Charting A Success Story: Paradoxes of the Bangladesh miracle

But  50  years  after  its  independence,  Bangladesh  is  fast  becoming a development paragon a Miracle on the Meghna. Among  the country’s  achievements is a dramatic improvement in its  citizens’  average  standard  of  living.

According  to  the  most  recent  data  from  the  International  Monetary  Fund,  Bangladesh’s  per  capita  GDP  (measured  in  purchasing-power-parity terms) was about half of Pakistan’s  in  1987  and  two-thirds  of  In-dia’s as recently as 2007. But in 2020, Bangladesh  has  surpassed  the  former  and  is  catching  up  with  the  latter, owing partly to its success in be-coming  a  leading  textiles  and  clothing   exporter,   trailing   just   behind   China and Vietnam.

Even more noteworthy are the improvements in social indicators such as life expectancy, infant and maternal  mortality,  fertility,  and  female  labour-force      participation.      And,      equally  important,  Bangladesh  has  managed  to  sustain  a  modicum  of  democratic  stability  –  keeping  the  army in the barracks.But  beyond  such  metrics,  Bangla-desh’s  experience  is  distinctive  in  two ways that have yet to be fully appreciated  from  a  broader  development perspective. The first relates to state   formation   and   capacity.

The   defining characteristic of the modern state  is  that  it  holds  a  monopoly  on  legitimate violence, legitimate extortion  (namely,  taxation),  and  the  pro-vision  of  essential  services.  The  second monopoly serves the objective of the  third,  and  even  when  the  state  does not provide services directly, it dictates the terms.In  Bangladesh,  however,  the  state  has    voluntarily    ceded    the    service-provision     monopoly     to     the     non-governmental sector. BRAC and a number of other now-famous NGOs have  played  a  major  role  in  providing  health  care,  schools,  and  financial   services,   and   in   leading   public-health  campaigns  to  deliver  oral  rehydration  therapy  and  immunisation.

Despite  the  NGO  sector’s  out-size  presence,  Bangladeshi  leaders  have not perceived its activities as a usurpation of the state’s authority.As such, Bangladesh offers a fascinating  study  in  political  economy.  Normally,  democratic  states  aim  to  ensure popular support by providing the  services  that  citizens  need.  Most  are  loath  to  cede  that  function  lest  they  lose  power  and  legitimacy  (not  to      mention      opportunities      for      rent-seeking   and   corruption).

The   more  effective  that  non-state  actors  become  in  delivering  services,  the  more threatened most states feel. But Bangladesh has escaped this dynamic.A partial explanation is that Bangladesh  was  so  poor  and  lacking  in  state  capacity  in  its  early  years  that  public service delivery suffered, creating  a  vacuum  for  other  actors  to  fill. Those who seized the opportunity then enjoyed access to vast inflows of foreign aid, which averaged (in net terms)  5%  of  GDP  for  25  years  until  the turn of the century.But deeper factors could also be at play.

Given  that  Bangladesh  has  a  relatively low tax-to-GDP ratio of less than 10%, one can infer that the state implicitly chose to cede its monopoly on service provision to avoid exercising  the  politically  costlier  monopoly  of   taxation.   So,   while   Pakistan   is   seen as a failing state, and India as a “flailing state,” Bangladesh is a fledgling state, though more effective than its South Asian neighbours.

The  other  distinctive  feature  in  Bangladesh’s  development  is  its  export  performance.  The  fact  that  its  success  in  manufacturing  contributed  in  turn  to  greater  education  and  agency  for  Bangladeshi  women  has  been  well  documented  by  the  economists  Rachel  Heath  and  A.  Mushfiq  Mobarak.   Less   appreciated   is   the   paradox  that  lies  at  the  heart  of  this  export success.

As my research with Raghuram G. Rajan  of  the  University  of  Chicago  has shown, export sectors historically have fared relatively poorly in developing countries that received a lot of aid, suggesting the work of an “aid curse”  –  a  variant  of  the  natural-resource  curse.  Foreign  aid,  no  less  than  an  abundance  of  oil  and  gas,  tends to make the real exchange rate too  strong,  rendering  export  sectors  uncompetitive.

But  Bangladesh  has  bucked the trend again.Beyond luck and chance, additional factors that may have contributed to  Bangladesh’s  export  success  include  plentiful  labour,  which  kept  dollar wages low enough to offset an exchange rate kept too strong by foreign aid and remittances; and preferential  trade  access  to  foreign  markets,   first   under   the   Multi-Fiber   Agreement  (until  it  was  abolished),  and   then   under   programs   established  by  the  United  States  and  the  European Union.Looking  ahead,  low-lying  Bangladesh,  of  course,  faces  a  serious  climate change challenge, but its ability to  sustain  its  economic  transformation  will  depend  on  how  these  two  distinctive  features  evolve.

If  non-state actors enter politics, they could upset     the     current     equilibrium,     prompting the state to reappropriate its  monopoly  on  service  provision.  Were that to happen, the state would almost certainly have to increase tax-es  to  show  that  it  can  be  as  effective  as the NGOs. Similarly, Bangladesh’s export  competitiveness  could  be  undermined  by  rising  wages,  the  enforcement  of  cost-increasing  labour  standards  and  regulations,  and  the  loss  of  preferential  export  access  in  rich markets.

Bangladesh  was  carved  out  of  India  in  1947  on  religious  grounds  and  then  broke  away  from  Pakistan  in  1971    on    linguistic    and    cultural    grounds.  For  decades,  it  was  an  object  of  condescension  for  India  and  Pakistan  alike.  Not  anymore.  Now  a  shining  model  of  development,  this  twice-dismembered   country   offers   lessons  for  the  struggling  countries  from which it was born