Renewing the ‘elite bargain’ for Bangladesh’s future growth

Stefan Dercon's latest book, 'Gambling on Development: Why some countries win and others lose' was published in May 2022. It draws on his academic research as well as his policy experience across three decades and 40-odd countries, exploring why some countries have managed to settle on elite bargains favouring growth and development, and others did not. 

Dercon is a Professor of Economic Policy at the Blavatnik School of Government and the Economics Department, and a Fellow of Jesus College at the University of Oxford.

Between 2011 and 2017, he was the Chief Economist of the Department of International Development (DFID), United Kingdom. 

Let's start with the main premise of your book - the elite bargain. What do you mean by elite bargain and what sorts of elite bargain have you seen in Bangladesh in comparison to other developing countries you looked at?

It's really the right question and a lot of the book is, of course, comparative. So, let me give you an idea of what I understand as an elite bargain and how, of course, development and Bangladesh fits in. 

It is not uncommon among political scientists and political economists to think of societies, economies and states as essentially run or heavily influenced by a group of people, large or small, with power and influence. They can come from politics, the military or the business community, senior civil servants, public intellectuals and so on. 

Somehow, the direction of a country for a longer period of time tends to be determined by the nature of an implicit agreement among the elite. This is not like a piece of paper that they put signatures on, but it is about the boundaries of actions, and things they would do or not do, which is a kind of a joint project. Every society has that.

So, you have societies where almost the entire emphasis of those leading groups may be stealing from the people. You have kleptocratic societies, unfortunately, in certain countries. You also have societies where there is an understanding that the state is largely an instrument to reward those people that support you, with jobs and things like that, and not necessarily for the broader population. That could be a very small group, your ethnic group or nationality, whatever. 

You basically could have all kinds of ways that elite bargain plays out in society. My argument in the book is that for growth and development you need a specific feature of that elite bargain, one that actually puts growth and development really centrally within the actions and behaviours of those people in the elite.

So, as you will see, Bangladesh stands out from some other countries in recent times for definitely managing to forge this kind of growth and standard. We saw in Bangladesh that there was certain prudence in terms of what kinds of macroeconomic policies were pursued. 

In countries where it's in the elite's interest to make sure that imports are extremely cheap, they overvalue the exchange rate all the time to get luxury items like Mercedes or BMW etc. Bangladesh carried out sensible macroeconomic policies here. 

When RMGs started to emerge, the state was very supportive. Similarly, in social services, when the state was weak it allowed the NGOs to emerge, often founded in fact by international elites as well, and grow to a massive scale. You know Brac is the largest NGO in the world. And I do make a point of it in the book: I can't think of any other country that would have allowed Brac to become as big as it was at its peak not so long ago. That's the kind of thing that I look at.

Now, academies would debate where exactly they came from. But we can see from the actions and behaviours of the key players that it was clearly an understanding that evolving the country through growth and development was something they favoured.

How would you evaluate Bangladesh's current standing in terms of the elite bargain? 

Look, in every society, there will be times that this elite bargain for development will need to be renewed. 

Bangladesh obviously needs to find a way to move to a broader base of exports beyond RMGs. It's a very tricky thing to do because of course there are specific interests now - that those people who build up certain types of industries or structures in the society, may not necessarily want to change it. So, this is a very tricky moment for any leading group of the society on how do we manoeuvre this change, to be a more diversified economy and to be a better functioning state. Not necessarily a perfect state, but you need to be more institutionalized and better governed to tackle issues like corruption and so on. That's what I think where you are, you are in a transition moment to move forward and sustain the progress over the next two decades.

You looked at a number of countries in Africa as well as in Asia. How would you compare the elite bargain in Bangladesh with those countries? 

If you look at the details, every country is different in terms of local circumstances, history, institutional history and so on. Let me mention a couple of the ones that I think over the last 20-30 years appeared to have this kind of elite bargain for development. 

