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Abstract
This paper revisits Bangladesh’s ‘double paradox’ – sustained macroeconomic growth despite the poor state of governance and a high level of corruption – by critically reviewing trends in governance and corruption indicators during 1990–2017 vis-à-vis other South Asian countries. In addition, we draw upon data from a purposefully designed survey of manufacturing firms to assess the state of economic governance in the export-oriented ready-made garments (RMG) sector, the country’s main source of foreign exchange and driver of economic growth. Consistent with the country’s poor ranking in a host of indicators of investment climate and corruption perception, in-depth interviews of RMG factory owners confirm the high cost of doing business in various forms. We also find no evidence of growth-mediated improvements in indicators of governance. On the contrary, our review of print media reports suggests a growing governance deficit in the country’s financial sector. We conclude by discussing the implications of our findings for the country’s future growth as well as performance of the RMG sector.
Acknowledgements
We’re grateful to Adam Kinnison, Antonio Savoia, Ajit Mishra and two anonymous referees of this journal for their valuable comments. The usual disclaimers apply.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes on contributors
M. Niaz Asadullah is a Professor of Development Economics at the Faculty of Economics and Administration, University of Malaya. He obtained a DPhil in Economics from the University of Oxford. He has held visiting positions at Harvard, Kent, Reading, BRAC, Manchester and Mindanao State Universities. His current research focuses on poverty, labour market and institutional development and has been supported by grants from Leverhulme Trust, AUSAID, DFID, International Growth Centre and the World Bank. Dr Asadullah is an associate editor of the Journal of Human Development and Capabilities. Email: [email protected]
N N Tarun Chakravorty is a Professor of Economics at the Siberian Federal University, Russia. He did his MSS in Economics from the University of Dhaka, MA Economics from the University of Leeds and PhD from the University of Bath. Previously he taught at Independent University Bangladesh and Stamford University Bangladesh. His research interests include growth, development, inequality, well-being, governance and corruption. Email: [email protected]
Notes
1 De Long and Shleifer, “Princes and Merchants,” 671–702; Knack and Keefer, “Institutions and Economic Performance,” 207–27; La Porta et al., “The Quality of Government,” 222–79.
2 Transparency International, “Corruption Perception Index 2017.”
3 International Republican Institute, Bangladesh: Daily Challenges.
4 Devarajan, “South Asian Surprises,” 4013–15; Devarajan and Johnson, “Two Comments on ‘Governance Indicators,’” 31–6.
5 Ang, How China Escaped the Poverty Trap.
7 Mahmud et al., “Bangladesh’s Achievements in Social Development,” 26–8; Hossain, The Aid Lab.
8 Asadullah et al., “Paths to Development,” 138–54.
9 World Bank, Bangladesh Development Update: Breaking Barriers.
10 The Economist, “Bangladesh’s GDP per Person.”
11 Lewis, “Crossing the Boundaries between ‘Third Sector,’” 125–41.
12 Asadullah, “Educational Disparity in East and West Pakistan,” 1–46.
13 The Economist, “Bangladesh’s GDP per Person.”
14 World Bank, Bangladesh’s Achievements.
15 World Bank, Bangladesh Development Update: Building on Resilience; The Daily Star, GDP Growth Data;Ahmed, On Growth Rate Controversy.
16 Hossain, The Aid Lab.
17 Ahmed et al., “The Paradox of Export Growth,” 258–71.
18 Heath and Mushfiq Mobarak, “Manufacturing Growth and the Lives of Bangladeshi,” 1–15; Sonobe et al., “The Miraculous Development of the Garment,” 27–51.
19 Ahluwalia and Mahmud, “Economic Transformation and Social Development,” 4009–11; Devarajan, “South Asian Surprises,” 4013–15.
20 Zafarullah and Siddiquee, “Dissecting Public Sector Corruption,” 465–86.
21 Mahmud and Mahajan, Economic Reforms, Growth and Governance.
22 Mauro, “Corruption and Growth,” 681–712.
23 World Bank, Corruption in Bangladesh.
24 Rahman, “Governance Matters: Climate Change,” 313–26.
25 North, Growth and Structural Change; Butkiewicz and Yanikkaya, “Institutional Quality and Economic Growth,” 648–61; Djezou, “The Democracy and Economic Growth Nexus,” 251; Easterly and Levine, “Tropics, Germs, and Crops,” 3–39; Kraay et al., Aggregating Governance Indicators; Aidt, “Corruption, Institutions, and Economic Development,” 271–91.
