Moves Toward a Market Economy

Following the violent events of 1971 during the fight for independence, Bangladesh--with the help of large infusions of donor relief and development aid--slowly began to turn its attention to developing new industrial capacity and rehabilitating its economy. The static economic model adopted by its early leadership, however--including the nationalization of much of the industrial sector--resulted in inefficiency and economic stagnation. Beginning in late 1975, the government gradually gave greater scope to private sector participation in the economy, a pattern that has continued. A few state-owned enterprises have been privatized, but many, including major portions of the banking and jute sectors, remain under government control. Population growth, inefficiency in the public sector, resistance to developing the country's richest natural resources, and limited capital have all continued to restrict economic growth.

In the mid-1980s, there were encouraging, if halting, signs of progress. Economic policies aimed at encouraging private enterprise and investment, denationalizing public industries, reinstating budgetary discipline, and liberalizing the import regime were accelerated. From 1991 to 1993, the government successfully followed an enhanced structural adjustment facility (ESAF) with the International Monetary Fund (IMF) but failed to follow through on reforms in large part because of preoccupation with the government's domestic political troubles. In the late 1990s the government's economic policies became more entrenched, and some of the early gains were lost, which was highlighted by a precipitous drop in foreign direct investment in 2000 and 2001. In June 2003 the IMF approved 3-year, $490-million plan as part of the Poverty Reduction and Growth Facility (PRGF) for Bangladesh that aimed to support the government's economic reform program up to 2006. Seventy million dollars was made available immediately. In the same vein the World Bank approved $536 million in interest-free loans.

Efforts to achieve Bangladesh's macroeconomic goals have been problematic. The privatization of public sector industries has proceeded at a slow pace--due in part to worker unrest in affected industries--although on June 30, 2002, the government took a bold step as it closed down the Adamjee Jute Mill, the country's largest and most costly state-owned enterprise. The government also has proven unable to resist demands for wage hikes in government-owned industries. Access to capital is impeded. State-owned banks, which control about three-fourths of deposits and loans, carry classified loan burdens of about 50%.

The IMF and World Bank predict GDP growth over the next 5 years will be about 6.0%, well short of the 8%-9% needed to lift Bangladesh out of its severe poverty. The initial impact of the end of quotas under the Multi-Fiber Arrangement has been positive for Bangladesh, with continuing investment in the ready-made garment sector, which has experienced annual export growth of around 20%. Downward price pressure means Bangladesh must continue to cut final delivered costs if it is to remain competitive in the world market. Foreign investors in a broad range of sectors have been increasingly frustrated with the politics of confrontation, the level of corruption, and the slow pace of reform. While investors viewed favorably steps by the interim government to address corruption, governance, and infrastructure issues, most believed it was too early to assess the long-term impact of those developments.