You can go to, of course, China. But from China, you can learn very little for the rest of the world. The underlying thing is that when the changes came around 1979, this was a country in crisis after the cultural revolution where Mao's ideologies dominated, and it was only then that somehow the party shifted towards a more pragmatic approach. It was a very specific structure of society with 2,000 years of centralised bureaucracy. 

But what they had at that moment was that the regime in 1979, the Communist Party of China, clearly posited growth and development as a source of legitimacy for its population. So, it means they committed to doing this, arguably out of self-interest to secure their position. There was massive poverty reduction, serious growth and standards of living increased dramatically. So, the elite interest and people's interests can coincide. But in China, the way they did it has very few lessons for the rest. 

However, in terms of the elite bargain, that's a commonality that it has with Bangladesh. Just as it does with very different countries like Ghana in Sub-Saharan Africa. Or indeed Indonesia, from actually even earlier, where despite having all kinds of imperfections and not so strong institutions, there was that commitment to try to actually make it work. 

Indonesia's development is not at all comparable with China. It had to do it within weaker institutions as well. But they began to show commitment from the 1970s to start getting growth in the economy and beginning to deliver a bit more to the people. 

So, Bangladesh fits into that. And probably Bangladesh had the weakest institutions of all when it started to do it. It was a very young state and didn't really have a strong history of how to manage an economy or manage social services. 

What I admire about Bangladesh is that it was self-aware enough not to try to overreach and actually gave the space to RMGs or big NGOs. That's what is really different about Bangladesh compared to most of these other countries. 

Let's not forget that there was the basket case remark made by Henry Kissinger in the 1980s or late 1970s. So, it was really difficult; very poor and poorly functioning society at the time. There are a lot of countries where nothing like this has happened. 

I wrote a book about Nigeria, a country which disappoints me deeply. They have oil but it has not been used for development and has instead been used to distribute patronage among a relatively large group of hundred or two hundred thousand people who have a really good life in Nigeria. But it's a country of 200 million people who do not see any progress either in growth or development. The state has really no incentive there, as those who control the state do not try to have growth in the economy and create wealth that can be shared with the people through economic and social processes.

An RMG factory. Photo: TBS

As I was reading the chapter on Bangladesh in your book, what struck me was that at least the first elite bargain seems to have been struck after the 1974 famine and the killing of the family members of Bangabandhu. Then I was looking at the names of other countries like Rwanda, Ethiopia, or say China after the cultural revolution. Do you think that some of these developmental bargains seem to be struck after some sort of national trauma?

Yes. That definitely strikes me very strongly and that's indeed the case. Many of these countries, not all of them, Ghana and so on, faced a kind of national trauma or a conflict, or actually a kind of reaching a dead end to feel let's do something better. 

Even historically, if you look at Britain, a lot of changes happened after the two World Wars. These are the moments when the elites are in crisis too and they may use their position to change things. They may need to legitimise their position and behaviour. Or, alternatively, some people among the elite may make national narratives of recovery for doing things. 

But one important aspect I need to mention is that there is no guarantee that a conflict will certainly do this. There are many countries where conflicts only breed more conflicts, like in South Sudan and Ethiopia. So, you would not necessarily succeed from it and it's not a necessity that you must have a conflict.

There's a line in the book that says "Progress is not at all a result of a grand design instead it is almost coincidentally a matter of politics and economics not doing the wrong things". It strikes me that elite bargain is also in some ways about when you have weak institutions, those striking a bargain work out a way to bypass these institutions. So, how do you move towards development without necessarily having strong institutions? Was that true about Southeast Asian countries like South Korea and Singapore in the 1960s and 1970s when they started to move up? Or, is this unique only to the countries that came up in the 1990s? 

Historically, in Southeast Asia or in East Asia, the moment when it happened, these were still politically and economically turbulent times. Korean history does not all move at once in one direction, but there were a lot of upheavals to keep it all together. All the societies started when the state institutions weren't necessarily there. Even with Singapore, it was not settled that it would be successful. 

