Achieving the status of a middle income country

Posted by BankInfo on Mon, Nov 19 2012 07:28 am

the World Bank concluding a two-part summary of its latest report on Bangladesh titled 'Bangladesh: Towards Accelerated, Inclusive and Sustainable Growth: Opportunities and Challenges'

It is important to ensure that growth is inclusive. Growth has been pro-poor in Bangladesh in the sense that it came with a significant reduction in the number of absolute poor. Income inequality remains high, but the good news is that consumption grew for poor and non-poor alike over the past decade. Similarly, the distribution of economic opportunities has remained inequitable, but opportunities have increased for all deciles over time.

Notwithstanding its achievements in poverty reduction, the size of Bangladesh's vulnerable non-poor remains very large. Simply moving from the national poverty line of US$1.09 per day to the international US$1.25 per day line increases the headcount ratio from 31.5 per cent to 43.25 per cent. The pace of poverty reduction in the last two decades slows considerably with the raising of the poverty line. Thus, while the 'Cost of Basic Needs'-based poverty headcount rate has declined rapidly in the past three decades, vulnerability has not. Large numbers of people are at the margin, indicating potential vulnerability to myriad idiosyncratic or covariate shocks to income and/or expenditures. Bangladesh has almost 81 million people in the US$1.09-US$2.00 per day range.

Vulnerability varies by region and household characteristics. Bangladesh can make growth much more inclusive by focusing on enhancing the human capacities of the poor and vulnerable and by strengthening social insurance mechanisms. Inclusion is also helped by an enabling environment for local economic development in small and medium-size cities by connecting them to markets and creating a level playing field in the provision of basic services.

Growth also needs to be sustainable. How can this accelerated growth be sustained given the challenges to growth posed by climate change and unplanned urbanisation? Both these issues are increasingly affecting growth and need to be on the forefront of the development agenda in Bangladesh.

As one of the most climate-vulnerable countries in the world, growth in Bangladesh is eroded through both ex-post and ex-ante channels. Ex-post macro effects include the direct effects of climate phenomena such as sea-level rise, changes in crop yields, and floods after they occur. Over the next decade, growth could be 2.0-6.0 percentage points lower, depending on the frequency of flooding. Ex-post impacts of climate change include depression of labour demand, with demand for low-skilled workers declining more than that of skilled workers. Most of the effects of climate change will be felt a few decades from now and these impacts on the economy are only likely to worsen. These national level estimates capture impacts of climate change after they occur.

But what about the ex-ante impacts of climate change before the shocks hit? Taking a micro view by looking at how households alter their behaviour in anticipation of a climate risk and how this affects productivity and growth, it can be said that by anticipating climate risks, households can diversify employment of its members to hedge against such risks. While this is good if diversification happens due to "pull" factors that attract people to higher productivity jobs, evidence suggests that climate-related "push factors" could lead to sub-optimal employment choices that lower productivity, welfare and growth under certain conditions. Adopting policies that encourage climate-resilient sectors as well as helping households cope with climate variability will help Bangladesh alleviate the impact of climate change on growth.

While further urbanisation offers opportunities to accelerate growth, it also comes with risks to sustainability if not managed properly. Based on salient features of urbanization in Bangladesh today, it is important to have an urban vision for a middle-income Bangladesh. Given its high urban population density and low economic density (GDP or value added per square km), it is argued that Bangladesh needs to substantially increase its economic density to become a middle-income country by 2021. This could happen if Bangladesh had taller "mountains" (higher value added per square kilometre) around its current growth centers in Dhaka and Chittagong and/or increased the number of "hills" (created alternate growth centers). Accelerated growth can be sustained only if the urban space is competitive i.e., well connected, livable, and innovative.

These three objectives could be achieved by a three-pronged policy approach that focuses on infrastructure, institutions, and incentives. Four strategic directions are provided that point to improving Dhaka's competitiveness, leveraging Chittagong's natural advantage as a port city, creating an enabling environment to foster local enterprise in smaller cities, and finally, locating Export Processing Zones (EPZs) strategically.

The reform agenda is vast for Bangladesh to become a middle income country (MIC) by 2021. Real gross domestic product (GDP) growth would have to accelerate by a couple of percentage points from its current level. Where would this come from? Would it be inclusive and sustainable? A comprehensive list of actions across several fronts is proposed for the purpose.

It is interesting to note that at least four policy actions are important across all the objectives of accelerating growth, making it inclusive, and ensuring that it is sustainable. To help prioritise, the focus here is on key reforms that cut across the three main themes, while recognising that bold actions across all fronts are necessary if Bangladesh is to reach its goals. These cross-cutting action areas are infrastructure, land, human development and the business regulatory environment:

News: The Daily Financial Express/Bangladesh/19-Nov-12

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