How to cope with the recession
MY students recently wanted to know the definitions of recession and depression. I reminded them of the old joke: a recession is when your neighbor loses his job; a depression is when you lose yours.
Notwithstanding the definitional debate that could invoke 100 different answers from 100 economists, we are assuming that a recession has already gripped the world, the ripples of which are likely to reach (or have already reached) Bangladesh's shores.
The signs are quite obviously ominous: the rate of remittances and export earnings going down; retails sales sliding, growth rate of GDP is estimated to fall, massive unemployment looming large, etc.
The global economy is poised for slower growth. It is thus no surprise that the newly elected government has a stiff task at hand. And in an economy already in shambles with bad governance, any minor exogenous or endogenous shock is sufficient to steal the sound sleep of the finance minister or the economic adviser.
Economists are worried about the projected fall in economic growth rate since a fall in absolute poverty is related to a rise in economic growth. Thus, for example, if Bangladesh is to witness 4.5-5.2 percent growth this time (World Bank and ADB forecasts) compared to 6 per cent plus of earlier times, poverty is likely to mount by a big margin.
I fully agree with this calculus, but I am only partly perturbed by the reduction in the growth rate. It should be first noted that the rate of poverty reduction is the growth rate times the growth elasticity of poverty reduction (GE for short). A large negative GE means that even a modest growth rate can bring rapid poverty reduction.
For the dollar-a day poverty rate and average GE at minus 2 (which is average for developing countries), a growth rate of say 5 per cent in mean household income per capita will reduce the share of population living below the poverty line by 10 per cent a year (in proportionate terms). So, quality, not quantity, of growth is more important.
Second, the combined effect of high poverty and high inequality greatly attenuates the growth elasticity of poverty reduction. That means that the initial levels of inequality and poverty are also important determinants of the growth game.
I think the budgetary thoughts of the Finance Ministry should keep the above-mentioned caveat in mind. Quite obviously, an expansionary budget (deficit budget) is called for to raise effective demand in the economy. The prime aim should be to expand the safety net programs and take up mostly pro-poor projects located in the agricultural and rural development sector. There are ample scopes to invest in water development and agricultural research and extension.
The recession seemingly rings the bell that import substituting economic activities, hitherto left in the backyard, need a firm boost. Unproductive expenses should be shelved at least for the moment (if not for good) and productive channels should be opened up.
En passant, one of the important sources of employment and, via linkages, output, is ADP development projects. The ADP implementation rate is pitifully low now but needs to be speeded up within the next few months.
The export oriented industries should be protected from the recessionary whirlwind with required incentives. But cash incentives should be avoided, as far as possible. Non-cash incentives like lowering interest rates, reducing time and corruption in ports, access to infrastructure, trimming terrorism and private tolls, etc could help stem the rot.
The finance minister's proposal of a public-private partnership to establish a stabilisation fund for creating infrastructure is a laudable option to face the recession. No less important, perhaps, is to lean on economic diplomacy in search of markets for goods and labour. That requires revamping existing embassies (or creating new ones) with new visions of economic diplomacy.
Resources should be generated through reducing the tax rate but expanding the tax net and raising the efficiency of the tax officials. Whitening of black money may be allowed to the extent that the money is invested in productive sectors.
Another source is borrowing from banks. However, one must note that too much borrowing by the government might crowd out private investment and that government projects are less productive than private projects.
However, serious efforts should be marshaled to mobilise external aid and grants to supplement domestic resource availability. Given that an environment of good governance prevails, there is no reason that foreign aid and investments would not come to Bangladesh.
Let us hope that the upcoming budget pursues and implements human-face policy measures to cushion the effects of economic meltdown. The poor should be protected from peril through safety nets, growth should come mostly from pro-poor and labour intensive projects, and good governance should prevail.
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