I didn't want to paint it as if you first get perfection in the institutions and only then start developing. Sometimes, you get the impression that's what people tend to argue. 

China, arguably, was historically at its weakest moment in terms of its institutions when it started in 1979. The mere existence of China or the survival of the regime was put into question. But you do raise a really good point. Now, look at these states, we identify them with strong institutions - Korea, Taiwan, Singapore. That's of course a very important point. 

It's also relevant for Bangladesh that when you renew this bargain, you need to make sure that with some of these implicit commitments - which is a little bit of coincidentally coming together to not do the wrong things and do some of the right things – you actually have structures of checks and balances overseeing this progress. 

You will have to start looking at how you can institutionalise more. Once you have a richer and more sophisticated society, of course, institutions have to emerge. Weakness cannot continue forever; you can see in China how in different phases they keep on having to rethink how they look at the wrong institutions within their own political model. 

You have to look for ways of formalising things that at an earlier moment worked informally. That's why I think you need a new bargain in Bangladesh. I'm sure that a lot of people are aware of it. To make the state more functional, you can't have informality continue to rule in the way decisions in the economy are being made now. Because then it becomes harder and harder to avoid bad decisions.

Do you think democracy will play a role in the next phase or how important is democracy in the elite bargain?

It's really a very important question. When we look empirically at countries that managed to do their take-offs in their economic performances across the world; for their early stage of development, there is no obvious outperformance of democracy over more autocratic regimes. But what is important – is autocracies, when they go wrong, they go very wrong. But democracy is a very useful tool for checks and balances and ensuring accountability. 

Look at China, it does not have external accountability in the system, that's why it has to rely on incredibly strong internal accountability. You cannot have it in countries where the state is not set up to do it like this, or where other factors determine the way the state functions. 

I would say that internal accountability in a lot of countries like Indonesia, Ghana or maybe in Bangladesh, is difficult and harder. This state is built up from other historical premises in the way that it functions. So, if you don't have that, maybe you need other checks and balances. So, every country needs to balance external and internal accountabilities to achieve growth and development. 

I am more circumspect in terms of saying exactly how it is. I know for a fact that in Ghana, which is not dissimilar to Bangladesh, democracy was very important, however, in Malawi, it hasn't really delivered any growth. It's too simple to say it must be, but in Ghana, it was a crucial part of getting out of the military regime and getting a hold of democracy functioning again, because otherwise there was no trust among the elites for long-term growth and development. 

My advice is to think more about internal and external accountability mechanisms, for making sure they exist, because growing an economy is hard. You can try things out, but you have to learn. I think Bangladesh needs to keep on having better and better learning from successes and failures.

Let's talk about the state. Bangladesh started with very weak institutions at the beginning. But the state is, in many ways, no longer that ineffective and fragile. Do you see the state continuing to be self-aware or will it become subversive because as you point out, sometimes the elites in the first phase can also become the blocking force in the next phase?

You are clearly in a transition phase and I am not the first one to say that. You've reached the stage where a lot of countries can get stuck if they are not careful. 

I had an excellent session with the officials of the ministry of finance the other day and the officials also recognise that self-awareness needs to be there. I have been in the civil service for 11 years, until a few weeks ago. You know, within the state, you cannot be a pure technocrat, you have to be politically aware; politics matters and your bosses are politicians. It is all about finding that right balance, listening to technocrats, and giving space to technocratic people to actually give advice that is mutually beneficial and not only political. And the political class needs to be able to listen to the facts and be able to learn. 

Arguably, Bangladesh, compared to a lot of other countries, conducted itself sensibly to handle things quite well so far. So, it's clear that there is a willingness in the state and the ability to do the right things and not to do the wrong things. That's why self-awareness and self-critical politicians and officials are required. 

It's the period of diversifying your economy which is really tough. 

