Rapid growth can mask governance failures, economists warn

Economists have warned that rapid economic growth can backfire if it leads to ignoring deep-rooted governance problems of a country.

High growth rates often provide a "comfort zone" for policymakers and international partners to ignore corruption and cronyism, eventually leading to economic collapses or political upheavals, they argued while virtually addressing the 9th SANEM Annual Economists Conference "Development Challenges and Policy Responses in a Changing World."

Today (17 April) was the opening day of the three-day programme.

Delivering the keynote speech on "The Cost of Denial: How economic growth undermines governance reform," Shanta Devarajan, professor at Georgetown University and former acting chief economist of the World Bank, said that periods of rapid prosperity often create a facade of success that masks systemic fragility.

"When an economy is growing at 6% or 7%, there is a temptation for both the government and the international community to downplay governance problems," said Devarajan who presented a provocative thesis.

He referred to the Arab Spring in the Middle East and North Africa and the 2022 economic crash in Sri Lanka as prime examples of this "cost of denial."

Regarding Bangladesh, Devarajan noted that while the country was long hailed as a growth miracle, its rapid human development and GDP growth masked a significant deterioration in the rule of law and press freedom.

He recalled his warning from April 2024, months before the political transition, that Bangladesh was at risk of becoming a fragile state due to institutional erosion.

Joining the event virtually, Professor Kunal Sen, director of UNU-WIDER, introduced the "Deals vs. Rules" framework and explained that many developing nations jumpstart growth through closed-ordered deals or cronyism.

"Growth is inherently political. If a system is tilted towards "renters" and "power brokers," they have no incentive for transparency or better governance," Sen said.

Eminent economist and Executive Chairman of the Centre for Policy Dialogue Professor Rehman Sobhan criticised the macroeconomic models pushed by international financial institutions.

He said focusing too much on macroeconomic numbers often overlooks how growth is actually achieved. This approach can create a small, powerful business elite and encourage crony capitalism, ultimately weakening the state's stability.

SANEM Executive Director Dr Selim Raihan moderated the discussion.

The experts urged governments to use periods of high growth to implement difficult institutional reforms rather than using growth as an excuse to avoid them.

The first day's discussion concluded with a reminder: as poverty declines, the rising middle class shifts its expectations.