Nexus between economic growth and poor governance
For last two decades, Bangladesh has been experiencing significant economic growth amounting on an average more than 5 per cent, higher than the other regional players; and achieved outstanding development in various socio-economic development indicators. Few decades back, the post-independence period can be characterized by infrastructural bottlenecks, deplorable living condition of people, lower literacy rate and widespread corruption prevailing in the economy.
Now, Bangladesh is regularly being admired in various international occasions and being termed as "Asian tiger" for registering spurious economic growth and improvement in socio-development indicators such as per capita income ($1909), average life expectancy rate (73 years), literacy rate (61 per cent). After the independence, the de-facto government took the economic policy based on socialism by nationalizing the major industrial units, which had been abandoned by Pakistani ruler.
However, such initiative didn't work long because of rampant corruption in public sectors, poor governance practices, lack of proper check and balance in monitoring and evaluation process and systematic failure of the incumbent government. The reformation of economic policy, done by the then government through privatizing the major public institutions and introducing the market economy, had opened a new era towards the modern economic development of the country.
The major economic reform had taken place in 1990s by adopting the recommendation of IMF, which included the mass liberalizations in import quota, subsequent privatization of public institutions, and financial liberalization by adopting free-floating exchange rate, opening up current account.
The past two decades' impressive economic development and social development have been termed as development paradox by World Bank and other donor countries as we secured first positions several times in corruptions and bad governance practices in public sectors parallel with economic growth.
The consistently increasing RMG export earnings and remittance from abroad are the main driving force behind the economic miracle of Bangladesh. The development of garments industry is underpinned by various favourable factors like competitive labour market, lower entry barriers, favourable government policy, tax incentive, preferential access of Bangladesh's product in the market of US an EU, but the future of RMG sector is not as good as we are expecting.
The automations in RMG sector, lack of diversification in product portfolio, lower investment in research & development and training facilitates, poor port facilities, absence of bilateral trade agreement with host countries, inabilities to build personal brand and increasing cost of labour force, which act as the prime catalyst to attract more foreign direct investment, are the prime factors blurring the future potentials of RMG sector.
The rate of participation of businessmen in politics has been rising unprecedentedly, since currently more than 80 per cent of the Member of Parliament is businessmen which in 1971, was only 4 per cent. There is an inherent relationship between political system and economy of a state. How an economy will work is often determined by the political forces and political culture.
The politicians and businesspersons are highly inter-dependent for mutual personal incentives. Businessmen through their political connections try to influence the policy making to be in favour of them. On the other hand the politicians also receive financial incentives from businessmen to bear election expenses along with other organizational expenditures. Such malpractices underpin the root of bad governance to expand which eventually becomes the biggest challenge in formulating equitable economic policies and its proper implementation.
However, the size of our economy has increased by multiple times, the tax to GDP ratio has not improved to that extent. According to Bangladesh bank, the tax to GDP ratio is 13 per cent, which is the lowest in south Asian region. Whereas the tax rate, prevailing in Bangladesh is the highest among the SAARC countries and that makes no sense at all. The authority has taken several initiatives to reform the existing value added tax (VAT) law but the strong lobbing and resistance form the business communities did not let it happen or get implement.
The major portion of revenue of government, amounting to 38 per cent, come from indirect form of taxation (VAT), implying that the poor part of population regardless of their income, has to bear same tax burden like rich ones. Moreover, the number of wealthy individual taxpayers has not increased much. Besides, ones who submit the tax return do not show their actual financial positions with the intention of tax evasion which further fuels the inequality in society.
The existing tax system is characterized by low modernization, low enforcement mechanisms and inadequate policy implications. Despite having tremendous economic growth in recent years, the favourable business environment is yet to be ensured. According to recent report published by World Bank, Bangladesh positioned 176th rank among 190 countries, poorest in south Asian region in ease of doing business index.
This, for a country with 6.5 per cent average growth rate, is very frustrating. Bureaucratic complexities, widespread corruption, inefficient work force, inadequate power supply, unstable political environment, slow pace in adopting automation and absence of good governance in public institutions are the most striking reasons for this poor Business environment.
Point to be noted that consistent growth in recent times has been driven mostly by public sector investment whereas the private sector investment has remained stagnant for the last three years. Nevertheless, the private sector investment is the main catalyst for creating the opportunities for thousands of unemployed youth and bringing their innovation in the economy.
Banking sector, one of the leading contributors to GDP and employment has been under pressure, coming from sprawling rise of non-performing loan and persistent poor corporate governance. The recent reformation in banking company act (2013) and regular approval of new bank in already crowded sector and government bail out to the public banks through capital injection are some of the noteworthy examples of how the sector is politically influenced and corrupted. This dilemma in banking sector poses threat to overall economy.
Economists question why government always gives back up to wilful defaulters instead of bringing them into trial and taking strong actions which are very important to combat the ever increasing non-performing loan. The over-politicization in every aspect of the country has made it challenging for new investors to sustain without political support. It is somewhat like political support is a must, if someone wants to carry out his business activities.
If the ground continues to be like this, economic indicators may go up and few wealthy individuals may become wealthier but the ultimate goal, equitable growth can't be achieved. Equal income distributions can't be ensured as well. For a balanced and sustainable economic growth, a country's politics and economy should have a fair relation. Accountability and transparency could have a big role in that regard. Over-politicization in business ground along with high participation of businessmen in politics thereby in policy making can lead a country to a wider income inequality as it facilitates the way to serve the objectives of a few individuals and syndicates.
The writers are graduated from the Department of Finance, University of Chittagong