Re-design institutions to cut inequality

Though successive regimes should be given credit for poverty reduction, but it is not only governments which have played a role in the process. The dynamism of people engaged in producing goods and services, particularly farmers and workers, has been far more important in reducing poverty, believes Professor Rehman Sobhan, Chairman, Centre for Policy Dialogue (CPD). But farmers have not got fair prices and workers have not been rewarded with just real wages for their hard labour, he points out, as he elaborates on the areas that contribute to rising inequalities. Rent extraction in mega projects, debt default being institutionalized as a business model, rising subsidies growing into a burden on the public exchequer are some of the issues that featured prominently in the conversation between senior economist Prof Rehman Sobhan and The Business Standard Editor Inam Ahmed on 5 January 2022 on a virtual platform. The economist who is one of the planners who had crafted post-independence development model for Bangladesh feels proper public policy, just allocation of public expenditure and redesigned institutions can reduce social disparities and ensure an inclusive growth.     

Question (Q): Bangladesh has come far in the last 50 years in spite of weak institutions and widening inequality. But have we achieved an optimal level of development? What do you think we need to do for the next big leap?

Prof Rehman Sobhan:

Much depends on how you interpret the term achievement. Because, this can have many manifestations. There is a strong tendency, among governments and even from many people in my profession, who interpret it in macro quantitative figures. For example you had this percentage of growth, you had this level of exports…the problem with this quantitative interpretation is that you do not have any real qualitative understanding of what is actually going on behind the numbers.

I recognise the importance of the numbers and Bangladesh's numbers in many cases are impressive by any standards. Recently in a keynote presentation that I made at the conference on 50 Years of Bangladesh organized by CPD, I began by looking at indicators of our progress in the last 50 years compared to Pakistan. I pointed out that the struggle against Pakistan was built around economic disparity and in virtually every indicator when we began life in 1972 Pakistan was doing better due to past discrimination in policies and public resource allocation. But over 50 years we have demonstrated and have numbers to prove it, we have surpassed Pakistan in all indicators, including macroeconomic and human development indicators. In our human development indicators we have even managed to do better than India in some areas.

The problem with numbers is what lies behind them. What we need to understand is the nature of the driving forces behind our economic growth, what are the components of this growth and how sustainable these components are. Here some indicators are indeed very strong. The most impressive part of Bangladesh's economic growth has been its agricultural development, its diversification, the expansion of the non-farm rural economy. These are all very solid achievements which should be recognised. These gains have been brought about, in many cases, mostly by productivity increases, which is certainly an important part of the growth process. It has been brought about by the entrepreneurial skills of mostly small farmers. This is not a success story of large corporates, but a success story of small farmers. The problem which has always been pointed out with this aspect of the success was that the farmers who were actually responsible for promoting the growth of our agriculture rarely derived their due rewards from their entrepreneurship and their productivity, largely because all the value-added was being appropriated both through the marketing system and by the agro-processing sector. Virtually every year we hear complaints from farmers that they are producing bumper crops in a particular area, but they are not getting remunerative prices. On the other hand, we are all buying our farm produce in urban markets and are always complaining that prices are constantly rising. This paradox, should be an immediate area of address for our policymakers who have not managed to successfully resolve this problem while researchers have also not analysed this very satisfactorily.

The main challenge in the agricultural sector in the course of the next 20 years is how to give the farmers who are actually responsible for the productivity gains a much larger share in the value addition process. This problem can be addressed by getting farmers to come together to engage in marketing their produce, so they can deliver their produce to higher levels of the market and get a much bigger share of the final retail price. Farmers can also become partners in the food processing system, where both the automated rice mill owners and companies such as Pran and other agro-processing industries can incentivise farmers by making them their partners and giving them shares in the business. In this way, for example the government price support system for paddy and marketing benefits will be shared by the growers rather than being exclusively appropriately by the automatic rice mill owners. Now that we are in the digital age such an upward involvement of small farmers is likely to be more easily accomplished because both farmers and the state can monitor all these transactions digitally. 

Our current development model, high spending on mega projects, taking loans, how do you look at this model?

I think the approach of the Prime Minister, who put emphasis on developing the infrastructure, is quite sensible. We had very large infrastructural deficits which we inherited from Pakistan. Throughout the years, various studies carried out by the World Bank and the Asian Development Bank showed that Bangladesh had one of the largest deficits of infrastructure in the Asian region.

