The economy of Bangladesh is constituted by that of a developing country.[1] Its per capita income in 2008 was US$1389 (adjusted by purchasing power parity) lower than the world average of $10,497.[2] According to the gradation by the International Monetary Fund, Bangladesh ranked as the 48th largest economy in the world in 2008, with a gross domestic product of US$224,889 million. The economy has grown at the rate of 6-7% p.a. over the past few years. While more than half of the GDP belongs to the service sector, nearly two-thirds of Bangladeshis are employed in the agriculture sector, with rice as the single-most-important produce.
Remittances from Bangladeshis working overseas, mainly in the Middle East and East Asia, as well as exports of garments is the main source of foreign exchange earning. Economic growth is rather endogenous with slow growth in foreign direct investment. Although one of the world's poorest and most densely populated countries, Bangladesh has made major strides to meet the food needs of its ever growing population.[3]
The land is devoted mainly to rice and jute cultivation, although wheat production has increased in recent years; the country is largely self-sufficient in rice production.[3] Nonetheless, an estimated 10% to 15% of the population faces serious nutritional risk, and that food security is at risk for 45% of the population.[3] Bangladesh's predominantly agricultural economy depends heavily on an erratic monsoonal cycle, with periodic flooding and drought.[3]
Although improving at a very fast rate, infrastructure to support transportation, communications, power supply and water distribution is poorly developed.[3] Bangladesh is limited in its reserves of oil, but recently there was huge development in coal mining. While the service sector has expanded rapidly during last two decades, country's industrial base remains narrow.[3] The country's main endowments include its vast human resource base, rich agricultural land, relatively abundant water, and substantial reserves of natural gas which are depleting quickly and may disappear in the next 7-8 years.[3]
Economic history
East Bengal--the eastern segment of Bengal, a province of undivided India --a region that was to become East Pakistan and later Bangladesh -- was a prosperous region of South Asia until modern times.[4] It had the advantages of a mild, almost tropical climate, fertile soil, ample water, and an abundance of fish, wildlife, and fruit.[4] The standard of living compared favorably with other parts of South Asia.[4] As early as the thirteenth century, the region was developing as an agrarian economy.[4] It was not entirely without commercial centers, and Dhaka in particular grew into an important entrepôt during the Mughal Empire.[4] The British, however, on their arrival in the late eighteenth(18th) century, chose to develop Calcutta, now the capital city of West Bengal, as their commercial and administrative center in South Asia.[4] The development of East Bengal was thereafter limited to agriculture.[4] The administrative infrastructure of the late eighteenth and nineteenth centuries reinforced East Bengal's function as the primary agricultural producer--chiefly of rice and jute--for processors and traders in Calcutta and beyond.[4] Integration of East Bengal with the world economic system remained traditionally low.Some of the same factors that had made East Bengal a prosperous region became disadvantages during the nineteenth and twentieth centuries.[4] As life expectancy increased, the limitations of land and the annual floods increasingly became constraints on economic growth.[4] Preponderance on traditional agricultural methods became obstacles to the modernization of agriculture.[4] Geography severely limited the development and maintenance of a modern transportation and communications system.[4]
The partition of British India and the emergence of India and Pakistan in 1947 severely disrupted the former colonial economic system that had preserved East Bengal (now Bangladesh) as a producer of jute and rice for the urban industrial economy around Calcutta.[4] East Pakistan had to build a new industrial base and modernize agriculture in the midst of a population explosion.[4] The united government of Pakistan expanded the cultivated area and some irrigation facilities, but the rural population generally became poorer between 1947 and 1971 because improvements did not keep pace with rural population increase.[4] Pakistan's five-year plans opted for a development strategy based on industrialization, but the major share of the development budget went to West Pakistan, that is, contemporary Pakistan.[4] The lack of natural resources meant that East Pakistan was heavily dependent on imports, creating a balance of payments problem.[4] Without a substantial industrialization program or adequate agrarian expansion, the economy of East Pakistan steadily declined.[4] Blame was placed by various observers, but especially those in East Pakistan, on the West Pakistani leaders who not only dominated the government but also most of the fledgling industries in East Pakistan.[4]
