IN THE LATE 1980s, Bangladesh continued to be called the "largest poorest" country and to be singled out as "the test case for development." A great deal that had happened in the economy since independence in 1971 supported the hope that the country would eventually overcome its dependence on foreign aid and would approach relative self-sufficiency. In the meantime, success was measured in more limited and immediate accomplishments: greater production of food grains year by year, greater vigor shown by the private sector in generating investment capital and using it productively, and measurable growth and diversification of exports. The government continued to depend on the donor community to provide the bulk of the resources needed to promote human development in the form of nutrition, health, and education programs. The most active donors continued to give Bangladesh good marks for its economic performance.
In 1971, the year Bangladesh achieved independence from Pakistan, the new nation was referred to in foreign circles as an "international basket case," a wounded combatant almost beyond hope of recovery. Bangladeshis themselves, recalling the "international basket case" characterization, often choose the metaphor "bottomless basket," implying that no matter how much assistance is given to the economy, there will always be a need for more. It is a tribute to the Bangladeshi people, to the constructiveness and generosity of other nations, and to the strength of the human spirit that the gloomiest fears have not materialized. The firsttime observer of Bangladesh may still perceive the country as poverty stricken, overpopulated, and with little prospect for a sunnier future. In its first seventeen years of independence, Bangladesh did not prosper, nor was it able to improve substantially the quality of life for its huge population, but it did not lose ground either. If the prospects for rapid economic development were not noticeably better in 1988 than they were in 1972, it was encouraging that Bangladesh was active in economic fields that were not foreseen even a few years earlier--e.g., as a major producer and exporter of ready-made garments and frozen seafood. And if the economy still seemed dangerously poised on the brink of disaster--a drought, a typhoon, or excessive flooding threatens every year--the government, the people, and the international community had combined to limit the scope of disasters, and the economy of Bangladesh had continued to struggle upward.
Showing posts with label The Economy. Show all posts
Showing posts with label The Economy. Show all posts
Wednesday, January 9, 2008
The Economy - Historical Perspective
East Bengal--the region that was to become East Pakistan and later Bangladesh -- was a prosperous region of South Asia until modern times. It had the advantages of a mild, almost tropical climate, fertile soil, ample water, and an abundance of fish, wildlife, and fruit. The standard of living compared favorably with other parts of South Asia. As early as the thirteenth century, the region was developing as an agrarian economy. It was not entirely without commercial centers, and Dhaka in particular grew into an important entrepôt during the Mughal Empire. The British, however, on their arrival in the early seventeenth century, chose to develop Calcutta as their commercial and administrative center in South Asia. The development of East Bengal was thereafter limited to agriculture. The colonial infrastructure of the eighteenth and nineteenth centuries reinforced East Bengal's function as the primary producer--chiefly of rice and jute--for processors and traders in Calcutta and beyond.
Some of the same factors that had made East Bengal a prosperous region became disadvantages during the nineteenth and twentieth centuries. As life expectancy increased, the limitations of land and the annual floods increasingly became constraints on economic growth. Traditional agricultural methods became obstacles to the modernization of agriculture. Geography severely limited the development and maintenance of a modern transportation and communications system.
The partition of British India and the emergence of India and Pakistan in 1947 severely disrupted the former colonial economic system that had preserved East Bengal (now East Pakistan) as a producer of jute and rice for the urban industrial economy around Calcutta. East Pakistan had to build a new industrial base and modernize agriculture in the midst of a population explosion. The united government of Pakistan expanded the cultivated area and some irrigation facilities, but the rural population generally became poorer between 1947 and 1971 because improvements did not keep pace with rural population increase. Pakistan's five-year plans opted for a development strategy based on industrialization, but the major share of the development budget went to West Pakistan, that is, contemporary Pakistan. The lack of natural resources meant that East Pakistan was heavily dependent on imports, creating a balance of payments problem. Without a substantial industrialization program or adequate agrarian expansion, the economy of East Pakistan steadily declined. Blame was placed by various observers, but especially those in East Pakistan, on the West Pakistani leaders who not only dominated the government but also most of the fledgling industries in East Pakistan.
Some of the same factors that had made East Bengal a prosperous region became disadvantages during the nineteenth and twentieth centuries. As life expectancy increased, the limitations of land and the annual floods increasingly became constraints on economic growth. Traditional agricultural methods became obstacles to the modernization of agriculture. Geography severely limited the development and maintenance of a modern transportation and communications system.
The partition of British India and the emergence of India and Pakistan in 1947 severely disrupted the former colonial economic system that had preserved East Bengal (now East Pakistan) as a producer of jute and rice for the urban industrial economy around Calcutta. East Pakistan had to build a new industrial base and modernize agriculture in the midst of a population explosion. The united government of Pakistan expanded the cultivated area and some irrigation facilities, but the rural population generally became poorer between 1947 and 1971 because improvements did not keep pace with rural population increase. Pakistan's five-year plans opted for a development strategy based on industrialization, but the major share of the development budget went to West Pakistan, that is, contemporary Pakistan. The lack of natural resources meant that East Pakistan was heavily dependent on imports, creating a balance of payments problem. Without a substantial industrialization program or adequate agrarian expansion, the economy of East Pakistan steadily declined. Blame was placed by various observers, but especially those in East Pakistan, on the West Pakistani leaders who not only dominated the government but also most of the fledgling industries in East Pakistan.
Economic Reconstruction after Independence
The economic situation facing Bangladesh as it emerged from the war of independence in 1971 included the highest rural population density in the entire world, an annual population growth rate between 2.5 and 3 percent, chronic malnutrition for perhaps the majority of the people, and the dislocation of between 8 and 10 million people who had fled to India and returned to independent Bangladesh by 1972. The new nation had few experienced entrepreneurs, managers, administrators, engineers, or technicians. There were critical shortages of essential food grains and other staples because of wartime disruptions. External markets for jute had been lost because of the instability of supply and the increasing popularity of synthetic substitutes. Foreign exchange resources were minuscule, and the banking and monetary system was unreliable. Although Bangladesh had a large work force, the vast reserves of undertrained and underpaid workers were largely illiterate, unskilled, and underemployed. Commercially exploitable industrial resources, except for natural gas, were lacking. Inflation, especially for essential consumer goods, ran between 300 and 400 percent. The war of independence had crippled the transportation system. Hundreds of road and railroad bridges had been destroyed or damaged, and rolling stock was inadequate and in poor repair. The new country was still recovering from a severe cyclone that hit the area in 1970 and cause 250,000 deaths. India, by no means a wealthy country and without a tradition of giving aid to other nations, came forward immediately with massive economic assistance in the first months after the fighting ended. Between December 1971 and January 1972, India committed US$232 million in aid to Bangladesh, almost all of it for immediate disbursement. The largest single element in Indian aid was 900,000 tons of food grains. The United States and the World Bank thereafter became leading foreign aid donors, and the World Bank organized a consortium known as the Bangladesh Aid Group, comprising twenty-six international financial institutions and foreign governments interested in assisting Bangladesh's development.
