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Why Bangladesh In South East Asia Has Much Faster & Better Economy than its neighbouring states like India & Pakistan

The founders of Bangladesh declared independence from Pakistan in March 1971, half a century ago. Millions fled to India and were killed by Pakistani soldiers; the nation was born amid famine and war. George Harrison and Ravi Shankar organized the first-ever super benefit to raise money for relief work in Pakistan ranked by the Pakistani military’s American backers. Henry Kissinger, then-Secretary of State, famously called the new country a “basketcase.”

Bangladesh’s GDP per capita reached $2,227 this month, up by 9% over last year. Meanwhile, the per capita income in Pakistan is $1,543. Today, Bangladesh is 45% richer than Pakistan, which was 70% richer in 1971. An economist in Pakistan theorized that it may be possible to rely on Bangladesh for assistance in 2030.

India, which is eternally convinced it is the only important economy in South Asia, is somewhat poorer than Bangladesh in per capita terms. The country’s per capita income in 2020-21 will be $1,947.

India will not acknowledge Bangladesh’s success anytime soon: Right-wing figures believe Bangladesh is so poor that illegal migrants are descending on the country. It’s like Mississippi fretting about illegal immigration from Canada. Bangladesh is much more prosperous than the depressed Indian states where Hindu nationalist politicians rail against Bangladeshi “termites.”

Hence, when the government announced the GDP numbers in India, social media erupted with anger and denial. Bangladeshi media, however, has not drawn comparisons, and consistent growth is what gives a person self-confidence.

Bangladesh

There are three pillars of Bangladesh’s growth: exports, social advancement, and fiscal responsibility. Bangladesh’s exports grew 8.6% per year between 2011 and 2019, compared with a 0.4% growth rate worldwide. The country’s success is mainly due to its relentless focus on apparel, a field in which it excels.

Unlike in India and Pakistan, where the share of women in the labour force has decreased, Bangladesh has seen its share of women in the labour force consistently grow. A government debt-to-GDP ratio of 30% to 40% has been maintained in Bangladesh. Pakistan and India will emerge from the pandemic with public debts of 90 per cent and 80 per cent, respectively. Private sector borrowing and investment have been possible because of Bangladesh’s fiscal restraint.

The success of Bangladesh is not without its problems. Among them is the country’s participation in various mechanisms that allow the government to access developed economies with no tariffs, such as the Generalized System of Preferences (GSP) of the United States. A country only qualifies for membership in these groupings if it is a least developed nation. As Bangladesh grows, these privileges will likely have to be given up by 2026.

The country’s comparative advantages will change as its economy matures. Eventually, it will focus less on garment exports and more on higher-value exports, like Vietnam. Bangladesh will face the same challenges as other nations.

An economic transformation strategy centred on new forms of global integration is necessary for the next decade. Maintaining access to its markets would be made more accessible by a free trade agreement. Bangladeshi officials report that talks have started on a free trade agreement with the Association of Southeast Asian Nations despite many outstanding issues.

Once again, Bangladesh should benchmark itself against Vietnam, which signed a free trade agreement with the European Union in 2019 and is a member of China’s Regional Comprehensive Economic Partnership, the successor to the Trans-Pacific Partnership. Bangladesh’s trade terms can’t be transformed overnight, which is why now the right time to get started is. There are no dedicated trade negotiators in Dhaka’s commerce ministry: The country will need to beef up its negotiating capabilities in particular.

The past 50 years have shown that betting against Bangladesh is unwise. It was a long shot that Bangladesh would succeed in 1971. The country is located in a fertile delta and is more densely populated than Vatican City today, making it the standout success of South Asia.

HSBC International Business Guides | Bangladesh

Bangladesh has grown so rapidly and robustly. How did it accomplish this?

Bangladesh struggled to overgrow during the first few years of its independence from Pakistan. But moving away from Pakistan gave the country a chance to build a new identity economically and politically. Due to this, its labour laws were less strict, and it had a more diverse economy. Female employment is higher than men. Among the key drivers of growth in Bangladesh was its garment sector, where women workers allowed the country to corner the global export markets from which China withdrew.

In addition, Bangladesh has a structure of its economy that allows its industrial sector to lead GDP, while its services sector follows. The two industries are both highly remunerative and create a lot of jobs. The industrial sector in India has struggled to grow, and far too many people remain dependent on the agriculture industry.

Besides economic factors, Bangladesh’s progressive faster growth rate can be attributed mainly to the country’s improvement in several social and political indices, like health, sanitation, financial inclusion, and women’s political participation.