One of the great achievements of the Prime Minister has been to convert us from a severely-power deficient economy into an economy which now has, at least temporarily, surplus generating capacity. But here is also one of the weaknesses in the way the government has handled this issue. Whilst, it is a great achievement to establish power plants, I personally believe that there should be no concept as a power surplus. Because where you have got the supply capacity, it remains a major responsibility of the government to create the demand. One of the weaknesses in the way they have generated the demand response is that they have not matched the investments in the distribution system to keep pace with the power generation system. This is an old problem which has been pointed out for many years, that distribution has been lagging behind generation. But major interventions in this area are needed, backed by a very conscious attempt to ensure delivery to every household and to every sector of the economy which needs power. This is one area where, for example, the rural electrification programme initiated since the 1980s, has been an important factor in delivering power to the rural economy and could have been more effectively used to ensure universal energy outreach.

The other problem which has also gone hand in hand with both the power generation programmes and the mega projects for infrastructural development is that there has been an open-ended commitment to simply set up the projects at any cost, where inadequate attention has been given to cost consciousness, in the planning and implementation of these investments which has impacted on the costing of power, which has risen very sharply. These escalated project costs are not fully recovered through the retail pricing of power, due to subsidies. This has now built in huge structural deficits in the budget, which has to incorporate the permanent and growing subsidies implicit in the costing and pricing of power. Furthermore, now that we have become a major importer of energy resources, this deficit is going to be a growing burden on the public exchequer. The fluctuations in global energy process will also lead to considerable budgetary instability because we are not going to be able to forecast the extent of the deficiencies which are going to be built into the budget in order to subsidise power. This is the big challenge we face if we are going to maintain our trajectory of heavy investment in the power sector.

We have faced similar problems of high and escalating costs of other mega projects. The CPD periodically reports on the escalating cost and the time overruns of these projects. I would again advise The Business Standard to carry reports on both mega and even smaller projects. Enquire from the project directors to show you detailed breakdowns of how the cost escalations have taken place. These are not modest escalations of 10% or 20% but multiples of four or five times. Now this indicates two things. One is serious deficiencies in the planning of the project. You cannot continue to account for repeated deficiencies in the project planning exercise. If everything is above board then we cannot have overruns of multiples of 4 and 5. This implies that those who are responsible for planning and designing the project have little competence in assuming such responsibilities. My view is that some deficiencies in the planning process can be allowed for but careful investigation is needed to explore the rental element built into every project. Investigative journalists and researchers should track down who are the beneficiaries of this rent extraction.

If it is discovered that the rent extraction from every major project is 20% or so, then researchers should just calculate the opportunity cost of that 20%. The opportunity cost here is the resources which could be saved and invested in, for example, the health sector, which is hugely deficient in accessing public funding. The over-investment could have been used to enhance the quality of the education sector, it could have been invested in social protection programmes, where a whole range of deficits still remain. Even though large expenditures are being made in these areas much more public expenditure could be diverted to the social sectors from the savings in mega projects.

We should not see such public project cost escalations only in terms of mega projects. If we go all the way down to say road construction, every day we see in the newspaper that this road or that road has broken down, or this project is running behind schedule. So what is happening in these projects? I would suggest to Business Standard to introduce a regular feature on investigative reporting focusing on the quality of various public projects, what is the cost escalation, what is the delay and who have been the beneficiaries.

I had one last question based on the famous theory of James Robinson on inclusive system-extractive systems. They make the difference between a successful nation and an unsuccessful nation. If we consider that, how do you fit Bangladesh into that spectrum?

Well as you know, I have been writing on this subject for the last 50 years and my most recent books from the beginning of this century have been centred around the system of inclusive development. The real problem which, unfortunately, has risen is that whilst we have had growth and development, it has not been inclusive. We have reduced poverty and I must congratulate the successive regimes, more so the present regime, in this regard. But it is not only governments which have played a role in the reduction of poverty. The dynamism of people engaged in producing goods and services for the economy has been far more important in reducing poverty. While poverty has been reduced, certain categories of people have spectacularly enriched themselves. They have now become part of a new elite class. This is not unique to Bangladesh. It has been happening in many countries.

The major issue now under discussion in the international developmental discourse related to the SDGs is the need to reduce inequalities and for ensuring more inclusive development. Such concerns also apply to Bangladesh but the problem, at the moment, is not being seriously recognized. Our policymakers argue that we are being inclusive but provide little evidence to support this. The very concept is being misconceived. In explaining away inequality I notice that the Planning Minister regularly talks about the Kuznets curve. To argue, derived from the work of Kuznets, that in the early stages of development inequality will grow is quite inappropriate. An enormous body of literature has now emerged to demonstrate that inequalities grow because of the nature of the institutions, nature of the politics, the nature of the policies of the particular governments.