MANAGING THE ECONOMY
Economic Policy and Planning
After West Pakistani owners of industrial enterprises fled in 1971, the government of Bangladesh seized their plants as abandoned properties. The government suddenly found itself managing and operating more than 300 medium- and large-scale industrial plants, which represented nearly 90 percent of the value of all such enterprises in the new nation. It organized public corporations to oversee the major industries: jute, textiles, sugar, steel, paper and paperboard, fertilizer, chemicals, pharmaceuticals, engineering and shipbuilding, minerals, oil and gas, food and allied products, and forest products. With government control over major industries and massive inputs of foreign aid, the economy gradually returned to the levels of the late 1960s, but it was still among the world's poorest and least developed countries.
The main government institution responsible for coordinating national rehabilitation and development was the Planning Commission. Sheikh Mujibur Rahman (Mujib), the first president of Bangladesh, led the formation of the national-level Planning Commission, which prepared plans that directed economic priorities for five-year periods. The First Five-Year Plan covered the period July 1973 to June 1978. It was succeeded by a two-year plan, covering the period July 1978 to June 1980, which was followed by a year-long hiatus. The Second Five-Year Plan (1981-85) and the Third Five-Year Plan (1985-90) put the planning process back on track. The broad objectives of the Third Five-Year Plan were to reduce poverty, bring down the rate of population growth to 1.8 percent annually, increase exports by 5.9 percent and domestic savings by 10 percent, attain self-sufficiency in food production, and realize an annual growth of the gross domestic product of 5.4 percent. These ambitious goals went well beyond the previous actual performance of the economy.
Five-year plans are financed through the development, or capital budget, which was separate from the government's revenue, or administrative, budget. The Third Five-Year Plan envisaged a total outlay of more than US$12 billion, approximately 65 percent of which was destined for public sector projects. About 55 percent of the needed funds were to come from foreign sources, including private investment, the aid programs of international financial institutions, and bilateral donor nations. Foreign commitments in the early and mid-1980s were around US$1.7 billion per year (exclusive of external private investment, which in any case was not significant). The portion of the development budget to come from domestic sources (45 percent) represented a substantial increase from the 15 to 20 percent of earlier development budgets.
The Planning Commission translates the multiyear development plan into public investment through the Annual Development Programme. The commission also ensures that public programs and policies are in conformity with its long-term strategy through its project approval process and through its advisory position on the country's highest economic decision-making bodies, the National Economic Council and its Executive Committee. The National Economic Council in the late 1980s was chaired by the president of Bangladesh and included all government ministers plus the governor of the Bangladesh Bank and the deputy chairman and members of the Planning Commission. The Executive Committee of the National Economic Council made most of the decisions on major development projects and development issues in general. The committee included the ministers of key economic sectors (finance, planning, industries, commerce, and public works) and, according to the agenda, any other sectors concerned. A third organization involved in the planning mechanism is the Project Evaluation Committee, which monitors the progress of five-year-plan programs.
After West Pakistani owners of industrial enterprises fled in 1971, the government of Bangladesh seized their plants as abandoned properties. The government suddenly found itself managing and operating more than 300 medium- and large-scale industrial plants, which represented nearly 90 percent of the value of all such enterprises in the new nation. It organized public corporations to oversee the major industries: jute, textiles, sugar, steel, paper and paperboard, fertilizer, chemicals, pharmaceuticals, engineering and shipbuilding, minerals, oil and gas, food and allied products, and forest products. With government control over major industries and massive inputs of foreign aid, the economy gradually returned to the levels of the late 1960s, but it was still among the world's poorest and least developed countries.
The main government institution responsible for coordinating national rehabilitation and development was the Planning Commission. Sheikh Mujibur Rahman (Mujib), the first president of Bangladesh, led the formation of the national-level Planning Commission, which prepared plans that directed economic priorities for five-year periods. The First Five-Year Plan covered the period July 1973 to June 1978. It was succeeded by a two-year plan, covering the period July 1978 to June 1980, which was followed by a year-long hiatus. The Second Five-Year Plan (1981-85) and the Third Five-Year Plan (1985-90) put the planning process back on track. The broad objectives of the Third Five-Year Plan were to reduce poverty, bring down the rate of population growth to 1.8 percent annually, increase exports by 5.9 percent and domestic savings by 10 percent, attain self-sufficiency in food production, and realize an annual growth of the gross domestic product of 5.4 percent. These ambitious goals went well beyond the previous actual performance of the economy.
Five-year plans are financed through the development, or capital budget, which was separate from the government's revenue, or administrative, budget. The Third Five-Year Plan envisaged a total outlay of more than US$12 billion, approximately 65 percent of which was destined for public sector projects. About 55 percent of the needed funds were to come from foreign sources, including private investment, the aid programs of international financial institutions, and bilateral donor nations. Foreign commitments in the early and mid-1980s were around US$1.7 billion per year (exclusive of external private investment, which in any case was not significant). The portion of the development budget to come from domestic sources (45 percent) represented a substantial increase from the 15 to 20 percent of earlier development budgets.
The Planning Commission translates the multiyear development plan into public investment through the Annual Development Programme. The commission also ensures that public programs and policies are in conformity with its long-term strategy through its project approval process and through its advisory position on the country's highest economic decision-making bodies, the National Economic Council and its Executive Committee. The National Economic Council in the late 1980s was chaired by the president of Bangladesh and included all government ministers plus the governor of the Bangladesh Bank and the deputy chairman and members of the Planning Commission. The Executive Committee of the National Economic Council made most of the decisions on major development projects and development issues in general. The committee included the ministers of key economic sectors (finance, planning, industries, commerce, and public works) and, according to the agenda, any other sectors concerned. A third organization involved in the planning mechanism is the Project Evaluation Committee, which monitors the progress of five-year-plan programs.
Government Budget Process
Revenue Budget
The annual budget is prepared by the Ministry of Finance and presented to Parliament for approval each year, except during periods of martial law, when the budget has been announced by the martial law administration. It is divided into a revenue budget and a development budget, on both the receipts and the expenditures sides.
The revenue budget pays for the normal functioning of the government and is intended to be fully financed from domestically generated sources. The fiscal year 1988 revenue budget was based on anticipated receipts of about US$1.6 billion, or approximately Tk48.9 billion. Expenditures were to be US$1.5 billion, leaving a surplus of US$130 million for development. The previous year a revenue surplus of US$246 million was applied to the development budget.
Tax revenues, almost half of them from customs duties, accounted for about 80 percent of revenue receipts. Excise duties and sales taxes also were important, each producing more revenue than taxes on income, which yielded only about US$150 million according to the revised budget in FY 1985. That amount represented less than US$2 per capita income tax. The largest part of the nontax revenue--making up 20 percent of the revenue budget in the late 1980s--came from the nationalized sector of the economy, including industrial enterprises, banks, and insurance companies.
Even by the standards of developing countries, Bangladesh's ratio of taxes to GDP, and of direct tax revenue to total tax revenue, was very low. In 1984 taxes amounted to only 8.1 percent of GDP, just half the percentage for India, less than half the average for 82 other developing countries, and far below the average of 29.7 percent for the developed countries. Similarly, the 20.1 percent of tax revenue coming from direct taxation was one of the lowest in the world (the average for developing countries was 29.3 percent, for industrialized countries 34.2 percent). Most of the population was exempted from direct taxation because its income fell below the poverty line; the cost of collection probably would have exceeded the revenue potential. For higher incomes, the system provided incentives for savings and investment, rather than seeking to maximize tax revenue. The central government operated on revenue of less than US$20 per person.
