Growth-investment nexus: Lesson for Bangladesh from cross-country experience

In the wake of persistent recessionary economic condition in the developed countries, international development organisations (e.g. IMF, United Nations, World Bank and the regional development banks) have been advising the developing countries to restructure their economies. The suggested direction of restructuring is that developing countries should shift growth strategy away from exports in favour of domestic demand. In an earlier paper (DS. July 8, 2010) I argued that Bangladesh had very little option other than to pursue strong export-oriented growth strategy. This article emphasises the importance of investment as the key determinant of export success as well as overall economic growth.

Apriori rationale
There are several reasons why increased levels of investment can be viewed as a precondition for accelerated growth. First, a country cannot successfully pursue an export-oriented growth strategy without increasing investment.
Exports are after all the difference between production and domestic consumption. To increase exports, therefore, requires that production increase must exceed domestic consumption increase and that would require higher and higher levels of investment.
Second, as a component of aggregate demand, investment is fundamentally different from consumption. The former not only adds to aggregate demand but also enhances production capacity, while the latter simply adds to demand. I may add that the capacity creating effect of investment is formally embedded in Harrod-Domar growth theory. An increase in aggregate demand through the consumption route without additional investment would lead to inflation rather than real growth.
Third, technological progress is, to a great extent, embodied in machinery and equipment. Investment in new machinery and equipment is thus a precondition for adoption of improved technology and thereby realisation of greater productivity.

Cross-country experience
I have reviewed the long-term growth and investment experience of twelve Asian countries over two periods, namely, 1990-2000 and 2000-2010. The countries chosen had at least 5% GDP growth in one or both of these periods. Seven countries (Cambodia, China, India, Indonesia, Laos, Pakistan and Sri Lanka) experienced higher GDP growth and higher investment growth in the latter period. Four countries (Korea, Malaysia, Singapore and Vietnam) experienced lower GDP growth as well as lower investment growth in the latter period.
The solitary exception was Bangladesh, which recorded somewhat higher GDP growth despite lower investment growth in the latter period. This was probably because in the 1990-2000 period Bangladesh had a very high rate of investment growth which might have created some excess capacity enabling a slightly higher growth during the latter period despite slightly lower investment growth. At any rate, this solitary exception does not undermine a strongly positive correlation (0.74) between GDP growth and investment growth. And the correlation cannot be considered spurious in view of the apriori arguments noted above in support of investment as a key determinant of GDP growth.

Lesson for Bangladesh
The lesson that emerges from cross-country experience, therefore, is that Bangladesh needs to raise investment/GDP ratio substantially (well above 30%) in order to achieve GDP growth required to attain middle-income country status by 2021. It should devote utmost efforts to exploit the opportunities for both domestic and foreign investment offered by the structural characteristics of the economy. Some of these are briefly noted below.
The country has a large population and its GDP has been growing at the rate of about 6% for well over a decade. The resultant size of the domestic market should be an attraction for investors. The proportion of total population who are young and easily trainable is quite high. This allows smooth access to cost-effective labour force.
A dynamic entrepreneurial class has emerged in the country offering scope for joint venture partnership for foreign investors. The country has a favourable geographical locationa close neighbour of two giant and rapidly growing economies (China and India) and a bridge between the Middle East and South-East Asia.
As a least developed country, it enjoys preferential, duty free market access to many developed countries. The country can thus serve as an export platform for foreign investors.
However, to translate the above opportunities into realised investment on the ground requires policy makers' urgent attention to a number of nagging challenges confronting the country. These relate to access to land, amelioration of infrastructural deficiency, improving the quality of human resources by imparting market relevant education at various levels, ensuring sound governance and removal of regulatory bottlenecks.

The writer is a former adviser to a caretaker government, presently a Visiting Professor in BRAC University.