Tuesday, September 20, 2011

Bangladesh and Global Economy: Does Bangladesh Keep Pace with Economic Globalization?

The purpose of writing this paper is to discuss the economic condition of Bangladesh
and the challenges Bangladesh face to keep pace in global economy. This paper
explains what challenges restrain Bangladesh to accelerate its trade and business
globally. Also mentioned in this paper some prospects of this country’s economy, in
which investment and business can be accelerated with foreign countries. This paper
also examines some basic obstacles of Bangladesh economy and it also describes
some recommendations of how to solve these obstacles to build a sturdy economy for
Bangladesh.
1. Introduction
Globalization is a much used term and there are diverse views as to how and
why globalization is occurring this time around. The late 19th and early 20th centuries
saw a globalization in economic markets, but we can see its pervasive and widespread
impacts at the present time. Every country in this world enters into global economy
and trying to cope with the pace of global economy. Bangladesh is one of the
developing countries in the world and its economy has already being impacted by
global economy. It is not possible for a third world country like Bangladesh to keep
pace with global economy, because it is conceivable that the origins of globalization
lie in the political decision by merely the developed countries of the world.
Bangladesh’ economy experiences a recession of industrial growth.
The study is focused that there is strong opportunity for Bangladesh to boost
its economy, but the socio-political situation should be favorable one to enhance
savings and investment in this country. The study articulates some strong
recommendations that could make Bangladesh even stronger to boost to compete
globally to a greater magnitude. It is conceivable that Bangladesh needs to privatize
its State- owned enterprise (SOEs) and should maintain an unassailable relation with
World Bank, IMF and other donor agencies. It is a big challenge for Bangladesh to
contend in global economy through considerable internal and external obstructions.
The entire paper is arranged by giving a brief current economic condition of
Bangladesh followed by an introduction initially; after then the next section is
discussed how Bangladesh economy impacted through regional trade agreement and
later the paper portrays the role of privatization in Bangladesh economy. Later the
paper discusses some constraints of Bangladesh economy and then it illustrates some
basic recommendations that could make this economy stronger to compete with
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global economy. And at last a conclusion is illustrated that reflects the overall theme
of this paper.
2. Overall economic condition of Bangladesh
Bangladesh is one of the poorest countries in the world, but it is plausible that
the overall growth rate of Bangladesh is not stagnant; the overall growth rate of
Bangladesh is actually moving forward. The growth average of Bangladesh is 5.4%
per year over the FY01-05 period, which has been the highest since the country’s
independence (The World Bank). Figure 1 represents recent economic indicators of
Bangladesh.
Bangladesh has global merchandize trade relationship ships with many
countries around the world. Bangladesh has a good market in the United States,
United Kingdom, Australia and Germany. Bangladesh also exports goods and services
from around the globe. Figure 2 illustrates the Bangladesh’s trade relations with other
countries.
Garments sector is the largest exporting sector for Bangladesh. For
Bangladesh, openness to trade would be a vital basis of future growth. Growth from
trade directness will depend upon simultaneous investment climate reforms that
would boost competitiveness to domestic firms. In Bangladesh the government should
undertake policies to attract overseas remittance into productive investment activities.
Land price is getting high excessively in Bangladesh due to the using foreign money
in exploratory and unproductive investment such as real estate and consumption. The
Bangladesh Government should create some attractive tax incentives and should
control the foreign investment to various project deemed necessary for economic
development. The Export Processing Zone (EPZ) of Bangladesh offer various
incentives to foreign investments, so Bangladesh Government should also devise
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alternative mechanisms to put that remittances into work( Bashar, Hassan, Ishik &
Maroney 2004).
3. Impacts of regional free trade agreement on Bangladesh economy
From the last decade Bangladesh joined into several trade agreements to
accelerate its economy throughout the world. Seven nations in the South Asian
Region- Bangladesh, Bhutan, Maldives, Sri Lanka, India, Nepal and Pakistan have
entered into a Preferential Trade Agreement (PTA) called South Asian Preferential
Trade Agreement (SAPTA) in 1995. This agreement leads to The South Asian Free
Trade Agreement (SAFTA) by the year 2000. The SAFTA is one path toward trade
liberalization and is therefore supposed to lead to welfare gain and economic growth
in region. Market efficiency is supposed to achieve through this free trade agreement.
