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Alam, Quamrul; Mian, Mohammad Emdad Ullah --- "Money magnet misery" [2006] MonashBusRw 13; (2006) 2(1) Monash Business Review 47

Money magnet misery

Bangladesh has seen little of the flow of foreign direct investment (FDI) to the third world in the wake of the globalisation of the world economy, and this is its own fault, writes Quamrul Alam and Mohammad Emdad Ullah Mian.

Bangladesh economic reform started immediately after independence by opening the economy to more internal and external competition. The settings and intention were there but a number of factors continued to hold it back. For example, the program to divest state enterprises in manufacturing stagnated and state enterprises remain a huge drag on the economy.

Bangladesh’s economic performance and slowing population growth over the past two decades has produced real per capita GDP growth of 3.1 per cent a year (36 per cent over a decade). The per capita GDP growth of Bangladesh was negative in the 1970s, rose to 1.7 per cent in the 1980s and to 3.1 per cent in 1990 to 2001. Bangladesh moved to a flexible exchange rate on 31 May 2003.

Governance and corruption

Governance relates to government interactions with business, which typically means regulation and dealing with corruption, both of which affect the costs of starting and running a business.

Quantification of various aspects of governance of a country is difficult to achieve. Available statistics regarding governance issues in Bangladesh suggest a mixed performance. To assess governance quality of different countries of the world, six aggregate measures were used that capture different aspects of governance, including regulation and corruption. Developed by Kaufmann, Kraay, and Lobaton (2002), these measures combine information on up to 60 (mostly subjective) indicators from other sources. The six indexes measure perceptions about – voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption.

Plotted on a ‘governance hexagon’, these measures of governance show a mixed performance for Bangladesh compared with the 175 developing and industrial countries in the sample (see figure below).

Bangladesh scores relatively well on the indexes for voice and accountability, regulatory quality, and government effectiveness, exceeding the average for low-income countries on all three measures. In addition, it performs better than China, India, and Pakistan on regulatory quality – but worse than all three on government effectiveness, control of corruption, political stability and rule of law and also worse than the average for low income countries.

Corruption is a major problem in Bangladesh with Transparency International ranking it the most corrupted country in the world for five consecutive years. The study also showed that Bangladesh firms have little confidence in courts. Efforts to create specialised commercial courts have not been successful.

Infrastructure

The quality of infrastructure is poor in Bangladesh with a recent survey of business executives ranking it 74th from 75 countries. Power supply, transmission and distribution are unreliable and firms experience power outages and surges for about 250 days a year, resulting in a loss of more than 3 per cent of production on average. Despite this, over the past two decades the country’s power-generating capacity has increased almost threefold, from 1.0 million kilowatts in 1980 to 3.3 million. As far as roads and ports are concerned the news there is not good either with the Global Competitiveness Report 2001/02 ranking Bangladesh 70th among the 75 countries for roads and 72nd for ports.

Telecommunication services in Bangladesh are also lagging and in 2001, it had fewer fixed line and mobile phones than the average for low-income countries and fewer than comparable East and South Asian countries. The World Bank investment climate survey also reveals that the average time for getting a fixed telephone connection within the previous two years was 90 days in Bangladesh, 18 days in Pakistan and only seven days in China.

Financial infrastructure

The profit motive drives investment, but it’s the easy access to credit unrelated to a company’s performance that makes it possible. Firms or industries in Bangladesh have reasonable access to formal finance compared to other low-income countries. However, Bangladesh financial systems still lag behind and lack institutional support.

International integration

Countries that aggressively pursued global economic integration in the 1990s, like Brazil, China, India and Malaysia, grew more quickly than those that didn’t. Bangladesh has been very slow to integrate into the global economy, despite some growth in trade in recent years. The country’s exports rose from only 6 per cent of GDP in 1980 to 15 per cent in 2001, while its imports increased from 18 per cent of GDP to 23 per cent. These proportions compare favorably with those of India and Pakistan, but less so with those of other low and middle-income countries, especially in East Asia.

Political stability

Politics can be a messy affair in Bangladesh as there is no broad national consensus on most major issues. Although a democratic political process has been initiated, a sound bipartisan system is yet to be developed. Moreover, a deterioration of law and order, political rivalry, unauthorised strikes, militant gang action/incidents and ineffective enforcement of regulations has scared off foreign investors.

Human resources

Bangladesh has failed to generate a skilled workforce to attract investment in non-traditional industry sectors. The Global Competitiveness Report 2001/02 ranked Bangladesh 58th among the 75 countries, ahead of China (59th) and Malaysia (60th) but below other comparable countries in terms of skilled and trained labour. However in terms of unskilled labour, it is widely believed Bangladesh offers the most competitive labour cost in the South Asian region, a fact reflected in the recent inflow of FDI in the garments and textiles sector and labour-intensive processes of electronics and machinery.

Technology infrastructure

According to UNESCO, Bangladesh spends less on research and development (R&D) as a share of GDP than most developing countries in East and South Asia. While R&D spending totalled about 0.03 per cent of GDP in Bangladesh, it was 0.2 per cent in the Philippines and Malaysia and 0.2 per cent in China and India.

Business start up

Data from the World Bank’s ‘Doing Business’ project suggest that to start up a new firm in Bangladesh is relatively costly. However, hiring and firing workers is easier than in most other developing countries in East and South Asia. An entrepreneur must complete seven procedures to start a firm – the smallest number among a group of comparator countries in Asia (Malaysia is also seven). But the cost of these procedures amounts to 77.6 per cent of per capita income – by far the highest among these countries (Figure 2).

Bangladesh has been making effort since the early 1980s to attract FDI. However, it does not have adequate policies for the progressive development of foreign investment. Corruption, poor governance, weak rule of law, large administrative burden, shortage of skilled labour and inadequate knowledge of infrastructure discourage FDI as do its poor infrastructure and a lack of policy continuity. Bangladesh also needs to be better integrated with the global economy to improve the investment climate and encourage FDI. The primary challenge ahead for Bangladesh is to establish a transparent, broad and effective enabling policy environment for investment, and improve its infrastructural as well as human and institutional capacities.

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About the authors

Quamrul Alam

Quamrul Alam, BA (Hons), MAPublic Admin Dhaka, MAEcon Manchester, PhD Flinders, teaches Strategic Management and International Management at Monash University. His research interests include: internationalisation of Australian businesses; globalisation; FDI, strategic management issues; business cluster; international public administration; public-private partnership; government and business; and e-business strategy.

Mohammad Emdad Ullah Mian

Mohammad Emdad Ullah Mian, a member of the Bangladesh Civil Service, recently completed a Master of Public Policy and Management from Monash University. He holds a postgraduate Diploma in Government Financial Management from the University of Ulster, Northern Ireland.