Bangladesh: the new Asian tiger?
At the time of independence in 1971 few people thought that Bangladesh would have any economic future. So many people, about 70 million, living on an area roughly four times that of The Netherlands. And almost all very poor, settled in a delta of the Ganges and the Brahmaputra, with frequent floodings and cyclones. In that very year, the Beatle George Harrison organized in New York the Concert for Bangladesh where he sang the famous text “Bangladesh, Bangladesh, where so many people are dying fast”. The hunger in the country was compared to that of Biafra, a few years earlier. The country was called “a basket case” and permanent food aid seemed to be its fate.
But looking at the country today, a miracle seemed to have happened. In 2019 Bangladesh had economic growth of a little over 8%, which made it the fastest growing economy in Asia. In previous years already a remarkable growth could be observed; since 2000 the economy grew with an annual average of 6%, even one of the fastest in the world. The increase in GDP slowed down in 2020 and 2021 to around 4% due to the Covid-pandemic but is expected to be between 6% and 7% in 2022.
And while the population more or less doubled since independence, national income increased about 40 times to around $ 320 billion at present. Per capita income multiplied by four since 2000 and presently amounts to $ 1900. In real terms this means that the income per person doubled. Bangladesh left officially the status of a poor country. Nearly enough food is produced at home to feed the population. The population growth is more than halved to about 1% and the number of people in poverty was drastically reduced. In 1990 more than 50% had to live with less than the internationally recognized standard of poverty ($ 1,90 per person per day), at present this is less than 20%, which is also in absolute terms a sharp decrease. Social indicators evolved favorably: life expectancy increased to 72 years (higher than India), while infant mortality (under five years) decreased with no less than 80% (now 30 on 1000 births), and two thirds of children enter middle school (compared to 20% in 1990).
No wonder that here and there analysts whisper that Bangladesh might be the next Asian tiger, another success story on the continent, after, much earlier, South Korea, Taiwan, Singapore and Hong Kong, more recently followed by China, Indonesia, Vietnam and Thailand. How was this possible?
Agriculture
Contrary to what was thought in the late 1970s, the agricultural sector has developed spectacularly and has contributed most, by far, to the reduction of poverty. The liberalization of the economy during the eighties turned out to be a blessing, especially with regard to agricultural inputs. Since 1990 the Green revolution took hold in the country, improved rice seeds, fertilizer and irrigation pumps were introduced at breakneck speed, somewhat later even followed by mechanization (small machines and tractors). And surprisingly, it were predominantly the small farmers (70% of farming households owned less than half a hectare) that adopted the new technologies, much more so than the big farmers (owning more than 2 hectares, which is internationally speaking still modest). The modernization also brought an improvement in the tenancy conditions. More than a quarter of rural families are dependent on work on someone else’s land.
Gradually agricultural production increased with 5% annually and this sort of growth was sustained over the years, which had much to do with the fast expansion of irrigated rice crops in the dry winter season. This development pushed the countrywide average yield up from one to four tons per hectare, with paddy crops in the winter reaching six tons. Nowadays, on about two thirds of the cultivated area, modern technologies are used with a combination of improved seeds, fertilizer and irrigation, often supported by small machines. Two crops a year is not uncommon, and even three crops is possible. Irrigation made the sector more shockproof in times of long periods of drought.
Agricultural laborers benefitted from these changes. The intensified use of land stimulated the demand for labor, which was in part compensated by more mechanization. Although use of labor per hectare decreased, there is across the board a shortage of labor. Wages increased year by year and in real terms doubled since 2000, in part because the larger rice production had a downward effect on the price of rice. Since the mid-eighties, price of food increased in general less than that of other consumer products.
Helped by these developments in agriculture, also the non-agricultural sector contributed to a rural transformation. While all rural families still earn an income in agriculture, around 80% also derive an income from non-agriculture activities. Traditional skills were replaced by new ones, often in small businesses like processing of rice and other agriculture products, transport, trade, construction, repair shops and even renting out of machinery. This sort of activities flourished mostly close to cities, but much has been done to open up rural areas through construction of roads, bridges, markets and the expansion of the electricity grid. This led to a sort of urbanization of rural areas, to which the diversification of income certainly contributed, slowing down migration to cities. In rural areas, even more people are employed outside agriculture than is the case in the urban areas. A significant development was the improvement in communication: most households own a mobile telephone.
The role of women cannot be underestimated. Especially women from poorer households became more active outside agriculture, also due to the spectacular success of microcredits, and their formal participation in the economy increased rapidly. Muhammad Yunus, Nobel laureate in 2006, established the Grameen Bank, that, along with other NGOs became a big player in the provision of small credits, especially geared towards landless women. By forming groups of lenders, controlling each other, formal collaterals could be bypassed, opening the avenue for poor families to formal credit, with modest loans, usually less than $ 100. As said, many NGOs are now involved in small credits. Of course, BRAC must be mentioned, along with more than 500 other NGOs. They achieved something that until then proved to be illusory: reaching poor households, especially women, with not only loans, but, among other activities, also with education, health, and skill development.
In the beginning microcredit loans were predominantly meant for non-agricultural activities, it gradually started to include agricultural inputs as irrigation pumps and fertilizer. A survey in 2014 showed that half of all rural households had access to credit. And not only from NGOs, but also from state-owned and private banks which were forced by the government to channel more money to rural communities against reasonable interest rates.