Following the violent events of 1971 leading to the fight for independence, the highest rural population density in the entire world, an annual population growth rate between 2.5 and 3 percent, chronic malnutrition for perhaps the majority of the people, and the dislocation of between 8 and 10 million people who had fled to India and returned to independent Bangladesh by 1972.[5] The new nation had few experienced entrepreneurs, managers, administrators, engineers, or technicians.[5] There were critical shortages of essential food grains and other staples because of wartime disruptions.[5] External markets for jute had been lost because of the instability of supply and the increasing popularity of synthetic substitutes.[5] Foreign exchange resources were minuscule, and the banking and monetary system was unreliable.[5] Although Bangladesh had a large work force, the vast reserves of under trained and underpaid workers were largely illiterate, unskilled, and underemployed.[5] Commercially exploitable industrial resources, except for natural gas, were lacking.[5] Inflation, especially for essential consumer goods, ran between 300 and 400 percent.[5] The war of independence had crippled the transportation system.[5] Hundreds of road and railroad bridges had been destroyed or damaged, and rolling stock was inadequate and in poor repair.[5] The new country was still recovering from a severe cyclone that hit the area in 1970 and cause 250,000 deaths.[5] India, by no means a wealthy country and without a tradition of giving aid to other nations, came forward immediately with massive economic assistance in the first months after the fighting ended.[5] Between December 1971 and January 1972, India committed US$232 million in aid to Bangladesh, almost all of it for immediate disbursement.[5]
Bangladeshi leaders slowly began to turn their attention to developing new industrial capacity and rehabilitating its economy.[3] The static economic model adopted by these early leaders, however--including the nationalization of much of the industrial sector--resulted in inefficiency and economic stagnation.[3] Beginning in late 1975, the government gradually gave greater scope to private sector participation in the economy, a pattern that has continued.[3] A few state-owned enterprises have been privatized, but many, including major portions of the banking and jute sectors, remain under government control.[3] Population growth, inefficiency in the public sector, resistance to developing the country's richest natural resources, and limited capital have all continued to restrict economic growth.[3]
In the mid-1980s, there were encouraging signs of progress.[3] Economic policies aimed at encouraging private enterprise and investment, privatizing public industries, reinstating budgetary discipline, and liberalizing the import regime were accelerated.[3] From 1991 to 1993, the government successfully followed an enhanced structural adjustment facility (ESAF) with the International Monetary Fund (IMF) but failed to follow through on reforms in large part because of preoccupation with the government's domestic political troubles.[3] In the late 1990s the government's economic policies became more entrenched, and some of the early gains were lost, which was highlighted by a precipitous drop in foreign direct investment in 2000 and 2001.[3] In June 2003 the IMF approved 3-year, $490-million plan as part of the Poverty Reduction and Growth Facility (PRGF) for Bangladesh that aimed to support the government's economic reform program up to 2006.[3] Seventy million dollars was made available immediately.[3] In the same vein the World Bank approved $536 million in interest-free loans.[3]
Bangladesh historically has run a large trade deficit, financed largely through aid receipts and remittances from workers overseas.[3] Foreign reserves dropped markedly in 2001 but stabilized in the USD3 to USD4 billion range (or about 3 months' import cover).[3] In January 2007, reserves stood at $3.74 billion, and they increased to $5.8 billion by January 2008, according to the Bank of Bangladesh, the central bank.[3] However, aid-dependence of the country has systematically been reduced since the beginning of 1990s.
This is a chart of trend of gross domestic product of Bangladesh at market prices estimated by the International Monetary Fund with figures in millions of Bangladeshi Taka. However, this reflects only the formal sector of the economy.
| Year | Gross Domestic Product | US Dollar Exchange | Inflation Index (2000=100) |
|---|---|---|---|
| 1980 | 250,300 | 16.10 Taka | 20 |
| 1985 | 597,318 | 31.00 Taka | 36 |
| 1990 | 1,054,234 | 35.79 Taka | 58 |
| 1995 | 1,594,210 | 40.27 Taka | 78 |
| 2000 | 2,453,160 | 52.14 Taka | 100 |
| 2005 | 3,913,334 | 63.92 Taka | 126 |
| 2008 | 5,003,438 | 68.65 Taka | 147 |
For purchasing power parity comparisons, the US Dollar is exchanged at 12.86 Takas only. Average wages in 2007 hover around $2-3 per day.
