A deal with the devil or a blessing?

Let us now come to Bangladesh. In the first few years after independence, much time was spent on resolving the issue of debt-burden-sharing between Pakistan and Bangladesh. At the same time, urgent aid was provided for relief and rehabilitation, including food aid. 

Later, starting in the mid-1970s, donors started providing loans for budgetary support, import financing and specific projects in areas such as infrastructure, industry, food production and family planning. Particularly important was a series of import programme credits provided by the World Bank and the Asian Development Bank. These loans did not have many conditionalities attached to them except that the project funds be utilised efficiently. 

One important exception to this was the requirement for exchange rate devaluation that the IMF asked for, leading to a very significant devaluation of the Taka in 1975. This resulted from the high rates of inflation in the early post-independence years that had made the real exchange rate highly overvalued. 

This was going to harm exports from Bangladesh and create balance of payments problems. Thus, there was a strong justification for this policy condition of the IMF.       

Starting in the early 1980s, the World Bank started attaching certain policy conditionalities to its import programme loans to Bangladesh, replaced later by structural adjustment loans. It may be noted that this was also the time when the World Bank started advocating for structural adjustment across the developing world. 
 
The policy conditionalities covered a wide ground including privatisation, import liberalisation, pricing reforms including the removal or reduction of subsidies, improving tax collection, financial sector reforms and improved public financial management, just to give a few examples. 
 
There is a strong body of public opinion in Bangladesh that believes that many, or most, of these conditionalities, were inappropriate and harmful for the country, and that successive governments accepted these because they were too dependent on the donors and did not have the ability or inclination to push back on donor demands. While the above arguments may have been true in some cases, we must also note at least three important things. 
 
First, it is incorrect that the governments in Bangladesh have always been submissive to donors. Quite on the contrary, all governments to date have often pushed back on the positions taken by the donors and have adopted reforms at their own pace. 
 
In many cases, the donor conditionalities merely reflected the policy intentions of the government; in other words, the donors included as conditions policy actions that the government had already decided on its own to undertake. Thirdly, in many cases, the impact of the policy reforms has been far more beneficial than what many people assume.    
 
It may be pertinent here to quote from a senior policy-maker who has had the most in-depth experiences among Bangladeshi officials of dealing with donors. 
 
In his article, "Aid and Policy Reforms in Bangladesh", published in the 2004 CPD volume 'Revisiting Foreign Aid: A Review of Bangladesh's Development 2003', Mohammad Syeduzzaman writes about the 1980s, "An important feature of the Import Programme Credit-led policy reforms was that these were based on continuous 'dialogue' between the government and IDA, and were being implemented in a gradual manner…..In fact, in many cases, IDA staff members picked up initiatives taken by the government itself to justify a policy-based import credit." 
 
This is a strong indication that many policy initiatives of the government are taken independently even if these later received support from donors.  
 
Let me come back to the point I made above regarding the impact of policy reforms. Not many people in Bangladesh are aware that the World Bank provided several loans to help modernise the state-owned jute industry in the 1970s and 1980s. 
 
However, the results were not satisfactory. It was then that the World Bank concluded that it will be better for Bangladesh to privatise some jute mills and close the rest. 
 
The most significant example of the latter is the Adamjee Jute Mills which was closed in 2002, resulting in a job loss of 26,000 people. Many people in Bangladesh were critical of this decision and accused the World Bank of supporting the de-industrialisation of the country. 
 
However, it is not widely known that an export processing zone was subsequently developed on the land of the former Adamjee Jute Mills and that, by mid-2019 (the latest period for which I have data), more than 55,000 people have been employed in the zone. This is double the number of jobs lost when Adamjee closed. 
 
A dynamic economy requires a regular process of reallocation of resources from activities that are no longer profitable to those that are more promising. The World Bank's advice to close the Adamjee Jute Mills was in line with this important lesson of economics and the performance of the Adamjee EPZ has vindicated this position. 
 
Another example is agricultural input market liberalisation which happened throughout the 1980s and early 1990s. Donors, in particular USAID, played an important role in pushing for these reforms. 