The expenditures side of the revenue budget put the largest single block of funds into education, totaling 17.3 percent of the FY 1988 budget. Defense spending took 17.2 percent of the budget; if expenditures for paramilitary forces and the police are added to the portion for defense, the figure rises to nearly 23.8 percent of the budget. Debt service, general administration, and health, population, and social planning each accounted for about 20 percent of expenditures.
The annual budget is prepared by the Ministry of Finance and presented to Parliament for approval each year, except during periods of martial law, when the budget has been announced by the martial law administration. It is divided into a revenue budget and a development budget, on both the receipts and the expenditures sides.
The revenue budget pays for the normal functioning of the government and is intended to be fully financed from domestically generated sources. The fiscal year 1988 revenue budget was based on anticipated receipts of about US$1.6 billion, or approximately Tk48.9 billion. Expenditures were to be US$1.5 billion, leaving a surplus of US$130 million for development. The previous year a revenue surplus of US$246 million was applied to the development budget.
Tax revenues, almost half of them from customs duties, accounted for about 80 percent of revenue receipts. Excise duties and sales taxes also were important, each producing more revenue than taxes on income, which yielded only about US$150 million according to the revised budget in FY 1985. That amount represented less than US$2 per capita income tax. The largest part of the nontax revenue--making up 20 percent of the revenue budget in the late 1980s--came from the nationalized sector of the economy, including industrial enterprises, banks, and insurance companies.
Even by the standards of developing countries, Bangladesh's ratio of taxes to GDP, and of direct tax revenue to total tax revenue, was very low. In 1984 taxes amounted to only 8.1 percent of GDP, just half the percentage for India, less than half the average for 82 other developing countries, and far below the average of 29.7 percent for the developed countries. Similarly, the 20.1 percent of tax revenue coming from direct taxation was one of the lowest in the world (the average for developing countries was 29.3 percent, for industrialized countries 34.2 percent). Most of the population was exempted from direct taxation because its income fell below the poverty line; the cost of collection probably would have exceeded the revenue potential. For higher incomes, the system provided incentives for savings and investment, rather than seeking to maximize tax revenue. The central government operated on revenue of less than US$20 per person.
The expenditures side of the revenue budget put the largest single block of funds into education, totaling 17.3 percent of the FY 1988 budget. Defense spending took 17.2 percent of the budget; if expenditures for paramilitary forces and the police are added to the portion for defense, the figure rises to nearly 23.8 percent of the budget. Debt service, general administration, and health, population, and social planning each accounted for about 20 percent of expenditures.
Development Budget
The development budget is presented to Parliament at the same time as the revenue budget each year. The FY 1988 development budget called for resource mobilization of US$1.6 billion, the majority of which--more than 85 percent--was to be provided by foreign grants and loans. The great bulk of capital expenditures went to the Annual Development Programme.
The FY 1988 Annual Development Programme provided financing for 818 projects, including 684 investment projects, 80 technical assistance projects, and 54 public sector-funded projects. Almost all the projects were carryovers continued from previous years. The Annual Development Programme directed new project financing to particular sectors, consistent with the goals of the five-year plans. For example, large portions of the FY 1988 Annual Development Programme were earmarked for power projects (17.5 percent of expenditures), water resources development (11 percent), and infrastructure (23.4 percent). Looked at from another perspective, the FY 1988 program called for overall expenditures 11.3 percent higher than the previous year, but certain sectors were to receive much greater increases than the average: agriculture, 40.7 percent; rural development, 32.3 percent; water resources, 26.5 percent; health, 28.8 percent; family planning, 23.1 percent; education, 33.6 percent; and oil, gas, and natural resources, 26.5 percent. Since independence these trends changed annually because demands of particular projects absorbed disproportionate amounts of capital and because some sectors were more capital intensive than others.
The FY 1988 Annual Development Programme provided financing for 818 projects, including 684 investment projects, 80 technical assistance projects, and 54 public sector-funded projects. Almost all the projects were carryovers continued from previous years. The Annual Development Programme directed new project financing to particular sectors, consistent with the goals of the five-year plans. For example, large portions of the FY 1988 Annual Development Programme were earmarked for power projects (17.5 percent of expenditures), water resources development (11 percent), and infrastructure (23.4 percent). Looked at from another perspective, the FY 1988 program called for overall expenditures 11.3 percent higher than the previous year, but certain sectors were to receive much greater increases than the average: agriculture, 40.7 percent; rural development, 32.3 percent; water resources, 26.5 percent; health, 28.8 percent; family planning, 23.1 percent; education, 33.6 percent; and oil, gas, and natural resources, 26.5 percent. Since independence these trends changed annually because demands of particular projects absorbed disproportionate amounts of capital and because some sectors were more capital intensive than others.
Joint Ventures and Foreign Investment
Despite its early concentration on developing a socialist economy, the government became increasingly open to private investment. The 1974 New Investment Policy restored certain rights to private and foreign investors. In December 1975, President Ziaur Rahman promulgated the Revised Investment Policy, which allowed greater private sector activity and authorized joint ventures with public sector corporations in a number of previously reserved areas, provided that the government retained 51 percent ownership. The Dhaka Stock Exchange was reactivated in 1976, and the Bangladesh Investment Corporation was established the same year to provide financing for bridge construction and underwriting facilities to the private sector. Investment ceilings for private industry were abolished in 1978. Then, in 1980, the government delineated a more liberal attitude toward foreign direct investment in the Foreign Private Investment (Promotion and Protection) Act. Growth of investment nonetheless remained slow, and industry was still dominated by relatively inefficient public enterprises and governed by an elaborate system of administrative controls.
In June 1982, the new government of Hussain Muhammad Ershad introduced its own New Industrial Policy, calling for a significant increase in private sector activity and denationalization of selected public sector enterprises. The government transferred 650 industrial enterprises to private hands, leaving only 160 under public ownership. In 1986 the government announced a comprehensive revision of its industrial policy, setting out objectives and strategies to accelerate the pace of industrialization. The policy also emphasized private and foreign investment in high technology, export-oriented, and labor-intensive industries. The revised policy increased the number of sectors open to private investment, liberalized the tariff structure, reduced quantitative import restrictions, and furthered privatization of state-managed enterprises.
The role of the public sector in the late 1980s was limited to seven fields: arms, ammunition, and sensitive defense equipment; electrical power generation, transmission, and distribution; management and exploitation of reserved forests; telecommunications; air, water, and railroad transportation; atomic energy; and currency note printing and coin minting. In addition, public sector involvement was still possible, alone or jointly with private participants, in projects where investment was not forthcoming from the private sector. The only consistent moneymakers among public sector industrial corporations were the Bangladesh Petroleum Corporation (Tk248 crore in FY1986; for value of the crore, the Bangladesh Chemical Industries Corporation (Tk18.7 crore), and the Bangladesh Forest Industries Development Corporation (Tk5.8 crore).
In 1987 an amendment to the Bangladesh Industrial Enterprises (Nationalisation) Ordinance was adopted, providing the legal basis for plans to sell up to 49 percent of government shares in remaining nationalized enterprises. The fact that the government would retain the majority was understood by some as a political gesture to workers and entrenched management opposed to privatization.
