'Cost overruns may create serious problems in the long run'

Bangladesh is expected to become a middle-income country by 2024. However, in response to Dhaka's request, the CDP set a five-year transition preparation period for Bangladesh. As such, the transition from LDC for Bangladesh will officially take place in 2026.

Bangladesh also aims to reach upper-middle-income status by 2031 and a high-income country by 2041. In March 2022, the IMF released an analytical report on possible ways to achieve these goals and Bangladesh's readiness to do so.

According to the report, a five-year comparative analysis of the transition of some countries from low to medium to high middle income shows that Bangladesh is comparatively weak in all indicators, including trade, exports, foreign direct investment, remittances, tariff structure and taxes.

Dr Syed Akhtar Mahmood, economist and former Lead Private Sector Specialist in the World Bank Group, explains why Bangladesh lags behind other LDC (Least developed country)-graduating countries in different perimeters. 

He weighs in on why Bangladesh is struggling to diversify its exports, attract FDI, keep RMG's competitiveness in the absence of low wages and preferential treatment, and many other challenges that come with graduation. 

A recent IMF report found major weaknesses in Bangladesh's economic foundations that they said no other country had while graduating from the LDCs. IMF points out that our exports are not diversified, and revenue sources are limited. Are we doing something wrong?

I would not say we were doing everything wrong all these years. We did many things right, but there are some areas where we should have paid more attention. Before I go into that, let me point out that Bangladesh is relatively disadvantaged compared to many other countries that have transitioned from an LDC status. 

Unlike many developing countries, we are not well-endowed with natural resources; we have a vast population living in a tiny landmass; we are often faced with natural disasters. More recently, we have started facing the perils of climate change. So we must first acknowledge how far we have come despite all these disadvantages. 

Nonetheless, we could have paid more attention to a few things. The first issue is about raising tax revenues. The failure to do so is essentially a tax administration issue (such as not collecting the taxes we should be collecting). In addition, tax policy is also to be blamed (such as not broadening the tax base). If you go deeper into these factors, you see a governance problem.

Inadequate export earnings and lack of diversification of exports result from two policy biases: firstly, a general anti-export bias that reduces the volume of exports; and secondly, a bias against non-garment exports resulting from relatively more support for garment exports compared to other exports.

There could be a governance problem here, too, since there are powerful lobbies of domestic-market-oriented businesses seeking and enjoying different privileges that tilt the policy stance in an anti-export direction. In other words, you can make so much money operating in the domestic market that you don't want to go through the rigours of competing in the global market.

I am not against the expansion of industries targeting the domestic market; I think it is good that we have a vibrant industrial sector serving the domestic market. But the policy stance could have been more balanced. The other governance problem is related to the influence of the garment lobby, which can extract many privileges from the government, thus creating a bias in favour of garments and against other export products.

Our stock market is small compared to GDP size, our tax to GDP ratio is poor, and so is our bank asset to GDP ratio. If almost everything is so low, what is our growth actually driven by, and what are the risks associated with it?

A large part of the growth has been driven by agriculture and remittance, which are not much dependent on bank finance and even less on financing from the stock market. Much of industry and construction rely on bank financing or retained earnings of the companies, not on the stock market. 

Syed Akhtar Mahmood. Illustration: TBS

Also, public investment has been an essential driver of growth. However, a large part of it has been funded by donor assistance. Of course, we could do much better if the stock market was more developed, the financial sector had more depth, and our tax system was better.

FDI has been a concern for a long time, and all stakeholders, including policymakers and economists, have been weighing in to create an environment to attract investment. What are we missing?

I would identify three major factors. The first is an inadequate investment promotion strategy. Countries that have been successful at attracting FDI have taken a very targeted approach. They have identified what kind of FDI they needed to achieve their economic and social objectives. For example, Malaysia and Vietnam decided to go into electronics manufacturing and exports.

They also understood that they needed FDI for capital and, more importantly, for technical know-how, access to markets, and brand recognition. Having realised that they needed FDI, they targeted sources of FDI and aggressively went about courting such investors. Our approach to FDI attraction lacks such a strategy. 

