Macroeconomic Management: From Stabilization to Growth

Macroeconomic Management
From Stabilisation to Growth?
This paper examines Bangladesh 's macroeconomic performance in the light of market-oriented liberalising policy reforms. By looking at the trends in fiscal, external and investment-savings balances, it analyses how, despite falling inflows of foreign aid, Bangladesh achieved macroeconomic stabilisation and an acceleration of economic growth in the 1990s. The paper concludes that for consolidating the transition from stabilisation to growth, improvements are needed in many areas such as revenue mobilisation, the efficiency of the financial system and the overall investment environment.
WAHIDUDDIN MAHMUD

I Background
The macroeconomic scene in Bangladesh, since the early 1970s, has undergone successive shifts in terms of policy environment, often linked with change in the ruling political regime. In the early years following the War of Liberation in 1971, macroeconomic management was primarily aimed at reviving a war-ravaged economy in an overall framework of extensive state control and with an avowed ideology of socialism. The state became the de facto owner of a large number of enterprises that had been abandoned by their Pakistani owners. After the killing of Sheikh Mujib and the change of government, there was a policy shift towards privatisation and promotion of the public sector. The denationalisation of abandoned enterprises continued with varying speed into the 1980s when a second wave of divestment was initiated under the military government of general Ershad. From the late 1970s to the beginning of the 1980s, there was a short-lived episode of investment boom, with investment in both public and private sectors growing at nearly 15 per cent annually in real terms [Mahmud 1995]. This was made possible by relying on an increasing flow of foreign aid and adopting a privatisation strategy based on lavish dispensation of cheap credit and provision of other incentives such as highly protected markets

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This is more evident from the later episode of upturn in 2000-01; the domestic inflation rate in fact declined to less than 2 per cent in that year, but foreign exchange reserves came down to a critically low level, equivalent to less than two months ' import payments; see Table 2. 8 Public savings are not however identical with the governmet budget 's revenue surplus, since the budget 's current expenditure does not fully. reflect public consumption. 9 The official estimate of export earnings is from the data of the Export Promotion Bureau; as a result, Bangladesh Bank 's balance of payments estimates are reconciled by including an 'errors and omissions ' figure. 10 In comparison, the sectoral allocation pattern of current expenditures has remained relatively stable; see Mahmud (2002a). I I Among the few notable changes in the current expenditure pattern was increased allocations to education, specially towards the late 1980s; see Osmani et al (2003). 12 Among 139 developing countries considered, Bangladesh is ranked the 7th most protectionist country, India 12th, Pakistan 23rd and Sri Lanka 61st, see World Bank (2004), Chapter 3. 13 Between 1992 and 1996, the import-weighted average customs duty rate on capital goods declined from 19 per cent to 10 per cent, and for final consumergoods, from 47 per cent to 21 percent; see World Bank (1999), p 39. 14 A striking example is provided by the decline of the domestic textile machinery industry (power looms); this industry has been virtually eliminated during the past seven to eight years. 15 Incidentally, Bangladesh stands togain from the WTO agreement regarding the waiver of patent rights for the domestic production of drugs in LDCs until 2016, and for the production and trade in certain life-saving drugs among developing countries generally. 16 Statistical Yearbook of Bangladesh 2000, p 452. 17 Small industries are likely to have grown also at the cost of cottage