During rapid growth, economic institutions are more important than political institutions : study

During rapid growth, economic institutions are more important than political institutions : study


Dhaka December 7 2021 :


The session titled, “Panel 3: Bangladesh’s Economic Transformation” of the Virtual International Conference on Fifty Years of Bangladesh: Retrospect and Prospect, held on 7 December 2021, according to a release of Centre for Policy Dialouge (CPD).

On day two, the session was chaired by Professor Geof Wood, Emeritus Professor, International Development, Department of Social and Policy Sciences, University of Bath. Three presentations were made at the session and three discussants commented on the paper.

The paper titled “Synergies and Tipping Points: Policy Actions, Market Responses, and Economic Growth in Bangladesh” authored by Dr Syed Akhter Mahmood, Former Lead Private Sector Specialist, World Bank discusses Bangladesh’s economic transition over the past fifty years.

He presented his paper at the session. This paper explains Bangladesh’s impressive growth since independence in terms of synergies between government actions and market responses and synergies between different economic variables. It argues that Bangladesh’s story of steady growth with peaks can be found for several variables that play a role in the overall growth story, such as irrigation coverage, private credit flows, rural roads, remittance flows, agricultural machinery imports, power generation, and mobile financial services.

He advocated that part of the reason Bangladesh has grown at a fast pace was because of a sequence of turning points and the way they worked together. He discussed how key economic variables often had turning points and accelerations of growth at the same time. It highlighted that an acceleration in one variable led to acceleration in another variable after a time lag. The paper claimed that the Bangladesh economy has grown because of this synergy and demonstrated how the different turning points worked together.

Dr Khan Ahmed Sayeed Murshid, Former Director General, BIDS was the discussant of the paper.

He opined that the discussion also provided a conceptual framework to help explain the policy dynamics that led to the growth dynamics. This framework illustrates that policy actions, such as public investment projects in different areas, were implemented because of responses in the market or economy. This led to a pattern of growth of different economic variables. The government often responded to new demands with new policy actions. With this approach, instead of going all-in at once, the government usually tested the market with some activities and responded with more actions after it saw how the market responded.

The other part of the synergy story is about how policy actions and market responses worked together. Agricultural policy, rural road expansion, trade and industrial policy, and mobile financial services are just a few of the policy areas that the paper looked at to show how they worked together. The author argues that Bangladesh’s remarkable growth story may be partly explained by how policy and the market worked together.  The author concluded by saying that Bangladesh’s economic success was largely due to a gradual and adaptable policy stance that always made room for new businesses, leading to a process of cumulative change.

The paper titled “Bangladesh Transitioning from LDC to Post-LDC Future: Challenges and the Next Steps” was presented by Professor Mustafizur Rahman, Distinguished Fellow, CPD.

He discussed the future of the Bangladesh economy after its graduation from the Least Developed Country (LDC) group. Bangladesh was included in the LDC sub-strata in December 1975. Bangladesh is expected to graduate out of the LDC group in the year 2026 since it has surpassed all three graduation criteria. This reflects Bangladesh’s remarkable achievement in key socioeconomic development indicators, and international acknowledgement of this success. While this recognition is impressive and will open up new opportunities, this graduation will also create new challenges for the country.

Bangladesh is among the few LDCs that have reaped significant benefits from the special and differential treatment given to LDCs under several WTO agreements and has enjoyed preferential market access extended to the LDCs by several developed and developing countries. For this reason, Bangladesh could pursue its policies with a high degree of autonomy.

This has given exporters a competitive advantage and contributed significantly to the Bangladesh economy’s global integration. Consequently, LDC graduation may cause the loss of the international support measures (ISMs), which will have a disproportionately large impact on the Bangladesh economy from both domestic policy space and the global market space.

The second graduation, the middle-income graduation of Bangladesh, will have other implications for the country’s economy. As Bangladesh goes forward in the future years, identifying the challenges in light of the dual transition and the strategies to be taken in addressing these challenges is of heightened concern and interest.

