Structural problems run deep: Surgical interventions required

Highlights: 

• Economic professionals spent little time looking at the underlying economics of pervasive inequalities 
• Unless you address the sources of injustice, you are not going to move very far.
• Do research on how poverty reductions and human development improvements have taken place under such a mal-governed and inequitable society 

Governance today has been identified as Bangladesh's paramount concern, certainly reflected in the recent White Paper. It is seen as a major constraint to the realisation of Bangladesh's development potential, both as a source and a symptom of the malfunctioning democratic system. Most of the governance problems affecting Bangladesh's polity today have been perpetuated over the years. Thus, what was essentially a regulatory problem some years ago has hardened into a structural issue, posing serious political challenges in any regime in Bangladesh. If we look at the full range of governance problems, from the state of law and order, the loan default issue, the deterioration in administration, the degeneration of educational institutions, to the pervasiveness of corruption—each of these issues has now become embedded in the sociopolitical fabric of Bangladesh's society.

I can't imagine that too many people would disagree with that proposition. What you are discussing are not problems that emerged very recently, but ones that have been percolating and have now become embedded in the system itself. This means that what you are now dealing with are structural problems originating in state failure across many areas, and these issues need to be addressed to come up with an agenda for reform. To believe that correcting regulatory failures alone would suffice would be a serious underestimation of the nature of the problems we face.

What has contributed to the qualitative change in the circumstances is the fact that we have witnessed a prolonged regime that lasted for 17 years. This gave them an opportunity to push the process forward without scope for significant corrective actions, so the problems deepened and consolidated themselves. To look ahead, we must recognise that in most areas now, you will need not just therapeutic interventions but surgical ones. How feasible that is, and who will undertake it, is already a central issue that will need to be considered in addressing the fundamental problems you refer to as restructuring institutions for equitable and sustainable development. But both issues—restructuring institutions and achieving equitable and sustainable development—have been far from the agendas of successive regimes over many years.

The new version of the Bangladesh paradox

If you want to look at the immediate consequences of the process you witnessed, you will see the emergence of a much more articulated and concentrated class enjoying economic power, resulting from the pursuit of private enterprises in Bangladesh's market economy. In various parts of the literature, we have termed this crony capitalism. In the recent publication of the White Paper, this was elevated to oligarchy. Whether all crony capitalists are oligarchs, or whether oligarchs constitute a specific class of crony capitalists, remains an interesting issue for discussion.

Various market-oriented reforms were initiated in the early 1980s when we began creating the state-sponsored capitalists' class through massive injections of state-financed lending. This class has evolved and mutated, achieving many positive things in various areas. However, it has also become a more economically concentrated class, accumulating significant social and political power, which has now become a variable in the policy-making process.

Both positive and negative changes have occurred over the years. Significant structural changes have taken place. We have evolved from a primarily agricultural economy into an increasingly manufacturing-oriented economy. While this growth has been driven largely by the rise of the RMG sector, the domestic economy has certainly become much more diversified. This has happened due to structural changes in demand and financing, as well as the protection provided by government policy regimes. Industries have also improved their technology, diversified, and have the potential to become more competitive.

At the same time, poverty reduction has taken place and human development has improved. Whatever debates may be occurring about the quality of GDP growth and the relevant figures, no one has suggested that the significant reduction in poverty, as shown by the HIES, has been greatly underestimated. If we take those figures at face value, we have done remarkably well in that area by any standard. In fact, if you look at the multidimensional indicators of poverty, reducing it from 57% to 25% is very impressive by any standard. I do not know how many countries in the world could claim such results.

Additionally, if you look at the multidimensional indicators of nutrition, child mortality, years of schooling, sanitation, access to fuel, drinking water, electricity, and housing, very remarkable reductions have taken place in all these areas.

Perhaps we should be exploring in our research the new version of the Bangladesh paradox, where previously you wondered how growth could take place with poor governance, but now the question is how such reductions in poverty and improvements in human development could take place under such a mal-governed and inequitable society. I hope this will present some challenges to the economists around the table.

If the Gini coefficient has risen to 0.5 under the prevailing HIES, and the wealth Ginis has reached 0.8, that suggests significant dynamic income growth and poverty accumulation in the middle levels. These figures point to emerging inequalities, and the nature of these inequalities needs to be deconstructed to understand where disparities are developing. This will provide insight into the nature of the corrective interventions required.

MPs feel like zamindars

Structural problems are now deeply embedded in the sociopolitical order. We need to identify these problems—debt problems in the financial sector, the politicisation of the administration, erosion of judicial independence, weaponisation of law enforcement, and the parliamentary system. We had three parliaments without an opposition, and their role was merely to rubberstamp legislation. Parliamentarians, not being heavily engaged in their parliamentary responsibilities, chose to spend their spare time pursuing business ventures as a primary vocation. If 70-75% of them declared themselves businessmen, either as their first or second profession, the remaining 25% who call themselves something else clearly found opportunities to participate in business during their underemployed moments in parliament. The second area where they occupied themselves was by becoming zamindars in their constituencies, usurping the functions of local government and the upazila chairmen.

