1. Challenges for Bangladeshi n Becoming a Middle-Income Country PRMED Growth Seminar Series February 27, 2008

2. Can Bangladesh Become a Middle- Income Country by 2016? Gross National Income per-capita of US$470 in 2005 places Bangladesh in the category of low- income countries as per IDA classification Gross National Income per-capita of US$470 in 2005 places Bangladesh in the category of low- income countries as per IDA classification IDA’s threshold for middle-income countries was US$870 in 2005. IDA’s threshold for middle-income countries was US$870 in 2005.

3. Can Bangladesh Become a Middle- Income Country by 2016? Can Bangladesh become an MIC by 2016? Can Bangladesh become an MIC by 2016? Yes, if GDP growth increases to 7.5% a year Yes, if GDP growth increases to 7.5% a year If growth falls to the 3% rate seen in the 1980s, MIC status will happen after 5 decades If growth falls to the 3% rate seen in the 1980s, MIC status will happen after 5 decades

4. Can Bangladesh Become an MIC by 2016? Reasons to be optimistic Good growth record (> 5%) since 1990 Good growth record (> 5%) since 1990 Sound economic fundamentals Sound economic fundamentals A young labor force – demographic dividend A young labor force – demographic dividend Established entrepreneurial culture Established entrepreneurial culture Substantial improvements in human development Substantial improvements in human development

5. An Impressive Growth Record that needs to be Strengthened

6. Per-Capita GDP: Bangladesh Vs. Median LIC Bangladesh Median LIC

7. Growth Record: International Comparisons

8. Growth Matters Over Long-Run

9. Can Bangladesh Become an MIC by 2016? Challenges to Consider Target of 7.5% growth is an ambitious one. Few developing countries have been able to sustain it Target of 7.5% growth is an ambitious one. Few developing countries have been able to sustain it Being an MIC is not just about income levels. MICs have more complex and sophisticated economic systems which need to be understood Being an MIC is not just about income levels. MICs have more complex and sophisticated economic systems which need to be understood

10. What Explain Bangladesh’s Growth Experience? Growth acceleration in the early 1990s was enabled by major policy improvements Growth acceleration in the early 1990s was enabled by major policy improvements macroeconomic stabilization (monetary and fiscal discipline, and correction of exchange rate misalignment and of external imbalances) macroeconomic stabilization (monetary and fiscal discipline, and correction of exchange rate misalignment and of external imbalances) Easing of trade and exchange restrictions Easing of trade and exchange restrictions Relaxation of restrictions on private investment in various Industrial Policy Orders Relaxation of restrictions on private investment in various Industrial Policy Orders Launching of the Financial Sector Reform Program (FSRP), deregulating interest rates and abolishing credit quotas Launching of the Financial Sector Reform Program (FSRP), deregulating interest rates and abolishing credit quotas Further deregulation of agriculture markets Further deregulation of agriculture markets

11. What Explain Bangladesh’s Growth Experience? Contd…. Govt moved early and decisively to avail of opportunities provided by MFA/ATC quota systems for garment exports – EPZs, bonded- warehouses, back-to-back LCs etc. Govt moved early and decisively to avail of opportunities provided by MFA/ATC quota systems for garment exports – EPZs, bonded- warehouses, back-to-back LCs etc. Sharply rising workers remittances fueled construction and domestic demand Sharply rising workers remittances fueled construction and domestic demand Early emphasis on human development – especially women’s advancement – proved crucial. Early emphasis on human development – especially women’s advancement – proved crucial.

