Economic liberalisation and rural poverty in Bangladesh

Dhaka,  Thu,  08 December 2016
Published : 17 Oct 2016, 18:04:03

Economic liberalisation and rural poverty in Bangladesh

Muhammad Mahmood
The Bangladesh economy has undergone profound transformation since the onset of economic liberalisation which started in the late 1980s. But the liberalisation process has become more vigorous in the second half of the 1990s. The liberalisation agenda incorporated, among others, an important element, foreign direct investment (FDI) to enable the country to achieve a burst of growth which would then become a self-accelerating process.  This is a very typical policy recommendation in line with the World Bank (WB) and the International Monetary Fund's (IMF) policy prescriptions and consistent with their neo-liberal  doctrinaire orientation. These two organisations were responsible for engineering the liberalisation process in Bangladesh; it was not an internally generated process.

To encourage FDI also required liberalisation of the trade regime, financial and foreign exchange markets. Furthermore, very lax labour laws relating to wages, working conditions, occupational safety and hazard and collective bargaining were also introduced and are still in place to attract FDI. The inflow of FDI in Bangladesh averaged US$916 million dollar between 2002 and 2015.

 As the liberalisation process was engineered by the outside forces, not by the internal forces, it led to bottlenecks along the way.  This is because there was no firm commitment by the political, bureaucratic and business elites in the country to the liberalisation process.  They did not own it, so there was no political commitment to it. Their lack of commitment to the reform process is reflected in such as creating bureaucratic obstacles in doing business and lack of interest in, and creating hurdles to, carrying through the agreed reform agenda. 

But over the last two decades a consensus has emerged among the competing interest groups to follow through the economic liberalisation process but with a local touch ensuring that the social and economic power structures remain untouched. Furthermore, serious infrastructural deficiencies, comparatively high trade barriers, closed capital account can be added to the list of problems standing in the way of carrying through the reform process as envisaged by the WB and the IMF. However, endemic corruption spoils everything at the end of the day. The country was also lurching from one crisis to another, creating uncertainty.

Despite all those limitations, the economy continued to grow achieving an average growth rate of 5.72 per cent between 1994 and 2016. This is an impressive economic performance for the country. This growth has been accompanied by the structural changes in the economy.  The structural changes in the economy are reflected in the changing composition of its gross domestic product (GDP).  At birth the country was largely an agrarian economy accounting for about 55 per cent of GDP; that figure stands at 15 per cent in 2016. During that period the share of manufacturing increased from 10 per cent to 31. The services sector recorded an increase from 35 per cent in 1971 to 54 per cent in 2016. 

The increasing shares of manufacturing and services in GDP also caused the movement of population from rural areas to urban areas.   The share of rural population to total population declined from 93 per cent in 1971 to 66.5 per cent in 2014. The population growth rate in the rural area recorded only 0.1 per cent in 2014 compared to 3.5 per cent for the urban area in the same year. Dhaka, the capital city, now accounts for 32 per cent of the country's total urban population. It is estimated that 40 per cent of population in the capital city of Dhaka live in slums. The process of rapid urbanisation appears to have coincided with the process of economic liberalisation.

The services sector is the most dominant sector in the economy, but its growth remains very unpredictable or even unsustainable if the manufacturing and agriculture sectors do not perform well. It also could not absorb the very large number of educated people who find themselves unable to find any decent reasonable work. Manufacturing activity in Bangladesh is overwhelmingly dominated by the apparel industry where most jobs require very low levels of skill or no skills at all. This industry is now a US$30 billion industry, yet distinguished by offering extremely low wages to compete with other low wage countries. Indeed Bangladesh pays the lowest hourly wage (about US$ 0.25 per hour) among the Asian apparel exporting countries such as Nepal, India, Pakistan, Sri Lanka, Indonesia and Vietnam. This industry also focuses on the very lower-end of the market; there is no indication available that the industry is attempting to move up into the high value added apparel manufacturing. This industry also accounts for about a quarter of FDI flows to the country.

Despite such rapid urbanisation, two-thirds of the country's population still live in rural areas. Rural areas in Bangladesh are marked by substantial poverty, inequality and deprivation. It is estimated that 47 million people, almost a third of total population, live below the poverty line and a significant proportion of them live in extreme poverty. Majority of these poor people live in rural areas. The poverty rate is higher in rural areas at 36 per cent compared to 28 per cent in urban areas. However, this rate has, of late, been showing a marked uptrend in the urban areas.

It is estimated that 48 per cent of labour force in the country is in agriculture and 87 per cent of rural population earn their livelihood from agriculture. Malnutrition and hunger are a part these poor people's everyday life. Large proportion of the poor are landless and completely depend on finding any employment if at all available in the rural sector.  It is estimated that 55 per cent of rural households are landless and the average size of  land holding is 0.6 hectare.

In the absence of a properly targeted social safety net, these poor must have to do whatever comes their way, but quite often nothing comes their way and that means starvation.  These poor also have very limited access to education, therefore perpetuating the cycle of poverty from one generation to another. It has always been recognised that the quality of education in rural areas is very poor.  

Income inequality is on the increase in Bangladesh and this inequality appear to be starker in rural areas resulting from very limited employment opportunities and very low productivity. Poverty also prevents them from having access to modern amenities of life and services, resulting in extremely poor quality of material life. This is driving many to migrate to urban centres where life turns out to be  not very different from the one left behind in the village as most of them can find jobs only in the informal sector. This is simply because there are not enough jobs created either in the urban sector or in the rural sector. Supply of labour far outstrips its demand, forcing many to seek employment outside the country when that is possible.

Overall it appears that the economic liberalisation process largely befitted the urban middle class and also the rich and the very rich. The poor in general and the rural poor  in particular lost out in the "trickle down" process as the liberalisation process marched on promising a better future which was never realised for the poor. This is indicative of policies for those in deprivation are not only in very short supply but also not considered a priority issue. To address rural poverty, gainful job creation and equitable sharing of productivity gains with the public provision of rural health care, education, clean water and sanitation are required.  

Over the last two decades it has been clearly demonstrated that economic liberalisation process has not helped to trickle down the benefits to the people who needed it most - the poor. Business enterprises both domestic and of foreign origin are not in the business of poverty eradication, their objectives are very different. It is the responsibility of the state to take concrete measures to get the people out of poverty. 

The writer is an independent economic and political analyst.

muhammad.mahmood47@gmail.com

 
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