This concentration of power, the devaluation of decentralisation, and the development of crony capitalism as a more universal phenomenon were part of the process that emerged from structural problems within the political system. This issue did not limit itself to parliament but extended all the way down to the upazila and union levels. The system emerged from a high concentration of power at the apex of the system, which was concentrated in the Prime Minister's Office, and, before that, in the President's office. This, in turn, became the central factor, originating from another structural issue: the fact that the principal political parties themselves were undemocratic organisations, with all power concentrated at the leadership levels of these parties. The result was an inbuilt structural problem in the political system that then manifested itself in the way administrative systems functioned, and in the way the administrative system related to the emerging business sector.

The electoral system has become subject to elite capture, where substantial profitability is available through participation in politics and getting elected to parliament, making it worthwhile for some to spend large sums of money to achieve that goal. This has impacted the nature of the political process.

Finding the source of inequality and injustice

The main impact on our society has been the emergence of a highly unequal society. To understand the nature of inequality, you must look beyond the system itself and examine its sources. One such source is Boisomya, and the way this concept evolved within the system. There is a whole range of sources of Boisomya to examine, particularly how mal-governance compromised the functioning of the financial system and created the debt default crisis, which remains one of the major disequalising factors within the economy. However, this has never really been recognised for its role in exacerbating inequality.

How is it disequalising? Defaults have accumulated over the years, which were then rescheduled and written off—these three stages of the default crisis also led to a financial crisis, especially in state-run banks, which required recapitalisation year after year. These recapitalisations represented a transfer of resources from the budgetary system into the hands of the recapitalised banks and, beyond them, to the defaulters.

If you add up the implications of write-offs and rescheduling over the years and aggregate them, this gives you a measure of the transfer of resources into the hands of the beneficiaries of this process. When you analyse this as a form of income distribution, it paints a very different picture of the society in which we operate.

Similarly, if you deconstruct your budget and take into account subsidies, tax forgiveness, and various tax concessions, these represent significant transfers of resources. Here is a challenge for all of you in the profession who talk about inequality but, for some reason, have not spent much time addressing the problem or truly exploring its underlying economics. This is an issue I hope you will take up in the days ahead.

This is the issue that needs to be addressed. Moving on, what other areas should we focus on to address the problems of growing inequality? We need to look at the fundamentals of inequality in terms of asset ownership, the functioning of the market, and the disequalising effects of our education system.

You can't just write off the state

In the classical socialist model, inequality in asset ownership was identified as the root cause of social, economic, and political inequality. It was addressed through the nationalisation of the means of production. That part of the discourse has long since disappeared, with no one now advocating nationalisation as a corrective intervention. However, there are still various forms of state intervention that can have positive results. Many of you may have forgotten the Korean experience of the '70s and '80s, during which major structural changes in the economy, including the move from labour-intensive industries to much higher levels of industrialisation—from steel to petrochemicals—were patronised and accelerated by the state, despite total opposition from the World Bank. We have seen similar examples in Singapore with Singapore Airlines and the Singapore Port Development Authority, and in Taiwan with state enterprises.

So the relevant issue is that we cannot write off the state. The state remains a key factor in correcting market failures. For instance, if we had a functioning state today, it could address one of the major market failures in Bangladesh—the lack of diversification in our export sector. I classify this as a market failure that requires state intervention. However, I would not, in my wildest imagination, suggest that any state in Bangladesh over the last 30-40 years would be qualified to undertake such an intervention, as the state itself has degenerated and become dysfunctional in many areas.

Everyone talks about syndicates operating in Bangladesh, but no one has captured a live syndicate. When will we be smart enough to catch one? There are various imperfections in the market that contribute to the relocation of value-added from primary producers to end consumers.

The literature should substantively explore how more value-added can be retained in the hands of primary producers. I have not seen any robust research on this subject. My suggestion is that small farm producers should be given opportunities to become shareholders in agro-processing enterprises, so they can have a guaranteed market and a better share. Another idea is to associate workers, particularly in the readymade garment sector, with opportunities for ownership rights, so they can become stakeholders in the most dynamic, growth-oriented, export sector and share in the value-added process.

Finally, in the current situation, while everyone talks about Boisomya, I haven't seen any ideas on how its inequality dimensions can be significantly reduced. The possibility of this happening, without the deep structural changes I have identified at the outset of my discussion, is a major question I leave before you.

Abridged from the lecture given at the Annual BIDS Conference on Development 2024 in December on the theme: Equity, Opportunity, Freedom and Dignity: Restructuring Institutions for Equitable and Sustainable Development