The second problem is the lack of adequate follow-up to investment promotion efforts. We do not have a sound system to track what has happened to those investors who showed some initial interest. 

Have these investors progressed with their investment plans, and if not, where are they stuck? We are more interested in glamorous events such as roadshows and less in the painstaking task of creating processes such as investor tracking systems. 

The third factor is regulatory uncertainty. Even if FDI policies are good on paper, their effects may be offset if the regulations are not clearly written and if there are inconsistencies between different rules and regulations. All these create regulatory uncertainty. My conversations with foreign investors in Bangladesh suggest that this is a big problem for them. 

We are not particularly good at taking care of investors who are already here. We tend to take them for granted. Our attitude is that they are already here, so we don't have to worry about them. 

That is a very wrong approach. Prospective investors exploring Bangladesh as an investment destination will always check things out with the investors who are already here. If existing investors have bad experiences, prospective investors will think twice before investing in Bangladesh.

Also, we must remember that existing foreign investors also reinvest, but such reinvesting may decline if they have a terrible experience in the country. We would notice if they withdrew their existing investment, but we might never know how much reinvestment we lost because we ignored the problems faced by existing investors.   

The RMG sector covers about 80% of our exports, while remittance is the other major driver of our economy. LDC graduation can impact both these sectors. But the country is too slow to diversify its exports and revenue sources. Do you fear Bangladesh could get into the lower-middle-income trap like the Philippines or, even worse, a Sri Lanka like tragedy?

I am less worried about a Sri Lanka type situation. Our ability to service external debt is better than that of many countries, thanks to conservative debt management by successive governments over the years. But there is no ground for complacency. 

The relatively good debt management situation should in no way be an excuse for doing so inefficiently. We continuously hear stories of cost overruns and inadequate project screening protocols. This may create severe problems in the long run.

About the middle-income trap, the most crucial challenge is moving toward an innovative and productivity-oriented private sector. Most countries that have fallen into the middle-income trap have emphasised investment in output growth but not in productivity growth, leading to innovation. 

And this, in turn, has often been the result of crony capitalism. Some business groups have become too powerful, and all they are interested in is getting various privileges from the government. They were not interested in competition. 

Instead, innovation and productivity improvement are disregarded by them. Since they were influential, they could steer public policy away from a pro-competition, pro-innovation stance. 

We have to guard against this in Bangladesh. We now have many business-friendly policies, but we need to move towards more market-friendly policies, i.e., policies promoting market competition and creating pressure for innovation. If we are not careful, we may move in another direction, i.e., crony-friendly policies.  

There has been a recent boom in the growth of local conglomerates. However, there has not necessarily been much export growth beyond RMG. Is our tariff structure too protectionist? What are the long term risks of a protectionist tariff structure?

I have partly addressed this in my answer to the previous question. Yes, the tariff structure is protectionist to a significant extent, which is a major reason for the anti-export bias. 

Some degree of protectionism is good because it can give our industry the breathing space to grow and acquire the capabilities to compete abroad. But it can also reduce the incentive to learn and develop such capabilities. Why bother if you can make a lot of money operating in the protected domestic market? 

Thus, it is vital that protection is time-bound and comes with conditions. In other words, the recipients of protection should be required to invest in learning, acquiring capabilities and increasing productivity. 

Indicators should be defined clearly to capture whether the firms are complying (this exercise may be done jointly with the companies), and then specific targets should be set for these indicators. 

The government should then collect data on whether these targets are being met and, if they are not, the protection should be withdrawn or lowered. This is what the East Asian countries have done with great effectiveness. It is time that we brought such discipline to Bangladesh.

Is our competitiveness in the RMG sector solely based on low wages and preferential treatment? And Vietnam gets a lot of FDI in RMG, meaning there is a lot of technology transfer. Do you see us losing a chunk of our global market share post LDC-graduation?

That is indeed a risk. I believe that while we may lobby to retain the preferential treatment, our focus should be more on improving competitiveness, encouraging more FDI into our RMG sector and modifying the government's policy stance towards instilling the kind of discipline I mentioned.