Agriculture
Manufacturing & Industry
Many new jobs - mostly for women - have been created by the country's dynamic private ready-made garment industry, which grew at double-digit rates through most of the 1990s.[3] By the late 1990s, about 1.5 million people, mostly women, were employed in the garments sector. During 2001-2002, export earnings from ready-made garments reached $3,125 million, representing 52% of Bangladesh's total exports.
Eastern Bengal was known for its fine muslin and silk fabric before the British period. The dyes, yarn, and cloth were the envy of much of the premodern world. Bengali muslin, silk, and brocade were worn by the aristocracy of Asia and Europe. The introduction of machine-made textiles from England in the late eighteenth century spelled doom for the costly and time-consuming hand loom process. Cotton growing died out in East Bengal, and the textile industry became dependent on imported yarn. Those who had earned their living in the textile industry were forced to rely more completely on farming. Only the smallest vestiges of a once-thriving cottage industry survived.
Other industries which have shown very strong growth include the chemical industry, steel industry, mining industry and the paper and pulp industry.
Textile sector
Bangladesh's textile industry, which includes knitwear and ready-made garments along with specialized textile products, is the nation's number one export earner. The sector, which employs 2.2 million workers, accounted for 75 per cent of Bangladesh's total exports of US$10.53 billion in FY2005-06, in the process logging a record growth rate of 24.44 per cent. However, since May 2006 the industry has been plagued by on-going industrial unrest, as textile workers, who are among some of the most lowly paid in the world, have staged regular violent demonstrations in a bid to achieve a higher minimum wage, regular rest days and safer working conditions.
Following the worst of the unrest in late May, which saw at least one worker killed as police shot live rounds at protesters, the government formed a Wage Commission, ordering it to report on a suitable new minimum wage in three months. [6]
The Commission, which included business and worker representatives finally released its conclusions on October 9, recommending the wage be set at Tk1,662.50, up from the current level of Tk950, but far below initial worker demands for Tk3,000.
After initially condemning the unrest as the work of outsiders attempting to capture the nation's share of global markets, Bangladesh Garment Manufacturers and Exporters Association (BGMEA) leaders appear to have finally accepted the need to raise wages.
The government also seems to believe some change is necessary. On September 21, 2006 then Ex-Prime Minister Khaleda Zia called on textile firms to ensure the safety of workers by complying with international labor law at a speech inaugurating the Bangladesh Apparel & Textile Exposition (BATEXPO).
Investment
The stock market capitalization of the Dhaka Stock Exchange in Bangladesh crossed $ 10 billion in November 2007 and the $15 billion dollar mark. Major investment from foreign investors have led to a massive building boom in Dhaka and Chittagong.
External trade
The Bangladesh Garments Manufacturers and Exporters Association (BGMEA) has predicted textile exports will rise from US$7.90 billion earned in 2005-06 to US$15 billion by 2011. In part this optimism stems from how well the sector has fared since the end of textile and clothing quotas, under the Multifibre Agreement, in early 2005.
According to a United Nations Development Programme report "Sewing Thoughts: How to Realize Human Development Gains in the Post-Quota World" Bangladesh has been able to offset a decline in European sales by cultivating new markets in the United States. [7]
"Last year we had tremendous growth. The quota-free textile regime has proved to be a big boost for our factories," said BGMEA president S.M. Fazlul Hoque told reporters, after the sector's 24 per cent growth rate was revealed.[8]
Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) president Md Fazlul Hoque has also struck an optimistic tone. In an interview with United News Bangladesh he lauded the blistering growth rate, saying "The quality of our products and its competitiveness in terms of prices helped the sector achieve such... tremendous success."
Knitwear posted the strongest growth of all textile products in 2005-06, surging 35.38 per cent to US$2.82 billion. On the downside however, the sector's strong growth came amid sharp falls in prices for textile products on the world market, with growth subsequently dependent upon large increases in volume.
