Extractive institutions won't turn inclusive overnight, start with a few key sectors

With Bangladesh approaching its 13th national election, former World Bank Dhaka Office lead economist Zahid Hussain recently sat down for a candid conversation with TBS Executive Editor Shakhawat Liton on our show "TBS Future", reflecting on the country's economic crossroads, policy missteps and the choices voters face. This is an abridged version of the interview.

Zahid Hussain: Economics, as such, did not exist as a separate subject. The subject was political economy. Adam Smith is regarded as the father of modern economics or political economy. So the second question I ask in my classroom is: why is it essential to study a country's political economy in order to understand its economy? Or, if you do study it, how does it help you grasp the true picture and character of that country's economy?

To put it very briefly, the economy stands on a certain kind of ground — the ground on which it operates and carries out its activities.

Shakhawat Liton: Is that ground solid, muddy, or quicksand? Can you stand on it, walk on it, or run on it?

ZH: The characteristics of this ground are determined through political processes. So if the ground itself is not right, economics, as a discipline, loses much of its relevance. How healthy an economy is depends heavily on politics.

SL: How has politics in our country influenced markets, resources, the distribution of assets, and the rules governing them? And as a result of that influence, what kind of political economy has taken shape in Bangladesh?

ZH: This is a very big question. If you look at Bangladesh's history of political transition from independence to the present, what lessons do you draw? The nation was born with the expectation that it would be governed through a democratic process, and the movement for independence itself was driven by economic issues.

In the first 15 years after independence, we went through many changes just to determine what kind of system of governance we would have. But the reality is that we failed to establish a proper democratic system during those first 15 years. I would argue that undemocratic processes did not begin only after 1975; the controversy started right after the 1973 election. After 1990, however, there was a visible change. At least under a broadly acceptable and relatively neutral authority, people were able to go to polling centres and vote for candidates of their choice. Those elections gained general acceptance. Those who were elected went to parliament with votes from the people. The elections of 1990, 1996, and 2001 were broadly accepted.

From 1990 to 2014, there was a basic precondition for economic development: a certain degree of political stability. Without that, economic activity cannot function. Politics during this period moved through an overall stable — though imperfect — process. And during this time, Bangladesh managed to shed its "basket case" image. In achieving the Millennium Development Goals, which covered the period from 1990 to 2015, Bangladesh received international recognition as a star performer. This is where the terms "Bangladesh paradox" or "Bangladesh development surprise" emerged.

Bangladesh is a country with virtually no natural resources — only people and land. With limited natural resources and such a large population in such a small area, how did Bangladesh outperform many African countries and even surpass several South Asian countries in achieving the Millennium Development Goals? Even compared to India, which also emerged as an independent country in 1947, Bangladesh's progress between 1990 and 2015 under the MDG framework was far beyond what anyone had expected. Yet it happened. That was the Bangladesh surprise.

After the walkover election of 2014, however, we began to see these achievements lose momentum. The democratic process — particularly the choice of legislators, the selection of MPs through elections—lost the kind of participation and the basic right of "my vote, I will cast it" that we had in the previous four elections. Along with that, economic dynamism also declined. Inequality increased. Inequality existed before as well, but there had at least been a trend toward reduction. Since then, that trend has reversed.

SL: The Bangladesh surprise we saw between 1990 and 2015 faded, and Bangladesh's development turned into a non-story. Earlier, Bangladesh was a story—any discussion of development had to mention Bangladesh because its achievements were such a surprise. People asked: how did this happen? But after that, Bangladesh stopped attracting attention. This does not mean the economy completely collapsed, but it became a non-story—nothing particularly noteworthy or worth highlighting. Corruption and misgovernance exist in many countries. So, from being a success story, Bangladesh turned into a non-story after 2014.

What is the core reason for this? Politics — politics went off track. We moved away from the electoral and political system we once had. And after moving away, over the past 15 or 16 years, we have seen another kind of "surprise." We have mega projects, but we also have mega-scale corruption.

