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Potential for progress: opportunities for economic growth in Bangladesh.

Precarious topography, political turmoil, and a Struggling global economy are tough conditions for any state, let alone a young democracy of 140 million citizens. In light of these problems, Bangladesh's sustained economic growth becomes all the more impressive. Over the past five years, Bangladesh has enjoyed an average real GDP growth of six percent. Labor-intensive industries, in particular textiles, have fueled growth as Bangladesh's tremendous reserves of cheap, low-skill labor have attracted foreign investment. Educational attainment rates are on the rise and Bangladesh has a particularly vibrant political culture, as a vast majority of citizens vote.


Continued economic progress, however, is by no means assured. For all its economic potential and political vibrancy, Bangladesh suffers from a virulent party conflict. Bangladesh's two major parties, the Awami League (AWT) and Bangladesh Nationalist Party (BNP), figure at the center of this conflict, and their respective leaders, Sheikh Hasina and Khaleda Zia, persist in a blood feud that stretches back to the inception of the nation. Their personal vendettas have embroiled a poor but promising country and threaten future growth. In particular, the charged political atmosphere and instability hinder governmental commitments to long-term infrastructure projects and discourage foreign investment. More importantly, the animosity between the AWL and BNP endanger Bangladesh's potentially most important regional relationship, namely ties with India. The parties vary wildly in their stances towards their powerful neighbor--and as tensions intensify, their differing positions become further entrenched. This is surely foreboding for future relations with India, as a leadership change in Bangladesh may lead to cooler relations at best with a key strategic partner.

Economic Progress and Potential

To be sure, Bangladeshi economic growth pales in comparison to the roaring successes of regional giants, India and China. For the latter two countries, double-digit annual GDP growth has been expected, with anything below a cause for concern. Nevertheless, Bangladesh's six percent average compares favorably with other high-growth states such as Vietnam and Malaysia, both at seven percent. Moreover, Bangladesh has managed to achieve consistent growth in spite of its government, a far cry from the government-aided and -directed expansion in China and other export-oriented East Asian states. This economic growth, in turn, has been a boon to a population that has struggled with pervasive and crippling poverty for most of the nation's existence. The percentage of the population living below the poverty line has decreased from a 15-year high of 45 percent in 2004 to 40 percent in 2010.

The crucial driver of Bangladeshi growth has been a thriving textiles industry that relies on the country's vast amount of cheap, unskilled labor. Garment exports accounted for US$12.3 billion dollars, nearly 12 percent of GDP. Furthermore, the rate of textile exports accelerated in 2009, despite the world economy floundering in the throes of a deep recession, as textile exports to the United States increased by 10 percent.

The growth of Bangladesh's most robust industrial sector is especially encouraging given the expiration of the Multi Fibre Agreement (MFA). This arrangement, which lasted from 1974 through 2005, imposed quotas on textile exports from developing countries to the developed ones. This, in effect, helped propel Bangladesh to a thriving textile industry in the 1990s through the early 2000s. However, experts feared that the expiration of MFA in 2005 would effectively cripple Bangladesh, leaving it uncompetitive against bigger textile producers like China. These fears were ultimately unfounded, as Bangladeshi labor proved to be both cheaper and just as effective as their bigger Asian competitors. In fact, textile exports actually increased by US$500 million immediately after the expiration of the MFA.

Not only do textile exports and profits contribute to a significant portion of overall GDP, but they also help employ millions of Bangladeshis. More than 3.5 million Bangladeshis work in the garment industry, 90 percent of whom are women. The latter demographic is particularly important as steady employment and earnings have helped empower Bangladeshi women, who are among the most enfranchised in all of South Asia. The industry, however, is not without its flaws. For one, a lack of government involvement in regulating the industry has hurt labor. Wages remain relatively low, despite official increases in the minimum wage for entry-level workers, raising monthly pay from about US$24 to US$43. Disgruntled workers rioted throughout the summer of 2010, destroying property' throughout Dhaka and disrupting regular traffic. Their dissatisfaction with the wage increase revealed deeper issues in the government relationship with labor. The Bangladeshi government, involved in its own inter-party squabbles, has failed to ensure fair and transparent arbitration between capital and labor. There is a disturbing lack of accountable unions, and allegations of corruption on the part of government regulators abound. Not only do these issues expose a fundamental problem between workers and owners, they also contribute to the staunchly national ownership of the industry. Foreign investors have by and large avoided investing in textile factories, as over 95 percent of the industry is domestically owned.

