Economic impact of political unrest unfolding
Awami League (AL) and Bangladesh Nationalist Party (BNP) are the two biggest political parties in Bangladesh. But instead of cooperating with each other, they have been carrying out a feud. We, the 'governed,' suffer as a result of their duel. Yet, they say they do it to serve us better and for our betterment.
Surprisingly, they do not suffer much. Rather, the economic life of common people suffers the most. It suffered heavily in the second half of 2013, and now it has been suffering heavily again since the beginning of 2015, with no foreseeable sign of ending. Given that the service sector accounts for the lion's share of Bangladesh's economy, conflicting politics significantly affect the economy as this sector is more prone to blockades and strikes. In plain words, the severity of the economic sufferings from strikes and blockades has increased more than ever before.
The economic impact of any kind of political or non-political incident can be traced with the help of the lead and lagged economic variables. Lead variables are those that forecast the likely impacts whereas the lagged variables reveal the impacts only after they have been felt. However, there is another kind of economic variable in many developed countries, which is called 'coincidental variable.' Coincidental variables reveal the real-time impact of any kind of shock in the economy. It is difficult to identify any coincidental economic variable in developing countries like Bangladesh.
One of the most renowned lead economic variables across the globe is the stock price index. It is assumed that the buyers and sellers participating in the stock markets are forward looking and use all information available to them at a given time to make a decision about buying and selling of stocks. Therefore, any event that can potentially affect the business and economy in future will affect the price of the stock today. Any incident that can potentially negatively affect the economy in future will reduce the stock price today, and vice versa. When all available information is exhaustively used in decision making, the outcome is said to be an 'efficient' one. The stock market is assumed to be one of the efficient markets where the participants (buyers and sellers) leave no information unutilised in making their economic decision.
This efficient market hypothesis explains, for example, why a tsunami in Japan affects stock prices all over the world. Tsunami in Japan is likely to affect the Japanese economy, which is one of the three largest economies of the world. In this era of globalisation, where most countries are interrelated through trade and capital flow, any downturn in Japanese economy is likely to negatively affect the economies of other countries. This possibility, when taken into account by the stock market participants all over the world, immediately slashes the price of stocks.
However, Dhaka stock market, by far Bangladesh's largest stock market, is not very big and connected with the rest of the world. It can easily be maneuvered by a few large buyers and sellers. This may cast doubts about the efficiency of this market and its ability to provide leading information about the economy. Notwithstanding such limitation, the stock price index of Dhaka Stock Exchange (DSEX) is correctly unfolding the formidable economic challenges ahead created by the ongoing political crisis.
On January 1, 2015, the DSEX index was 4941.52. The current wave of vandalism accompanied by strike and blockade started from January 6, 2015. The DSEX index started declining as result. On February 1, 2015, the index plummeted to 4618.47. This fall reflects not only the current but also the looming threat of further economic damage by the ongoing vandalism. As this fear intensified, the DSEX index continues declining. On March 12, 2015, it stood at 4556.94, registering a decline by about 8.5% since January1, 2015.
Inflation is one of the most renowned macroeconomic variables, which captures the economic impacts of past events. The inflation figures for the months of January and February 2015 have been released by Bangladesh Bureau of Statistics (BBS). These figures mark the impacts of ongoing blockade and strike on commodity prices, which ultimately affect the quality of life.
Inflation was high in the first half of the last fiscal year, which experienced political vandalism and serious disruption in the supply chain. In particular, food inflation was very high in the urban areas. Since the beginning of 2014 -- the second half of the last fiscal year -- political vandalism lessened and supply chain was restored. Because of this favourable change, inflation started declining.
In the first month of the current fiscal year, July 2015, the overall inflation was 7.04%, with food inflation of 7.94% and non-food inflation of 5.71%. These measures of inflation continued declining since then. In December 2014, the last month of the first half of the current fiscal year, overall inflation declined to 6.11%, with food inflation of 5.86% and non-food inflation of 6.48%. But as a result of the newly started political unrest and disruption in supply chain, food inflation started increasing, which eventually drove the overall inflation up as well. In February 2015, food inflation increased to 6.11%, putting a brake on the declining trend of overall inflation.
Interestingly, food inflation in urban areas in February 2015 was 7.02%, while the same in the rural areas in the same month was 5.72%. Since agricultural products flow from rural to urban, the difference between urban and rural food inflation to some extent reflects the effects of disruption in supply chain. The observed dynamics of overall as well as different components of inflation imply that the ongoing unrest is taking a toll on the economy.
No matter who says what, both lead and lagged economic variables are showing deep scars in the economy created by the ongoing unrest. If this situation continues, these scars will become unmanageable. Bangladesh was nicely poised to become a middle income country. Over the last decades, the country made recommendable developments and was termed as a 'development surprise' by many economists and economic commentators at home and abroad. But if the current conflicting politics continues, soon the country will be identified as a land of lost potentials.
The writer is Researcher at Bangladesh Institute of Development Studies (BIDS), former economist, World Bank, and former faculty, Willamette University, USA.