How vulnerable is Bangladesh?
There is a consensus among all leading economists and major international organisations that the world economy is in serious turmoil. However, there seems to be some degree of uncertainty about the effects on developing countries. Bangladesh's leading economists and business leaders are holding different views -- but no one is expecting huge fallout.
On February 13 Mr. Anoop Singh, IMF Director of Asia and Pacific Department opined: "Bangladesh's economy has been able to resist, thus far, some of the effects of the global financial crisi. The domestic economy has retained momentum from a favourable agricultural performance and Bangladesh has benefited from the fall in food, fuel and other commodity prices. Moreover, limited capital account dependence has largely protected the country's banks and stock market from the first round impact of the global crisis."
Assistant Secretary General Ajay Chhibber of the United Nations said that that Bangladesh would be less affected by the global economic downturn than other nations as it was not much integrated with the world financial system. "We hope the impact of recession will be much less for Bangladesh," said Mr. Chhibber.
Dr. Sultan Hafeez Rahman, Director General, Pacific Department of ADB, told The Daily Star that Bangladesh was not so exposed to the global economy and its portfolio investment was also limited. Hence, there is hardly any chance for Bangladesh to be affected through financial linkages.
However, they did acknowledge that the situation might change if the global recession was prolonged. Their optimism for Bangladesh arises from its limited exposure to the world economy as evident from low trade to GDP ratio and low inflow of foreign capital, stable macroeconomic situation, and favourable international commodity prices.
Two recent World Bank policy notes (2008 and 2009) have suggested a framework for assessing the vulnerability of developing economies to the global economic crisis. The first focuses on fiscal and current account balances and financial sector stress. The second creates an ordinal index with which to classify more than 100 developing economies into "high exposure," "medium exposure" and "low exposure" cases.
A "high exposure" country has high initial levels of poverty and decelerating growth. Using the 2008 benchmarks, 25 % of the countries in the sample have both high fiscal and current account deficits. Using the 2009 criteria, 39% of the countries have "high exposure." In addition, about 75% of the "high exposure" countries have either low institutional or low fiscal capacity.
Bangladesh is classified as a "high exposure" country. It also has, according to this classification scheme, "medium" institutional capacity and some fiscal space. This assessment by the World Bank regards Bangladesh as one of the countries with a high initial level of poverty that is likely to increase significantly as a result of deceleration of growth. Bangladesh is expected to have some institutional and fiscal capacity in responding to the global economic crisis.
The World Bank "vulnerability analysis" does not clarify the reasons for this growth deceleration. This is where we need to examine the nature and composition of external linkages. The vulnerability test should not only look at the aggregate exposure to the world economy but also consider the exposure of specific sectors in terms of export concentration, and include the quality of labour market policies and social safety-nets as mitigating institutions.
The aggregate magnitude of external dependence is less important than the composition of this dependence. Particular countries could, for example, have a relatively low trade-to-GDP ratio, but this could mask a high degree of dependence on particular export markets and particular products and services. Furthermore, some external linkages in particular countries could be more important than others.
Let us now apply the above framework to Bangladesh. According to the Bangladesh Bank's latest figures, knitwear and woven garments constituted over 77% of countries total export earnings in 2008. About 75 % of the exports of garments and knitwear go to the US and Europe, two of the regions most affected by the global recession.
There is a view that Bangladesh's exports are less likely to be affected as they serve the low end of the market. Hence, Bangladeshi products will benefit as people in the US and Europe cut back their spending on expensive items. Anisur Rahman Sinha, the owner of the country's biggest garment manufacturing group, Opex, sees no reason to panic, saying cheap prices will help Bangladesh ride out the turmoil. "It's true some of the top retailers are downsizing their inventories due to the crisis. But we don't think we have much to worry about."
Professor Taslim of Dhaka University has exposed the flaw in this argument. It means Bangladesh is supplying "inferior" goods whose demand rises as income falls. If that is the case, then Bangladesh should lose out when the US and European economies recover. You cannot have it both ways -- benefiting from the downturn as well from the recovery.
Therefore, even if the macro economy of Bangladesh may appear resilient, the garment sector, the largest employer, is likely to be severely affected by a prolonged and deep global recession. One can only surmise the impact on the labour market and poverty from the downsizing of this industry in the absence of labour market programs to provide income maintenance, and to retrain and redeploy workers in alternative jobs.
One should note that export earnings went down by 10.07% in December 2008 compared to the same month in the last fiscal year; the second time in a row that this had happened. This indicates that the global financial trauma has begun to weigh on the country's export sector.
Bangladesh is heavily dependent on remittances, about 25% of which comes from the West and 75% from the Middle East. Dubai, a major destination of Bangladeshi workers, has been hit hard by the crisis. In the US and the UK, a large segment of the Bangladeshis work in the hospitality industry. This industry is particularly vulnerable to recessions. Therefore, remittance flows could soon fall.
The World Bank now believes that, due to the global economic downturn, the country's GDP growth will decline from 6.5% to 5.4 % in the current the fiscal year. Bangladesh needs to grow at 7-8% for a sustained period for any appreciable impact on poverty reduction.
The jury is still out on how Bangladesh will fare during the course of the global economic crisis. A lot depends on whether the global economy will experience a "V" shaped recovery or whether we will see the emergence of a lost decade. Historical evidence, compiled by Reinhart and Rogoff, suggests that recessions engendered by financial crises can be long and deep, with labour markets taking about five years to recover. In light of this, and the vulnerability of the Bangladesh's key export sectors, policy makers should prepare for the worst-case scenario.