Challenges for Bangladeshi n Becoming a Middle-Income Country

1. Challenges for Bangladeshi n Becoming a Middle-Income Country PRMED Growth Seminar SeriesFebruary 27,2008

2. Can Bangladesh Become a Middle-Income Country by 2016? • Gross National Income per-capita of US$470 in 2005 places Bangladesh in the category of low-income countries as per IDA classification • IDA’s threshold for middle-income countries was US$870 in 2005.

3. Can Bangladesh Become a Middle-Income Country by 2016? • Can Bangladesh become an MIC by 2016? • Yes, if GDP growth increases to 7.5% a year • If growth falls to the 3% rate seen in the 1980s, MIC status will happen after 5 decades

4. Can Bangladesh Become an MIC by 2016?Reasons to be optimistic • Good growth record (> 5%) since 1990 • Sound economic fundamentals • A young labor force – demographic dividend • Established entrepreneurial culture • Substantial improvements in human development

5. An Impressive Growth Record that needs to be Strengthened

6. An Impressive Growth Record that needs to be Strengthened Per-Capita GDP: Bangladesh Vs. Median LIC Bangladesh Median LIC

7. Growth Record: International Comparisons

8. Growth Matters Over Long-Run

9. Can Bangladesh Become an MIC by 2016?Challenges to Consider • Target of 7.5% growth is an ambitious one. Few developing countries have been able to sustain it • Being an MIC is not just about income levels. MICs have more complex and sophisticated economic systems which need to be understood

10. What Explain Bangladesh’s Growth Experience? • Growth acceleration in the early 1990s was enabled by major policy improvements • macroeconomic stabilization (monetary and fiscal discipline, and correction of exchange rate misalignment and of external imbalances) • Easing of trade and exchange restrictions • Relaxation of restrictions on private investment in various Industrial Policy Orders • Launching of the Financial Sector Reform Program (FSRP), deregulating interest rates and abolishing credit quotas • Further deregulation of agriculture markets

11. What Explain Bangladesh’s Growth Experience? Contd…. • Govt moved early and decisively to avail of opportunities provided by MFA/ATC quota systems for garment exports – EPZs, bonded-warehouses, back-to-back LCs etc. • Sharply rising workers remittances fueled construction and domestic demand • Early emphasis on human development – especially women’s advancement – proved crucial.

12. Can Bangladesh Become an MIC by 2016?Challenges to Consider Sources of Growth

13. Bangladesh’s Transition to MIC Status

14. Transition 1: Agriculture to Labor-Intensive Manufacturing • Transition 1 implies a deeper labor-intensive manufacturing base and more productive agriculture • driven by globally competitive manufacturing firms & productive, diversified, and commercially-oriented agriculture sector

15. Main Constraints to Deepening Manufacturing Base • Firm-level analysis suggests that following areas need particular attention to boost productivity in manufacturing • Rapidly emerging power supply constraints • Limited access to FDI for manufacturing • High remaining anti-export bias • Deficiencies in worker and mgmt skills • Limited knowledge economy base • Concerns over law and order

16. Firm Size and Productivity

17. Transition 2:Closed Economy to Globally Integrated One • Transition 2 implies judicious, but not complacent, approach to global integration • Bangladeshi firms plugged into global supply chains and country figuring prominently on global investment maps

18. Main Constraints to Deepening Global Integration High levels of anti-export bias hurts non-RMG exports and prevents export diversification • Among the highest trade protection in the world

19. Main Constraints to Deepening Global Integration

20. Main Constraints to Deepening Global Integration High levels of anti-export bias hurts non-RMG exports and prevents export diversification • Among the highest trade protection in the world • Bonded warehouse facility not available to most sectors. With dysfunctional DEDO, this discourages export diversification. • Poor state of trade facilitation – inefficient port and various bottlenecks at customs and related to connectivity with hinterland

21. Transition 3:Rural to Urban • Transition 3 implies emergence of diverse, dynamic urban centers, with Dhaka remaining at forefront of urban activity

22. Managing Rapid Urbanization: Key Challenges • Absence of balance in urbanization – no viable urban alternatives to Dhaka • Dhaka fast reaching choking point • Rising congestion pressures in Dhaka • Provision of infrastructure and urban services far behind demand • Exorbitant real estate prices in Dhaka • Key issues • Virtual absence of decentralization • Lack of devolution of key services to city governments • Lack of city govts’ revenue sources and admin. capacity • Interregional transport and communication networks underdeveloped

23. Long-Term Transitions

24. Long-Term Transitions

25. Enabling Environment for the 3 Long-Term Transitions • Strengthening governance and regulatory environment • Addressing infrastructure constraints, with a special focus on power • Addressing acute labor skill shortages • Creating deeper and more efficient financial system • Maintaining macro policies and liberalizing trade

26. Key Summary Messages • Continued strong private investment and labor force growth will help, but productivity improvement is key. • Need to implement 2nd generation reforms, and refocus policy attention toward hitherto neglected structural areas – governance, urban management, infrastructure (especially power and ports) and labor skills.

27. THANK YOU!