An export processing zone was established officially at the port city of Chittagong in 1980. But because of political controversy and indecision surrounding the project from the moment it was proposed, the Bangladesh Export Processing Zones Authority did not actually begin functioning until March 1983, when a program of inducements was offered to investors opening up enterprises. Zone enterprises enjoyed a tax holiday of 5 years (10 years for pioneer industries), subsequent rebate of 50 percent of income tax on export sales, freedom from duties on both imports and exports, and guaranteed full repatriation of profits and capital. Additional export processing zones were contemplated for Khulna and Dhaka.
In June 1982, the new government of Hussain Muhammad Ershad introduced its own New Industrial Policy, calling for a significant increase in private sector activity and denationalization of selected public sector enterprises. The government transferred 650 industrial enterprises to private hands, leaving only 160 under public ownership. In 1986 the government announced a comprehensive revision of its industrial policy, setting out objectives and strategies to accelerate the pace of industrialization. The policy also emphasized private and foreign investment in high technology, export-oriented, and labor-intensive industries. The revised policy increased the number of sectors open to private investment, liberalized the tariff structure, reduced quantitative import restrictions, and furthered privatization of state-managed enterprises.
The role of the public sector in the late 1980s was limited to seven fields: arms, ammunition, and sensitive defense equipment; electrical power generation, transmission, and distribution; management and exploitation of reserved forests; telecommunications; air, water, and railroad transportation; atomic energy; and currency note printing and coin minting. In addition, public sector involvement was still possible, alone or jointly with private participants, in projects where investment was not forthcoming from the private sector. The only consistent moneymakers among public sector industrial corporations were the Bangladesh Petroleum Corporation (Tk248 crore in FY1986; for value of the crore, the Bangladesh Chemical Industries Corporation (Tk18.7 crore), and the Bangladesh Forest Industries Development Corporation (Tk5.8 crore).
In 1987 an amendment to the Bangladesh Industrial Enterprises (Nationalisation) Ordinance was adopted, providing the legal basis for plans to sell up to 49 percent of government shares in remaining nationalized enterprises. The fact that the government would retain the majority was understood by some as a political gesture to workers and entrenched management opposed to privatization.
An export processing zone was established officially at the port city of Chittagong in 1980. But because of political controversy and indecision surrounding the project from the moment it was proposed, the Bangladesh Export Processing Zones Authority did not actually begin functioning until March 1983, when a program of inducements was offered to investors opening up enterprises. Zone enterprises enjoyed a tax holiday of 5 years (10 years for pioneer industries), subsequent rebate of 50 percent of income tax on export sales, freedom from duties on both imports and exports, and guaranteed full repatriation of profits and capital. Additional export processing zones were contemplated for Khulna and Dhaka.
Bilateral Investment
In addition to the broad policies encouraging foreign investment, the government of Bangladesh has entered into bilateral investment treaties with eight countries: Belgium, Britain, Federal Republic of Germany (West Germany), France, the Republic of Korea (South Korea), Romania, Turkey and the United States. As of early 1988, similar treaties were at various stages of negotiation with ten other countries. These treaties included such assurances as unrestricted currency transfers, compensation for expropriation, dispute settlement procedures, and taxation treatment. In addition, Bangladesh has signed agreements for the avoidance of double taxation with Britain, Canada, Sweden, Singapore, and South Korea.
Even with a reasonably attractive framework in place, the flow of private capital to Bangladesh has been slow. Estimates from the Organization for Economic Cooperation and Development indicated that for the 1980-84 period foreign direct investment in Bangladesh averaged only US$3.4 million per year. The Bangladesh Ministry of Industries listed just sixty-eight existing and forty-one "sanctioned" joint venture and multinational companies in Bangladesh in 1987. The largest amounts of foreign private investment were from other Asian countries--Japan foremost, with smaller amounts from South Korea, Singapore, Taiwan, and Hong Kong--and from Britain and other countries in Western Europe. American investment of about US$20 million in 1987 was concentrated in the physical assets of a life insurance company, the manufacturing operations of three pharmaceutical firms, and a vegetable oil processing and storage plant.
Even with a reasonably attractive framework in place, the flow of private capital to Bangladesh has been slow. Estimates from the Organization for Economic Cooperation and Development indicated that for the 1980-84 period foreign direct investment in Bangladesh averaged only US$3.4 million per year. The Bangladesh Ministry of Industries listed just sixty-eight existing and forty-one "sanctioned" joint venture and multinational companies in Bangladesh in 1987. The largest amounts of foreign private investment were from other Asian countries--Japan foremost, with smaller amounts from South Korea, Singapore, Taiwan, and Hong Kong--and from Britain and other countries in Western Europe. American investment of about US$20 million in 1987 was concentrated in the physical assets of a life insurance company, the manufacturing operations of three pharmaceutical firms, and a vegetable oil processing and storage plant.
Money and Banking
Currency Fluctuation
At independence the value of the taka, Bangladesh's unit of currency, was set between 7.5 and 8.0 to US$1. With the exception of FY 1978, the taka's value relative to the dollar declined every year from 1971 through the end of 1987. To help offset this phenomenon, Bangladesh first used the compensatory financing facility of the International Monetary Fund in FY 1974. Despite the increasing need for assistance, the Mujib government was initially unwilling to meet the IMF's conditions on monetary and fiscal policy. By FY1975, however, the government revised its stance, declaring a devaluation of the taka by 56 percent and agreeing to the establishment by the World Bank of the Bangladesh Aid Group.
Between 1980 and 1983, the taka sustained a decline of some 50 percent because of a deterioration in Bangladesh's balance of payments. Between 1985 and 1987, the taka was adjusted in frequent incremental steps, stabilizing again around 12 percent lower in real terms against the United States dollar, but at the same time narrowing the difference between the official rate and the preferential secondary rate from 15 percent to 7.5 percent. Accompanying this structural adjustment was an expansion in the amount of trade conducted at the secondary rate, to 53 percent of total exports and 28 percent of total imports. In mid-1987, the official rate was relatively stable, approaching Tk31 to US$1.
At independence the value of the taka, Bangladesh's unit of currency, was set between 7.5 and 8.0 to US$1. With the exception of FY 1978, the taka's value relative to the dollar declined every year from 1971 through the end of 1987. To help offset this phenomenon, Bangladesh first used the compensatory financing facility of the International Monetary Fund in FY 1974. Despite the increasing need for assistance, the Mujib government was initially unwilling to meet the IMF's conditions on monetary and fiscal policy. By FY1975, however, the government revised its stance, declaring a devaluation of the taka by 56 percent and agreeing to the establishment by the World Bank of the Bangladesh Aid Group.
Between 1980 and 1983, the taka sustained a decline of some 50 percent because of a deterioration in Bangladesh's balance of payments. Between 1985 and 1987, the taka was adjusted in frequent incremental steps, stabilizing again around 12 percent lower in real terms against the United States dollar, but at the same time narrowing the difference between the official rate and the preferential secondary rate from 15 percent to 7.5 percent. Accompanying this structural adjustment was an expansion in the amount of trade conducted at the secondary rate, to 53 percent of total exports and 28 percent of total imports. In mid-1987, the official rate was relatively stable, approaching Tk31 to US$1.
The Banking System
The banking system at independence consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. Virtually all banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together absorbed 75 percent of total advances.
The government's encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY 1987, while advances to private manufacturing rose from 13 percent to 53 percent.