A deeper integration was offered through SAFTA. A regional currency was also
offered that could be used as a unit of account for settling transactions under regional
arrangements. It can also be used for funding the creation of regional public goods in
the area of transport and communication, energy, information technology, tourism etc.
Finally the setting up of South Asian Development Bank (SADB) was also given
emphasis, where the fund would come from regional and international institutions and
also from member governments (Muchkund 2005).
India’s large market offers huge opportunities for Pakistani consumer goods
industries to realize economies of scale and Pakistan’s 130 million consumers offer a
captive market for Indian industries (Jain 1999). It is conceivable that Bangladesh has
been facing a tremendous challenge by joining into this agreement. Since India is a
giant in the region and also Pakistan as another important nation, Bangladesh has been
struggling to face the dominance of India in this region. Trade imbalance between
India and Bangladesh has been one of the most crucial issues in Bangladesh. India
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accounts for 14 percent of Bangladesh’s imports, but contributes a little more than one
percent of Bangladesh’ export that is neither healthy for trade nor for mutually
beneficial linkages for Bangladesh. Indian Government levied Anti- Dumping Duty
(ADD) on the lead acid battery of all Bangladesh exporters on June 02, 2002, which
exacerbated the trade dispute between Bangladesh and India (Islam 2004).
Bangladesh entered into BIMST-EC (The Bangladesh, India, Myanmar, Sri
Lanka, and Thailand Economic Cooperation) in 1997. Bangladesh’s exports
increased only in India among the BIMST-EC countries, while as Bangladesh have
been able to accelerate its export to the EU and especially to the United States (Warr
2005). It is also conceivable that unofficial trade between Bangladesh and India has
been increased tremendously and this illegal trade almost double to the official
bilateral trade between India and Bangladesh.
4. Trade liberalization in Bangladesh and its role in export expansion
Bangladesh has moved from an import-substituting inward oriented policy
regime towards a more liberalized trade and market oriented regime. Since its
independence, Bangladesh has been witnessed to growth per capita real GDP, value of
trade and also an increase in income inequality. Bangladesh has gone through an
industrial sectoral reform, financial sectoral reform and it also changed its export and
import policies to accelerate trade liberalization with a view of having allocation of
resources to those areas where Bangladesh has comparative advantages, which in turn
will promote specialization and growth.
In Bangladesh real total export increased by an annual compound rate of 6.18
percent over the period of 1974-1999, while during pre-liberalized era of 1972-1982,
total export grew at inadequate rate of 1.02 percent in contrast of 8.69 percent during
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the post liberalization period. Manufacturing exports, led by textile and readymade
garments especially since the mid 1980s grew at rates much faster than total exports
in each period and the combined share of textile and garments exports rose from 13
percent in 1975 to 39.35 percent in 1985 and 66 percent in 1999 (Alauddin & Hossain
2005). Bangladesh still needs further reform for sustain growth. IMF approved
US$493 million loan in June, 2003 to the government to expedite economic
development and reforms and IMF suggested that Bangladesh should strengthen state
owned enterprises and monetary reforms. Bangladesh’s economy has grown 5% in
last few years and IMF in its World Economic Outlook released that Bangladesh
experiences 6.2% growth this year and in 2007, but half of the Bangladesh’s people
still live on less than US$1 a day (The Wall Street Journal 2006).
5. Structural Adjustment Program and Bangladesh economy
As a part of the globalization process, Bangladesh accepted Structural
Adjustment Programs (SAP) in 1980s that attempts to increase countries export-led
growth, privatization, liberalization and the efficiency of free market. Structural
Adjustment Policies are policies that countries must follow in order to qualify for new
World Bank and IMF loans. The major objectives of the SAP policy package in
Bangladesh included increase the growth rate of its GDP, raise its agricultural output,
raise tax-GDP and revenue GDP-ratios, promote exports, mobilize and raise savings
and investments, attract foreign private investments etc.
