Challenges for Bangladesh in becoming a middle-income country

The recently published World Bank report, Bangladesh: Strategy for Sustained Growth, raises an important and consequential question -- how can Bangladesh become a middle-income country (MIC) in the shortest amount of time? The answer to that, of course, lies in how fast the country manages to grow. For example, if GDP growth picks up to a sustained rate of 7.5% -- something only a select few countries have achieved in recent history -- Bangladesh can become an MIC by 2016. If average growth falls to the 3 percent rate seen in the 1980s, the MIC aspiration will have to wait for another five decades!
This report argues that Bangladesh is well poised to become an MIC within a decade or soon thereafter. Thanks to a combination of sound economic policies and the tremendous grassroots energy for which Bangladesh is globally renowned, GDP growth has averaged over 5% since 1990. The average income in the country today is more that 75% higher than in 1990. Remarkably, despite its vulnerability to natural calamities, Bangladesh has not allowed its per-capita income to fall in a single year since 1990, even in years in which there were severe floods. There are few countries in the world -- developed or developing -- that can match this record.
At the same time, a rapid transition to MIC status would demand an even deeper level of political commitment. With many of the first-generation reforms soundly in place, a new set of challenges is likely to emerge, requiring far more complex policy innovations. Any of the emerging structural issues -- critically weak governance, urban congestion and mismanagement, overburdened port, power, and transportation facilities, and acute skills shortages -- can easily become a binding constraint to growth. Slippages in macro-economic discipline or inability to judiciously harness the vast potential from globalization can derail this transition by several years. Neither would continued lackluster performance of agriculture be conducive to the MIC aspirations.
It is a fair question to ask why we care so much about growth. Shouldn't the focus be on tackling poverty instead? The answer is straightforward. We care about growth because across the world it has proven to be the most effective instrument in the fight against poverty. Benefiting from strong growth, China and other dynamic East Asian economies have successfully lifted millions of their citizens from the clutches of poverty. At the same time, the fate of the poor in many sub-Saharan countries has worsened in recent decades simply because of their very weak growth records. Let's just consider Bangladesh, where the most success in lowering the poverty rate came during periods of strong growth. Most notably, the poverty rate fell by a remarkable 9 percentage points over 2000-2005, a period over which GDP grew at just under 6% a year.
An important channel through which growth impacts poverty is employment creation. And for that, solid growth of labour-intensive manufacturing activity is particularly important. This sector is the most likely source of employment generation at a scale that can absorb a large number of unskilled workers, many of whom would come from poor backgrounds and rural areas. It is instructive to consider the remarkable impact of the rapidly growing garment sector in Bangladesh. Starting from an insignificant employment base, the sector today employs close to 2 million workers, mostly women from under-privileged backgrounds. The money these garment employees send back to their villages further lifts several others from abject conditions. Imagine for a moment if there were several other such dynamic sectors in the Bangladeshi economy!
How to ensure rapid growth of manufacturing? It is clear from the example of the garment sector, as well as from many of the successful East Asian countries, that deepening the integration with global goods and capital markets will be essential. Many have argued that Bangladesh should first respond to the demand of its own domestic market, before thinking about opening up and relying on exports. The benefits of having a large domestic market are clear, but that should not detract from the tremendous opportunities that access to global markets offers. What if the garments sector had only relied on the domestic market? Moreover, the transfer of technology and managerial skills that accompany foreign direct investment (FDI) are vital to efficiency improvements and to being competitive in global markets. Again, the example of the garments sector is instructive.
Finally, even if we accept the importance of export-led manufacturing growth, can we reconcile that with the state of urban management in Bangladesh? After all, such activities mostly thrive in urban environments which offer them important agglomeration benefits. In Bangladesh, Dhaka has been the engine of growth. But the growing congestion pressures in Dhaka and overstretched state of its service provision clearly indicate the current urbanisation model will not support the kind of strong employment-generating growth Bangladesh seeks.
Dhaka, surely, will have the major role for future growth, and, for that, far-reaching improvements in its management and infrastructure are essential. However, in a country of Bangladesh's size, it alone cannot carry the burden. Creation of dynamic and diverse urban centers is essential.
To summarise, successful management of three transitions would be key to achievement of Bangladesh's MIC aspirations:
* A shift in the economic structure from agriculture to labour-intensive manufacturing.
* Deepening of integration with global markets wherein internationally competitive Bangladeshi firms would be plugged into global supply chains.
* Unleashing the growth potential of the major urban centres, Dhaka especially. Reform measures essential to these objectives include continuing macro-economic stability; deepening financial sector and external trade reforms; and rebalancing the policy focus toward hitherto neglected structural areas -- economic governance, urban management, infrastructure (especially power sector, ports, and transportation), and labour skills.
The World Bank's report does not offer any silver bullets for sustained high growth. It only presents a framework underpinned by solid analysis that can potentially help the country set its longer-term development vision. For the Bank, success of the report will be measured by its contribution to a stimulating national debate and, eventually, some sort of consensus on the set of priority reforms needed to ensure Bangladesh's place amongst MICs in 10 years. If a broad consensus is reached, authorities and the people of Bangladesh would need to be mindful that some of the associated reforms will not be painless. Complexities and short-term costs notwithstanding, it would be useful to keep in mind that the longer-term goal itself is worth striving for.
Xian Zhu is World Bank Country Director. Sandeep Mahajan is lead author¸ "Bangladesh: Strategy for Sustained Growth" and Senior Economist, South Asia Region, World Bank.