The morning after: Political economy, geopolitical economy and the economic crisis

There is no getting away from the fact that Bangladesh is sitting on the brink, politically, economically, as well as geopolitically. 

Once the dust has settled, the new government will have to look hard at itself and ponder over the state of the economy and what to do about it. Unfortunately, there are few words of comfort that one can provide to them. The tasks ahead will not be pleasant.

In 2019-20, we were poised to join the Asian Flying Geese club. Indeed, I argued in my last book, 'The Odds Revisited', that we had already done so, and what we needed to do was gain height and momentum along our flight path. 

Since 2020, we have been hit by massive headwinds — first in the form of Covid-19, and then by Ukraine. These hits upended normal economic flows, both domestic and international that are too well known to have to be repeated. 

These kinds of risks are difficult to prepare for in advance and become even more potent when our own house remains in a poor state of economic and administrative governance, hobbled by crony-driven policies, ill-advised appointments to crucial leadership positions, and a blind pursuit of highly visible prestige projects and a belief that remittances, export earnings and the GDP growth rate will continue to deliver automatically, year after year. 

All these issues will need to be revisited and addressed head on and not, once again, swept under the carpet under some 'role model' fig leaf.

Development first policy

Politicians frequently talk of the 'development highway' and have tended to frame their political rhetoric in terms of rapid development outcomes pointing mainly to mega infrastructure projects, good GDP growth and 'overflowing' forex reserves. 

One understands that politicians in developing countries like megaprojects as a relatively straightforward way to boost their image and acquire credibility amongst the electorate. Massive resources deployed to mega initiatives in turn generate enormous spillovers that are easy to appropriate — thus a clear win-win for the ruling classes. 

Nevertheless, costs need to be justified by economic and social returns. Going forward, we will urgently need to focus rigorously on the foreign exchange component of projects under the assumption that forex is in fact highly scarce and poses a binding constraint on development. 

This will be difficult because in the last few years we began to believe that we were sitting on massive reserves and began to hatch ingenuous plots to dip into those (eg. in the name of foreign investments in Africa). 

After many decades, we are once again faced by the spectre of the foreign exchange gap. Therefore, we must now make every effort to generate and save foreign exchange. 

A note of warning: the habitual cost-return figures generated by consultancies fielded to assess project feasibility and produce the magic numbers (IRR, EIRR, NPV) for megaprojects must be treated with more than a grain of salt. As someone who has done cost-benefit analyses of large infrastructure projects, let me just say that I understand how these numbers are generated. 

Suffice it to say simply that a consultant who finds a megaproject infeasible is unlikely to be employed by the same agency again. Truth be told, none of the feasibility studies that are routinely churned out by the consultancy mafia is truly independent. A government seeking an independent evaluation must find a way to get around this dilemma.

Even if politicians tend to favour high visibility megaprojects, what is really needed is development that requires a shift of attention towards metrics that more closely reflect human welfare like employment, wages, poverty, inequality, food security, quality of education and skills, growth of SMEs, access to capital, growth of the farm and non-farm sector, and technological transformation that can usher in broad-based, high-velocity growth. 

Urban-industrial growth remains excessively narrow and will not be able to address the aspirational needs of a large, restless middle class that is feeling left out of Bangladesh's development miracle judging by labour market performance. 

Mindlessly expanding public sector employment as a solution is misplaced, even counterproductive. I remember well how I was pressured by a certain ministry to hire more people despite my repeated pleas that we needed to fill the posts with youngsters meeting our strict criteria. 

They insisted that I lower standards and find a way to train up the new recruits to meet our needs. While this sounds fair, the problem is that a lifetime of educational neglect cannot be remedied by a few months of 'on the job' training — at least not in academia. Just hiring to fill up some ad hoc quota would be tantamount to leaving behind a legacy of inefficiency and poor quality that would stay with us for several decades with huge adverse effects on the institution. Nevertheless, the pressure was relentless, but I refused to give in. I have not checked with my successor to find out how matters stand now. 

To get back to the 'development first' policy — yes, it is a good policy. One could even argue that it has served its political purpose as well. We now, however, must set our sights on real development that goes well beyond brick and mortar and puts human beings at its centre.

The current macro crisis 

I think readers of this paper are familiar with the macro crisis we face today and its broad underpinnings. Our reserves quickly disappeared because the value of our dollar was kept artificially low. In other words, the value of the taka was propped up gradually to a level that bore little resemblance to its real value (in terms of what economists' refer to as the Real Effective Equilibrium Exchange Rate or REER). 

