Role of state capacity in ensuring sustainable economic future

As Bangladesh progresses from the rank of a least developed country to a developing country, we will have to embark on an unprecedented path. At this stage of our development, policymakers in our country are set to face a completely unfamiliar set of challenges, and one of the main concerns is how the government plans to address these challenges. 

The Youth Policy Forum (YPF) has initiated a discussion series, "Forging our Future" to help provide our policy makers with a global perspective, as they strive to address the challenges going forward. 

The inaugural session in this series was held on 20 January, 2022, where world-famous economists -  Sir Tim Besley, Professor, LSE and Dr Shanta Devarajan, Professor, Georgetown University were joined by Dr Mashiur Rahman, economic advisor to the Prime Minister of Bangladesh, in a conversation to enrich the public discussion about policy in our country. The Business Standard was one of the media partners of the event.

The session focused on state capacity development: democracy, government accountability, aid relations of Bangladesh, and how these would shape the country's sustainable economic future. Dr. Pauline Boerma-Collier, an economist who is the senior fellow for Global Public Policy at YPF, moderated the discussion on forging our future.

Building state capacity is an integral part of development

Quoting Adam Smith, Professor Tim Besley stated during his speech, that good governance is a prerequisite for development. The esteemed scholar said, "States' capabilities are the sinews of the state, the things that make states work. I like to divide these capabilities in three key areas: fiscal, legal and collective". 

Professor Besley also remarked that countries with strong fiscal systems gradually develop strong legal and collective capacities. These aptitudes, along with well-maintained social norms and market support, have been the key to development of most high-income countries. 

But he also remarked on the crucial part the government has to play in that regard. Emphasising on its role in the market, Professor Besley said that the outcome from the global market depends largely on how a country's government interacts with it. To solve the potential problems that may arise, he advocated for "common purpose and common interest", which will bring people together. 

A country with sustained success despite weak governance

Shanta Devaranjan, the panel's second speaker and a Professor of Practice of International Development at Georgetown University, discussed Bangladesh's seemingly paradoxical development. Despite being one of the most corrupt countries on earth, Bangladesh has seen steady economic growth since independence. 

Non-government organisations played a remarkable role in providing healthcare and education for the poorest of the society. Even though Bangladesh has one of the lowest tax revenue-to-GDP ratios in the world, it has demonstrated stout economic stability. 

According to Professor Devaranjan though, Bangladesh's growth is not paradoxical at all, but a result of our people's resolve and initiative. For example, people took advantage of the opportunities created by the government's trade liberalisation policies and this resulted in an export and economic boom. 

These endeavours have been joined by a large number of expats who send an enormous sum of remittance every year. Even though he expressed concerns about the weak balance sheets of the country's banks, Professor Devaranjan appreciated the progress made in terms of financial inclusion. 

He also praised Bangladesh for the fact that Bangladesh has always set its own economic policies, rather than relying on the prescriptions of international organisations like the IMF. 

Perception of Bangladesh's governance

In response to Dr Shanta Devarajan's presentation, Dr Mashiur Rahman, economic advisor to the Prime Minister, said, "We all know that corruption stifles growth. But, if growth continues, can we assume that the perception about corruption is accurate?" He claimed that Bangladesh's growth is misunderstood, and the effects of governance is often minimised. 

He pushed back on Dr Devarajan's comment on private provision of education by pointing out that the teachers' salaries in private schools were mostly paid by the government, while many secondary schools have been nationalised in recent times. 

Furthermore, Dr Rahman stated that public universities were established even before the country's independence, whereas private universities are relatively new. 

He also stated that the government is also expanding the number of schools and colleges that offer technical education. Women's quotas have been in place in various sectors since 1972, and they have played an important role in women's empowerment, as has family planning, which was introduced by the government before non-governmental organisations in the country.

Government also played a vital role in the ready-made garment sector's progress by providing them with bonded facilities. 

Dr Rahman stated that our fiscal deficit is only about 4% of GDP, of which, only half is financed by concessional loans. The saving and investment rates also match up being 29%-30% over a period of 5-10 years. In the rural areas, as the earnings of people are not calculated properly, government assistance is hard to assess.

He also acknowledged the incidences of corruption as mentioned by Dr Devarajan, but said that the Corruption Perception Index should not be taken too seriously. According to him, these are based on perceptions and many corrupt countries are left out due to lack of information about corruption information. 

In response to questions, Sir Tim Besley pointed out the decentralisation strategy of China, which he termed as a brilliant move. It forced provincial governors to compete with one another in order to provide economic growth within their respective provinces. 

The promotion of these governors was also contingent on the prosperity of their province. He said, "Despite the fact that it was not democratic, China created a system that was efficient and accountable." 

In response to a question about development models, Dr Mashiur asked, "Where was the Taiwanese or South Korean model before they did it? As a result, these are not the only models that should be emulated, and Bangladesh can also demonstrate a different path of development." 

Zahrah Rahman is an undergraduate student of Economics at Brac University.

Sayma Akhter Jafrin is an Economics graduate specialising in Finance and Management from Asian University for Women.

Disclaimer: This article first appeared on foreignpolicy.com, and is published by special syndication arrangement.