Can February election breathe fresh air into a gasping economy?
A good election is good for an ailing economy – this is not a mere hypothesis, but an evidence-based fact
Bangladesh economy is suffocating not for a single reason.
Prolonged investment slump causing draught in the job market, persistently high inflation eroding people's living standard, wage growth's failure to keep pace with rising cost of living pushing millions below the poverty line, banking sector buried under the mountain of default loans – the list is long. Stagnant economic growth is the cumulative impact.
And in the latest, economists raised another red flag: Bangladesh is entering a moderate stagflationary phase – one that is eroding real incomes – weakening employment and threatening long-term growth prospects. Stagflation, described by many economists as an economic nightmare, is generally considered more dangerous and painful for an economy than a typical recession.
What does the Bangladesh economy need most now to get rid of the suffocation and stagflation risk? It needs fresh oxygen – investment, a big investment. Economy needs a big bang.
Keep updated, follow The Business Standard's Google news channel
However, given the prevailing uncertainty over the political transition, expecting a large investment remains a distant cry. The other side of the uncertainty also is not bleak completely. A magic lies in the February election. The election can open the window for fresh air, strong flow of investment for the ailing economy to create employment and avert the risk of stagflation.
Against this backdrop, all eyes are now set on the February election, which is politically significant as Bangladesh is going through a political transition. But economy is no less significant than politics. A credible election might be able to clear the clouds hovering over the future investment.
Everyone – from economists to politicians, from businesspeople to job seekers – are expecting a turnaround in everything after the election. Some, however, warn that the flow of investment will depend on the quality of the election.
A good election is good for an ailing economy – this is not a mere hypothesis, but an evidence-based fact.
Take the study of Mike Touchton, an American professor of political science, on elections and investment. His extensive analysis of data on elections and net investment flows in 157 countries between 1990 and 2013 speaks for the facts.
Based on his findings the political scientist in his study paper published in December 2015 concluded: "If developing countries want to be prosperous and attract international investment, they should hold free and fair elections."
Next year, in January, in an article titled "Free and fair elections attract investment, no matter who's elected. Here's why" published in The Washington Post, he argued fair elections invite confidence that the government will treat investors fairly.
"Fair elections are critical not only because they hold a government accountable for its actions, but also because they signal to investors that this nation's government respects democracy and the rule of law," he wrote.
Why do investors check the state of the rule of law before making an investment? The answer is simple. Mike Touchton wrote: "Investors want reassurance that governments will respect their property and not seize or tax it at high rates, as was done by illiberal rulers like Venezuelan leaders Hugo Chávez and Nicolás Maduro, or Argentina's Cristina Kirchner, or Zimbabwe's Robert Mugabe."
Findings of his study offer food for thoughts in Bangladesh ahead of its high-stakes election scheduled for February. With nomination submission closing on 29 December, the country advances one step further towards the election.
Economists, businesspeople and political analysts are cautiously optimistic that the persistent investment slump would gradually be reduced after the election as they believe investors will open their wallets to provide the economy with much-needed impetus to overcome the stagflation risk. Failure to make the election credible will make Bangladesh economy and its people pay more in the coming days, they warned.
A leading business man, AK Azad, recently in a public programme said, "Foreigners who are doing business with us are keeping an eye on Bangladesh's election if it is credible or not. Great danger lies ahead for us if the election is not credible."
But a credible election alone cannot be the game changer. As economist Zahid Hussain, former lead economist at the World Bank's Dhaka office, stressed that political stability is a prerequisite for macroeconomic stability, but not sufficient on its own.
He identified three key pillars of macro stability: controlling inflation, maintaining external balance, and restoring health in the financial sector.
Structural supply-side factors are a key reason behind persistent food inflation, particularly extortion along supply chains and the market power exercised by syndicates in supply of essential commodities such as rice, onion, edible oil and sugar.
"Extortion acts like a tax and becomes embedded in prices," he said, adding that both extortion and market manipulation create self-fulfilling inflationary expectations.
Economic challenges will not resolve themselves automatically even under a stable political scenario, he cautioned. The undisputed fact is that Bangladesh now urgently needs democratic reset.
The question now is: Can the February election deliver on the skyrocketed expectations? The February election has become a make-or-break event. Still scepticism in the public mind runs high whether the election will be peaceful and credible.
A tight rope journey is awaiting Bangladesh. If it can navigate well, setting the democratic path for building inclusive economic and political institutions in the coming years, the economy will start recording high growth. Voters, who will determine the battle of ballots in February, will be benefited most after the fall of an autocratic regime.
Again, this is not a mere hypothesis.
In their groundbreaking study, 2024 Nobel Prize winning economists Daron Acemoglu, James A Robinson and Simon Johnson showed how institutions shape a nation's prosperity, how inclusive political and economic systems foster long-term growth while extractive ones lead to poverty.
Acemoglu and Robinson along with co-authors Suresh Naidu, and Pascual Restrepo in another seminal research published in 2019 challenge earlier views that democracy has a negative or neutral effect on growth.
Their analysis of 175 countries between 1960 and 2010 indicates that a country transitioning from a non-democracy to a democracy experiences approximately 20% higher GDP per capita over the following 25 years compared to a country that remains an autocracy.
Authoritarian rulers who are for mere growth may never like such research findings. Still, political scientist Mike Touchtone in his study argues, "Authoritarian governments should consider holding fair elections." Why? Because it attracts investment, he asserts.
Bangladesh, now at a crossroads, has no other alternative but to have a credible election and a democratic reset as most of the crisis the economy is facing stemmed from political crisis.
