Does Bangladesh benefit from trade liberalisation?

The rationale

The authors started with a rationale for undertaking the research. It appears that they wanted to protest the populist view that trade liberalisation and economic integration has been a drag on development and a drive towards deindustrialisation. But what is the reality on the ground? "Informing this debate with a good analysis of the analytical and empirical foundations of trade protection and the gains from trade openness will facilitate more informed debate on this major subject. This in turn would likely lead to support for further trade reforms. The objective of this research is to provide the analysis".

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Theories and empirics

A priori, greater openness is likely to contribute to higher growth and lower poverty in Bangladesh by (a) improving productive and allocative efficiency; (b) factor accumulation and investment; (c) knowledge spillovers; (d) improved income distribution and (e) government policy improvements. Since Bangladesh is a labour abundant country, a la Heckhsher-Ohlin and Stolper-Samuelson model, expansion of international trade opportunities will likely support the growth of labour-intensive export industries, promoting employment and income. The authors also enveloped empirical evidences on trade openness and economic development as espoused by scholars from time to time and for different periods of time. The section on Trade Openness and Economic Deregulation in Bangladesh succinctly summarised the policy regime episodes on reforms related to 1972-2002. Progress with Trade Liberalisation was placed in sequence with structured information.

The impacts

The authors delineated three distinct phases to compare and contrast the indicators such as average growth rate of GDP, average per capita GDP growth, average inflation rate, poverty Head count and trade GDP ratios. The periods could be identified as 1972-75 (period 1), 1976-90 (period 2) and 1991-2000 (period 3). In analytical discourse, admittedly, such categorisation of periods is often criticised on the grounds that policies and programmes continue to cross regimes to result in overlapping. However, in the face of no other better comparable yardsticks, the route chosen by the authors could be considered as acceptable.

The Bangladesh trade-GDP ratio, a standard measure of trade openness, rose from an average of 11 per cent in 1972/75 to 17 per cent in 1990 and further to 30 per cent in 2000. Both imports and exports grew as a share of GDP, with imports growing from an average 8 per cent in 1971-75 to 18 per cent in 2000 while exports expanded from 3 to 12 per cent during the same period of time. Per capita GDP growth moved from negative 1.1 per cent to posit a positive 3.1 per cent. Inflation rate came down from a peak of 47 per cent per annum to perk at 6 per cent. Poverty head count index fell from as high as 88 per cent to 50 per cent in 2000. By and large, according to the authors, Bangladesh marked a respectable march towards higher economic growth, lower inflation and poverty pari passu panoply of policies that went to open the economy. But, possibly to keep the critics calm, the authors kept a note: "Although the overall growth and poverty outcomes presented above are the results of a variety of economic and social policies, it is fair to conclude that greater outward orientation reflected in trade openness and a supportive macroeconomic management that helps maintain low inflation to preserve the competitiveness of the exchange rate…."

Manufacturing GDP growth was significantly robust in the 1990s compared to the 1980s --fairly broad based with strong contribution from small and medium enterprises. Manufacturing employment surged from 3 million in 1985/86 to about 6 million in 1990/91 growing nearly at 20 per cent per annum compared to a long term trend of 3.3 per cent. Without substantial downsizing in evidence in the public sector in the 1980s, the growth in employment must have been generated by the private sector.

The authors dwelt on the development of real wages -- a better indicator to justify a change. "On average, real wages of unskilled workers in manufacturing grew by 2.4 per cent since FY1973 liberalisation. Which is faster than per capita GDP, and importantly, faster than real wages of skilled labour during the third phase of rapid trade". The trend seems quite in tune with the prediction of the theory that trade openness pushes up the price of unskilled labor. Agricultural real wage -- albeit slower though -- also posited a positive growth at 1.5 per cent per annum. "Putting together the output, employment and wage picture, it seems that the Lewis model of unlimited supply of labour fits well with Bangladesh agricultural scene. Faced with low average productivity and massive underemployment, the pace of labor absorption in agriculture is contracting, simply because agriculture is unable to create enough jobs to absorb the growing rural population". On the other hand, non-agricultural employment and output expanded fast but, disconcertingly, without driving up the marginal productivity and real wages growth noticeably in agriculture. 'So the "turning point' whereby real wages in agriculture are driven up by contracting labour availability in agriculture is yet to come". This observation is substantiated by empirical evidences encompassed by researches of Dr Mahabub Hossain and Dr Wahidudin Mahmud. However, the authors opine, "overall, it is fair to conclude that deregulation and trade liberalisation have been favourable for supporting a modest increase in real wages of unskilled workers throughout the economy" adding further that agriculture lagged behind in the race not for liberalisaation but for a lack of it.

The inequality question was duly on board. The authors agreed that increase in income inequality reduced the poverty impact of growth but that could be averted appreciably had public sector been more sensitive to push for more pro-poor growth by supporting investment in agricultural policies. The authors found the argument of "deindustrialisation 'unfounded" as "notwithstanding the contraction of inefficient protected industries, overall manufacturing output grew much more rapidly in the 1990s than in earlier periods. Also, manufacturing employment and wages of unskilled workers grew significantly". Given the empirics and the analytical discourse at their disposal, the authors landed, not surprisingly perhaps, with a faster pace of liberalisation rather than trade protection.

Epilogue

In a recently held seminar on South Asian Trade Regimes, organised by the BIDS and the World Bank, one paper observed a negative relationship between trade liberalisation and Bank economists on the plea that growth is determined by a volley of variables and trade liberalisation is just one of the factors. The same reasoning would, perhaps, rule over the present research. To corner the critics, more rigorous econometric exercises are needed to drive home the point that Bangladesh benefitted from trade liberalisation. I personally feel so but fail to establish. Till that regression results come, we have to bank on World Bank's observations. Undoubtedly, a post liberalisation period is better as far as the movements of the indicators are concerned.

Abdul Bayes is a Professor of Economics at Jahangirnagar University