Bangladesh – A journey from poverty to development

Equivalent to the combined population of the Netherlands, Germany and France, Bangladesh is home to 160 million people. Although it is ranked as one of the world’s poorest of the 10 most populous countries, its economy grew by 7.1 per cent in 2016, a 30 year record. The country is starting to attract the attention of global companies. Can Bangladesh make poverty history?

Bangladesh – A journey from poverty to development

The story so far

Bangladesh’s recent economic upturn is attributed to two major factors: its robust NGO sector and its thriving garment manufacturing industry. Bangladesh exported over USD26 billion in clothing, second only to China.

Bangladesh gained independence from Pakistan in 1971 after a devastating war. Just prior to the war, in 1970, a massive cyclone had hit the nation, killing thousands. Today Bangladesh’s GDP per person is USD1,538 in comparison to Pakistan’s at about USD1,470 in June 2016.

Some analysts assess that Bangladesh has the potential to emerge as the 23rd largest economy in the world by 2050.

Bangladesh’s recent economic upturn is attributed to two major factors: its robust NGO sector and its thriving garment manufacturing industry.Bangladesh exported over USD26 billion in clothing (in 2015), second only to China.

Path to recovery

Bangladesh pursues a private sector-led growth model, where foreign currency is available due to remittances and the central bank also respects the transferability of foreign currency. In terms of industry and services, more developed Asian countries have outsourced factory production to Bangladesh, mainly in textiles.

In 2016, Foreign Direct Investment (FDI) reached a record USD2.2 billion which is why Bangladesh continues to place a high priority on attracting foreign investment as an engine of economic growth.

Some pull factors that make Bangladesh an attractive destination for investors include:

  • Macroeconomic stability

Despite social and political unrest, the economy remains resilient. GDP grew by over 7 per cent in 2016 with the support of remittances from over ten million Bangladeshi workers living abroad – valued at USD14.9 billion in 2016. Increased private investment and stable credit growth will help to underpin continued macroeconomic stability.

  • An open and diversified economy

On attaining independence in 1971, Bangladesh had no industry, foreign reserves or modern infrastructure. The country was dependent on a few products, namely, paper, jute and tea.

Before the Ready Made Garments (RMG) industry emerged in 1981, 70 per cent of Bangladesh’s exports were dominated by jute products. However, due to the rise of cheaper jute substitutes globally and weak industrial policies, the jute industry declined. By 1990, RMG dominated traditional exports – reaching 81 per cent in 2014.

  • Abundant low-cost labor

In 2016, over four million people worked in the garment industry, which accounts for 80 per cent of Bangladesh’s foreign trade.

As the second largest exporting country in the world for RMG (as of December 2016), Bangladesh continues to attract international and regional investors in that sector.

  • Strategic location

Bangladesh is strategically located between three major economic hubs – India, Southeast Asia and Northeast Asia. It enjoys close proximity to China – Asia’s largest power and a strategic rival to both India and the United States. China signed trade deals with Bangladesh worth USD13.6 billion in October 2016.

  • Young labor force

Bangladeshi workers are described as optimistic and diligent and imbued with an entrepreneurial spirit. 37 per cent or 21.5 million of the employed population is aged 15 to 29 years old (as of September 2016). With 26 as the average age of employed workers, the nation boasts one of the youngest and largest labor forces in the world.

Measuring market risk

One of the drivers of Bangladesh’s economic growth is the evolving jute exports and textile sectors. These two sectors have played a key role in alleviating poverty and providing employment to women. Out of a total work force of 76 million, four million people work in the RMG sector; where 80 per cent are women.

The key economic sectors in Bangladesh to watch out for include:

  • Agriculture

Agriculture still employs 47.5 per cent of the population and is a major source of livelihood in rural areas. It was also responsible for 90 per cent of the country’s success in poverty reduction between the years 2005 and 2010.

  • Textiles

The textile sector has been a job creation engine for Bangladesh. It benefits from abundant low-cost labor, making Bangladesh’s textile industry second in terms of exports only to China’s. 79 per cent of Bangladesh’s export earnings come from the RMG sector.

  • Pharmaceuticals

Although small, the pharmaceuticals sector is the most technologically developed of Bangladesh’s major industries. The earnings from medicine exports in fiscal year 2015-2016 were around USD16.8 billion.