Bangladesh's quest to boost the quantity of textile trade was also helped by US and EU caps on Chinese textiles. The US cap restricts growth in imports of Chinese textiles to 12.5 per cent next year and between 15 and 16 per cent in 2008. The EU deal similarly manages import growth until 2008.
Bangladesh may continue to benefit from these restrictions over the next two years, however a climate of falling global textile prices forces wage rates the centre of the nation's efforts to increase market share.
Prior to the Wage Board's announcement of its recommended minimum wage, the rate had remained unchanged at Tk950 for more than 12 years. Although the government may allow up to three years for the new wage to be implemented, and inevitably there will be compliance issues as manufacturers drag their feet, it seems politically untenable for wages to remain at their current levels given the unprecedented industrial unrest.
In response to the Wage Board's initial draft recommendation of a minimum wage of Tk1,604 to be increased to Tk1,800 after eight months, the BGMEA declared over 50 per cent of factories would be ruined within three months. While this claim is no doubt an exaggeration, the capacity of Bangladesh's textile industry to absorb a significant wage hike as margins become tighter is a key question which hangs over the future of the industry. Bangladesh's textile sector is concentrated in export processing zones in Dhaka and Chittagong. These zones, which are administered by the Bangladesh Export Processing Zone Authority, aim to offer "a congenial investment climate, free from cumbersome procedures"m according to Bangladesh Export Promotion Bureau's website. [9]
They offer a range of incentives to potential investors including 10 year tax holidays, duty free import of capital goods, raw materials and building materials, exemptions on income tax on salaries paid to foreign nationals for three years and dividend tax exemptions for the period of the tax holiday.
All goods produced in the zones are able to be exported duty free, in addition to which Bangladesh benefits from the Generalised System of Preferences in US, European and Japanese markets and is also endowed with Most Favoured Nation status from the United States.
Furthermore, Bangladesh imposes no ceiling on investment in the EPZs and allows full repatriation of profits.
The formation of labour unions within the EPZs is prohibited as are strikes.[9]
Bangladesh's exports to the U.S. surpassed $1.9 billion in 1999. Bangladesh also exports significant amounts of garments and knitwear to the EU market.
Bangladesh also has significant jute, leather, shrimp, pharmaceutical, and ceramics industries.
Bangladesh has been a world leader in its efforts to end the use of child labor in garment factories. On July 4, 1995, the Bangladesh Garment Manufacturers Export Association, International Labour Organization, and UNICEF signed a memorandum of understanding on the elimination of child labor in the garment sector. Implementation of this pioneering agreement began in fall 1995, and by the end of 1999, child labor in the garment trade virtually had been eliminated. The labor-intensive process of ship breaking for scrap has developed to the point where it now meets most of Bangladesh's domestic steel needs. Other industries include sugar, tea, leather goods, newsprint, pharmaceutical, and fertilizer production.
The Bangladesh government continues to court foreign investment, something it has done fairly successfully in private power generation and gas exploration and production, as well as in other sectors such as cellular telephony, textiles, and pharmaceuticals. In 1989, the same year it signed a bilateral investment treaty with the United States, it established a Board of Investment to simplify approval and start-up procedures for foreign investors, although in practice the board has done little to increase investment. The government created the Bangladesh Export Processing Zone Authority to manage the various export processing zones. The agency currently manages EPZs in Adamjee, Chittagong, Comilla, Dhaka, Ishwardi, Karnaphuli, Mongla, and Uttara. An EPZ has also been proposed for Sylhet.[10] The government has given the private sector permission to build and operate competing EPZs-initial construction on a Korean EPZ started in 1999. In June 1999, the AFL-CIO petitioned the U.S. Government to deny Bangladesh access to U.S. markets under the Generalized System of Preferences (GSP), citing the country's failure to meet promises made in 1992 to allow freedom of association in EPZs.
Sylhet is fast becoming the retail capital of Bangladesh,[citation needed] with many shopping centres being built by expatriates to serve fellow expatriates visiting Sylhet and the emerging middle class. Many of these developments hark back to Britain. [11]
