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Country Report Bangladesh

Country Report

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The January 2014 elections have left Bangladesh with a government whose legitimacy is questioned. With the opposition expected to continue protests and strikes, the risk of more political instability is high. 

Strengths (+) and weaknesses (-)

(+) Low labour costs

Bangladesh has some of the lowest wage costs in the world, which make it the main location for the production of cheap clothing in Asia, besides China. The generally positive attitude of the government towards foreign investors supports the sector. The garment sector is at times criticized by western countries for the poor labour and safety standards.

(-) Political instability and polarization

A polarized political spectrum and personal animosity between the leaders of the two main blocks create political instability and hinder effective policy implementation. In the past, the military has stepped in on more than one occasion.

 (-) Very weak infrastructure and poor business climate

Economic development is hindered by poor public institutions, low level of infrastructure, regular power outages, annual floods in vast areas of the country and endemic corruption. As a result, poverty is widespread, with more than 40% of the population living on less than USD 1.25 a day.

Key developments

1. Flawed elections leave legitimacy of new government in question

On January 5th, 2014, Bangladesh held general elections. The ruling Awami League (AL) won the elections, which was no surprise, as the opposition boycotted the elections. Due to the opposition boycott and the very low voter turnout (a little over 20%), the legitimacy of the new government is questionable and the risk of political instability is high. The opposition Bangladesh National Party (BNP) and its allies boycotted the elections after the AL had decided two years ago to end the practice of installing a non-partisan caretaker government in preparation of elections. In the past two decades, an independent caretaker government was appointed to organize (more or less) unbiased and fair elections. The January elections were organized under a multi-party (and thus not an independent) caretaker government. As the opposition did not want to take part, only the AL and its allies were included. Going forward, the risk of ongoing political instability is high. The country is deeply polarized and a boycott of elections by one of the sides is not new either. Moreover, now that the opposition is not represented in the parliament, there is a substantial risk of recurring street protests and strikes. Unfortunately, these tend to be rather violent in Bangladesh, as was also seen in the run-up to the elections. Estimates suggest that several hundred people were killed during protests and strikes last year. If the political situation remains volatile, the army could step in. The last time the military was more or less in power was between 2007 and 2009, when Bangladesh was ruled by a caretaker government backed by the military. In a positive scenario – in which the legitimacy of the government is confirmed – the policy stability could increase in the coming parliamentary term, as it has been the first time since 1991 that a party wins a second term in office. Infrastructure planning, among others, has suffered from the frequent alternation of power between the AL and the BNP, as new governments at times overturn  old decisions.

2. War crimes tribunal criticized for politically motivated sentences

The International Crime Tribunal (ICT), which is a special tribunal in Bangladesh for crimes committed during the 1971 independence war, has sentenced several senior leaders of the Jamaat-e-Islami party to life in prison or death in the past year. While many in Bangladesh support the need for a war crimes tribunal, human rights groups question the capabilities of the court. Moreover, the Jamaat party, an ally of the opposition BNP party, claims that the ICT is politically motivated and that it aims to eliminate its leaders. As the ruling AL has pursued a ban on religious parties like the Jamaat, this is a plausible claim. After each conviction, protests erupted that have cost the lives of dozens of people. As such, the tribunal has so far failed to reach its goal of reconciliation. In fact, the ICT seems to further deepen the political polarization in Bangladesh.

3. Factory safety issues in garment sector

In April 2013, more than 1100 people were killed when the Rana Plaza garment factory collapsed. This brought renewed attention to safety issues in the textile sector, which accounts for almost 70% of Bangladesh’ exports. So far, the international response has been limited. While there have been numerous incidents of factory fires and collapses in the past, the April collapse is possibly the worst garment-factory accident in Bangladesh’s history. It highlights the poor health and safety standards in the factories and inadequate enforcement of building regulations. So far, not many corrective measures to limit future damage have been taken by the government, much to the discontent of textile workers. In May, death sentences were demanded for the owners of the Rana Plaza garment factory during a demonstration. However, international retail chains have not been scared away by the accident. Several well-known brands have launched initiatives to improve the situation in Bangladesh, but the impact of these initiatives remains to be seen. However, in the longer run, more accidents could further hurt Bangladesh’ image. Meanwhile, the opening up of Myanmar poses more risks to the garment sector. Myanmar enjoys similar low wages and was recently granted duty-free access to the EU, just as Bangladesh already had. However, it will take considerable time before garment production capacity will have been built in Myanmar.

4. Remittances possibly affected by war crimes tribunal

Remittances are an important source of foreign currency and economic growth for Bangladesh. Remittances come from the more than 6 million Bangladeshi working overseas and are about 10% of GDP. In 2013, remittances were USD 13.8bn, which was a 2.5% decline from 2012 and the first decline since 1991. Gulf states hired far fewer Bangladeshi in 2013 than in the years before. Saudi Arabia, which accounts for about 20% of remittances and is Bangladesh’ largest overseas job market, provided only 13,000 new jobs in 2013, compared to 204,000 in 2007. Rumour has it that Saudi Arabia questions the neutrality of the war crimes tribunal, which has sentenced several members of Jamaat-e-Islami. This party belongs to the same conservative branch of the Islam as the rulers in Saudi Arabia and other Gulf States. With the re-election of AL (Jamaat-e-Islami is allied to the opposition BNP), the implicit political rift with Saudi Arabia is unlikely to be mended. The government will need to find other overseas job markets, but it has not been very successful so far. Still, the decline in remittances income has been rather moderate and is expected to remain so. As such, the current account balance, which is only in surplus thanks to a large transfer balance surplus, is expected to be around 2% of GDP in 2014. 

Figure 1: Remittances important for Bangladesh
Figure 1: Remittances important for BangladeshSource: EIU
Figure 2: Stable economic growth
Figure 2: Stable economic growthSource: EIU
 
Factsheet of Bangladesh
Factsheet of BangladeshSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

With an average income per capita of USD 821 (USD 1,967 in PPP) in 2013, Bangladesh is a poor country. More than 40% of the population lives on less than USD 1.25 per day. With 155 million inhabitants, Bangladesh is densely populated. Many live in the fertile lowlands of the Brahmaputra and Ganges rivers, which put them at risk of flooding every monsoon season. Occasionally, Bangladesh is also hit by typhoons. Even though about half of the population works in the agricultural sector, the ready-made garment sector, which benefits from low labour costs, is vital for the economy and accounts for almost 70% of exports. Remittances are also an essential source of foreign currency.

Owing to its Muslim majority, Bangladesh became part of Pakistan after the end of British rule over (Hindu-dominated) India, despite a distance of about 1,600 km between the two territories. In 1971, Bangladesh (East Pakistan) declared independence from (West) Pakistan in a short but bloody war. Since independence, coups have been a regular feature in Bangladesh and the military continues to play an important role in the country. A 1991 referendum reintroduced democracy after military rule since 1975. Currently, politics in Bangladesh are dominated by the Awami League (AL) and the Bangladesh Nationalist Party (BNP). The secular, centre-left AL, which has been in power since 2009, focuses on improving ties with India and limiting religious influences in politics. The Islamic, centre-right BNP leads the opposition and tends to be more nationalistic. Much of the political polarization is due to personal animosity between the leaders of the AL and BNP parties. 

Economic indicators of Bangladesh
Economic indicators of BangladeshSource: EIU
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