This increase was almost entirely due to the dynamism in private investment, which has risen from less than 10 per cent of GDP to about 16 per cent since the late 1980s, with the investment rate in the public sector remaining almost unchanged at around 6 to7 per cent of GDP. The growth of GDP, which averaged 3. 7 per cent annually during the 1980s, increased to 4. 4 per cent in the first half of the 1990s, and further to 5. 2 percent in the second half.
Introduction The current GDP growth rate for the US economy stands at about 2.5%. It is interesting to note that in each of the last quarters of the years, the rate is higher, but at the start of a new year the rate decreases in the first quarter. For example 2011, QIV is 4.9% while 2012 QI is 3.7%. The stage of the business cycle the US economy may be is the expansion/recovery stage since its ...
Meanwhile, due to robust and sustained growth in export earnings, the exportGDP ratio increased from less than 6 per cent in the later half of the 1980s to the current level of above 15 per cent. With the accompanying increase in imports, the trade openness of the economy (that is, the combined ratio of imports and exports to GDP) neatly doubled during the same period. All this was achieved along with remarkable success in keeping inflation under control. In the first half of the 1980s, the average annual rate of inflation as measured by the consumer price index was ominously high at 13 per cent.
It is only the contractionary effect of structural adjustment of that period that brought inflation down – to around 8 per cent in the second half of the decade. During the 1990s, there was further decline in the inflation rate – down to 5. 6 per cent in the first half of the decade and 5. 8 per cent in the second, and this time the reduction was achieved despite the relative buoyancy of the economy, as compared to the preceding decade. The 1990s thus saw positive developments on several fronts: transition to parliamentary democracy, strengthening of economic growth performance, and consolidation of conomic stabilisation in the face of declining foreign capital inflow. This said, there were some periodic lapses in macroeconomic discipline – particularly related to the timing of approaching national elections – thus producing the symptoms of the so-called ‘political business cycle’. 4 Despite the overall soundness of these macroeconomic trends, there were some disconcerting features. While the increase in the investment rate was entirely led by private investment, there were some symptoms of a feeble investment response to policy reforms.
In the early 1990s, for example, the marked increase in the domestic savings rate found no commensurate response from private investment, producing a situation of aggregate demand deficiency. This was evident from a sharp fall in the inflation rate to near zero, along with a fall in private sector credit expansion and an unprecedented build-up of international reserves [Mahmud 2001]. It is difficult to ascertain whether the rapid reduction in industrial protection achieved through import Liberalisation at that time played a role in this.
The Term Paper on Capital investment analysis and inflation and capital investment analysis with taxation
Inflation refers to persistent increase in price of goods and services. It is also referred to as average general increases in the price of goods and services. Prior to this time, there had been lots of argument amongst writers in finance on whether or not to ignore or include inflation when computing capital budgeting. The argument has always being that inflation affects both the discount rate ...
The uncertainty created by these reforms, which had no pre-announced targets or timetable, could have been a contributing factor as well. There were other episodes of stagnation or decline in invest ment in manufacturing. 5 Thus, apart from the resource constraint on investment growth, the ‘desire to invest’ factors may have become important in the post-reform era, particularly because of the withdrawal of public investment from directly productive sectors. This problem may have much less to do with the structure of industrial incentives than with the overall investment climate.
It differs from official estimates because it does not include official transfers (foreign aid as grants); a negative value implies surplus. 3 Equals gross investment minus trade deficit; also equals gross national savings minus net factor income from abroad. 4 Equals gross investment minus current account deficit. 5Expenditure under Annual Development Plan (ADP).
6 Includes food account balance and certain capital expenditures and net lending not included in the development budget. 7 Includes net borrowing from the banking system and net sale proceeds of savings certificates. 8 Includes grants and concessional loans net of amortisation.
Budgetary figures are the realised actual and may differ from official ones because of the data reconciliation done by the World Bank and IMF. Sources: Various publications of the World Bank, IMF, Bangladesh Bank and Bangladesh Bureau of Statistics. Also inhibit the inflow of foreign private investment, which are imported, domestic manufacturing depends heavily on imremains insignificant despite Bangladesh’s liberal policies. 6 ported raw materials, and intermediate goods and finished conIt is noteworthy that in some years, the inflation in price indices sumer goods account for less than 10 per cent of all imports. f domestically produced industrial goods was near zero (Table 2).
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There seems to be thus little room for adjusting to lower import While low inflation is a measure of successful stabilisation, it growth without subduing investment demand or creating capacity may also be in part a symptom of aggregate demand deficiency. underutilisation in the economy. In the latter case, production contraction can happen in some There were also other adverse factors limiting the prospects parts of the economy if prices are not flexible downward, which of an economic upturn.
Political unrest and natural disasters like may be the case not only for industrial production but also for floods severely disrupted the economy from timetotime [Mahmud many subsistence type activities where the price (of the service 2002]. The effectiveness of public development spending was or the product) may be determined somewhat inflexibly like the compromised by widespread corruption and inefficiency in project so-called subsistence wage. The problem of pushing inflation implementation.
Again, because of the inefficient banking systoo low is that it can result in a hit or miss situation if the aim tem, there was apprehension that a large part of any increased is not to adversely effect capacity utilisation envisaged in the flow might turn into bad loans. The surge in credit disbursements presence of downward inflexible prices, particularly at a time had therefore to be restrained, not only to keep monetary exwhen trade liberalisation policies are aiming at bringing about pansion within safe limits, but also to prevent a further deterio large relative price changes. ation in banking discipline. The experience of macroeconomic management in the 1990s While domestic savings show healthy trends since the early also shows the fragility of the country’s balance of payments, 1990s, it is not easy to explain these trends. The determinants notwithstanding impressive export growth. Periods of marked of domestic saving mobilisation are poorly understood in dynamism in investment and industrial activity turned out to be Bangladesh.
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One visible source of the increase in the savings short – lived, limited by the balance of payments constraint and rate in the early 1990s was the significant improvement in the resulting in the depletion of foreign exchange reserves. This was government’s budgetary position resulting in a likely increase true of the two episodes of mini-boom that took place around in public savings. The surplus of revenue earnings over current 1994 – 95 and 2000 -01. In both cases, there was an upturn in largeexpenditures clearly increased in that period (Table 1).
But this scale manufacturing production associated with a rapid expancannot explain the continued increase in domestic savings since. sion of private sector credit and high growth in the import of In fact, one may be tempted to conclude from the experience capital goods and industrial inputs (Table 2).
In both cases, of recent years that if investment demand were to rise, matching external deficits increased and foreign reserves sharply diminsavings would be forthcoming. However, there are uncertainties ished, until stabilisation measures stifled the growth of investabout these saving estimates.
These are derived indirectly from ment and manufacturing. the investment estimates (Table 1), which themselves suffer from The above phenomenon is reminiscent of a dominant ‘trade many methodological and data deficiencies. Also, in the years, gap’ in the erstwhile popular two – gap model of foreign aid. 7 the official estimate of export earnings is suspected to have had It reflects the highly import-intensive nature of investment and an increasingly upward bias, thus resulting in a possible undermanufacturing activities in Bangladesh, where most capital goods estimation of the external current account deficit.