12. Can Bangladesh Become an MIC by 2016? Challenges to Consider Sources of Growth

13. Bangladesh’s Transition to MIC Status Agriculture Labor-Intensive Manufacturing Closed Economy Global Integration Rural Urban

14. Transition 1: Agriculture to Labor-Intensive Manufacturing Transition 1 implies a deeper labor-intensive manufacturing base and more productive agriculture Transition 1 implies a deeper labor-intensive manufacturing base and more productive agriculture driven by globally competitive manufacturing firms & productive, diversified, and commercially-oriented agriculture sector driven by globally competitive manufacturing firms & productive, diversified, and commercially-oriented agriculture sector

15. Main Constraints to Deepening Manufacturing Base Firm-level analysis suggests that following areas need particular attention to boost productivity in manufacturing Firm-level analysis suggests that following areas need particular attention to boost productivity in manufacturing Rapidly emerging power supply constraints Rapidly emerging power supply constraints Limited access to FDI for manufacturing Limited access to FDI for manufacturing High remaining anti-export bias High remaining anti-export bias Deficiencies in worker and mgmt skills Deficiencies in worker and mgmt skills Limited knowledge economy base Limited knowledge economy base Concerns over law and order Concerns over law and order

16. Firm Size and Productivity

17. Transition 2: Closed Economy to Globally Integrated One Transition 2 implies judicious, but not complacent, approach to global integration Transition 2 implies judicious, but not complacent, approach to global integration Bangladeshi firms plugged into global supply chains and country figuring prominently on global investment maps Bangladeshi firms plugged into global supply chains and country figuring prominently on global investment maps

18. Main Constraints to Deepening Global Integration High levels of anti-export bias hurts non-RMG exports and prevents export diversification Among the highest trade protection in the world Among the highest trade protection in the world

19. Main Constraints to Deepening Global Integration

20. High levels of anti-export bias hurts non-RMG exports and prevents export diversification Among the highest trade protection in the world Among the highest trade protection in the world Bonded warehouse facility not available to most sectors. With dysfunctional DEDO, this discourages export diversification. Bonded warehouse facility not available to most sectors. With dysfunctional DEDO, this discourages export diversification. Poor state of trade facilitation – inefficient port and various bottlenecks at customs and related to connectivity with hinterland Poor state of trade facilitation – inefficient port and various bottlenecks at customs and related to connectivity with hinterland

21. Transition 3: Rural to Urban Transition 3 implies emergence of diverse, dynamic urban centers, with Dhaka remaining at forefront of urban activity Transition 3 implies emergence of diverse, dynamic urban centers, with Dhaka remaining at forefront of urban activity

22. Managing Rapid Urbanization: Key Challenges Absence of balance in urbanization – no viable urban alternatives to Dhaka Absence of balance in urbanization – no viable urban alternatives to Dhaka Dhaka fast reaching choking point Dhaka fast reaching choking point Rising congestion pressures in Dhaka Rising congestion pressures in Dhaka Provision of infrastructure and urban services far behind demand Provision of infrastructure and urban services far behind demand Exorbitant real estate prices in Dhaka Exorbitant real estate prices in Dhaka Key issues Key issues Virtual absence of decentralization Virtual absence of decentralization Lack of devolution of key services to city governments Lack of devolution of key services to city governments Lack of city govts’ revenue sources and admin. capacity Lack of city govts’ revenue sources and admin. capacity Interregional transport and communication networks underdeveloped Interregional transport and communication networks underdeveloped

23. Long-Term Transitions

25. Enabling Environment for the 3 Long-Term Transitions Strengthening governance and regulatory environment Strengthening governance and regulatory environment Addressing infrastructure constraints, with a special focus on power Addressing infrastructure constraints, with a special focus on power Addressing acute labor skill shortages Addressing acute labor skill shortages Creating deeper and more efficient financial system Creating deeper and more efficient financial system Maintaining macro policies and liberalizing trade Maintaining macro policies and liberalizing trade

26. Key Summary Messages Continued strong private investment and labor force growth will help, but productivity improvement is key. Continued strong private investment and labor force growth will help, but productivity improvement is key. Need to implement 2 nd generation reforms, and refocus policy attention toward hitherto neglected structural areas – governance, urban management, infrastructure (especially power and ports) and labor skills. Need to implement 2 nd generation reforms, and refocus policy attention toward hitherto neglected structural areas – governance, urban management, infrastructure (especially power and ports) and labor skills.

27. THANK YOU!