A not unimportant source of income for rural families, especially those living close to big cities as Dhaka and Chittagong, are the remittances by family members from foreign countries. On average, every year about half a million young men, and women also, migrate to countries in the Middle East and Southeast Asia, where wages are five to seven times higher than at home. The present level of remittances reaches about $ 22 billion. Figures of the total number of migrant workers are hard to come by, but it is estimated that approximately 7,5 million Bangladeshis work outside the country, which would mean an average transfer per person of around $2,900 a year or $240 a month. The total of remittances of $ 22 billion approaches three times the annual foreign investments and development aid, combined about $ 8 billion.
Garments
Another important factor in Bangladesh’s success is the striking rise of the garment industry. Readymade shirts, blouses, jerseys etc. are being exported directly to Europe and the USA. In 2018 this represented a value of $ 33 billion, about 80% of all exports and 11% of the national income. After China, Bangladesh is the second producer of apparel in the world, and soon will be the second exporter as well. Not bad for a country that hardly grows cotton itself; it has to import it, largely from Uzbekistan and India. In old times, Bengal produced the famous Dhaka linen, home grown and traded by the Dutch East Indian Company, and discontinued under British colonial rule.
When in 1974 South-Korean producers were forced to divert to a poor country due to the Multi Fiber Agreement (MFA), Bangladesh was chosen. Low wages, abundance of labor and an increasingly friendly government policy, with special bonded warehouses, credit facilities and export zones. Nationalized businesses were returned to their original owners and more domestic investors followed. Nearly the whole garment industry is in Bangladeshi hands these days.
More than four million people find employment producing clothes, largely young women, with wages of on average $ 100 a month, above the official poverty line, but working conditions often leave much to be desired. This became obvious after a garment factory collapsed in Savar near Dhaka in 2013, where 1100 people lost their lives. National and international outcry led to improvements in the safety rules, reduction of child labor and more participation of the workers.
For the time being the clothing industry will grow further, with occasionally efforts to introduce automation. Bangladesh successfully coped with the phasing out of the MFA (in the years between 1995 and 2005) and now, with a per capita income of more than $ 1000 it has to stay within the WTO regime. The success of the garment sector had a spillover effect on, for instance, trade, banking, and transport, with a lot of additional employment opportunities. Also, the textile industry received a boost, through spinning- and weaving factories, processing imported cotton, raising the domestic value added. Parallel to these industries there are still probably about a million traditional manually operated weaving looms. Other industrial sectors doing well in Bangladesh are pharmaceutics, plastics, leather, jute- and rice processing, shipbuilding, and IT services.
Trade
Bangladesh has made remarkable achievements in its export performance over the last few decades. While export earning was only $ 348 million in FY1972-73, it reached over $ 33 billion in FY2019-20. Since the mid-80s, Bangladesh has been pursuing an export-led growth policy and making the economy more liberal and open. In doing so, tariffs have been reduced gradually; import restrictions on most products have been withdrawn; several incentive packages and innovative mechanisms have been introduced to facilitate exports. All these measures have resulted in an enabling environment for expanding exports. Besides, preferential market access under arrangements such as the US Generalized System of Preference (GSP) and the EU Everything But Arms (EBA) also contributed significantly to the growth of exports of Bangladesh.
Duty-free & quota-free (DFQF) market access were provided by many trading partners around the world. Preferential Rules of Origin (RoO) associated with those schemes have also been very instrumental in making the best utilization of preferential market access.
Though the export sector of Bangladesh has made remarkable progress in the last few decades, exports remained heavily concentrated in few products and limited markets. The vulnerability of export concentration is well recognized in the Bangladesh planning landscape. The 8th Five Year Plan (2021-2025) and other perspective plans have given due attention and many measures and policy options have been devised to diversify both products and markets. A blend of skills, finance, improved technology, entrepreneurship, and adequate quality infrastructure is key to the success of the export diversification program.
In 2020 the value of international trade was about 30% of GDP, back to the 2000 level, after fluctuations up to 47% in 2011. Bangladesh has an overall trade deficit: imports are higher than exports. The ratio of imports to exports increased from 1,5:1 in 2015/2016 to 1,9:1 in 2019/2020. The earlier mentioned income of foreign currency generated by the remittances of migrant workers helps to balance the overall balance of payments.
Imports amounted to $ 49,4 billion in 2015/2016 and $ 64,1 billion in 2019/2020. Most imports came from China and India (material for consumer goods as textiles and raw cotton; a wide range of consumer goods from wheat and rice to plastic articles; and capital goods (machinery and equipment).
The total value of exports was $ 33,7 billion in 2015/2016 and $ 33,2 billion in 2019/2020. With 80%, readymade garments formed the lion’s share, with fish, shrimps, jute and leather as other important items. Bangladeshi exports are highly skewed to developed economies, topped by the EU market with a share of around 57% of its total exports. Neighboring developing nations like South-Asian countries are less penetrated. It is worth mentioning that the participation of Bangladesh in UN Peace keeping efforts was a source of earning foreign currency as well.
The trade with the Netherlands shows a trade surplus for Bangladesh. In 2015 exports were Euro 870 million (garments, shoes, yarns) and imports Euro 184 million (machinery, transport equipment, vegetables and fruits). In 2019 exports grew to Euro 1,4 billion and imports to 247 million. Trade took a hit the following year with exports declining to Euro 1,3 billion and imports to Euro 232 million.
Like all countries around the world, the export sector of the Bangladesh economy has experienced a significant decline due to the COVID-19 pandemic. Exports maintained a positive growth over the period 2015-16 to 2018-19. However, COVID-19 has severely affected the export of Bangladesh and resulted in a decline of 16.9% in FY 2019-20 compared to the same period of the previous financial year. Such a drastic decline in export was caused due to the closure of economic activities at home and abroad and the sharp decline of global import demands.
Read more:
Check out our chronological timeline on the cooperation between the Netherlands and Bangladesh.