26 Rigobon and Rodrik, “Rule of Law, Democracy, Openness, and Income,” 533–64. Among other important studies, De Groot, Linders, Rietveld, and Subramanian (2004) found regulatory quality to have a positive effect on both trade and economic growth in democratic countries while Jalilian, Kirkpatrick, and Parker (2006) suggested a significant positive impact of regulatory quality and government effectiveness (two components of WGI) on the GDP per capita in developing countries.
27 Méon and Weill, “Does Corruption Grease or Sand,” 69–97.
28 Freund, Hallward-Driemeier, and Rijkers, “Deals and Delays,” 354–82.
29 Ugur, “Corruption’s Direct Effects on Per‐Capita,” 472–90.
30 Huang and Ho, “Governance and Economic Growth in Asia,” 260–72.
31 Wedeman, Double Paradox: Rapid Growth.
32 Ramirez, “Is corruption in China,” 76–91.
33 Two exceptions are Aidt et al., “Governance Regimes, Corruption and Growth” and Bai et al. (2019). According to Aidt et al., the growth–corruption relationship is non-linear. Given strong institutions, growth reduces corruption, but has no effect when institutions are weak. Using data on firms between 2006 and 2010 in Vietnam, Bai et al. found that higher levels of growth rates reduced corruption levels, in particular when there were strong land rights. Dimant and Tosato, “Causes and Effects of Corruption,” 335–56.
34 Governance indicators, such as rule of law, are seen to lead to more significant economic growth in ‘Not Free’ countries when compared to ‘Free’ and ‘Partly Free’ countries; Huang and Ho, “Governance and Economic Growth in Asia.”
36 Bangladesh is positioned 102nd among 113 countries in rule of law and 93rd in corruption related sub-component; World Justice Project, WJP Rule of Law Index 2017–2018.
37 This is also acknowledged by development partners, e.g. the World Bank (Citation2003) emphasises that corruption increases the cost of doing business, saps public confidence in the investment climate and thus retards development.
38 The Daily Star, “Export Fund Raised to $2b.”
39 The Daily Star, “Public Bank Scams: Problems.”
40 Ibid.
41 Utilisation permission is an official document, required to complete garments export procedure. It used to be issued by the customs authority. Because of the significant delays by the customs authority, the government authorised the Bangladesh Garments Manufacturers and Exporters Association (BGMEA) to issue this document.
42 To facilitate export financing, the government (1986–1987) in Bangladesh, instead of offering subsidies, introduced back-to-back letter of credit (L/C) system which did not require the garment manufacturers to open import L/C or make payment to the fabric suppliers from their own resources. This innovative system greatly minimised the problem of financing working capital for garment manufacturers; Ahmed et al., “The Paradox of Export Growth.”
43 This is also consistent with the evidence on the overall level of illicit capital outflow (defined as ‘money that is illegally earned, used or moved and which crosses an international border’) from Bangladesh. According to Global Financial Integrity, “Illicit Financial Flows”, as much as US$81.74 billion was siphoned off the country in 2006–2015.
44 Kaufmann and Kraay (2003) find the reverse causality to be negative and rules out such ‘virtuous circles’, i.e. automatic improvements in governance following a rise in per capita income.
45 Ben Ali and Saha, “Corruption and Economic Development,” 133–54.
46 Drury et al., “Corruption, Democracy, and Economic Growth,” 121–36; Aidt et al., “Governance Regimes, Corruption and Growth,” 195–220; Chowdhury, “The Effect of Democracy and Press Freedom,” 93–101; Rivera‐Batiz, “Democracy, Governance, and Economic Growth,” 225–47; Nawaz, “Growth Effects of Institutions,” 118–26.
47 Mahmud, “Growth and Governance: Making the Transition.”
48 Gerring et al., “Democracy and Human Development,” 1–17.
49 Ahmed, Greenleaf and Sacks, “The Paradox of Export Growth,” 258–71.
50 Shleifer and Vishny, “Politicians and Firms,” 995–1025; Kaufmann and Wei, Does Grease Money Speed Up.
51 Hossain, The Aid Lab.
52 Hassan and Raihan, “Navigating the Deals World,” 96–128.
53 Neusiedl, “The Deep Marketisation of Development,” 1639–54.
54 Myrdal, Asian Drama.