I had initially planned on continuing with the reform theme, following on from term limits and presidential powers. But then, I started to wonder whether there was any point in writing when things like this suggest that guns are more powerful than pens (or keyboards). But to stop writing would mean letting guns have their way. And even though I’m not sure I want to write about reforms under the current circumstances, I can write about things other than politics, as pointed out by some readers in the open thread. In this piece, I’m going to discuss economics.

What is Bangladesh’s current economic condition? I’m going to explore this question, using this article as a starting point. Then I’ll move on to the economic records of the democratically elected governments compared with those of the military-dominated governments. Here, I’ll use this piece as my starting point. Hat tip AsifS for both pieces. As usual, looking forward to a good discussion.


Current economic conditions and outlook

The IMF released its country report for Bangladesh earlier this month, forming the basis of the International Herald Tribune article linked above. The key points of the reports are the following.

1. The economy is expected to grow by around 6.5 to 7 per cent over the medium term, the fastest pace in nearly three decades, but inflation has picked up.
2. The last government borrowed a lot to finance pre-election spending in the second half of 2006, but the current regime has reversed this, and the IMF considers the 2007-08 Budget to be ‘more realistic’.
3. The Fund applauds the economic reforms of the current regime, including: ‘significant adjustments of energy prices, corporatization of the nationalised commercial banks, and a range of governance reforms’.
4. The Fund recommends monetary tightening (raising interest rates and/or curbing credit growth) to combat inflation. It also believes that ‘there is … scope for more flexibility in the exchange rate given the improved reserve position’.
5. More economic reforms — including reforms of the tax system and further trade liberalisations, and more controversially, ‘further adjustments’ (read: increases) in prices of ‘fuel, electricity and fertiliser’ — are recommended.

Economic growth has been increasing for a while (see below), but it is the rising inflation that is the key economic issue in the country (covered here and here). I was surprised to read that the Fund believes ‘inflation is expected to be contained around 6½ per cent’. Although media reports and anecdotes are no substitute for hard economic data (which is quite scant in Bangladesh), inflationary expectations appear to have set in — that is, people expect prices to rise tomorrow, and they expect the magnitude of price rise to be higher tomorrow than it was yesterday.

The causes of rising inflation are manyfold. The last government’s attempt to spend its way to re-election pumped a lot of money in the economy, and as the economy’s supply potential didn’t increase, prices rose. Demand also increased from strong exports and higher remittances — the world economy too has been growing at the fastest pace in three decades. Add to this the rising food and other commodities prices in the world market.

In addition to the international and macroeconomic factors, there are also microeconomic reasons for price hikes. The conventional wisdom has it that a group of powerful, politically connected, corrupt businessmen were behind high prices during the last government. In the early days of the current regime, supply networks around the country were disturbed during various anti-corruption and clean-up drives — I witnessed a street side bazaar being demolished by the army in the first week of the emergency; if you break up a vegetable bazaar without any alternative arrangement, prices will rise.

So much for the causes, how to curb inflation now? There is no easy way to reduce inflation. The Fund recommends tighter monetary policy to curb inflation. This will reduce the credit available to businesses (as well as households). If the business spending slows, it might reduce inflation, but it will also dampen investment, which will inhibit the economy’s ability to grow in the medium to long term. Our investment-GDP ratio is already lower than our neighbours to the east. Should the policymakers squeeze the domestic business even more?

Another way to reduce demand is to allow the taka to appreciate against other currencies, particularly the Indian rupee. One rupee cost 1.20 taka in May 2001 and 1.50 in May 2006, compared with over 1.70 now. Since much of the daily necessities come from across the border, an appreciation of taka can help reduce prices. Of course, an appreciating taka will hurt exporters. But then again, exports are being driven by strong world economy, not an undervalued taka.

Raise the exchange rate or the interest rate, nothing will happen to the prices unless the domestic supply networks are restored, and very surprisingly, the IMF report was largely silent about this. Instead, the report stressed the need to adjustments of (increases in) fuel, electricity and fertiliser prices.

