Will Bangladesh become an advanced economy by 2041?

The World Bank says streamlining business regulations should be prioritised. The IMF recommends successive “waves” of structural reforms for LIDCs. But these will not be enough. A clear and coherent industrial policy will be needed.

The World Bank’s Doing Business Indicators (WBDB)is that rare indicator of institutional quality that is not determined by per capita GDP alone, and which can be improved rapidly. India, for example, improved its ranking from 100th to 77th in just one year recently. The WBDB features as the  point around which the World Bank builds its case for a reform agenda in its April 2019 report: The Bangladesh Development Update: Building Regulatory Predictability. Bangladesh presently ranks at 176th out of the sample of 190 countries in the 2019 WBDBReport.   The WB argues that removing regulatory unpredictability should feature as one of a set of key structural reforms that will be needed to achieve the national targets for advanced economy status by 2041.

This issue is further illuminated by series of earlier reports by the IMF on structural reforms and their macroeconomic consequences, in which easing business regulations also feature.  These studies aimed to identify reforms to counter the slowdown in growth and productivity across a wide range of countries since the2008 Global Financial Crisis. (Structural Reforms and Macroeconomic Consequences; Initial Considerations for the Fund; IMF, November 2015).

A key finding is that structural reform priorities “evolve”,  depending on whether a country is a Low Income Developing Country (LIDC), Emerging Market (EM),  or Advanced Market (AM). The IMF studies suggest that LIDCs and EMs should focus on agriculture, education, banking, fiscal reforms, infrastructure, and reform of business regulations  to maximize growth and productivity improvements. AMs should prioritize technology development, with an expectation that benefits will accrue in the long run.

The IMF makes a further set of observations on the impact of reforms over the longer term, depending on whether the focus of reforms is narrow or wide, and if the reforms are sustained or not.  Thus it finds that benefits are greater when reforms are broad or multi-sectoral. In addition,  there are strong benefits to successive waves of reforms, such as those observed in Turkey and Malaysia (each had three waves of reforms).  

Finally, banking and capital markets development have benefitted from being reform targets over successive reform efforts. This is the case for the financial sector in Malaysia, for example, which was prioritised in successive waves of  reformsin the aftermath of the Asian Financial Crisis of 1997.

Recent research on Chile, using this structural reforms framework, and benchmarked against its Latin American peers, and fellow OECD countries, provides further insights.  (Assessing Macroeconomic Impacts of Structural Reforms in Chile; M. Hadji-Vaskov;  IMF Working Paper 285; 2018).  

Chile, which is a lower-income AM,  is facing a growth slowdown as well as declining productivity. What are the likely impacts on growth and productivity from Chilean reforms targeted at four sectors:  streamlining business regulations, active labor market policies to aid displaced workers, liberalization of labor regulations, and technology and innovation policies?   

The simulations, which aim at closing the policy gaps in the above sectors with lower-income OECD countries (at the 25th percentile level),    found the largest benefits – in termsof contributing to output – were from easing business regulations. (Chile ranks 56th in the WB’s DB 2019 indicators).

Furthermore,  sustained efforts at regulatory reforms continue to provide major benefits over time, extending over five to ten years.  Technology policies, however,  take about 10 years to make a significant contribution to raising output.

What about productivity growth? In the Chilean simulations, this is primarily fromrisingtotal factor productivity (TFP), followed by employment expansion and then by capital accumulation.  Again, the key contributor to each of the three channels by which productivity is increased is regulatory reforms, with technology policies also important for TFP.

These results imply that Bangladesh could also benefit from a wave of reforms across a number of sectors, with follow up in later years to widen the number of sectors to be reformed, as well as to revisit critical sectors in which reforms had been launched earlier.  

Here the WB’s identification of key sectors provides initial suggestions for the first waveof reforms.“Converging towards these targets (for 2041) within the specified timeframe will require massive investments in physical capital, human capital and innovation, enabled by structural reforms in key areas such as the financial sector, fiscal policy, infrastructure, human development, and business regulation.” WB 2019

This grouping of reform sectors accords relatively well with the priorities identified in the IMF’s structural reforms framework. But what about the “second wave” of reforms, and will there be a need for a third?