I have seen across the world, that everywhere in the world, you will have a group of civil servants incredibly committed and very, very careful. The only problem is that in some countries, they are not given enough space to do their jobs well. I don't know the situation in Bangladesh, but I would appeal to anyone with influence on power to make sure that they get some space because I met here some officials who are committed to doing the right things. It's what you will need - the technocratic and civil service support to avoid the wrong decisions. In my experience in the civil service in the UK - the main job for me was that I was a senior technocrat in the government to make sure that no big mistakes were made. That's the most important role that you sometimes have and I hope that will happen here.

You gave a lot of credit to NGOs for Bangladesh's success. I was curious how you think they made their way around clientelism and patronage because as you point out, Bangladesh is still among the more corrupt countries in the world. So how did they navigate that space? Do you have any observations on that?

This is one of the enigmas of Bangladesh that they were able to emerge, obviously. The leadership of some of these organisations, you know, Brac, the founder of which was clearly very smart and he knew how to operate. It is one of these things that within society if you want to have influence you need to understand the politics, you need to understand how to manoeuvre in spaces. And I think they clearly did this admirably. 

But I will have to give credit to a broader part, and that's maybe kind of give credit to a broader group of powerful people in business, politics and other parts of society. They were given that space. In many other countries, the space is so limited. So, the state gave that space and the powerful people wanted to give that space. That was part of the self-awareness.

Do you think that population homogeneity and demographic density played a role here because the elite seems to know each other at a personal level? A lot of the elite started from their villages and they still have a connection with the rural areas. Do you think these played a role here?

In the 1970s, we all were being taught that demography was against you. At that time, of course, it was a very tough thing. But population density is actually in your favour. It works in two ways. It works exactly for the social capital that you have a kind of very closeness, but it's not just that. Because you also have closeness in India too, but it's definitely much more structured. I think the things you referred to earlier - the shared history of the independence war, the suffering etc. There was definitely something in that these organisations emerged out of an important moment in the psyche of the nation. 

There's another part of it that during the time of intervention - and of course, Bangladesh became famous for micro-credit - doing this in rural areas was helped by the high population density. It's easier to multiply the effects in areas where people live in high numbers. 

So, population density helped these organisations to be successful. And I think, you know each other at all levels of society, and that includes of course leadership as well. That's why I have no qualms in talking about the elite, then the private sector versus the public sector, versus the NGOs. We know in every society these are the people with power and influence, they can shape things, and that must be so in Bangladesh. Like the NGOs, they can shape things for the better. And I think, they have admirably played their role. 

In your book, you mentioned how foreign aid in Bangladesh has been more effective than in other low-income countries even though they didn't get as much as some other countries. Do you think the roles that organisations like Brac and others - where they design programmes with a strong awareness of local knowledge - have played a role in making foreign aid more effective?

Of course, yes. Absolutely. Think of the sums involved - it would be well over a billion dollars that Brac has received as aid from foreign countries. There's also a reason for that. Look, what these organisations earlier did that many NGOs in the world - whether they are international or not – did not, was that they wanted to scale with deep local knowledge. They recognised that scale matters. They invested a lot in functional structures, in mission driven organisations, large scale operations. 

I feel a joy visiting Brac here. It's the size of it, and the way it's been built up as a real incredible operation all the way up to the village. Just the way they build it up. Of course, outside help supported it a bit, but they did it themselves. I know it's a tricky thing because it looks a bit like a shadow state. But if the state is not functioning well, I would rather have a localised shadow state emerging a bit rather than having an UN agency setting up a parallel structure. 

And this is something again coincidental. It will be in the vision of the some of the leaders as well, as a kind of understanding and the localised knowledge of how it needs to be done in Bangladesh, which is part of its success. This is being studied and will keep on being studied by scholars from all over the world for a long time to come, because this is one of the most remarkable success stories. 

It's very hard to find in Sub-Saharan Africa where a local NGO ever was able to manage that much space. So, let's not forget that the state allowed it. That is the main differentiating factor, as there is no other state that would have allowed these organisations to grow so big. That we should not forget. 

That's another part of the success - of restraint of the self-aware state, of not trying to kill off things that actually would be pretty good for the people over time.