Better infrastructure, policies to fuel growth
Bangladesh should improve infrastructure and reform policies to tap the potential of its economy, the chief economist of the Asian Development Bank said yesterday.
"The country's potential is wonderful. Infrastructure and reforms in policies are needed to translate this potential into actual job creation and expansion in GDP growth," Shang-Jin Wei said.
He came to Bangladesh to see and learn as part of preparation for an ADB study on constraints to growth and economic inclusion.
He met senior officials and experts from government agencies, the private sector and local think-tanks.
Bangladesh's economy has been growing at greater than 6 percent on average for quite a while, making the country one of the top 20 performers in the world in terms of economic expansion.
"In the face of global financial crisis, a very few countries have managed to grow as fast as Bangladesh did. That's a very impressive record," the China-born US national told The Daily Star in an interview at the ADB office in Dhaka.
He said Bangladesh has certainly the potential to grow at 7.3 percent and even can surpass the target set by the government for the current fiscal year.
"But high growth potential will not automatically translate into higher growth. One has to work hard for that."
But ADB's judgement is that the economy would grow by 6.4 percent in the current fiscal year, Wei said.
He said Bangladesh, which has a vast inexpensive working age population, has the potential to grow even faster -- similar to some of the East Asian countries in recent past.
He said the country's need for infrastructure is vast. "So, the ADB is working to do more to mobilise funds for Bangladesh from our own resources as well from other sources."
He said the country faces several challenges to continue the current level of economic growth and raise it further.
Ensuring reliable supply of power is one of them. "The government needs to ensure reliable supply of power to reduce the cost of doing business of the companies so Bangladeshi firms can compete in the world markets."
The country also needs to address transport and congestion bottlenecks and improve the quality and capacity of its ports further.
"The ADB is helping Bangladesh in all of those areas. We did it in the past and will continue to do so in the future."
The chief economist also said Bangladesh needs to raise its tax-GDP ratio from the current 12-13 percent.
"It is relatively lower compared to many other countries at this stage of development. Because of low level of revenue generation, the government's ability to finance infrastructure projects and provide services to the citizens is constrained."
Wei said improving governance is also important. The ADB chief economist is opposed to higher customs duty as well as discretionary exemption of customs duties as they deprive the country of potential revenues.
He praised Bangladesh's macro-economic management, particularly for bringing down inflation to the region of 6 percent. "However, we should not be satisfied with this inflation rate and we need to try to bring it down further."
He also praised the country's banking sector for having a sizeable number of private banks, saying the sector is not dominated by only state-run banks.
"At the same time, the job of improving the banking sector has not finished."
He talked about high non-performing loans in the banking sector.
"Sometimes, these loans get extension. When it happens, it translates into higher lending rates for firms which are commercially in better position."
This is an area that needs to be reformed for the efficiency of the banking sector. This requires a combination of reforms of corporate governance in both private and public banks.
The ADB economist particularly talked about the reforms of the public banks as they sometimes come under pressure from the members of the government to provide loans to borrowers they would not otherwise provide.
On the government's plan to float international bonds, Wei said the international investors look at the present and future fiscal position of a country.
"Bangladesh can go out for funds any time. But the cost of borrowing could be so high that the government will not find it worthwhile. So you need to have certain conditions in place so international investors become interested about the sovereign bonds."
A former economist of the World Bank and the International Monetary Fund, Wei declined to specifically comment on the current political situation in the country and its impact on the economy.
He, however, said: "From our experience from other countries we can say that political stability is helpful for growth."
"Generally speaking, uncertainty and instability tend to have a negative impact on investment and growth. Investors tend to prefer stability which in turn helps create employment and generate growth."
Also the director general of economic research and regional cooperation department of the ADB, Wei said the multilateral bank is working very hard to promote regional cooperation in South Asia by extending assistance in the areas of road connectivity and energy cooperation.
South Asia is one the least integrated regions in the world, and intra-regional trade accounts for less than 5 percent of their total trade. The same is also true when it comes to cross-border investment.
"When we compare South Asia with some other regions such as East Asia and Southeast Asia, the degrees of trade and cross-border investment among the eight-member Saarc are much less than one would have expected given the physical proximity and size of the economy."
"But there is a lot of potential to grow further," he said, adding that the ADB is providing support to the countries in the region for putting the right physical connectivity in place.
The ADB has been actively promoting regional cooperation in South Asia through the South Asia Sub-regional Economic Cooperation (SASEC) initiative, focusing on transport, trade facilitation, and energy.
Wei, who taught at Harvard University between 1992 and 1999, said countries in South Asia should embrace policies that promote trade and investment among themselves.
"In order to promote trade, tariff should be low and non-tariff barriers should be removed."
"Saarc has the potential to do better. One of the very ingredients to growth for developing countries is the participation in the global value chain as well linkage between the countries with same production chain and common world markets. This is the area where countries have not done well."
Wei, however, said this gap points to the existence of the problems and also to potential for growth.
"The region can grow further if they take integration measures and bring in policy reforms."
"There is no reason why South Asian countries can't follow the successful model of some Southeast Asian or East Asian countries in many ways."
By utilising their vast labour, countries in South Asia can do more compared to Southeast Asian countries if they have better infrastructure and policies.
Countries in South Asia tend to favour bilateral agreements more than the multilateral ones. But the ADB chief economist said he hopes the bilateral integration would not be the end point; rather they would act as inputs for fuller regional as well as global integration.
"Bilateral integration can work as a stepping stone for regional integration," he said, adding that the electricity transmission between Bangladesh and India is a case in point.
He said Bangladesh is now importing electricity from India and would do the same from other countries in future. "Of course, there is an improvement in the attitude of the countries in the region."
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