Bangladesh, for example, has a lower mortality rate due to unsafe water and sanitation than India, despite a low percentage of its population having access to basic sanitation.

Compared to India, based on the Global Findex database of the World Bank, Singapore has a lower proportion of dormant bank accounts than India. Still, the proportion of people with bank accounts is higher.

According to the latest gender parity rankings, Bangladesh is also far ahead of India. Differences between men and women in political and economic opportunities, education, and health are all measured. Bangladesh ranks within the top 50 of the 154 mapped countries, whereas India comes in at 112th.

Global Hunger Index shows the same trend, and it looks at hunger in a broader sense than just calorie consumption. Among the factors considered are Undernourishment (insufficient food supply), Slaughter (caused by chronic undernutrition), and Mortality.

How Bangladesh has been helped

It is believed that Grameen Bank, BRAC, and other non-governmental organizations helped Bangladesh make this progress.

Among them is Grameen Bank, one of the world’s most renowned microfinance initiatives and the Nobel Peace Prize winner.

A small-scale entrepreneurial initiative that gives loans to those not eligible for traditional bank loans aim to alleviate poverty. 7.5 million Customers can now access loans without collateral, with 97% of them women, according to the bank’s website.

The inclusion of financial services has thus been boosted in the country. The World Bank reports that 34.1 per cent of Bangladeshi adults with bank accounts made digital transactions in 2017, compared to 28.8 per cent of adults in South Asia.

While government initiatives have helped boost education and women’s empowerment in Bangladesh, the health expenditure as a percentage of GDP remains lower than in India.

The government offers stipends and scholarships to girls throughout their education, making primary education free and compulsory. Women have a robust social safety net in the government with initiatives like maternity leave paid for up to six months, and impoverished and divorced women receive allowances.

Christian Aid in Bangladesh - Christian Aid

Over 60 per cent of Bangladesh’s fish farmers are women, and women dominate nearly 70 per cent of the country’s garment industry.

The World Economic Forum (WEF) has ranked Bangladesh number one in gender equality among South Asian nations in 2017 and 2016. It also ranked the country number one in 2016 for women empowerment initiatives.

India has also made significant progress on the parameter of reducing poverty.

Globally, Bangladesh ranked seventh, eight spots better than India.

The reason is that 50 of the 350 seats in the Bangladesh parliament are reserved for women or roughly 14 per cent. India elected 62 women out of 543 members of parliament in 2014, or 11 per cent, with a law on reservations, still pending.

Bangladesh has made significant advances, but what challenges does the country face?

Bangladesh’s status in the world has drastically changed in the last 15 years. Pakistan has left far behind and succeeded in establishing a democracy despite the challenges. Pakistan is still very far from being a fully-functioning democracy. Its poverty level, for example, is still higher than India’s. The World Bank forecasts that “poverty will increase substantially in the short term, affecting mainly workers in the manufacturing sector and non-agricultural industries.”

In addition, it still trails India in basic education parameters, which explains its lower ranking in the Human Development Index.

Despite Bangladesh’s lax regulatory system for the garment industry, which cuts corners on safety and demand work conditions, its most significant concern is not the economy.

Its everyday politics pose a more significant threat to its prospects. Political parties often engage in violent oppression against one another.

There is corruption in the country’s everyday life, and Bangladesh ranks 146th out of 198 countries according to Transparency International’s rankings for 2019. Additionally, militant Islam has been on the rise, as evidenced by the number of bloggers killed for speaking out against the establishment.

These developments can halt Bangladesh’s progressive social reforms that have empowered women and its economic miracle.

 

Is India capable of regaining the lead?

In short, yes. Similarly, the IMF predicts that India’s economy will grow next year. The per capita incomes of India and Bangladesh are likely to remain close for the foreseeable future because Bangladesh’s population growth rate is lower and its economic growth is faster.

Did this ever happen before?

Yes. Bangladesh’s per capita GDP surged ahead of India’s in 1991, as India was undergoing a severe crisis and growing by just over 1%. After 1991, India again took the lead.

Societal advancements

There have also been significant improvements in Bangladesh’s life expectancy, infant mortality, and gender parity indicators.

India ranked lower in human capital than Bangladesh, according to a new study in The Lancet.

Human capital – defined as health and education – was assessed in 195 nations between 1990 and 2016. Age, functional health status, and educational level were all included in this data.

Approximately one out of every 1,000 children born alive in Bangladesh died within their first year of being alive, according to a World Bank report published in 2017. The comparative figure for India was 32.

Bangladesh has a 72.58-year life expectancy, while India has a 68.8-year life expectancy.

In what ways can South Asia remain the fastest-growing subregion of the world?