The above framework suggests that Bangladesh, in its “second wave” of reforms, should take forward an expanded set of reform sectors including labor markets, with banking and capital market development, infrastructure, and product market deregulation  continuing as highest priority sectors.

For the third wave of reforms the issue becomes more challenging. Conceptually,  thereforms will need to shift prioritiesto growth of TFP, involving innovation and technology development.  

It is here that the limitations of the framework of the IMF and WB become clear. Indeed, the use of the framework for a further set of simulations in which Chile tries to close all structural gaps in relation to the median of the OECD countries is revealed to be unfeasible, as it would involve an “unprecedented set of policies”.

To understand this we must recognize that the IMF and World Bank are focusing principally on market-based liberalisation in which the primary channel of technology acquisition is foreign direct investment mediated by multinational firms.   This strategy, and the recommended successive “waves” of reforms fits best the experience of Malaysia over the last two or three decades. Malaysia’s achievements over this period have been impressive indeed, as the IMF’s former Managing Director recently stated in a speech in which she pointed to annual real GDP growth of 5.5 percent since the year 2000.  

Despite this outstanding achievement, Malaysia faces two challenges relevant to Bangladesh’s choice of reform strategy:first, it is still some way from achieving advanced economy per capita incomes; and second, it has not quite made the leap to frontier technologies, or to the sustained growth of productivity  achieved by both South Korea and Taiwan Province of China.  Indeed, Malaysia is far behind domestic R&D capabilities achieved by these economies, as is Chile.

Malaysia has in effect followed the strategy of structural reforms and liberalization to improve market functioning and to attract FDI, but its industrial policy goals, although attuned to those achieved by South Korea and Taiwan POC, were only partially successful.  

To be clear, the Malaysian approach, sustained for the next two decades will indeed help Bangladesh leapfrog its way towards middle income status, but no higher.  To go farther it will be necessary to think of industrial policy targets for the economy in which the state will have to play a key role.

This does not mean that we should ignore the recommendations of the WB and IMF. On the contrary,  these recommendations provide an excellent set of organising principles to conceptualise the  starting point  - as Bangladesh seeks to launch the sought after “takeoff” towards high income or advanced economy status.  

But to achieve that goal the strategy must go beyond the starting point provided by  the multilateral development banks. In particular,  liberalization of the policy framework is a necessary - but not sufficient – basis to enhance technological capabilities adequately; for this an explicit policy will be needed at the highest level of the government focusing on domestic innovation capabilities along the lines of South Korea and the “Asian Tigers”.

One way to crystallize the challenge, and to sharpen the focus, is to recognize that the goals of 2041 will require double digitgrowth rates. At a growth rate of 10 percent per annum Bangladesh’s current real per capita GDP of USD 1,203 will rise in 20 years to just under USD 10,000. It will thus fall a little short of where Malaysia is at today, USD 12,109, and further behind Chile’scurrent level of real per capita GDP of about USD 15,130 (US Federal Reservefigures in constant 2010 prices).

There is not much precedent in achieving these rates of  sustainedgrowth on the basis of the  structural reforms and liberalization recommended by the World Bank and IMF – focused as they are on  FDI as the key channel of raising productivity and technological capabilities. We must look elsewhere, to Korea and Japan, or to China, each of which saw industrialisation as an existential  - do or die - challenge of attaining economic and political autonomy.  

Finally, what do we mean by “advanced economy”? There is no one answer to this, but we can again usefully benchmark Chile and Malaysia. The former is a member of the OECD, a group of advanced economy countries, while Malaysia has a per capita income a little bit lower and is not eligible to be considered an advanced economy except under the UNDP Human Development Index (which has a benchmark score of 0.8).  

We need not worry too much on this point. We should certainly aim to improve the nation’s HDI index, currently at 0.608,  as soon as possible.  But the bottom line is given by the OECD’s latest country report in which it observes, “Life is Good in Malaysia”.

Indeed it is, even though it falls short of OECD benchmarks.   We need not, that is, aim for the “moon”.Becoming an upper middle income country in one generation is a fine goal for any LIDC. But there is no time to lose.