So what happens if you have cheap dollars (or cheap anything) — you buy more of it. So you import more, you hoard more, you launder more, you use all available mechanisms to take out those dollars from the system and dispose of those abroad. 

Economists have been warning against an overvalued exchange rate for years. Their advice was ignored until of course the IMF came along and made devaluation a precondition for their loans. The bitter pill had to be swallowed at the worst possible moment — when basic energy and food markets were exploding all around us. 

But if you are ill, you have to take your pill. This treatment, alas, did not do the job. The BDT continues to tumble as we speak, and more advice is piling in to further devalue or allow the taka to depreciate further led by market forces. 

Here, I have a disagreement.

In my view, the BDT has fallen to a level that is likely to be close if not actually below its REER. In other words, it should not have to keep falling any further relative to the USD. Indeed, as we begin managing our macro policies better, it should gradually begin to appreciate. In this context, a healthy dose of external borrowing could play a key role. This is what would be expected if things were normal. 'Things' however are far from normal.

As anyone who has ever looked at markets closely would testify, markets are easily spooked. While a competitive market will find its equilibrium restored eventually even after suffering bouts of volatility, a less competitive market will face greater volatility and a longer time interval before things settle down again. Thus, in between episodes of equilibrium, even the best of markets can exhibit considerable volatility. 

If you don't believe me, just look at Wall Street, which ostensibly is the largest, most competitive market in the world. So, what do you think is happening to our forex market, blanketed by uncertainty, political turmoil, threat of external sanctions, and high inflation? 

I do not think tinkering with the exchange rate is going to get us out of the hole we are in. We urgently need political stability in order for confidence to be restored in the market. In other words, we must find a permanent solution to our political woes. A piecemeal approach will no longer be sufficient. We owe this to ourselves and to the 3 million martyrs of the Liberation War. 

There are other elements of the macro situation that one could delve into. My position is that the macro policy variables are moving or have moved in the right direction. Its benefits are not going to be immediate for the aforesaid reasons relating to political uncertainty and an atmosphere that is antithetical to investment — in fact quite its opposite. 

Financial sector reforms

It goes without saying that a prerequisite to reversing our current economic disarray is through discipline in the financial sector which has been plagued by poor policies, poor regulation, surging non-performing loans, and flight of capital. One should recall that the major premise of allowing private sector banks in the country was that this would bring about competition, efficiency, and good performance. 

This has not happened despite initial promise and considerable potential. As always, the greed of a few thwarted the rise of a sector which could have helped Bangladesh to become a regional hub in international banking and finance. Certainly, we have the talent and the expertise. What we lack is imagination, vision, policy commitment and drive.

The next government will have to urgently revisit its position vis-a-vis the financial sector and its overdue reforms. Hint: Please get the cronies to back off so that the sector can be run by professionals.

Exports 

Our export basket is limited, and sadly, so are our export destinations! Given threats of unilateral sanctions (without reference to WTO rules or ILO labour standards) by the 'Human Rights' champion of the world, the time has come for vulnerable countries like Bangladesh to seriously rethink its economic development model. 

It is clear to me that we cannot be a puppet state of India or America, or indeed anybody else. Our international relations will have to be based on our own national interest. Our location makes this a difficult exercise given rising tensions between the US and China, and India and China, increasingly focused on the Indo-Pacific.

It was of course extremely irresponsible of China to become so rich and powerful at such great speed, and to add insult to injury, after taking full advantage of US technology and markets to boot! Even that would have been alright if it was not for the fact that the Chinese still decided to remain Chinese and refused to be American. This is not my view actually — I heard Jeffrey Sachs talking about this recently. 

Under the circumstances, the only moral as well as pragmatic way forward for us is to remain firmly, unshakably determined to hang on to the moderate, middle ground. Sorry, we are not going to be complicit in your wars — hot, cold, or warm. If you want our respect, help us with market access, help us with solving the Rohingya crisis, help us to prosecute Myammar for genocide, and stop meddling in our internal affairs. 

And above all, desist from any design related to forceful regime change. Bangladesh's politics are muddled enough without you guys making matters even worse. The people of Bangladesh will ultimately do the right thing by themselves. The best way forward is to support Bangladesh through a focus on education, technology, health, investment, and market access. The people of Bangladesh are and always have been pro-democratic. We have waited for 50 years — we can wait a few more — Bangladesh will emerge out of the present crisis as a democracy. This however, must be a result of our internal dynamics and not imposed by external forces.

In short: our exports are likely to face cold, head winds come the new year. We will therefore have to figure out what to do about dwindling reserves to stabilise the economy. In the short run, the alternatives are few. We will be in need of generous bailouts. Maybe we should ask our dear neighbour for a soft loan? After all, we have saved them a lot of money in more ways than I can count, including security costs in the Northeast and free water from our rivers.