ZH: Yes, another surprise. The earlier one was a pleasant surprise; this one is an unpleasant surprise. Corruption existed before, too, but what changed was the scaling up of corruption. The sense of shame traditionally associated with corruption gradually disappeared over the past 15 years. It became normalised.

This so-called developmental state concept emerged: it does not matter whether I steal or loot, as long as I deliver development. I have built the Padma Bridge, I have built railways, I have constructed expressways, flyovers, regional highways, taken up big projects, dreamed big dreams — so what is your problem?

Examples were often drawn from China or East Asia, from the so-called East Asian miracle — Malaysia, Indonesia. They also had corruption; they were not democracies, yet they delivered development. So why do you have a problem following that path?

The difference, in my personal view, is this: in Indonesia, a metro system was completed in nine months; in our case, it took years. A project that should have cost one taka costs one and a half taka there; here, a one-taka project costs five taka. Where they could deliver 100 units, we could barely deliver five. And we achieved even that through extremely long timelines and massive cost overruns—at a huge cost. The difference lies in accountability systems.

If accountability does not exist, delivery does not happen—or rather, delivery does not happen with the quality and efficiency that is possible. Without accountability embedded in the political system, you cannot ensure effective delivery. If you want to rise and move upward, you must go through an accountable process, where you cannot advance merely through connections, lobbying, or patronage. There must be a space for meritocracy: if you are not competent and cannot deliver, you should not reach top leadership positions.

SL: Election campaigns have begun, and political parties are making various promises. What does this signal about the political economy of the future? It is said that due to political uncertainty, the economy is slowing down, investment is not coming, and that after the election, stagnation will be overcome. Are there any signs of that?

ZH: The sign is that after the fall of an autocracy, an election is being held under an interim government. We saw this in 1990 as well, didn't we? A similar situation prevails now. Political stability is important for the economy. But the kind of stability we saw between 2014 and 2024 — where the same government stayed in power — was artificial stability. What is needed is genuine stability, with contestability.

A stable government must simultaneously have a strong opposition that ensures contestability — so that those in power cannot do whatever they want in parliament. Within parliament, the majority must be accountable to the opposition, and the opposition must be large enough that its voice cannot be completely ignored. Laws should not be passed at will without considering opposition views, and parliamentary committees must include opposition representation. If such a system of checks and balances emerges through elections, it would bring a major positive change for the economy and for investor confidence.

The future of our political economy will depend on accountability, an independent judiciary, a meritocratic administration, and neutral law enforcement agencies. From top to bottom, a mentality has taken root that one must work primarily to protect the interests of those in power. This kind of administrative mindset now dominates. The administration must be allowed to perform its professional duties and be accountable to the executive branch in a proper manner.

Once we build checks and balances within institutions, we can then move to economic reforms. Whether those reforms will be effective depends on whether our institutional framework can cooperate with the reform process. That is why institutions must be fixed first. I am not saying everything will become perfect, but at least we must start walking in that direction.

SL: In the book Why Nations Fail, two types of institutions are discussed: extractive institutions and inclusive institutions — both political and economic. The question for us is whether, over time, both our political and economic institutions have gradually turned into extractive ones. The major challenge now is to transform them into inclusive institutions. And that will determine the future of our political economy.

ZH: If the government formed in February wants to reverse extractive institutions into inclusive ones, it will face a Herculean task. There will be huge obstacles and resistance. At the very least, the message from the July uprising is that you cannot survive in the long term through this kind of misgovernance. Expecting an overnight transformation into virtue would be unrealistic. Reversing a vicious cycle into a virtuous one will not happen overnight.

A beginning can be made by identifying a few sectors — especially those where large-scale corruption has taken place. Let us start there. Fix banking. Fix the power and energy sector. Fix transport — these are major areas. Education, too, where there is massive corruption, and where the damage is perhaps the greatest because we are failing to build human capital. The existing labour force is turning into a liability for the country.

So if we can start with banking, energy, transport, education, and health, then perhaps, over the next 10 to 15 years, we can finally enter a virtuous cycle.

Abridged from an interview with TBS Executive Editor Shakhawat Liton