The transformation of finance priorities has brought with it problems in administration. No sound project-appraisal system was in place to identify viable borrowers and projects. Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities. In addition, the incentive system for the banks stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons. The rate of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline. As a consequence, recovery rates began to improve in 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh's system of financial intermediation early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987.
One major exception to the management problems of Bangladeshi banks was the Grameen Bank, begun as a government project in 1976 and established in 1983 as an independent bank. In the late 1980s, the bank continued to provide financial resources to the poor on reasonable terms and to generate productive self-employment without external assistance. Its customers were landless persons who took small loans for all types of economic activities, including housing. About 70 percent of the borrowers were women, who were otherwise not much represented in institutional finance. Collective rural enterprises also could borrow from the Grameen Bank for investments in tube wells, rice and oil mills, and power looms and for leasing land for joint cultivation. The average loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$65), and the maximum was just Tk18,000 (for construction of a tin-roof house). Repayment terms were 4 percent for rural housing and 8.5 percent for normal lending operations.
The Grameen Bank extended collateral-free loans to 200,000 landless people in its first 10 years. Most of its customers had never dealt with formal lending institutions before. The most remarkable accomplishment was the phenomenal recovery rate; amid the prevailing pattern of bad debts throughout the Bangladeshi banking system, only 4 percent of Grameen Bank loans were overdue. The bank had from the outset applied a specialized system of intensive credit supervision that set it apart from others. Its success, though still on a rather small scale, provided hope that it could continue to grow and that it could be replicated or adapted to other development-related priorities. The Grameen Bank was expanding rapidly, planning to have 500 branches throughout the country by the late 1980s.
Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting the growth of domestic private credit and government borrowing from the banking system. The policy was largely successful in reducing the growth of the money supply and total domestic credit. Net credit to the government actually declined in FY 1986. The problem of credit recovery remained a threat to monetary stability, responsible for serious resource misallocation and harsh inequities. Although the government had begun effective measures to improve financial discipline, the draconian contraction of credit availability contained the risk of inadvertently discouraging new economic activity.
Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to slightly more than 2 months worth of imports. This represented a 20-percent increase of reserves over the previous year, largely the result of higher remittances by Bangladeshi workers abroad. The country also reduced imports by about 10 percent to US$2.4 billion. Because of Bangladesh's status as a least developed country receiving concessional loans, private creditors accounted for only about 6 percent of outstanding public debt. The external public debt was US$6.4 billion, and annual debt service payments were US$467 million at the end of FY 1986
The government's encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY 1987, while advances to private manufacturing rose from 13 percent to 53 percent.
The transformation of finance priorities has brought with it problems in administration. No sound project-appraisal system was in place to identify viable borrowers and projects. Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities. In addition, the incentive system for the banks stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons. The rate of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline. As a consequence, recovery rates began to improve in 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh's system of financial intermediation early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987.
One major exception to the management problems of Bangladeshi banks was the Grameen Bank, begun as a government project in 1976 and established in 1983 as an independent bank. In the late 1980s, the bank continued to provide financial resources to the poor on reasonable terms and to generate productive self-employment without external assistance. Its customers were landless persons who took small loans for all types of economic activities, including housing. About 70 percent of the borrowers were women, who were otherwise not much represented in institutional finance. Collective rural enterprises also could borrow from the Grameen Bank for investments in tube wells, rice and oil mills, and power looms and for leasing land for joint cultivation. The average loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$65), and the maximum was just Tk18,000 (for construction of a tin-roof house). Repayment terms were 4 percent for rural housing and 8.5 percent for normal lending operations.
The Grameen Bank extended collateral-free loans to 200,000 landless people in its first 10 years. Most of its customers had never dealt with formal lending institutions before. The most remarkable accomplishment was the phenomenal recovery rate; amid the prevailing pattern of bad debts throughout the Bangladeshi banking system, only 4 percent of Grameen Bank loans were overdue. The bank had from the outset applied a specialized system of intensive credit supervision that set it apart from others. Its success, though still on a rather small scale, provided hope that it could continue to grow and that it could be replicated or adapted to other development-related priorities. The Grameen Bank was expanding rapidly, planning to have 500 branches throughout the country by the late 1980s.
Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting the growth of domestic private credit and government borrowing from the banking system. The policy was largely successful in reducing the growth of the money supply and total domestic credit. Net credit to the government actually declined in FY 1986. The problem of credit recovery remained a threat to monetary stability, responsible for serious resource misallocation and harsh inequities. Although the government had begun effective measures to improve financial discipline, the draconian contraction of credit availability contained the risk of inadvertently discouraging new economic activity.
Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to slightly more than 2 months worth of imports. This represented a 20-percent increase of reserves over the previous year, largely the result of higher remittances by Bangladeshi workers abroad. The country also reduced imports by about 10 percent to US$2.4 billion. Because of Bangladesh's status as a least developed country receiving concessional loans, private creditors accounted for only about 6 percent of outstanding public debt. The external public debt was US$6.4 billion, and annual debt service payments were US$467 million at the end of FY 1986
FOREIGN ASSISTANCE
Test Case for Development
Independent Bangladesh, from the beginning, has been regarded as a test case for development by economists, policymakers, and program administrators of donor countries and international financial institutions. Interest in the area predated political independence, as East Pakistan represented the world's most extreme case of population growth outstripping resources. Because Pakistan was a single country, project design and approval processes occurred at the national level. West Pakistan, also poor, appropriated most commodity aid, capital, and technical and project assistance. The people of East Pakistan considered the attention they received to be inadequate and inequitable.
In October 1974, the Bangladesh Aid Group was established under the aegis of the World Bank, with twenty-six participating governments and institutions. Commitments of the aid group were US$551 million in FY 1974 and US$1.2 billion the following year. Aid to Bangladesh has remained at a high level since the consortium came into existence, although with substantial fluctuations in new commitments from year to year. After the high initial commitments, the figure fell to US$964 million in FY 1976 and to US$744 million the following year, before turning upward again. Fiscal year 1979 was another breakthrough period, with new commitments of nearly US$1.8 billion, a figure surpassed 3 years later when the level reached US$1.9 billion, the all-time high through FY 1987.
In the 1980s, the value of food aid declined to around 11 to 18 percent of new aid commitments, most of it given on a grant basis. Commodity aid--about 25 percent of aid commitments to Bangladesh -- included key items for increasing productivity, such as fertilizer, cement, steel, pumps, and other equipment. Project assistance accounted for more than 50 percent of new commitments. This form of aid was preferred by the largest donors because their funds are put to work in well-defined ways that can be related to policy objectives. From the beginning, the Bangladesh government has been unable to use project funds at the same rate as they are authorized. As a result, a pipeline of authorized but undisbursed project funds has grown bigger every year. The undisbursed project assistance pipeline was expected to exceed US$5 billion in 1988 and to continue to grow after that. Not until the 1990s at the earliest could Bangladesh hope to begin reducing the backlog of undisbursed funds.
Disbursement figures did not account for Bangladeshi repayments of principal and interest on previous loans. In FY 1986, for example, Bangladesh paid out US$117 million against principal and US$72 million in interest in connection with earlier aid disbursements. Thus the gross US$1.3 billion in disbursement of foreign aid that year netted an inflow of US$1.1 billion. Although these funds were equal to almost 10 percent of Bangladesh's GDP, they averaged only about US$12 per person, hardly a scale to bring about dramatic improvement in the economy's performance.