The discussions and debates on these reforms were also informed by rigorous economic analysis carried out by international organisations such as the Washington-based International Food Policy Research Institute and local institutions such as the

Bangladesh Institute of Development Studies. Studies conducted after the reforms were enacted have provided strong evidence of the positive impact of these reforms. 

My final example relates to a combination of bilateral and multilateral aid. In addition to the support provided by international organisations such as the World Bank, IMF and the UN bodies, and regional bodies such as the Asian Development Bank, Bangladesh has also received considerable support over the years in the form of bilateral aid, i.e., aid provided directly by individual governments. 

Often such donors have worked together with multilateral donors. Take the example of DFID, which was later named UKAID, and has now been merged with the Foreign Ministry of the UK. The bulk of the assistance provided by DFID has been technical assistance. 

A good example of this is the Bangladesh Investment Climate Fund (BICF), which is funded by DFID and managed by the World Bank Group through its private sector arm, i.e., the International Finance Corporation. It was set up in 2007 and has been providing valuable assistance to help improve the investment climate.  

A flagship contribution of this facility is the support to Bangladesh's economic zones programme. This is a good example of donor support for a transformative agenda in a developing country and illustrates the various ways donors can support such an agenda. 

In 2007, the IFC published a report where it argued for a more organised and environmentally-friendly industrialisation process in Bangladesh through the establishment of a large number of economic zones in the country. Drawing upon international good practice, it also argued for the adoption of different types of public-private models in implementing the agenda. 

Once the government accepted the arguments and decided to go for an ambitious economic zones programme, the IFC in collaboration with the DFID, helped draft the Economic Zones Act and various rules and regulations and supported the establishment and institution building of the Bangladesh Economic Zones Authority. Later, the World Bank stepped in with loans to help build the infrastructure in the zones. 

The donor support to the economic zones programme is a good example of a set of donors staying with an agenda for a long time, in this case for a decade and a half already, and providing a wide range of support, including knowledge, technical assistance and loans.

The above example points to the direction that foreign aid may take in future years. Increasingly the emphasis will be on creating an enabling environment for private sector investment, whether domestic or foreign. This would involve assistance for improving the investment climate, as described above, as well as catalysing private foreign investment. 

A good example of this is the International Finance Corporation. The main mandate of this organisation, which was established in 1956, is to demonstrate that there are many commercially viable private investment projects even in the difficult conditions existing in developing countries. 

IFC typically invests in projects and sectors where foreign investors may be reluctant to come in because of perceived risks. The IFC is in a better position to take risks both because its mandate is development, and not commercial profits (although it must ensure that all its investments are commercially viable), but also because it can use its relationship with the World Bank to ensure that the policy and regulatory environment affecting its investments is conducive. 

However, IFC's goal is not merely to implement its own projects but to create a demonstration effect. By showing the viability of certain projects through its own investments, IFC hopes to encourage other investors to come to a country.

A good example of this is the first private sector project in power generation which was implemented about 20 years ago with IFC investment. The success of that project has subsequently encouraged many private investors to come into the power sector in Bangladesh. 

Another example is IFC's pioneering investment in IDLC in the mid-1980s that helped initiate the leasing industry in Bangladesh. More recently, its investment in bKash gave a significant boost to the mobile financial services sector. 

The IFC model of helping to create a demonstration effect through its investment while simultaneously supporting efforts to improve the overall investment climate through facilities such as the BICF may be a harbinger of how foreign aid may evolve in the coming years, i.e., focusing on facilitating private investment, including the flow of foreign investment. We should not be surprised if that happens. 

After all, as I mentioned at the beginning, about seventy-five years ago, when the World Bank adopted a charter at the time of its birth, three out of the five objectives mentioned in the charter had something to do with facilitating private capital flows across borders. The donors are perhaps just going back to their roots.    

Syed Akhtar Mahmood. Illustration: TBS

Syed Akhtar Mahmood is an economist who previously worked for an international development organisation. This is the concluding section of a two-part analysis. 

A shorter version of this full article was recently published in Bonik Barta.