A good read to understand Bangladesh's macroeconomy

The adage goes that a book should be known by its content, and not by the cover it carries. A very recent book published by Palgrave Macmillan (2020), however, appears to satisfy both conditions - crisp cover and contemporary content.

Generally speaking, economics textbooks are in avalanche in the market but of Bangladesh's macroeconomics in particular, the supply is almost non-existent.

In this backdrop, Dr Monzur Hossain, a senior research fellow of the Bangladesh Institute of Development Studies (BIDS) seemingly attempted to make a dent to the drought. Recently, he edited a seminal book titled, "Bangladesh's Macroeconomic Policy: Trends, Determinants and Impact".

The 500-page hugely book braces four parts as follows:  (1) Macroeconomic Growth Policy, Growth and Poverty; (2) Monetary and Fiscal Policy; (3) International Trade and Finance and (4) Finance and Growth.

A total of seventeen chapters (articles) written by a bunch of brilliant economists of Bangladesh are presented in the compilation. Monzur appears in fourteen of them either as principal or as co-author and his plenteous penning helped the book see light of the world. 

Notably, each article in the book represents an eloquent exposition of evidence-based macroeconomic issues but, due to space limit, we shall pick up a few.

The first part of the book portrays an overview of Macroeconomic Policy, Growth and Poverty Reduction in Bangladesh. Once bracketed as a 'Bottomless Basket' in the 1970s, Bangladesh is now being dubbed as a 'Development Puzzle' in international discourse. Economic growth rate averaged 6 percent or so during the last decade and crossed 7 percent in recent few years till corona crumbled the world. 

The introductory chapter therein focuses on macroeconomic performance, challenges of growth and future growth potential. It argues that macroeconomic policies are important for poverty reduction. There is a clarion call for a judicious mix of monetary and fiscal policies, integrated financing strategy, and institutional reforms with a view to stepping into a high growth trajectory.

Both rewards and risks are examined in this chapter on an empirical plane. That macroeconomic stability matters for the poor is amply argued in the following lines: "…instability might cause 'hysteresis' - a phenomenon where low output growth might have a lingering negative impact on poverty through shocks to the human capital of the poor."

An analysis of the pattern, nature and consequences of inflation and its interface are presented in the following chapters (chapters 2 and 3). Rather than grasping the gravity of the impact of inflation at aggregate level, the authors had a look at impacts across economic classes. "In the backdrop of rising inflation, it is important for policy makers to know which types of households are more affected by rising inflation and what measures can be adopted to redress their disadvantages, at least partially". 

For example, the pattern of rice expenditure and rice prices tend to show that a sharp rise in rice prices (of  food in general), could wreak havoc among lower income classes - especially those on the fringe of poverty line and those unable to adjust wages to prices.

Impact of energy price adjustments are done through a Macro-Econometric Modelling to reason that a partial analysis may not be appropriate to gauge the proper impact of energy prices on various economic indicators. Any upward revision in energy prices is inflationary to some extent to lower real GDP growth rate and vice versa, ceteris paribus. 

However, changes in other macroeconomic indicators, pari passu adjustments, could improve the outcome (Chapter 4).

The 'impotency' of monetary policy is well-articulated in the book. Monetary transmission channels in Bangladesh are thought to be weak and, ipso facto, monetary policy is less effective in achieving its dual objective of growth and price stability.

In the context of Bangladesh, the choice of target variables is the major constraint - administered interest rates and directed credit allocation make it difficult to use as target variables. "The weak link between money supply and interest rate reveals the fact that the financial system of Bangladesh is not largely competitive and efficient."

By and large, monetary policy has been less effective in accelerating growth and money supply has no discernible impact on inflation because of predominance of food inflation (Chapter 5).

Silver lining looms large on fiscal front. Maintenance of fiscal discipline has been commendable. The fiscal stance remained relatively robust despite exogeneous and endogenous shocks and the fiscal stance seems sustainable at the current and projected levels of the fiscal deficit. 

Public investment in health and education is a propeller of growth. On the other hand, a production function approach has been adopted to look into the effectiveness of fiscal policy instrument on economic growth. "The findings suggest that fiscal policy is more effective in stimulating growth in the long run than in the short run thus indicating to the importance of increasing government consumption for stimulating economic growth in Bangladesh."

Moreover, efficiency of the government spending must be ensured to obtain desired impact on economic development" (Chapters 6 and 7).

The remaining chapters relate to important issues like Financing Infrastructure Investment, Trade Liberalisation and Trade Performance, Analysis of Trade Pattern, Exchange Rate Management, Capital Flows, Aid and Economic Development, Macroeconomic Determinants of Remittance, Financial Liberalisation, Microfinance and Development of Capital Market. 

Each of them, penned by famous economists, highlights patterns, problems, prospects and policy prescriptions pertaining to Bangladesh's macro-economy.

The role of Aid in Macroeconomic Stability and Economic Development (Chapter 13) has been assessed in terms of the resultant improvement in economic, social and dependency on aid. The authors noticed that, inter alia, "public investments with support from foreign aid did not crowd out private investments. Rather, aid has played a catalytic role in public investment in infrastructure development that has led to private-sector-oriented growth".

Aid played a positive role in attaining fiscal stability, build-up of foreign exchange, improvement in key social indicators and more importantly, aid has reduced dependency on aid. But aid, argue the authors, should continue to pour in on the heels of financing infrastructure, protection against vulnerabilities in external sector, and to counteract climate change impact. 

However, the 'before-after' comparison could become a major concern to the critiques.

We reckon that the book would be a very rewarding read not only for researchers but also for whom apparently the book tolls - policy makers. An abridged version of the book containing the policy prescriptions in a paperback could possibly be a good cake for policymakers to swallow the valuable insights ingrained in the book.

The reviewer is a former Professor of Economics and Vice Chancellor of Jahangirnagar University and now an Adjunct Faculty, East West University.