His discussion argued that the duties of managing the two graduations are deeply entwined and should be considered as mutually reinforcing endeavours. Adding to this, the author used many examples of countries that have achieved the transition but are now stuck in the middle-income trap (MIT).

Dr Nazneen Ahmad, Country Economist, United Nations Development Programme (UNDP) commented on the paper as a discussant.

She said, this study examines the potential economic consequences of dual graduation for Bangladesh due to the loss of LDC-specific ISMs and graduation to a middle-income nation. The paper also discusses some of the crucial challenges of dual graduation and how these challenges should be seen as mutually reinforcing and synergistic. Moreover, the paper also sheds light on the problems of strengthening regional integration in trade-related areas as an integral approach for mitigating the negative impacts of preference erosion and for ensuring the sustainability of LDC graduation.

This paper has focused on three main aspects. First, the study investigated how dual graduation would impact Bangladesh’s domestic policy space and global market engagement.

Second, the study looked at measures and policies necessary for a successful transition to non-LDC status.

Third, the paper suggested steps to increase Bangladesh’s regional economic integration as a critical medium-term strategy for graduation and a successful transition to an upper-middle-income nation. Thus, Bangladesh will need to make adequate preparations for addressing the loss of LDC-specific ISMs, due to LDC graduation and incur higher debt due to middle-income graduation.

Professor Selim Raihan, Professor, Department of Economics, Dhaka University & Executive Director, South Asian Network on Economic Modelling (SANEM) presented the paper titled “Institutional Challenges in Bangladesh’s Economic Transformation” which discussed Bangladesh’s outstanding economic growth and development over the past five decades. Bangladesh’s strong economic and social advances have not been matched by equal improvements in institutional development, and thus Bangladesh’s institutions are still weak and are poorly ranked among other institutions in the world. In the face of weak institutions and economic pressures, Bangladesh faces difficulty in figuring out a new and sustainable development path.

It is widely agreed that institutions play a significant role in economic development because country-level indicators and indices for achieving institutional quality have been developed in recent years. There are a lot of indicators that show how healthy institutions work. This can be used to look at how countries grow and change. Literature also talked about how important it is to analyse institutions to understand the link between institutions and development, especially for developing countries, he continued.

He mentioned how organised people or groups could impact the way in which institutions grow. These institutions can give different groups different benefits or rents.

Professor Selim Raihan states that that the role of political institutions and processes, rent management strategies, and the deals environment are often overlooked in the dominant literature. He  has given a detailed account of how rent-sharing across political divides, political elites’ ability to separate economic and political rents, and an essentially ordered deals environment have all helped Bangladesh’s economy grow faster than it would have otherwise.

He argued that several studies had previously looked at the long-term effects of institutions on development and concluded that better institutions lead to higher growth rates over long periods. Better economic and political institutions are essential when growth converges to a stable trajectory. When a country goes from stable growth to rapid growth, better economic institutions are more important than political institutions. In light of this, this paper looked into whether Bangladesh was an exception based on a cross-country analysis of secondary sources.

This paper provides a quick overview of Bangladesh’s institutional strengths and flaws. It also looks at some recent research and the central institutional features of Bangladesh’s development.

The presentation concluded with two questions: i) can Bangladesh can achieve bigger development goals with the business-as-usual process?; ii) what is the position of Bangladesh when it comes to moving from some “pockets of efficient informal institutions” to well-functioning formal institutions?

The paper states that Bangladesh’s inadequate institutional capability may be holding the country back from achieving the SDGs by 2030, becoming an upper-middle-income country by 2031, and a developed country by 2041.

The paper pointed out the slow development of formal institutions and explained that the trends in the quality of formal institutions showed that most of the indicators were getting worse. He also mentioned that Bangladesh faced a number of other problems, such as lack of economic diversification, slow structural change, insufficient job creation, poverty, and inequality, said Dr Ahsan Mansur, Executive Director, Policy Research Institute of Bangladesh.