It was conceivable that the implementation of SAP policy was hampered by
the floods of 1987 and 1988 and the mass movement of 1989-1990 against the
autocratic government (Sen & Tisdell 2004). Bangladesh undertook many economic
reformed since the acceptance of SAP policy. Bangladesh introduced the value-added
tax (VAT) for the purpose of expanding its tax support. The maximum import tariff
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rate was reduced from 250 percent to only 45 percent and the average trade-weighted
import tariff rate was brought down to about 21 percent only during 1995-1996 (Sen
& Tisdell 2004). In Bangladesh export has registered a high growth rate to 12 percent
in 1995 and further to 15 percent in 1999, which was only 5 percent in 1982. Budget
deficit has also declined to 5.3 percent of GDP in 1998-1999 having dropped from 7.9
percent in 1989-1990 (Islam 2002). It is also noted that the post SAP period has been
increasing specialization in Bangladesh’s exports by commodity and destination. For
example, ready made garments accounted for over 75 percent of Bangladesh’s total
export earnings (Sen & Tisdell 2004). There is no doubt that free trade encourages
specialization and Bangladesh should fully utilize SAP policy to achieve such
specializations.
6. How private sector could play a dominant role in Bangladesh
economy
The Government of Bangladesh, influenced by the World Bank and IMF, has
boarded upon privatization programs and public sector reform in order to produce
more effective controls, increase enterprise efficiency and promote effective national
development. In 1991 BNP government came into power and formulating industrial
policy to advocating further private sector development. There were considerable
corruption was noted in public sector and hence the government of Bangladesh took
initiative to privatize some state owned enterprises to increase accountability and
transparency and efficiency. It was claimed that privatized companies would achieve
better economic performance and efficient management that state enterprises failed to
achieve. Figure 3 indicates the pre and post privatized economic performance of some
companies.
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It is assumed that certain enterprises could be allowed to operate as domestic
monopoly for some time, but subject to foreign competition. As the domestic
economy is opened to foreign trade and investment, as is the case with all the
programs being implemented, state enterprises are forced to compete. The short lived
monopoly profits may improve the financial position of the enterprise in preparation
for privatization it and forcing it to compete with foreign enterprise.
It was conceivable that privatization in Bangladesh was able to bringing about
better economic performance and greater management. Trade union activities are one
of major blockades in our economy. But trade union activities such as strikes and
demonstration had declined to a great extent soon after ownership change. To
evaluate the performance of these privatized companies, a distinct Privatization Board
was set up to help these companies to continue better functioning.
7. Findings:
Bangladesh is one of the third world countries of the world. Bangladesh’s
economy is one of the growing economies that try to keep pace with global economy.
Since its independence, Bangladesh has been trying to get a good economic position,
but there are various factors exist that restrain Bangladesh to get a good position in
world economy. Bangladesh along is not responsible for this; it is conceivable that as
a developing country Bangladesh needs to comply with the policies of international
institutions and also with the policies of Western world.
Logistics is one of the important components of a nation’s economy that
affects productivity, distribution, interest rate etc. Good logistic management involves
designing an effective framework of two independent networks-one of product flows
and another one of information flows that will facilitate a firms distribution of its
product at the right place and at the right time as they are demanded by consumers
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(Razzaq 1997). Bangladesh has been struggling to develop this network; in fact
logistic development is one of the big challenges for Bangladesh’s economy. There
are some major reasons of why Bangladesh’s economy is struggling to keep pace with
global economy.
7.1 Poverty: Poverty is the most significant reason of why Bangladesh’s economy is
struggling. Many people in Bangladesh live under poverty line and Bangladesh
government is struggling to deal with this massive poverty. Poverty causes wide
disparity between rich and poor; especially in urban areas this disparity takes acute
form. Poverty reduces productivity of people and it makes people vulnerable.
7.2 Corruption and lack of accountability: Bangladesh has been identified as the
most corrupted country in last few years by the Transparency International. This
recognition certainly was not a good indication for Bangladesh and its economy. In
Bangladesh the corruption prevails to some great extent especially in government
sectors. Since Bangladesh has been identified as the most corrupted nation, many
countries possess a negative outlook for Bangladesh and do not expand their business
spontaneously in this country.
7.3 Industrial disparity between regional giants: India has a apparent superiority
over Bangladesh I terms of size, diversity and competitiveness. India’s superiority in
the industrial sector has made a low cost producer of most products compared to
Bangladesh.
7.4 Infrastructure related challenges that hinder Bangladesh’s economy:
Inadequate transport and poor port and related facilities are the major factors
hindering the development of a logistic system in Bangladesh. These obstacles greatly
reduce the flexibility logistics configuration for the firm.
