Beyond the National Budget 2005-06

With the advancement of private sector led growth, the details of sectoral investment, cannot be accurately planned. While this practical problem is accepted, it cannot be denied that there is a need for indicative planning for longer term goals of economic development.

At present the guiding document is the national PRSP which contains a Medium Term Macroeconomic Framework (MTMF). This lays out the targets and projections of macroeconomic indicators and spells out policy thrusts in fiscal and monetary areas. But this encompasses another three years (or effectively 2½ years) only.

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A closer scrutiny shows that the allocations and policies in the budget 2005-06 has attempted to translate the strategies of PRSP into concrete actions; for example, agricultural growth and employment generation received due attention and safety nets have been expanded.

Although these are the commendable features of this year's budget proposal, one must go beyond the arithmetic of mere correspondence between PRSP strategies and budgetary allocations. One must ask: what type of vision of economic growth and structural change of the economy is incorporated into the allocations and/or sectoral priorities?

When we look at the budget from this angle, we find that its emphasis is more on short term response to previous one or two years' growth performance of the economy rather than on a longer term vision of poverty reduction through pro-poor growth and structural change of the economy. Many people have termed this focus on short term priorities as 'election year budget'. But the preoccupation with the short term programmes is also due to the absence of any longer term policy document on the goals of economic and social change, say for the next five to ten years. PRSP provides a reasonable set of guidelines for focus on poverty reduction in the short run. But its strategies do not look beyond three years and therefore this cannot be the sole guiding document for economic policies of a country.

A few key priorities and provisions of budget 2005-06 may be examined to highlight the lack of long term vision in the budget. During the last few weeks numerous analyses of budget and its specific provisions have been made. These analyses are of two major types: (a) reactions against specific measure of tax proposal and (b) detailed analysis of various aspects of the budget. Both approaches can be useful but these approaches look at the trees while the forest may be lost sight of. Therefore this writeup focuses on a few general points. Four questions will be addressed here: i) whether the target of GDP growth reflects the aspirations of the nation, ii) whether there is a vision of long term structural change of the economy, iii) whether the employment generation policies can help in GDP growth and poverty reduction targets and iv) how 'caring' are the proposed 'safety net' provisions.

Target of GDP growth during the next fiscal year has been set as 'Given favourable external and domestic environment, ... economic growth may exceed 6 per cent in the next fiscal year' (quoted from budget speech). It is good to be cautious and to keep in mind resource and other constraints faced by the country. But one must be able to distinguish between unforeseen events and the normal risk parameters. MFA withdrawal has not been an unforeseen event. Bangladesh must prepare for the associated changes. Natural disaster of a usual scale is also something that we must live with and adequate preparedness to face it may reduce the impact on GDP growth. With adequate attention to the risks, GDP growth target must strike a balance between caution and optimism.

The target of 6 per cent GDP growth rate is commensurate with the PRSP's MTMF. It has been recognised by PRSP that this target is conservative and an alternative growth scenario has been presented in the document, which gives GDP growth target of 6.2 per cent for the next fiscal year. Moreover, the GDP growth rate of 2003-04 now stands at higher than 6 per cent. Current year's GDP growth has been lower and with a lower base a much higher GDP growth would be easier to achieve next year. Is it a greater success if a higher growth target is set and the achievement is slightly short of that or if one is cautious and sets an unambitious GDP growth target at the level already achieved and exceeds that target? This question cannot be answered by only economists or by a single ministry in charge of budget preparation. Achievement of a higher GDP growth target requires higher investment growth. It requires commitment of the entire nation, all political parties and all relevant organs of the government. In this context, Bangladesh's policy makers and those in charge of providing building blocks for the vision document must keep in mind the performance of her South Asian neighbours. Many of them already set higher GDP growth targets (and realised them as well).

One cannot escape the sacrifices when the nation has already committed itself to specific poverty reduction goals. If the targeted (and realised) GDP growth rate is low, achievement of the poverty reduction goals will require more effort on the front of asset and income redistribution, which can be even more difficult to achieve than reaching a higher rate of GDP growth. The choice is a difficult one, but this is the right time to make the choice if one is serious about the PRSP process and attainment of Millennium Development Goals (MDGs).

The next question is about a structural change of the economy. To enter a path of sustained GDP growth and to achieve the poverty reduction targets, higher growth rates of the industrial sectors and the technology based service sectors are required. Power sector and other infrastructure must be developed to support industrial growth. How serious are the budgetary targets in these areas? There are isolated programmes, but all these together do not give an integrated effort towards desired structural changes. To give an example, for a serious matter like adequate power generation, a target has been mentioned in the budget, which will be achieved in next 3 to 5 year period. Moreover, a firm determination with concrete targets is lacking. 'Given the projects under consideration are implemented, it would be possible to generate additional 2910 MW electricity in the next 3-5 years' (quoted from budget speech). 3000 MW of power generation in 3 or in 5 years gives widely different growth rates and related implications about meeting the growing demand.

The last question relates to employment generation. This has implications for GDP growth as well as for structural change of the economy.

A mention of few particular points on employment generation strategy and related allocations in budget 2005-06 may be pertinent. Strategies of PRSP begin with employment generation and pro-poor growth. So does the budget speech. The specific provisions for employment in the budget focuses on i) safety net type employment in specific regions, and to deal with seasonal underemployment and ii) credit or in particular microcredit for self-employment. Such self-employment and seasonal employment are smart routes to safety net provision in a resource poor country like Bangladesh where people are eager to work for small returns. Some of the sectoral investment programmes, especially in agriculture will also result in employment growth: However, in the budget one cannot find appropriate policies or programmes which can result in better quality jobs. But employment creation as a strategy for pro-poor growth and for sustained and sufficient pace of economic growth requires a dynamic view about employment in addition to what have been proposed. The practical aspects of such dynamic view consist of (a) regular jobs, (b) improved terms of employment and rising real wage and (c) better quality of labour force.

The current year's budget is expected to provide 'care' implying that it has extended the safety net provisions. New programmes have been introduced, per person grant in the older programmes have been raised. The recipients (as well as their observers) view this as a dole given by the government It is not viewed as money from other tax payers or money which has other uses (some of which may be more pro-poor). There have also been proposals from others to raise the amount further.

Such programme should not be introduced in an ad-hoc manner. An integrated framework for safety net should be planned and except for very old or completely disabled, payment should be linked to productive work. Choice of programmes should be based on an evaluation of all available forms of safety net provision (including health service, free medicine etc.).

It should be emphasised that a single year's budget cannot provide a long term vision of the economy and society. Lack of long term vision in the proposed budget of 2005-06 is a reflection of lack of a national consensus on such a vision about the economy. Bangladesh must set the goals of socio-economic changes for the next 5 to 10 years and formulate the strategies for reaching those goals. The next ten-year period is critical for the path of Bangladesh's development and her position in comparison with the neighbouring countries. At this moment the nation cannot afford a lack of commitment to adopt a long-term vision of development for accelerated economic growth and a dynamic all-round development.

Dr. Rushidan Islam Rahman, an economist, is Research Director, BIDS.