The writer is the former Secretary General of the Islamic Financial Services Board.  

 

Will Bangladesh become an advanced economy by 2041?

The World Bank says streamlining business regulations should be prioritised. The IMF recommends successive “waves” of structural reforms for LIDCs. But these will not be enough. A clear and coherent industrial policy will be needed.

The World Banks Doing Business Indicators (WBDB)is that rare indicator of institutional quality that is not determined by per capita GDP alone, and which can be improved rapidly. India, for example, improved its ranking from 100th to 77th in just one year recently. The WBDB features as the point around which the World Bank builds its case for a reform agenda in its April 2019 report: The Bangladesh Development Update: Building Regulatory Predictability. Bangladesh presently ranks at 176th out of the sample of 190 countries in the 2019 WBDBReport. The WB argues that removing regulatory unpredictability should feature as one of a set of key structural reforms that will be needed to achieve the national targets for advanced economy status by 2041. This issue is further illuminated by series of earlier reports by the IMF on structural reforms and their macroeconomic consequences, in which easing business regulations also feature. These studies aimed to identify reforms to counter the slowdown in growth and productivity across a wide range of countries since the2008 Global Financial Crisis. (Structural Reforms and Macroeconomic Consequences; Initial Considerations for the Fund; IMF, November 2015). A key finding is that structural reform priorities evolve, depending on whether a country is a Low Income Developing Country (LIDC), Emerging Market (EM), or Advanced Market (AM). The IMF studies suggest that LIDCs and EMs should focus on agriculture, education, banking, fiscal reforms, infrastructure, and reform of business regulations to maximize growth and productivity improvements. AMs should prioritize technology development, with an expectation that benefits will accrue in the long run. The IMF makes a further set of observations on the impact of reforms over the longer term, depending on whether the focus of reforms is narrow or wide, and if the reforms are sustained or not. Thus it finds that benefits are greater when reforms are broad or multi-sectoral. In addition, there are strong benefits to successive waves of reforms, such as those observed in Turkey and Malaysia (each had three waves of reforms). Finally, banking and capital markets development have benefitted from being reform targets over successive reform efforts. This is the case for the financial sector in Malaysia, for example, which was prioritised in successive waves of reformsin the aftermath of the Asian Financial Crisis of 1997. Recent research on Chile, using this structural reforms framework, and benchmarked against its Latin American peers, and fellow OECD countries, provides further insights. (Assessing Macroeconomic Impacts of Structural Reforms in Chile; M. Hadji-Vaskov; IMF Working Paper 285; 2018). Chile, which is a lower-income AM, is facing a growth slowdown as well as declining productivity. What are the likely impacts on growth and productivity from Chilean reforms targeted at four sectors: streamlining business regulations, active labor market policies to aid displaced workers, liberalization of labor regulations, and technology and innovation policies? The simulations, which aim at closing the policy gaps in the above sectors with lower-income OECD countries (at the 25th percentile level), found the largest benefits in termsof contributing to output were from easing business regulations. (Chile ranks 56th in the WBs DB 2019 indicators). Furthermore, sustained efforts at regulatory reforms continue to provide major benefits over time, extending over five to ten years. Technology policies, however, take about 10 years to make a significant contribution to raising output. What about productivity growth? In the Chilean simulations, this is primarily fromrisingtotal factor productivity (TFP), followed by employment expansion and then by capital accumulation. Again, the key contributor to each of the three channels by which productivity is increased is regulatory reforms, with technology policies also important for TFP. These results imply that Bangladesh could also benefit from a wave of reforms across a number of sectors, with follow up in later years to widen the number of sectors to be reformed, as well as to revisit critical sectors in which reforms had been launched earlier. Here the WBs identification of key sectors provides initial suggestions for the first waveof reforms.Converging towards these targets (for 2041) within the specified timeframe will require massive investments in physical capital, human capital and innovation, enabled by structural reforms in key areas such as the financial sector, fiscal policy, infrastructure, human development, and business regulation. WB 2019 This grouping of reform sectors accords relatively well with the priorities identified in the IMFs structural reforms framework. But what