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7.5 Increasing differences in economic power: Increasing differences in economic
power between developing countries and Western countries result inequitable division
of labor internationally. The Western countries constitute the core of the world
economy and developing countries exist in the periphery of the global economy.
7.6 Impact of non-tariff barriers on market access: Non-tariff barriers may of
various forms, such as export-import quotas, quantitative restrictions, anti dumping
and countervailing duties, technical barriers to trade (TBT) etc. These non-tariff
barriers of developed economies restrain market access of countries such Bangladesh.
For example, in 1997 the EU banned imports of shrimp from Bangladesh because
they did not comply with the EU’s Hazard Analysis Critical Point standards
(Picchiotto & Weaving 2004).
7.7 Immoral system of IMF and the World Bank on Bangladesh’s economy: The
IMF’s and World Bank’s structural adjustment policies (SAPs) ensure debt repayment
by requiring Bangladesh to cut spending on education and health; eliminate basic food
and transportation; devalue national currencies to make export cheaper etc. This belt
tightening measures increase poverty and reduce country’s ability to exploit workers
and the environment.
7.8 Not cope with technological advancements: The pace of computerization in
Bangladesh business and industries is slow. Most of the enterprises in the public
sector have yet to computerize their operations.
7.9 Natural catastrophes: There are various natural calamities Bangladesh
experiences every year that hamper Bangladesh economy to a great extent. Every year
Bangladesh looses many resources due to the excessive floods, rains and cyclones. In
1998, three-fourth of the total land of Bangladesh went under water and Bangladesh
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had to sacrifice resources of million dollars. Recently Bangladesh has been affected a
strong cyclone, Sidr, that causes huge monetary loss of this country.
However it is obvious that Bangladesh is one of the most open economies
among developing countries in Asia. In recent years Bangladesh has taken adequate
steps to reduce the size of the public sector and to free convertibility of currency. To
assure foreign investment Bangladesh has already being recognized as a signatory of
Multilateral Investment Guarantee Agency (MIGA), International Center for
Settlement of Industrial Dispute (ICSID) and a member of the World Intellectual
Property Organization (WIPO). The government of Bangladesh has also reformed its
trade policy in recent years. In pursuance of the “Uruguay Round Table Agreement”,
one of the most important trade policy Bangladesh government undertook is to bring
considerable reduction in fiscal restrictions imposed on the international movement of
goods and services to adopt an export-led growth strategy to ensure faster economic
growth(Cheng & Hossain 2002). Bangladesh took many significant policy reforms
much earlier for its economy. In June 1982, the government announced a New
Industrial Policy (NIP). The main purpose of NIP was to accelerate industrial growth
through private sectors. The NIP was further liberalized in 1986 which aimed at
expanding and strengthening industrial development under the Revised Industrial
Policy (RIP), and the ultimately helped strengthen export promotion (Edwards 2001).
The government stated several objectives to promote international
competitiveness through flexible management of the exchange rate and through steps
to link real wages with productivity. The government has agreed to a wage increase to
public sector workers that does not take account changes in productivity (The World
Bank 1995).
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In recent years Bangladesh has taken many reforms in economic field to make
Bangladesh economy a better one. These reforms contributed to Growth of GDP rate
about 4.8% annually in the past decade, macroeconomic stability, significant human
resource development, gender equality in primary school etc. According to report of
the UNDP Human Development Report Bangladesh has graduated from the low
human development to medium human development category of the United Nations
(Chibber, Peters & Yale 2006).
Bangladesh has large and efficient manpower in the IT sector which has
already been identified as a priority area for Bangladesh’s export diversification.
Bangladesh’s IT firms have already set their eyes on the international market,
especially in Japan with the expectation of reserving a portion of their job and
software outsourcing market (Moni 2006).
On the policy side, a good record on growth seems to have benefited from
impressive macro stability. Inflation hasn’t reached double digits for almost two
decades, while public and external debt situation is fairly comfortable. Savings and
investment rates, currently at about 24%, are relatively high compared with other
countries at similar income levels.
The advantages of operating a business in Bangladesh generally include the
relatively competitive labor cost and copious manpower, enough large market and
preferential access to some foreign markets as a least developed country .The social
and cultural environment in Bangladesh also favorable to attract foreign investment.
