Monday, 3 December 2007

Economic Development in Bangladesh: A Case of Opposing Factors

The case of economic development in Bangladesh is one of puzzling dilemmas. Bangladesh came into existence in 1971 after fighting a bloody war of separation from Pakistan with the military support of neighboring India. Immediately after independence, the Bangladeshi economy was in dire straits. In the following 37 years, the international community poured billions of dollars of aid into the country. USAID alone provided more than $5 billion in development assistance since 1971. However, while Bangladesh has made commendable progress in certain areas, in spite of international aid flows, it remains one of the world’s least developed countries. This essay will discuss two opposing phenomena that have been salient to Bangladesh’s contemporary development situation. First, it will observe the negative effects of corruption, which have effectively stifled the benefits of international aid inflows. Second, it will discuss the significant positive effects that microfinance institutions have had on development and poverty reduction.

Prior to discussing these effects, this essay will present an overview of the current circumstances of the Bangladeshi economy, emphasizing both the shortcomings and the achievements. Bangladesh’s 2005 purchasing power parity GDP per capita was $2,130, ranking 144th in the world (IMF). However, more than half of the population, approximately 70 million people, lives on less than one dollar per day ($365 per year), highlighting an extremely high degree of inequality. About 3 million children receive no schooling and the adult literacy rates place among the lowest in the world. Maternal and child mortality is tremendously high, as only 27% of all mothers receive adequate pre-natal care. Gender discrimination is widespread, particularly affecting women in rural, low-income households. Bangladesh also suffers from particularly severe environmental degradation and resource depletion.

Yet, Bangladesh has experienced some positive development achievements as well. Over the last 10 years, the economy has grown at an average rate of 5% annually. The nation is now nearly self-sufficient in rice production, has eradicated polio and reduced the fertility rate by 50% (USAid 2005). During the 1990s, the infant mortality rate was halved and life expectancy rose to 61 years from 56. The development of microfinance institutions, such as the Grameen Bank, has contributed to the reduction of moderate poverty by 17% and extreme poverty by 13% between 1991 and 1999. The nation’s economy, while having several drawbacks, is not in as dire a condition as suggested by some.

Historically, Bangladesh’s principal impediments to development has been, corruption, poor governance, and lack of rule of law. According to surveys conducted by Transparency International, Business International, Political Risk Services and the World Economic Forum, Bangladesh consistently ranks as one of the most corrupt nations in the world (Transparency International). The World Bank attributes an estimated 2-3% GDP loss to corruption each year. The discrepancy between the international aid inflows and the amount actually received by development programs has also been stark. According to Chowdhury (2005), only 25% of aid has ever reached the poor.

Corruption can be loosely defined as the transfer of resources aimed at public ends into private hands. A few individuals with access to public resources, thus, accrue large amounts of wealth at the expense of the poor. In Bangladesh, corporate and bureaucratic tax evasion and bureaucratic theft are the most common sources of high-level corruption. On a lower level, theft of items from public facilities, such as medications from clinics, has also been a major contributing factor. Additionally, public employees, such as teachers and doctors, have high rates of absenteeism and prefer to provide their services privately (Transparency International). Theory states that corruption can have a detrimental effect on economic growth and development. To illustrate this effect, first consider the following fiscal budget deficit equation:

D = g – t – Ya

Here, the deficit is defined as government spending (g), less tax revenue (t) and international aid (Ya). The assumption is made that government revenue comes from only two sources: tax revenue and international aid.

In the case of corruption (c), this becomes:

D = g – (t + Ya ) + c

The equation demonstrates that corruption detracts from the tax revenue and international aid. The result is a reduction in useful funds available for the government to spend. Now, corruption (c) will be implemented into the simple equation (built for Rao 2007), explaining the long-run growth rates of per capita income, per capita capital stock, and human capital:

g^(t+Ya-c) * s^(a-t) * q^[1-(a-t)]

Here, g remains government spending, while s represents savings and q represents investment in human capital. As we can see in the exponent of g, corruption exerts a negative effect on growth rates in three vital economic areas.

As the poor have been suffering the ills of corruption, they have also been experiencing the widespread benefits of microfinance. Bangladesh has been home to some of the pioneering institutions in microfinance, such as the Grameen bank. In fact, in 2006, the bank and its founder, Muhammad Yunus, jointly shared the Nobel Peace Prize. Microfinance is a term referring to the provision of financial services, such as credit and insurance, on a very small scale to poor individuals. Microfinance institutions’ strategies such as collateral-free group-based lending and mobilization of savings have helped attract a broad usage base, while mitigating loan default risk. Additionally, such institutions have offered specialized support for women, whose traditional, gender-specific roles do not facilitate financial activity.

Ftom a theoretical standpoint, Microcredit allows the poor to consume beyond their means and to take entrepreneurial initiatives, positively affecting economic growth. Given Bangladesh’s high propensity for suffering severe seasonal flooding and other devastating environmental issues, microinsurance secures the property of poor individuals, which is often not valuable enough to be insured by mainstream commercial financial services. From a macroeconomic perspective, microinsurace presents a safeguard against large losses of GDP in the event of an environmental disaster. To further the microfinance initiative, governments and donor programs have provided substantial funding. In 1996, the World Bank provided the PKSF, an intermediary for wholesaling microfinance, a loan of $115 million. Due to the market (non-state) operation of microfinance institutions, higher levels of oversight and accountability form a barrier against corruption.

Empirically, microfinance has had a very important impact on poverty reduction in Bangladesh. Between 1991 and 1999, data on consumption and the consumption poverty line demonstrate that moderate poverty declined by 17% and extreme poverty by 13%. Microfinance was found to account for about 40% of the overall reduction of moderate poverty and even more in the case of extreme poverty. On an aggregate basis, microfinance was proven to reduce moderate poverty by 1.0% and extreme poverty by 1.3% annually (Khandker 2005).

In conclusion, Bangladesh is both one of world’s most corrupt nations and one of its pioneers in the provision of microfinancial services. Looking to the future, sustained development necessitates the revamping of government institutions to counteract widespread corruption. A campaign against corruption must stem from improving the democratic system of governance and rule of law, increased public accountability for officials, and eradication of the “status quo of cronyism and patronage that determine social benefits and power relations” (USAid 2005). Bangladesh can look to Hong Kong and Singapore’s effective anti-corruption bureaus as examples. Safeguards for press freedom and a non-politicized civil society are crucial for improving public accountability. For enhancing the democratic system, the example of Thailand’s voter education program may be observed.

While anti-corruption programs, if effectively implemented, will leave more funds at the disposal of the government, the allocation of these funds towards particular areas of concern is important. Greater investments in education and healthcare are needed, particularly targeting women. While NGOs and microfinance institutions have had a positive impact in this regard, the government must take a leadership role. Education and treatment spending must be channeled toward dealing with the growing incidence of HIV/AIDS. Finally, Bangladesh must thwart its rapid environmental degradation by investing in cleaner technology and protecting its remaining natural resources.