about the second wave of reforms, and will there be a need for a third? The above framework suggests that Bangladesh, in its second wave of reforms, should take forward an expanded set of reform sectors including labor markets, with banking and capital market development, infrastructure, and product market deregulation continuing as highest priority sectors. For the third wave of reforms the issue becomes more challenging. Conceptually, thereforms will need to shift prioritiesto growth of TFP, involving innovation and technology development. It is here that the limitations of the framework of the IMF and WB become clear. Indeed, the use of the framework for a further set of simulations in which Chile tries to close all structural gaps in relation to the median of the OECD countries is revealed to be unfeasible, as it would involve an unprecedented set of policies. To understand this we must recognize that the IMF and World Bank are focusing principally on market-based liberalisation in which the primary channel of technology acquisition is foreign direct investment mediated by multinational firms. This strategy, and the recommended successive waves of reforms fits best the experience of Malaysia over the last two or three decades. Malaysias achievements over this period have been impressive indeed, as the IMFs former Managing Director recently stated in a speech in which she pointed to annual real GDP growth of 5.5 percent since the year 2000. Despite this outstanding achievement, Malaysia faces two challenges relevant to Bangladeshs choice of reform strategy:first, it is still some way from achieving advanced economy per capita incomes; and second, it has not quite made the leap to frontier technologies, or to the sustained growth of productivity achieved by both South Korea and Taiwan Province of China. Indeed, Malaysia is far behind domestic RD capabilities achieved by these economies, as is Chile. Malaysia has in effect followed the strategy of structural reforms and liberalization to improve market functioning and to attract FDI, but its industrial policy goals, although attuned to those achieved by South Korea and Taiwan POC, were only partially successful. To be clear, the Malaysian approach, sustained for the next two decades will indeed help Bangladesh leapfrog its way towards middle income status, but no higher. To go farther it will be necessary to think of industrial policy targets for the economy in which the state will have to play a key role. This does not mean that we should ignore the recommendations of the WB and IMF. On the contrary, these recommendations provide an excellent set of organising principles to conceptualise the starting point - as Bangladesh seeks to launch the sought after takeoff towards high income or advanced economy status. But to achieve that goal the strategy must go beyond the starting point provided by the multilateral development banks. In particular, liberalization of the policy framework is a necessary - but not sufficient basis to enhance technological capabilities adequately; for this an explicit policy will be needed at the highest level of the government focusing on domestic innovation capabilities along the lines of South Korea and the Asian Tigers. One way to crystallize the challenge, and to sharpen the focus, is to recognize that the goals of 2041 will require double digitgrowth rates. At a growth rate of 10 percent per annum Bangladeshs current real per capita GDP of USD 1,203 will rise in 20 years to just under USD 10,000. It will thus fall a little short of where Malaysia is at today, USD 12,109, and further behind Chilescurrent level of real per capita GDP of about USD 15,130 (US Federal Reservefigures in constant 2010 prices). There is not much precedent in achieving these rates of sustainedgrowth on the basis of the structural reforms and liberalization recommended by the World Bank and IMF focused as they are on FDI as the key channel of raising productivity and technological capabilities. We must look elsewhere, to Korea and Japan, or to China, each of which saw industrialisation as an existential - do or die - challenge of attaining economic and political autonomy. Finally, what do we mean by advanced economy? There is no one answer to this, but we can again usefully benchmark Chile and Malaysia. The former is a member of the OECD, a group of advanced economy countries, while Malaysia has a per capita income a little bit lower and is not eligible to be considered an advanced economy except under the UNDP Human Development Index (which has a benchmark score of 0.8). We need not worry too much on this point. We should certainly aim to improve the nations HDI index, currently at 0.608, as soon as possible. But the bottom line is given by the OECDs latest country report in which it observes, Life is Good in Malaysia. Indeed it is, even though it falls short of OECD benchmarks. We need not, that is, aim for the moon.Becoming an upper middle income country in one generation is a fine goal for any LIDC. But there is no time to lose. The writer is the former Secretary General of the Islamic Financial Services Board.