People with different religions and faiths live in synchronization in Bangladesh. The
general attitude Bangladeshi people have a very friendly attitude toward the
foreigners that considered being a very important cultural element for living and
executing business in a foreign country.
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8. Recommendations: Though Bangladesh economy is not sluggish, but
Bangladesh is struggling to compete with global economy for various obstacles.
Several measures should be taken in competing these obstacles and make Bangladesh
economy a better one.
8.1 Government level reforms: It is true that Bangladesh government has taken
some steps to upgrade its telecommunication and transport. Government initiatives or
resources are not along to meet the nation’s growing requirements. Bangladesh
government should continuously improve system capabilities to enhance the private
sector participation. Government must set adequate policies to facilitate private
investment. A well developed domestic market is also inevitable for better economy.
This would require a drastic change of outlook of the policy makers, leaders and
managers in business and industries (Razzaque 1997).
8.2 Monetary Policy: The central bank must maintain a close look on the growth of
the monetary base or domestic credit creation. Extreme changes in relative prices are
not necessarily inflationary, but in Bangladesh there has been rapid inflation and
consequently, relative prices have changes only through the increase in the prices of
certain goods and services. Inflation ion this country actually conceals the impact to
the extent that there is money illusion. There is no reason for monetary policy to be
deflationary to the point of causing an economic contraction pin the real sector. The
policy should be carefully designed to accommodate institutional changes with
positive economic growth.
8.3 Integration into World Markets: In Bangladesh, firms can be internationally
integrated by means of ownership or by selling their products in foreign markets. In
the ready made garments and leather/footwear industries, most of the firms are
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majority exporters, i.e, they sell more than 50% of their output in export markets. In
contrast, in the pharmaceuticals industries there are no majority exporters (Fernandes
2006).
8.4 Attract free flow of FDI: Foreign Direct Investment is inevitable for any
developing economy. Bangladesh should create proper field to attract more FDI in
industrial sector. India’s booming software industries has been driven partly by FDI
from firms like Sun Micro system, Intel and Microsoft, which attracted by India’s
well educated, inexpensive labor force (Qin-Hilliard & Suarez-Orozco 2004).
8.5 Productive investment: Bangladesh needs substantial quality investment in the
industrial sector and investment in those activities where we can produce more
efficiently. The economic growth rate in Bangladesh is not necessarily constrained by
insufficient savings; rather it is due to poor level of investment and lack of efficient
use of capital.
8.6 Limited foreign capital assimilation: Every year Bangladesh seeks foreign
capital for undertaking various projects. But foreign capital can be a substitute for
domestic savings only to limited extent. Foreign aid, commercial borrowing and
portfolio investment can limit the expansion of savings by expanding consumption.
The economy can fall into debt trap and the subsequent decline in the growth rate
would be unavoidable. The government should immediately constitute a national
committee on aid for trade to work on getting a better share of the aid-cake as well as
adopt a foreign aid policy statement in consistent with the new PRSP (Poverty
Reduction Strategy Paper) to make donors clear about the priority areas of aid.
9. Conclusion
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The prescription of globalization is to open up economies through
trade and investment liberalization, deregulation and privatization. It can strongly be
said that Bangladesh’s economy is trying hard to keep pace with world economy,
even though this economy is going through some massive impediments. Recently
Bangladesh’s economy has been characterized by expanding flows of goods, services,
labor and ideas through collective action by government, non-government
organizations and other institutions. Two decades ago it was plausible that
Bangladesh economy is struggling merely for massive poverty, but in recent year’s
poverty reduction is one of the most significant phenomenons for Bangladesh
economy. Bangladeshi institution Grameen Bank (Village Bank) and its founder Dr.
Muhammad Younus most recently won the Noble Prize for Peace for introducing
micro credit model in poverty alleviation that could be applied world wide.
Bangladesh is now introducing such models to alleviate poverty and its also
improving IT and telecommunication sectors that would make Bangladesh a great
competitor in world economy. If Bangladesh government could play an active role in
fighting corruption and if there is a stable political situation, Bangladesh would
emerge as one of the strongest economy in the world in no time. Bangladesh dubbed
as one of poorest countries in the world does not tell the whole story and solve the
problems. Bangladesh has already showed tremendous progress in all sectors of
economy, which is the platform for Bangladesh economy to compete strongly with
the pace of global economy in near future.

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