By Famin Ahmed
I recently came back from a trip to Bangladesh with my family, and my enjoyment level of the experience exceeded my expectations times 987987. One of the nerdier reasons why I enjoyed it so much was that unlike last time I went 8 years ago, this time I could appreciate the social and economic issues surrounding the developing nation.
For those of you who have done ECON1020 with Bruce Littleboy, you might remember that there are two key theories that try to predict and explain the economic growth of developing countries. The Neoclassical Growth Theory, specifically the Solow model, predicts that the GDP growth rates of developing countries should be able to ‘catch up’ to developed countries. Simplistically speaking, there are two main reasons for this:
- Developed countries with a high level of GDP have already done a lot of the work necessary for developing new technologies allowing higher productivity. This means that developing countries can simply “import” these technologies, skipping the time/effort/money/learning curve part and allowing them to boost their GDP quickly.
- Because of diminishing returns, adding more capital to developed countries won’t do all that much for their GDP because they already have a high amounts of capital, whereas adding the same amount capital to a country like Bangladesh would help them significantly more as they are starting at a lower level. A typical example would be adding a tractor to an Australian farm which already would have a few, and adding a tractor to a Bengali farm, where they basically have none and still use predominantly manual labour – the extra capital would make a bigger difference to the GDP of Bangladesh.
So, based on this Solow Model, a country like Bangladesh should having a soaring GDP growth rate, consequently being able to catch up to the economies of countries like Australia relatively quickly. When you look at the stats for GDP growth rate (%) in isolation, this Neoclassical prediction holds up:
(Source: World Bank http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG)
However, the problem is, we can’t just look at these numbers in isolation. When we look at the Bangladesh economy in the scope of things, the sitch really isn’t that gr8 and catching up isn’t that realistic. Remembering that Bangladesh has a population of over 160 million people, when we look at GDP per capita adjusted for purchasing power, it is clear that the country is still really, really, behind:
How does the Solow model explain this? Well pretty much…it doesn’t. The theory fails to explain that copied technology and new capital doesn’t magically just appear in developing countries – there has to be a number of characteristics present for it to work. As New Growth Theory explains, it is vital for a country to have things like high levels of education, a founded rule of law, subsidies for research and political stability. Bangladesh lacks in literally every one of these.
The political corruption in the country is the foundation of all the other problems. In a nutshell, politicians in Bangladesh are corrupt/10 and only care about maximising their own personal benefit (money and power) and completely ignore maximising overall social benefit. Recently, the situation has worsened. Other than several politicians regularly being killed, a good example to portray the corruption is the election the other week, where voters had their polling papers snatched off them by politicians’ agents who would fill it out for them, before they could put their own vote in. This sort of environment inevitably erodes economic development.
For example, one of my relatives owns one of Bangladesh’s leading sweater manufacturing companies. It produces over 6 million pieces a year, is 100% export based and has several international buyers including H&M. Obviously, an important part of running an export based company is facilitating business deals – most major business deals are desired to be done face to face. Previously, most international buyers would fly to Bangladesh to do these deals, however now these buyers are more wary of buying from the country given the political situation. Instead, my relatives now have to fly overseas every time they want to do a business deal – extra costs for flights, accommodation and food = lower quantity produced = lower net exports. It also means less labour demand = less income = less consumption. Of course, there are heaps of other flow on effects. This type of economic hindrance is being echoed across multiple companies across the country.
In sum, the Bangladesh economic growth is being significantly stunted by their political system, and it sucks. 1 like for this blogpost = 1 prayer for Bangladesh.
(Check out Economist article ‘Why Bangladesh politics are broken’ if you wanna read/cry more about Bangladesh http://www.economist.com/blogs/economist-explains/2015/02/economist-explains-0 )