Whatever the merits of such adjustments, and there are long-term benefits, in the short term, these will further ignite inflation. And whatever political shenanigans might be going on, rising inflation will only add to political instability. As the IHT reports, the Fund says ‘Bangladesh … needs “political stability” to restore investor confidence’. I couldn’t agree more. In the interest of political stability, the regime should leave ‘adjustments’ to fuel, electricity and fertiliser prices to an elected government.


Economy and democracy

Ah, so we come back to politics after all! I’m afraid we have to touch on politics. Some say that it is quite naïve to expect an elected government to take the unpleasant decision of raising fuel prices — when have the politicians done the right thing by the economy? — they ask. Indeed, the IHT quotes the IMF as thus:

The destructive political rivalry of the last three decades, together with weak accountability and rule of law, has squandered a good portion of available resources…

Do elected governments perform worse than unelected regimes when it comes to the economy?

There is no clear answer to this question. All rich countries, with the possible exceptions of Singapore and Israel, are thriving multi-party democracies. But is democracy the cause of development or its effect? During their high growth eras in the 19th century, Europe had very limited forms of democracy, and East Asian countries like South Korea or Taiwan were outright dictatorships during their miracle era. In each of these cases, democracy followed economic development.

But lack of democracy is no guarantee for development. Latin America did quite poorly under dictatorships of socialist left and fascist right. The entire continent of Africa slipped into an abyss under undemocratic regimes. On the other hand, closer to home, India managed to transform its socialist-leaning economy into a dynamic market-oriented one without sacrificing its democracy. But then, so did China under its party dictatorship.

The truth is, there is no empirical link between democracy and development — whatever the case for democracy. There is no evidence that democracy is either helpful or harmful for development, it really depends on the country experience.


Economic records of past governments

So, what has been the experience in Bangladesh? Abdul Momen asks this in an online piece titled ‘Facts vs Fads: Democracy and Economic Performance’ (link above). He uses the World Bank and Bangladesh Economic Survey to show that the macroeconomic indicators were much better under the elected governments than under the military-led ones. His table, however, showed that GDP per capita has been growing faster than GDP in Bangladesh over the past 3 decades. Since population has grown, this patently cannot be correct, so how do we know that Mr Momen hasn’t made some errors in his calculation?

I decided to do some of my own calculations. I use the IMF data, which is publicly available here. The data go back to 1980. I consider the period before 1990 to be military-dominated, and the period since (up to 2006) to be under elected governments. The following picture tells the story — there was a noticeable pick up in the pace of growth in real (that is, adjusted for inflation) per capita income after 1990.

chart-1.JPG
click on the chart to see the whole image

So, Mr Momen appears to be right after all – democratically elected governments, for all their faults, have presided over faster improvements in per capita income. Mr Momen hypothesises the reasons as this:

The higher growth rates were achieved in part because of other liberal policies undertaken by political governments. A free press, private television channels like Channel I, ATN Bangla, and NTV, and the entire telecommunications revolution in Bangladesh made famous by GrameenPhone was spurred during democratic rule. The better flow of information and communication not only generated economic benefits, but also enhanced public consciousness dramatically, allowing the media to raise issues of accountability that we take for granted now.

I agree with his views. But I also know that the world economy has also been growing strongly — during the 1990s, we saw the advent of the IT-propelled new economy and globalisation; in more recent years, driven by the break-neck pace of growth in China and India, the world economy has been growing at the fastest pace since the 1960s. Could it be that the faster growth in Bangladesh is caused by external factors? That the form of government has nothing to do with this?

To explore this, I decided to see what happened to our per capita income relative to that of the US. The idea is, if the recent economic growth has some domestic reason, this should show up as an acceleration in the rate of catch up with the US.

The result is shown in the next picture — per capita income fell relative to the US throughout the 1980s, held steady during the 1990s, and in the past 5 years, steadily rose.

chart-2.JPG
click on the chart to see the whole image

So much for the economic statistics, how do we know that these growth rates have actually resulted in the standards of living of the common people? Fellow blogger AsifY discusses this here. I looked up how we have done in the UN’s Human Development Indicator. The table below shows that using this measure, standard of living improved more in the post 1990 period compared with the earlier years.

table.JPG
click on the chart to see the whole image

Next time you hear that democratically elected governments have done nothing and we need an unelected regime to set things right, remember these records.