Because much of the funding for the development budget in the mid-1980s was financed by external donors, the Bangladesh government had to attract financing for high-priority sectors and projects. Coordination was carried on at all times between the government and individual donors, but the keynote each year was a meeting organized by the World Bank as leader of the Bangladesh Aid Group. At these meetings Bangladesh's finance minister presented his government's development plans for the coming year and sought pledges from the major donors for as much of the Annual Development Programme as possible. The donors also made presentations at the meeting, including assessments of the performance of the Bangladesh economy in general and of the development plans of the government in particular, as background to their views on the realism and appropriateness of the priorities adopted in the five-year plan. These meetings, alternating between Washington and Paris, were the formal culmination of a process that went on year-round. In the late 1980s, the main coordination point with foreign donors was the External Resources Division of the Ministry of Finance, which monitored development projects and administrative and management aspects of planning.
Independent Bangladesh, from the beginning, has been regarded as a test case for development by economists, policymakers, and program administrators of donor countries and international financial institutions. Interest in the area predated political independence, as East Pakistan represented the world's most extreme case of population growth outstripping resources. Because Pakistan was a single country, project design and approval processes occurred at the national level. West Pakistan, also poor, appropriated most commodity aid, capital, and technical and project assistance. The people of East Pakistan considered the attention they received to be inadequate and inequitable.
In October 1974, the Bangladesh Aid Group was established under the aegis of the World Bank, with twenty-six participating governments and institutions. Commitments of the aid group were US$551 million in FY 1974 and US$1.2 billion the following year. Aid to Bangladesh has remained at a high level since the consortium came into existence, although with substantial fluctuations in new commitments from year to year. After the high initial commitments, the figure fell to US$964 million in FY 1976 and to US$744 million the following year, before turning upward again. Fiscal year 1979 was another breakthrough period, with new commitments of nearly US$1.8 billion, a figure surpassed 3 years later when the level reached US$1.9 billion, the all-time high through FY 1987.
In the 1980s, the value of food aid declined to around 11 to 18 percent of new aid commitments, most of it given on a grant basis. Commodity aid--about 25 percent of aid commitments to Bangladesh -- included key items for increasing productivity, such as fertilizer, cement, steel, pumps, and other equipment. Project assistance accounted for more than 50 percent of new commitments. This form of aid was preferred by the largest donors because their funds are put to work in well-defined ways that can be related to policy objectives. From the beginning, the Bangladesh government has been unable to use project funds at the same rate as they are authorized. As a result, a pipeline of authorized but undisbursed project funds has grown bigger every year. The undisbursed project assistance pipeline was expected to exceed US$5 billion in 1988 and to continue to grow after that. Not until the 1990s at the earliest could Bangladesh hope to begin reducing the backlog of undisbursed funds.
Disbursement figures did not account for Bangladeshi repayments of principal and interest on previous loans. In FY 1986, for example, Bangladesh paid out US$117 million against principal and US$72 million in interest in connection with earlier aid disbursements. Thus the gross US$1.3 billion in disbursement of foreign aid that year netted an inflow of US$1.1 billion. Although these funds were equal to almost 10 percent of Bangladesh's GDP, they averaged only about US$12 per person, hardly a scale to bring about dramatic improvement in the economy's performance.
Because much of the funding for the development budget in the mid-1980s was financed by external donors, the Bangladesh government had to attract financing for high-priority sectors and projects. Coordination was carried on at all times between the government and individual donors, but the keynote each year was a meeting organized by the World Bank as leader of the Bangladesh Aid Group. At these meetings Bangladesh's finance minister presented his government's development plans for the coming year and sought pledges from the major donors for as much of the Annual Development Programme as possible. The donors also made presentations at the meeting, including assessments of the performance of the Bangladesh economy in general and of the development plans of the government in particular, as background to their views on the realism and appropriateness of the priorities adopted in the five-year plan. These meetings, alternating between Washington and Paris, were the formal culmination of a process that went on year-round. In the late 1980s, the main coordination point with foreign donors was the External Resources Division of the Ministry of Finance, which monitored development projects and administrative and management aspects of planning.
Aid Dependence
International Banks
The World Bank has taken the lead in addressing some of the most deep-seated structural constraints in Bangladesh's economy by providing productive employment for those without assets, promoting economic opportunities for women, and addressing the social and economic inadequacies of education, health, nutrition, and population programs. Among aid projects were the Irrigation Management Programme, which supports drainage and flood control as well as the introduction of pumps and drills; support for maintenance of the nation's more than 43,000 primary schools (including repairs to existing buildings, additions to accommodate larger numbers of pupils, and construction of new schools where needed); and the 500,000-ton Ashuganj fertilizer complex, utilizing domestic natural gas, which came on stream in 1981. The World Bank has made loans to Bangladesh only from its "soft window," the International Development Association. These interest-free loans provide for a 10-year grace period before repayment of principal begins and a 40-year repayment schedule, with the addition of a service charge of 1.5 percent.
The Asian Development Bank was the second largest donor, after the International Development Association, to Bangladesh's development in the 1980s. As of the end of 1985, the Bank had approved 66 loans totaling US$1.8 billion. In 1985 alone, the bank approved loans of US$212.3 million for 6 new projects (down from US$306.8 million for 4 projects the year before). In addition, the bank provided local currency financing of US$59.8 million for 3 projects, cofinancing of US$10.5 million to projects with other donors, and a program loan of US$39 million for provision of fertilizer. About half of the Asian Development Bank's financing has gone to agriculture and agro-industry. The 1985 package, for example, included a livestock development project intended to increase food production and improve rural incomes through expansion of veterinary services and livestock nutrition. In 1987 the Asian Development Bank approved a technical assistance grant (cofinanced by the Norwegian government) to explore the feasibility of growing rubber trees commercially in Bangladesh. The Asian Development Bank also has been active in the development of natural gas. In 1987 the bank approved a US$74 million loan for construction and extension of natural gas transmission and distribution pipelines to 5 districts in eastern Bangladesh. The loan was intended to cover 71 percent of project costs, including all of the foreign exchange requirements for the project. The bank has also supported transportation projects (development and improvement of feeder roads between local markets and primary roads, inland waterways, and railroads) and social welfare schemes for population control, health, and education.
The World Bank has taken the lead in addressing some of the most deep-seated structural constraints in Bangladesh's economy by providing productive employment for those without assets, promoting economic opportunities for women, and addressing the social and economic inadequacies of education, health, nutrition, and population programs. Among aid projects were the Irrigation Management Programme, which supports drainage and flood control as well as the introduction of pumps and drills; support for maintenance of the nation's more than 43,000 primary schools (including repairs to existing buildings, additions to accommodate larger numbers of pupils, and construction of new schools where needed); and the 500,000-ton Ashuganj fertilizer complex, utilizing domestic natural gas, which came on stream in 1981. The World Bank has made loans to Bangladesh only from its "soft window," the International Development Association. These interest-free loans provide for a 10-year grace period before repayment of principal begins and a 40-year repayment schedule, with the addition of a service charge of 1.5 percent.