In Bangladesh inequalities have not grown because of any Kuznets curve but due to public policies, institutional arrangements and governance practices. I will only discuss two such factors here, the declining share of labour and value added and the inequalities originating from the default culture.

I have already pointed out the problems arising out of maldistribution of gains from our agricultural sector. Correspondingly, if we looks at the manufacturing sector, here we again observe that the workers are not really being justly rewarded for their contributions to the production process. In the recent conference organized by CPD mentioned earlier, Dr Rezwanul Islam, who has spent many years with the ILO, presented a very interesting figure in which he showed graphically that a considerable part of the high growth that has taken place in the manufacturing sector has been contributed by rising labour productivity.  He tracked the growth of labour productivity on one curve and the rise of real wages on another curve and showed that the gap between rising labour productivity and real wages was widening over the years so at that at its latest point it is at its widest. This shows that a lot of the dynamic of our growth is coming from the adaptivity and hard work of our workers. This is not being justly rewarded both in terms of wages keeping pace with productivity and also through participation in the value being added by labour.  

In my book, on Challenging the Injustice of Poverty, published some years ago I have pointed out that one solution to this problem in all areas may be to provide opportunities to us for more inclusive participation in the development process by making them equity partners in business enterprises where they work. We should not have a situation where the owners have graduated to a first world lifestyle while the living conditions of the people who are working in their factories remains part of the third world. These workers may be earning slightly higher than non-wage workers and earn incomes above the poverty line. But the disparity in their incomes and living conditions, relative to their owners, continues to widen. Workers today are not content with the wages they receive but compare their live to those who employ them. Such social disparities are not a recipe for social harmony. If we give workers a sense of participation in their places of work through ownership rights they will work twice as hard with twice the commitment to enhance productivity.

No day goes by when we aren't addressing the problem of debt default. Every year, it is increasing. This has been going on for 40 years. In the first studies which were carried out by me in the Zia regime in BIDS, we discovered Shilpa Bank and Shilpa Rin Sangstha were facing 90% default rates from their borrowers and that they would soon become bankrupt if they did not do something about the problem of debt default. By the end of the 1980s, both BSB and BSRS did become bankrupt and long term borrowing needed to be moved to the commercial banks. We now face this very dangerous situation where even though Bangladesh has been exposed to generations of financial sector reforms imposed on us by the World Bank and IMF, the main source of financing industries originates from commercial banks. As a result the financial sector faces a situation where the short term deposits of millions of people are being invested, without their knowledge, in long term lending.

A good part of this commercial bank lending is being defaulted by a class of mostly elite borrowers. These debt defaults have been perpetuated over four decades. A default culture has now become institutionalized as a business model for doing business in Bangladesh. The figures of non-performing loans are largely inaccurate as they don't take into consideration repeated past rescheduling or write off of the loans. We therefore need to compute the real extent of default of particular defaulters accumulated over a long period of years. Both media and researchers have not done a good job in making these calculations. If we could make such computations we would deduce that large, unrealized defaults have become a form of unrequited financial transfer to the defaulters via our financial sector extracted from the savings of millions of small depositors.

Such a system is not only immoral and unjust but highly inefficient and undermines the competitive process in the financial sector. The perpetuation of the default crisis implies that if someone is an honest businessman who regularly repays loans and does not default, then they are paying a higher price for their capital by repaying loans on time. On the other hand, the person who reschedules and then defaults, on their loan and may then have the loan written-off or written-down, ensures an automatic reduction in the cost of capital. This leads to an uneven competitive process in the market economy.

There are many other areas of public policy and allocative injustice in public expenditure which serve to widen income inequalities. Similarly various areas of unjust governance accentuate social disparities. All these state derived injustices are compounded by the injustices originating in the market place which remain at the source of growing inequalities. But this remains part of a more substantive discussion on such issues. Those who are interested in exploring such issues are invited again to read my work on Challenging the Injustice of Poverty: Agendas for Inclusive Development in South Asia.

In the final analysis it is within the political power of a government to use public policy, allocate resources and re-design institutions if it is genuinely interested in reducing inequality and promoting inclusive development. This was clearly the vision of Bangabandhu which should be kept in mind as we commemorate his centenary year.