Why isn't private investment growing faster? | The Daily Star
12:00 AM, November 08, 2018 / LAST MODIFIED: 01:19 PM, November 08, 2018

Why isn't private investment growing faster?

The long-term trend of GDP growth rate of Bangladesh shows that the country has continued to improve its rate of growth steadily over the past 46 years after independence in 1971. Starting from a highly volatile rate in the 1970s, the GDP growth rate became higher and much more stable in the 2000s and 2010s. The growth rate increased significantly since the early 1990s, shooting up to over 5 percent per annum, but importantly exceeding the 6 percent mark for a number of years during the 2000s, and then crossing the 7 percent mark in recent years. The average GDP growth rate increased from 3.7 percent in the 1970s to 6.7 percent in the 2010s. Bangladesh has been able to increase the average GDP growth rate by one percentage point for each decade since the 1990s. In 2018 the country achieved the highest growth rate of 7.9 percent in the past four decades.

Despite the gradual rise in the investment-GDP ratio over the past three decades, in recent years, the share of private investment in GDP has remained static and the share of public investment in GDP has risen. It is also found that the share of private investment in total investment has fallen whereas the share of public investment in total investment has increased. One very important aspect of the pattern of Bangladesh's investment regimes in the 1990s and 2000s is that the major contribution to the rise in investment-GDP ratio came from the rise in private investment and its share in total investment. Especially, during 1995 and 2008, there was a persistent rise in the private investment-GDP ratio. Between 2009 and 2017, this ratio fluctuated and increased by only 1.2 percentage points.

Bangladesh aspires to achieve 9 percent real GDP growth rate by 2030. In this case, the required investment-GDP ratio would be around 40 percent under the assumption of a 4.44 ICOR (Incremental Capital-Output Ratio)—the average ICOR between 2013 and 2017. In this scenario, between 2018 and 2030, the investment-GDP ratio has to be increased annually by 0.73 percentage points which is 171 percent higher than the annual average percentage point rise of 0.42 during 2013-2017. There is no denying that for such growth acceleration and high investment requirement, there will be the need for a much larger contribution from the private sector in raising the investment-GDP ratio.

So the question is, how do we boost private sector investment in Bangladesh to achieve the much larger GDP growth target? There is a need to address several policy-induced challenges. Further reform of trade policies is needed with strategic and dynamic industrial policies aiming at rapid expansion and diversification of the economy through large-scale domestic and foreign investments. Also, the crisis of the banking sector in Bangladesh is not conducive for private sector investment. There is a need for undertaking meaningful and effective remedial measures against the irregularities in the banking sector to enhance the confidence of the private sector. Furthermore, the tax system in Bangladesh is still a revenue-oriented tax policy, not a development-oriented tax policy, and thus it requires a major overhaul.

A number of supply-side constraints in the form of weak infrastructure and the high cost of doing business need to be addressed within a short time span. Bangladesh has not been able to attract much foreign direct investment (FDI) even by LDC standards. In 2016, the FDI share in GDP in Bangladesh was only 0.9 percent against the LDC average of 3.3 percent. Weak infrastructure and a poor business environment are critical problems for Bangladesh to overcome for attracting both domestic private investment and FDI. According to the 2019 Doing Business index of the World Bank, Bangladesh ranks 176th among 190 countries. In terms of sub-components of the Doing Business index, Bangladesh's worst performances are observed in the areas of "enforcing contracts", "getting electricity" and "registering property". There is a need for rapid improvement in these areas. The initiatives taken by the Bangladesh government in setting up 100 special economic zones (SEZ) as well as the development of big infrastructural projects seem to address these issues. However, there is a need for faster and quality implementation of these projects, as delay in implementation, cost overrun, and sub-standard quality of projects are long-standing problems in Bangladesh which discourage private investment.

The current level and quality of human capital in the country discourage enhanced private investment in high valued and diversified sectors. Public spending on education and health as percentages of GDP in Bangladesh is among the lowest in the world. The country, therefore, needs to attach vital emphasis on improving the existing low level of human capital by enhancing investment on education, skill development, and health facilities.

Dr Selim Raihan is Professor, Department of Economics, University of Dhaka, Bangladesh, and Executive Director, South Asian Network on Economic Modeling (SANEM).

Email: selim.raihan@econdu.ac.bd

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