Investing in long-term economic future
Given the triple global shocks of US recession, record oil prices and rampant food inflation, the relative strength of the Bangladesh economy is something that the country can be proud of. Add to this the lagged impact of cyclone Sidr and the current projected official growth rate forecast of 6.2 percent for FY 2007/08 is a testament to resilience of entrepreneurs and workers in the private sector.
But with the release of the budget, our focus naturally turns to strategy and the effectiveness of fiscal policy. The somewhat confusingly labelled “revenue budget” is expected to rise by 40 percent while the Annual Development Programme (ADP) element of the budget is projected to decline. While the Finance Adviser noted the distinction is “artificially separated” as they have an equal impact on people's lives, from a policy perspective, it is a useful split insofar as it distinguishes between expenditure to meet current consumption/subsidization needs for the economy, versus an ADP expenditure that ought to enhance the competitiveness and longer-term potential of the Bangladesh economy.
On the revenue element of the budget, there has been a lot of focus on the pros and cons of the policy of energy, food and fertilizer subsidization that is prevalent not only in Bangladesh but a number of other developing economies. My bias is always to think that greater price transparency is better than distortions in the costs of goods for the more effective functioning of a market economy. Direct subsidization for the poor is also more effective than subsidies than benefit the millionaire city businessman to the same extent as the poor farm labourer. But the violent protests in India in the past week in response to the 10 percent hike in oil prices underlines the need for sensitivity by the government in not adding to domestic political tensions at this sensitive time of transition back to a democratically elected government. So reducing subsidies in the short-term might be ill advised.
But the authorities should be less happy with the inability to deploy development spending more effectively. Bangladesh needs to equip itself more effectively to compete more effectively, attract FDI and reduce its reliance on imports of food and energy. So I would suggest focusing discretionary spending on the following areas:
1)Food: Expanding the Agri research budget so Bangladesh can become a major net exporter of food. More spending on biotechnology solutions from hybrid rice and enhancing crop yields to more efficient aquaculture will be money well spent.
2) Energy: Bangladesh can get closer to energy self-sufficiency by exploiting the 3.5 bn tonnes of coal as well as greater utilization of bio-diesel opportunities through expanded Jatropha production. Increased investment in energy research, both conventional and alternative, should be a top government priority.
3)FDI: ADP spending should be directed to both develop and market Brand Bangladesh more effectively that will increase FDI flows. Targeted fiscal incentives to bring back more NRBs as China has done so effectively with their Diaspora is also likely to be an effective use of resources.
If we see fiscal policy as a key strategic tool in our economic development, rather than merely budgetary firefighting and short-term expediency then we will be enhancing Bangladesh's global competitiveness and long-term economic future.
The author is the managing partner of Asian Tiger Capital Partners and formerly managing director and head of Global Macro Strategy at Citigroup, London. [email protected]