South Asia has been the world’s fastest-growing subregion since 2014, with an average annual growth rate of 7.0% across its eight economies. Even China (6.2%), Southeast Asia (4.9%), and the Pacific (47%) have higher rates. However, reforms and investments are needed to maintain this impressive performance beyond the next couple of years.

Bangladesh and India have led growth in South Asia over the past five years, with growth averaging over 7%. There has been a robust domestic demand for consumers and investors. Reforms such as introducing the goods and services tax in India and the ease of doing business in the region have encouraged private investment in the subregion. According to IMF estimates, India’s growth will remain above 7% in the next two years, while Bangladesh’s growth is expected to be around 8%.

Economic performance has been more variable in smaller economies in the subregion. Compared to other South Asian nations, Bhutan and Maldives experienced real growth of more than 6%. Nepal, the second poorest country after Afghanistan, saw an increase of just under 5% on average from 2014 to 2018. However, these three nations will grow by around 6.5% in the next two years, thanks to domestic demand and public infrastructure spending.

While Pakistan and Sri Lanka have both run up sizeable current account deficits and borrowed from overseas to finance infrastructure, they have also struggled with persistent and large current account deficits. As part of its balance of payment problems, Sri Lanka joined the IMF program in June 2016. Similarly, Pakistan joined the program in June 2016. As a result, both nations are expected to grow below 4% in 2019 and 2020 to rein in domestic demand and address macroeconomic imbalances.

Despite its poverty, Afghanistan faces long-term security and political uncertainties as it is one of the poorest countries in both the region and Asia. Defence spending and foreign aid are critical to its economy, and its growth rate has been barely above 2% since 2005. However, the government of Afghanistan has put in place a self-reliance strategy to achieve 7% growth by 2025 through structural reforms.

South Asia’s impressive economic growth performance at around 7% is expected to continue for some time to come.

Despite several political transitions in the past few years, most countries’ political situation is largely stable, except for Afghanistan.

Furthermore, governmental reform has been implemented to achieve a grand development agenda in the region. Bangladesh’s new government has pledged a “highway to development” while Bhutan has approved a new five-year plan. The Maldives is formulating a national development plan while Nepal is pushing for foreign direct investment.

Lastly, the global environment is still favourable for developing countries, even as significant economies slow. An unexpected slowdown in major economies and trade tensions pose substantial risks. However, a slowing global economy would maintain low oil prices and favourable global financial conditions. Oil is an essential source of energy in South Asia, and its investment needs are financed externally. South Asia, where most countries run current account deficits, will benefit from lower oil prices and lower general prices.

In addition, the boom in infrastructure building seen in the region in recent years will bear fruit in the years to come, increasing productivity and competitiveness in the area.

Fourth, South Asia’s economic growth is guided mainly by domestic demand rather than global economic trends. Because of the extensive development and investment needs, the domestic market is expected to remain strong. Tourism is the mainstay of the Maldives, and a growing middle class will also support consumption in the region.

South Asia should not relax despite these promising prospects. Subregional countries must implement announced reform measures and launch a new wave of structural reform. These reforms should focus on land, labour, and capital market reforms, and they will remove barriers to private investment and diversify the economy. For sustainable and inclusive economic development, Afghanistan will continue to be an outlier. 

The subregion should be encouraged to participate in global production networks through trade and investment regimes. As the worldwide trading system undergoes significant changes, it is essential to upgrade the region’s economies simultaneously. As the subregion continues to face infrastructure shortages, it must continue to invest. A subregion with a population of more than 1.8 billion and vast natural resources can be tapped due to the move.

Macroeconomic stability is essential for economic growth in Pakistan and Sri Lanka. A country in South Asia needs to be on the lookout for macroeconomic imbalances and take preventive measures. It is beneficial to have a deficit in the current account. However, an economy rapidly increasing its debt may be growing above its potential, and precautions may be needed.

A more integrated subregional market will also benefit South Asia, the least integrated subregion in the world. Markets are expanded beyond national boundaries when the subregion is integrated, and resources are allocated more equitably according to each country’s comparative advantage. Increasing productivity can boost economic growth and employment by accelerating regional cooperation and integration.

South Asian economies will double in size in 10 years if they grow at 7% annually. Introducing this initiative will drastically reduce the number of people living below the international poverty line of $1.9 per day per capita, the world’s largest group of poor people. Maintaining its status as the fastest-growing subregion in the world is no small feat. As long as economic reforms are carried, macroeconomic stability is maintained, and greater cooperation and integration between neighbours is fostered, the subregion will succeed.

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