Bangladesh—Economic System

After becoming independent from Pakistan in 1971, Bangladesh shifted in the mid-1970s from a socialist to a market-oriented model of development. Despite several economic reforms, however, the country is still far from enjoying an efficient market economy. Bangladesh's economy remains largely agricultural, with a relatively small industrial-manufacturing sector. While agriculture remains dominant in terms of contribution to total gross domestic product (GDP) and employment, the percentage of total agricultural employment nonetheless decreased from 85 percent in 1961 to 63 percent in 1996. The service sector's contribution to total GDP increased sharply from 36 percent in 1970 to around 57 percent in 1998.

Bangladesh has one of the lowest per capita annual incomes in the world ($345 in 1998). Income levels in rural and urban areas differ significantly. In rural areas opportunities for wage employment are limited, and wage rates are low. The level and composition of consumption expenditure also differ in rural and urban areas.

Bangladesh's agriculture is dominated by rice, the staple food crop, which occupies about 75 percent of the total cropped area. Since the early 1980s wheat production has increased significantly and is now around 5 percent of the total cropped area. Potato, chilies, pulses, and oil seeds are complementary noncereal food crops that supplement the staple diet. Besides rice, wheat, and jute, sugarcane and tobacco are major crops. On an experimental basis rubber, coffee, and palm trees are cultivated on a small scale in some areas. Small and medium-sized households produce barely enough food crops to meet their own consumption requirements. Only large farm households can generally sell their surplus cereal products in the market.

Jute is the major cash crop in Bangladesh. Rice and jute are small-scale farming operations in which land, labor, and capital equipment are often interchangeable. The agricultural technology is predominantly traditional and consists mainly of plows, shovels, bullocks, and homemade irrigation implements. Since the early 1970s a considerable number of high-yielding seed varieties (HYV) have been adopted. From 2 percent of the cropped area in 1970, the share of land under HYV cultivation grew to around 30 percent in the 1990s.

Bangladesh agriculture has a very low and declining land-labor ratio. Over time, the average size of farms has become smaller and smaller. For example, in 1960 the average farm size was 1.4 hectares, but in 1984 it was less than one hectare. Along with decreasing farm size came an increasingly unequal distribution of land holdings and increasing landlessness. In the active tenancy market in Bangladesh, around 25 percent of cultivable land is transferred, so that the distribution of cultivated land is less unequal than the distribution of ownership.

Of the various large- and small-scale industries, jute, carpets, paper and newsprint, rayon, sugar, cement, chemicals, fertilizer, and tanneries are the most important. Other notable industries are cotton yarn and textiles, engineering and shipbuilding, iron and steel, oil refining, electric cables and wires, matches, and cigarettes. Of cottage industries, carpet making, shoemaking, bamboo and cane products, earthenware, brass and metal products, small tools and implements, ornaments, and handicrafts are important. In terms of employment, cottage and small-scale industries occupy a significant place. These are for the most part family-oriented enterprises with low capital intensity and traditional technology. Since the late 1980s the ready-to-wear garment industry has rapidly expanded; it now employs more than one million workers (mostly female) and contributes more than 50 percent of total export earnings.

In 1972 the government under Sheikh Mujibur Rahman (1920–1975), popularly known as Sheikh Mujib, nationalized all major industries. While the nationalization decision solved initial political and administrative problems, Sheikh Mujib's government later encountered serious political and economic problems that lasted until he was killed during a military coup in 1975. After political change in 1975, industrial policy was revised to provide a greater role for private enterprise. Since the early 1980s successive regimes further revised industrial policy, but no regime has denationalized the most unprofitable industries, whose losses were caused primarily by disruptions in production, inappropriate and inflexible pricing policy, managerial inefficiency, and above all large-scale corruption.

Bangladesh is a relatively open economy, where the ratio of foreign trade to GDP is around 37 percent and steadily rising. However, its narrow export base is dominated by a few primary commodities (although ready-to-wear garments have become dominant in the export trade in recent years), whereas its essential imports are either basic consumption goods or raw materials and intermediate goods. The narrow base of exports and the noncompressible structure of imports have given rise to a large trade deficit.

The financial system of Bangladesh includes an organized or institutionalized financial sector and an unorganized credit market. Dominating the financial sector and accounting for more than 95 percent of its assets is the banking system, composed of the Bangladesh Bank, four nationalized commercial banks, twenty-seven private domestic banks, thirteen foreign banks, and five government-owned specialized banks. The nationalized commercial banks dominate the commercial banking sector, accounting for more than two-thirds of its assets. The foreign banks, with a share of around 10 percent of bank assets, remain active primarily in international transactions relating to foreign trade. Such credit allocation started following the nationalization of domestic banks and financial institutions in 1972. Since then, especially since the 1980s and 1990s, credit has been allocated more by political authorities than by market forces. After meeting the needs of the politically influential sectors, the limited available funds were rationed among economically and politically powerful borrowers. A lack of accountability created incentives for borrowers to default willfully, which led to a culture of loan default as big borrowers treated bank loans as a windfall. As a result during the 1980s and early 1990s, the nationalized banks had to be recapitalized by the government a number of times to keep them operationally solvent. Because the nationalized banks are not subject to competitive pressure or hard-budget constraints, they keep the loan rate of interest high, intending to recover some of the losses caused by the huge "privileged" loans. The indifferent attitude of depositors (and the government) has kept otherwise insolvent banks liquid, but at the cost of financial efficiency.

Bangladesh remains a test case of economic development. In terms of traditional development economics jargon, Bangladesh has yet to break the "vicious circle of poverty" or "low-level equilibrium trap" to set the economy on the path to self-sustaining growth. How to do this remains controversial. While it is easy to be gloomy, a close examination of the economy reveals some strengths. Remarkably the Bangladesh economy can feed an ever-increasing population from its narrow land base. Food production has increased to near self-sufficiency, with stabilizing food prices. The economy has been gradually deregulated since the early 1980s, and the rate of private saving is rising. Even though foreign investment is not yet forthcoming on a large scale, there are good prospects for the future. As the economic survival of the nation is at stake, Bangladesh cannot afford to fail in its quest for development.

Asian Development Bank (ADB). (1994) Bangladesh: Stimulating Investment and Growth, Manila, Philippines: ADB.

Bangladesh Bureau of Statistics (BBS). Statistical Yearbook of Bangladesh. Dhaka, Bangladesh: BBS (Various issues).

Hossain, A. (1996) Macroeconomic Issues and Policies: The Case of Bangladesh. Delhi: Sage.

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