The lack of foreign investment in textile industries also extends into other crucial sectors, such as infrastructure and energy. Foreign investors remain wary of the inter-party strife and pervasive corruption and are warned off by the lack of policy stability. This will prove to be especially problematic as Bangladesh attempts to augment growth in the future. Despite the solid progress of the last five years. International Monetary Fund (IMF) estimates indicate that Bangladesh needs to achieve eight to nine percent growth in order to drastically reduce poverty. Bangladesh remains low on the UN Development Index, ranking 129th out of 169 countries. The country has historically depended heavily on foreign aid and loans from developed countries such as the United States and Japan, and international organizations such as the World Bank, the Asian Development Bank, and the UN Development Program. Nevertheless, in order for Bangladesh to take the next step and progress to a middle-income state, foreign investment is crucial. With investment booming in emerging markets, Bangladesh must make itself an attractive spot for capital.


Over the last 15 years, the government has taken steps to make itself an enticing investment opportunity for foreign firms and banks. For example, "export processing zones" have been established in Dhaka, Comilla, Mongla, Iswardi, Uttara, and Karnafully. Among the incentives intended to attract foreign firms are tax holidays that last up to five years. While these steps are encouraging, it should be noted that the last of these zones were set up more than four years ago in 2007 under the aegis of a non-partisan caretaker government. These zones are in principle exactly the type of government action needed to lure foreign investment. However, legislative measures are not enough. Foreign investors also need to be convinced that the country's overall political climate and governance are stable. Bangladesh is riddled by corruption stretching through all levels of government, and according to Transparency International's 2010 Corruption Index, Bangladesh ranks 134th out of 154 countries, tied with states like Zimbabwe, which is notorious for its corrupt government. Given Bangladesh's increasing energy usage and considerable gas reserves, future prosperity depends on attracting foreign investment. It is up to both the BNP and Awami League to seriously address corruption if they hope to make due on Bangladesh's substantial economic potential.

Courting the Neighbor

While internal reforms will play a critical role in pushing Bangladesh forward, the country's poisonous politics also threaten the future of any fruitful relationship with it's neighbor, India. Bangladesh's ties with the regional power stretch back to the 1970s, as India was instrumental in helping defeat Pakistan during the Bangladeshi war for independence. These initial tics, however, were not to last. The past 30 years of the relationship have been marked by bloody incidents concerning Bangladeshi refugees, haggling over water, and border disputes and terrorism. Furthermore, domestic attitudes towards India have gradually turned from gratitude to apprehension. Even Indians recognize as much, as Indian President Manmohan Singh recently let slip that he believed "at least 25 percent of Bangladesh swears by the Jamiat-ul-Islami and are very anti-Indian."


Nevertheless, the past few months have seen a gradual and encouraging thawing of relations. This past July, Sonia Gandhi, scion of India's most famous family and leader of the ruling Indian National Congress, visited Prime Minister Sheikh Hasina in Dhaka, the nation's capital. Gandhi's visit set the stage for both Manmohan Singh's historic visit in early September and future relations between both states. Both Gandhi and Hasina could potentially be in office through the nud-2010s. While Gandhi's recent visit may have been purely symbolic, a good working relationship between the two could figure key to sustained Bangladeshi growth.