Under-developed country concessions from the World Trade Organisation (WTO) on intellectual property rights till 2033 have placed Bangladesh at an advantage in terms of attracting manufacturing in this sector.

  • Telecommunications

The government’s Telecoms Policy in 1988 liberalized the sector to ensure a competitive yet reasonably priced, multi-operator environment.

The country is set to launch its first communications satellite in March this year and roll out its 4G services in January.

In 2016, Russia’s GS group helped launch RealVU, Bangladesh’s first Direct-to-Home (DTH) digital TV service provider, in partnership with Beximco Group, a Bangladeshi industrial conglomerate.

Challenges ahead

Bangladesh’s economy remains stable despite global uncertainties and a decline in remittances. However its abysmal ranking at 176th position out of 190 countries for ease of doing business in 2017 underscores the need for improvement in the policy environment.

Some challenges that hinder its economy include:

  • Clean water and sanitation

Bangladesh is one of the most densely populated countries in the world. Its 57,000 square miles space home to 160 million people. Of those 160 million Bangladeshis, 85 million lack modern sanitation and 4 million lack safe drinking water. Over-crowdedness, lack of access to safe water and sanitation along with the absence of healthy waste disposal systems in urban centers continue to be pressing national problems.

  • Population management

Approximately 7 million people in Bangladesh were under-employed in 2017. Between 2013 and 2015, only 1.4 million jobs were added, while 5.5 million jobs were created between 2010 and 2013.

Bangladesh has failed to fully capitalize on its demographic dividend due to factors such as a flawed education system.

  • Lack of investment

Declining remittance inflows due to the slowdown in Gulf Cooperation Council (GCC) economies has further slowed investment and consumption.

Although FDI inflows rose by 4.4 per cent in 2016, private sector investment seemed sluggish amidst rising security concerns and political tensions.

Declining remittance inflows due to the slowdown in Gulf Cooperation Council (GCC) economies has further slowed investment and consumption.

  • Inadequate infrastructure

Bangladesh continues to struggle with underdeveloped and inefficient infrastructure. However the government, with international assistance, is determined to reverse this. It is expanding Bangladesh’s airports, seaports, railways and highways. The government is also focuses on modernizing telecommunications and Internet availability nationwide, which partly compensates for the limitations of physical infrastructure.

Adequate infrastructure for uninterrupted power supply is also a concern. Power outages are common, which tend to reduce GDP by 2-3 per cent.

At current prices (as of December 2016), demand exceeds power supply. Bangladesh generates only 60 per cent of the power generated by Pakistan, though its population is only about 15 per cent smaller.

  • Education

In 2016, Bangladesh spent only two per cent of its GDP on education, the second lowest in South Asia. Only four per cent of Bangladesh’s 87 million strong work force have post-secondary education. Approximately five million Bangladeshi children remain out of school between the ages of six and 13 – mostly living in urban slums or poor families living in isolated rural areas.

  • Corruption

Bangladesh ranks 145th in the World’s Corruption Perception Index for 2016. The well-connected are reputed to be immune from punishment.

The state of human rights is also a cause for concern. Although the law provides for an independent judiciary, there is a severe back log of cases and rumours of political interference.

The road ahead for Bangladesh

As the world’s eighth most populous country, Bangladesh needs to focus on sustainable and inclusive growth.

Amidst a modest global economic upturn, the recovery of exports and strengthening of investment is expected to support 6.8 per cent GDP growth in 2017.

Nevertheless, Bangladesh ranks 107th amongst the 140 countries assessed under the Global Competitiveness Index 2017. The legal and policy environment are still not business-friendly, a point underscored by slow commercial litigation processes. Corporate taxation, government bureaucracy and corruption remain a drag on economic growth.

In spite of this, progress is being made. Bangladesh hosts many international and domestic NGOs which have helped to keep economic growth somewhat inclusive. The poverty rate declined to 23.2 per cent in April-June 2016 in comparison to 31.5 per cent in 2010.

What Bangladesh needs in the short-term is a determined effort to invest in critical infrastructure such as gas, power, water, sanitation and transportation. In the longer-term, Bangladesh needs to tackle the deeply-rooted problems holding back the governmental, legal and policy environment. Only then can growth truly become unshackled and the remaining work of poverty alleviation completed.