Remittances and 'hundi'

I think remittances will rebound after elections especially if elections are able to stabilise the situation and instil confidence in the minds of the people. For the same reason, capital flight will diminish. I do not think marginal tinkering with policy rates will help one way or another at this time.

The subject of hundi is a difficult one. It has existed for thousands of years, facilitating long distance trade across oceans. 

This suggests that it cannot, indeed should not be uprooted. The question is, can it be regulated or at least nudged into 'good behaviour' as needed? Can we give out licences to hundi wallahs but refrain from breathing down their necks? Can the licensing conditions be easy, straightforward, and acceptable to the trade — including retaining anonymity of transactions? We will have to find a way to accommodate hundi-type exchange within the mainstream. 

Our financial wizards should try to figure out how. I have noticed that Bengali-owned grocery stores in New York have a little window for money transfers, ostensibly using some exchange platform. My suspicion is that this is hundi or hundi-like exchanges given the rates displayed. Apparently, this is not illegal, and may even be something that we in Bangladesh could consider adopting in some form, like having hundi-type booths in public sector banks? 

The other possibility might be to legalise crypto exchanges so that people have a way to preserve the value of their money under difficult conditions. The crypto exchanges could become part of the overall financial system so that flight of capital could be dissuaded. Of course crypto currencies are still struggling for acceptance but increasingly, its potential force is being recognized — just take a look at how well it has been doing in the last few months.

The third option would be to allow people to hold a certain percentage of their Taka savings in USD, or some other free currency. This would at least keep the money within the country although some of it, undoubtedly, would be deployed to meet foreign contingencies relating to treatment or education. These types of exigencies are being currently met already anyway — but in an inefficient and costly manner. 

I have also wondered about the merits and demerits of dollarization. I must confess I have not thought about it very hard. My sense is we could opt for partial dollarization on an experimental basis. There are a number of countries that use the USD as an alternative to the domestic currency, with some success. 

This at least helps to protect us from exchange rate worries, making hundi much less profitable. Some major economies like Argentina are considering adoption of the USD. The downside is that this will limit our ability to adopt monetary policy freely or print money at will. Not sure if this is much of a downside given our state of financial governance.

Political economy

The nature of our political economy has changed, both in its domestic as well as its external configuration. On the domestic front, we have moved away from an agrarian, surplus farmer dominated polity to one dominated by a new capitalist class consisting of independent as well as crony capital. 

As it happens, governments in poor countries thrive in the company of cronies, and will try hard to generate a crony class if one does not exist. In Bangladesh, one does not have to try very hard to accomplish this — the competition to join the crony market is intense through a complex system of 'tadbir', bribes, and various other enticements. Indeed, our semi-feudal culture appears to be well-suited for such a political economy.

This is how filial loyalty is cultivated and institutionalised in the interest of consolidating political power.

Such a political economy has strong, negative implications for a pro-people policy in addition to going against the further evolution of a vibrant, independent capitalist class. There is little chance of overturning this system anytime soon and must be viewed as a fetter on development. The crony class, however, is small and could in theory find itself quickly expelled if the winds of change should begin to shift. 

The emergence of Bangladesh's capitalist class is a true miracle. It has matured. It has the power to exert influence on governance – probably more than any other group in the country. One must look to them to play their historical role at this moment of crisis. The alternative, I fear, will not be pleasant.

The geo-political economy is of great concern as well. Bangladesh has clearly been identified as a hotbed of superpower rivalry. How we play this will matter in terms of stability and security, in terms of market access, and in terms of aid and investment. 

Dr KAS Murshid, economist. Former Director General, BIDS. TBS Sketch

There are a number of other risks as well on the horizon: global warming, Islamophobia in India and the West, the imminent collapse of another failed state in the neighbourhood, the low-level insurgencies in the Northeast of India across our borders, the potential re-emergence of jihadi groups — the list goes on. 

Each of these elements require us to formulate a strategy in terms of how we deal with foreign counterparts. It would be good to remind ourselves that we should never put all our eggs in one (Indian) basket if we want those to hatch. My sense is that while we must try hard to balance out contending forces, we must cultivate a slight pro-Western tilt — especially by focusing on countries like Japan, South Korea, Canada, Scandinavia, in addition to Western Europe and the US. Without access to their markets, it will not be possible to sustain an export-led growth model.

The author is an economist, chairman of the Shabab Foundation (SMDF) and former director general of the Bangladesh Institute of Development Studies (BIDS).