Despite their shared borders, Bangladeshi and Indian trade and investment are surprisingly low. Experts estimate billions of dollars of illegal trade occur across the 2,500 mile Indo-Bangladeshi border, and legalizing such exchanges could encourage greater interstate commerce. Furthermore, Indian direct investment in Bangladesh is relatively small. In fact, states like South Korea and Saudi Arabia, whose major relationship with Bangladesh is their shared Sunni faith, invested four to forty times more respectively during 2009 to 2010. Moreover, Bangladesh has also attracted the attention of the other regional power, China, their biggest trading partner. Chinese foreign direct investment has more than doubled India's. India's economic relationship with Bangladesh, however, has experienced some changes. India has committed an unprecedented US$1 billion dollar loan to Bangladesh, which intends to use it for infrastructure. And while President Singh's visit to Bangladesh did not culminate in a much-hoped for agreement on water sharing from the Teesta River, he did emphasize that a "strong, stable, and prosperous Bangladesh" was beneficial to India.

The recent advances from India and the consistent investment and loans from China leave Bangladesh with an enviable set of options, if the Bangladeshi government behaves wisely, it could potentially play the two regional rivals against each other in order to secure more lucrative trade arrangements and investment opportunities. India's tariff barriers have long been a bone of contention with, the Bangladeshi government--and, if reduced, they could be a tremendous boon to Bangladesh's attempts to become an export-oriented economy. Furthermore, many of Bangladesh's poorest districts line the border with India. If Chinese trade with Bangladesh can be leveraged into greater legal commerce with India, those border towns could benefit from an explosion in economic activity and help lift countless Bangladeshis out of poverty.

Regardless of the seemingly rosy outlook for relations with India, trouble potentially looms an election away. Unlike Sheikh Hasina, who has stressed the importance of positive relations with India, Khaleda Zia is resolutely anti-Indian. The BNP was allied with the Islamist Jamiat-ul-Islami in the most recent elections, and both share a common hostility towards their predominantly Hindu neighbors. Instead of stressing the advantages of increased economic activity and peace with their regional powder, the Zia-led coalition emphasizes cultural and religious differences and bristles at perceived slights. While President Singh may have erred in shunning Zia and the BNP in the past, Sheikh Hasina would be well advised to involve Zia and her BNP subordinates in future policy discussions regarding India. A continuation of domestic rivalries into foreign policy, especially when it concerns something as crucial as economic rapport with an emerging power, would be devastating for Bangladeshi economic prospects. Although Hasina seems like a good bet in the 2013 general elections, if in the odd chance Zia does assume the presidency, a reversion to previous antagonism with India is certainly possible. Not only would that jeopardize links that are only in their developmental stages, but it would also endanger future relations with Bangladesh. The Indian government and investors would be hesitant to invest in a country with a deeply mercurial stance toward them.


Towards the Future

Bangladeshi prosperity' and progress will require a careful alchemy of domestic reconciliation and foreign rapprochement. That can only begin with a political atmosphere less informed by political blood feuds but rather by sober long-term thinking. Moreover, it will require an honest self-evaluation by both parties and an admission of mutual guilt in the country's persisting and pernicious corruption. Currently, the signs are not very encouraging. Despite vowing to fight corruption regardless of its political affiliation, Sheikh Hasina has gone after predominantly BNP targets. While the arrests and exile of Zia's two sons Tareque and Arafat Rahman are based on significant amounts of incriminating evidence, the persistent and ultimately successful attempt to evict Zia from her ancestral home raises significant questions about the sincerity of Hasina's anti-corruption pledges. Furthermore, her recent attempts to enshrine portraits of her father, the late Sheikh Mujibur Rahman, in every governmental office raises suspicions of political maneuvering. Ultimately, Bangladesh will move forward only when its two most powerful leaders let go of the past.

staff writer

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Title Annotation:WORLD IN REVIEW
Author:Ahmed, Ashraf
Publication:Harvard International Review
Geographic Code:9INDI
Date:Sep 22, 2011
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