The Asian Development Bank was the second largest donor, after the International Development Association, to Bangladesh's development in the 1980s. As of the end of 1985, the Bank had approved 66 loans totaling US$1.8 billion. In 1985 alone, the bank approved loans of US$212.3 million for 6 new projects (down from US$306.8 million for 4 projects the year before). In addition, the bank provided local currency financing of US$59.8 million for 3 projects, cofinancing of US$10.5 million to projects with other donors, and a program loan of US$39 million for provision of fertilizer. About half of the Asian Development Bank's financing has gone to agriculture and agro-industry. The 1985 package, for example, included a livestock development project intended to increase food production and improve rural incomes through expansion of veterinary services and livestock nutrition. In 1987 the Asian Development Bank approved a technical assistance grant (cofinanced by the Norwegian government) to explore the feasibility of growing rubber trees commercially in Bangladesh. The Asian Development Bank also has been active in the development of natural gas. In 1987 the bank approved a US$74 million loan for construction and extension of natural gas transmission and distribution pipelines to 5 districts in eastern Bangladesh. The loan was intended to cover 71 percent of project costs, including all of the foreign exchange requirements for the project. The bank has also supported transportation projects (development and improvement of feeder roads between local markets and primary roads, inland waterways, and railroads) and social welfare schemes for population control, health, and education.
United Nations
In the mid-1980s, the United Nations Development Programme operated its own development projects and coordinated the activities of other United Nations (UN) agencies with programs in Bangladesh, including the World Food Programme, World Health Organization, United Nations Industrial Development Organization, and United Nations Fund for Population Activities. Typically, these agencies provided technical assistance and training. They often functioned as catalysts by doing analytical and policy development work alongside Bangladesh government authorities, preparing the ground for well-conceived programs requiring capital expenditures to be financed by other donors or even by the Bangladesh treasury.
Foreign Governments and Private Donors
The United States aid program to independent Bangladesh began even before the United States formally established diplomatic relations with the new nation in April 1972. Large quantities of emergency food aid were sent to help cope with the postwar famine situation. Project assistance through the United States Agency for International Development (AID) began in 1973 with a major program of reconstruction and infrastructure rehabilitation. In the course of time, that emphasis evolved into economic development focused primarily on three broad sectors: improved soil fertility, food security, and increased off-farm employment. By September 1987, United States assistance totaled US$2.8 billion. The United States was the most important donor until the early 1980s when Japanese aid reached similar levels.
Food aid has been a mainstay of the AID program. Through 1987 the United States provided more than 6.5 million tons of wheat, more than 1 million tons of rice, and some 350,000 tons of edible oil. Since 1979 all such aid has been on a grant basis. The Public Law 480 (PL-480) program of food and other agricultural commodity assistance has accounted for half of the dollar value of United States government aid over the years. In the mid-1980s, the PL-480 program ranged from US$85 million to US$110 million per year. In FY 1986, a high year, the United States provided 586,000 tons of wheat, 63,000 tons of rice, almost 25,000 tons of edible oil, and 58,000 bales of cotton. Commercially procured quantities of those commodities by Bangladesh in that period included 1.12 million tons of wheat, 34,000 tons of rice, 146,000 tons of edible oil, and 179,000 bales of raw cotton.
The PL-480 program fit into an overall development strategy to increase agricultural production and provide rural employment. Thus the wheat provided under Title II in the late 1980s was part of food-for-work programs, providing payment to workers who upgraded local footpaths and seasonal roads. The sales proceeds of supplemental PL-480 shipments financed a program of bridge and culvert construction on these food for work roads.
The commodities shipped under the larger PL-480 Title III program in the mid-1980s provided support to domestic food production and ensured that food was available to the most nutritionally disadvantaged population. Local currency generated from sales financed agricultural research, irrigation, and employment--projects essential to the Bangladesh government's goal of national food self-sufficiency--and increased personal incomes, thereby effectively increasing demand for food.
Other than food aid, the dollar value of United States development assistance stabilized between US$75 million and US$85 million annually in the mid-1980s and declined to US$58.5 million for FY 1988, largely because of general pressures on the United States budget for foreign development programs. The long-term trend remained intact, with the cash value of United States assistance about evenly divided between food aid and project assistance.
As the "largest poorest" country, and because its government has been hospitable to foreign assistance, Bangladesh has been chosen by several of the so-called richer smaller countries as a country of concentration for their own efforts. Thus, in addition to the programs of Britain, Japan, and West Germany, significant aid programs were initiated by Canada, Sweden, Finland, the Netherlands, Switzerland, Australia, and others, in which each country concentrated on areas where it possessed special expertise.
In the mid-1980s, a number of these donor countries--calling themselves "the like-minded donors"--jointly studied the trend of development assistance in Bangladesh. They concluded that the quality of life in Bangladesh was declining for the vast rural majority, and they faulted the way the Bangladesh government determined and administered its development priorities and the way the aid donors organized and carried out their own assistance programs. They presented a report to the Bangladesh Aid Group in 1986 suggesting changes in emphasis in favor of greater concentration on programs responsive to the deepest needs of the poor: better health care, better nutrition, greater literacy, a more effective approach to family planning, and greater economic opportunities for poor and landless farmers and for women. Although the analysis and conclusions engendered some controversy, the report influenced the direction of aid efforts by the entire Bangladesh Aid Group, including the most important donor and the group's founder, the World Bank.
Economic assistance has come to Bangladesh through the Soviet Union and East European countries and through oil-producing members of the Organization of the Islamic Conference. Much of the aid from these donors has taken the form of construction, equipment, and training. Moscow committed US$132 million for aid to Bangladesh immediately after independence, but disbursement proved to be very slow. In subsequent years, the Soviets figured prominently in power generation, and as of the end of 1987 the Soviet Union appeared to have agreed to extend more aid for power generation, transmission, and distribution and also for oil exploration.
Although relatively modest in monetary terms, the assistance of private voluntary organizations from the United States and elsewhere has also been important. They have offered assistance on a grant basis in fields where return-on-investment criteria cannot be applied, such as emergency relief, medical services, and basic education. In addition, because of their modest scale and insulation from international politics, these organizations can sometimes venture into activities with a high degree of social experimentation, sometimes producing models to be replicated on a larger scale by official development assistance. Aside from such well-known secular organizations as the International Red Cross and CARE, most of the private voluntary organizations had religious affiliations.
Food aid has been a mainstay of the AID program. Through 1987 the United States provided more than 6.5 million tons of wheat, more than 1 million tons of rice, and some 350,000 tons of edible oil. Since 1979 all such aid has been on a grant basis. The Public Law 480 (PL-480) program of food and other agricultural commodity assistance has accounted for half of the dollar value of United States government aid over the years. In the mid-1980s, the PL-480 program ranged from US$85 million to US$110 million per year. In FY 1986, a high year, the United States provided 586,000 tons of wheat, 63,000 tons of rice, almost 25,000 tons of edible oil, and 58,000 bales of cotton. Commercially procured quantities of those commodities by Bangladesh in that period included 1.12 million tons of wheat, 34,000 tons of rice, 146,000 tons of edible oil, and 179,000 bales of raw cotton.
The PL-480 program fit into an overall development strategy to increase agricultural production and provide rural employment. Thus the wheat provided under Title II in the late 1980s was part of food-for-work programs, providing payment to workers who upgraded local footpaths and seasonal roads. The sales proceeds of supplemental PL-480 shipments financed a program of bridge and culvert construction on these food for work roads.
The commodities shipped under the larger PL-480 Title III program in the mid-1980s provided support to domestic food production and ensured that food was available to the most nutritionally disadvantaged population. Local currency generated from sales financed agricultural research, irrigation, and employment--projects essential to the Bangladesh government's goal of national food self-sufficiency--and increased personal incomes, thereby effectively increasing demand for food.
Other than food aid, the dollar value of United States development assistance stabilized between US$75 million and US$85 million annually in the mid-1980s and declined to US$58.5 million for FY 1988, largely because of general pressures on the United States budget for foreign development programs. The long-term trend remained intact, with the cash value of United States assistance about evenly divided between food aid and project assistance.
As the "largest poorest" country, and because its government has been hospitable to foreign assistance, Bangladesh has been chosen by several of the so-called richer smaller countries as a country of concentration for their own efforts. Thus, in addition to the programs of Britain, Japan, and West Germany, significant aid programs were initiated by Canada, Sweden, Finland, the Netherlands, Switzerland, Australia, and others, in which each country concentrated on areas where it possessed special expertise.
In the mid-1980s, a number of these donor countries--calling themselves "the like-minded donors"--jointly studied the trend of development assistance in Bangladesh. They concluded that the quality of life in Bangladesh was declining for the vast rural majority, and they faulted the way the Bangladesh government determined and administered its development priorities and the way the aid donors organized and carried out their own assistance programs. They presented a report to the Bangladesh Aid Group in 1986 suggesting changes in emphasis in favor of greater concentration on programs responsive to the deepest needs of the poor: better health care, better nutrition, greater literacy, a more effective approach to family planning, and greater economic opportunities for poor and landless farmers and for women. Although the analysis and conclusions engendered some controversy, the report influenced the direction of aid efforts by the entire Bangladesh Aid Group, including the most important donor and the group's founder, the World Bank.
Economic assistance has come to Bangladesh through the Soviet Union and East European countries and through oil-producing members of the Organization of the Islamic Conference. Much of the aid from these donors has taken the form of construction, equipment, and training. Moscow committed US$132 million for aid to Bangladesh immediately after independence, but disbursement proved to be very slow. In subsequent years, the Soviets figured prominently in power generation, and as of the end of 1987 the Soviet Union appeared to have agreed to extend more aid for power generation, transmission, and distribution and also for oil exploration.
Although relatively modest in monetary terms, the assistance of private voluntary organizations from the United States and elsewhere has also been important. They have offered assistance on a grant basis in fields where return-on-investment criteria cannot be applied, such as emergency relief, medical services, and basic education. In addition, because of their modest scale and insulation from international politics, these organizations can sometimes venture into activities with a high degree of social experimentation, sometimes producing models to be replicated on a larger scale by official development assistance. Aside from such well-known secular organizations as the International Red Cross and CARE, most of the private voluntary organizations had religious affiliations.
AGRICULTURE
Structure of Agricultural Production
Despite progress toward greater industrialization, in the late 1980s agriculture still accounted for nearly 50 percent of the value of Bangladesh's GDP. Approximately 82 percent of the country's population lived in rural areas, virtually all of them making their living exclusively or substantially from agriculture. Domestic production increased at a relatively steady rate in the years following independence, but not fast enough to close the gap created by the continued rapid growth in population. According to official statistics, the real value of all crops and of agricultural production rose every year in the 1980s, but except for a 6.1-percent surge in FY 1981, the gains did not exceed 3.8 percent, and in 3 of the years it was less than 1 percent. The goal of food self-sufficiency by 1990 was asserted as part of the Third Five-Year Plan, but it could be achieved only under optimal conditions. Bangladesh was still importing an average of 2 million tons of food grains each year to meet minimum needs for the subsistence of the population. Most of the imports were on a grant or concessional basis from the United States, the World Food Programme, or other food aid donors.
The agricultural year begins in late February, when the weather is dry and getting warmer. Over a period of several weeks each field is plowed three or four times; using a wooden plow and two oxen, one man can plow 0.02 hectares in an eight-to ten-hour workday. In addition to plowing, field preparation for irrigation involves construction and maintenance of plot boundaries half a meter high, using earth and weeds from the field. These boundaries also serve to retain water in the plots when the rains come a few months later. Traditional methods of irrigation include pitcher, swing basket, and a hollowed-out log fixed on a pivot and fitted with a counterbalance. These methods have a natural grace and beauty and are still practiced in rural areas throughout Bangladesh. They offer the dual advantages of depending entirely on locally available materials and on human power for their operation. In those rural areas where electricity is available, tube wells with electric pumps are becoming an important irrigation device.
Absolute production has increased, and there has been an impressive diversification into a wide variety of seeds and new crops, such as wheat and vegetables. In fact, the patterns of agriculture have been virtually transformed. A previously self-contained and self-reliant subsistence economy has given way to one dependent on inputs, credit, markets, and administrative support from outside. But the price has been high--literally--and in the late 1980s was getting higher. Abu Muhammad Shajaat Ali, in his study of the agricultural village of Shyampur, describes the local economy as a "near-saturated agroecosystem." Continued population pressure has led in many areas to increases in output- per-unit area, but at very high rates of diminishing returns to inputs.
Shyampur exemplified the transformation going on in parts of the rural countryside affected by a modern market economy. The income of farmers in Shyampur, because of its proximity to Dhaka's high-demand urban markets, was greater than in more typical villages of Bangladesh. According to Ali, 31 percent of Shyampur's families in 1980 had a farm income greater than US$278 (Tk7,500) per year; 40 percent earned between US$93 and US$278; and the remaining 29 percent earned less than US$93. Eighty-four percent of farmers were also engaged for at least 100 days per year in off- farm work in small businesses or industrial occupations, with 70 percent of them earning between US$75 and US$295 and 23 percent receiving more than that. Virtually all of this employment was for males. As of 1980, it was rare for village females to be employed outside the household. The work they did in raising poultry, cultivating kitchen gardens, husking paddy, collecting fuel, and assisting neighboring families was not figured into calculations of income.
The ownership of agricultural land remained one of the most difficult problems in the Bangladesh countryside. During British rule, elite large landowners, many of them absentee landowners, owned most of the land in East Bengal. After 1947 new laws abolished large estates and set limits on the amount of land one person could own. Many big Hindu landlords moved to India, but the wealthy Muslims who bought up their holdings became a new landlord elite. Legal ceilings on landownership resulted in little extra land for distribution to the poor because landlords arranged ways to vest ownership in the names of relatives. As a result, in most villages a few families controlled enough land to live comfortably and market a surplus for cash, while a large percentage of families had either no land or not enough to support themselves. Studies have suggested that in the mid-1980s the richest 10 percent of the village population controlled between 25 and 50 percent of the land, while the bottom 60 percent of the population controlled less than 25 percent. The disparities between the richest and poorest villagers appeared to be widening over time. The large number of landless or nearly landless peasants reduced the average landholding to only less than one hectare, down more than a third since 1971. Because Islamic inheritance law as practiced in Bangladesh calls for equal division of assets among all the sons, the large population increases led to increased fragmentation of landholdings and further impoverishment. Inheritance, purchase, and sale left the land of many families subdivided into a number of separate plots located in different areas of the village.
The ready availability of large numbers of poor laborers and the fragmented character of many landholdings has perpetuated a labor- intensive style of agriculture and unequal tenancy relations. At least a third of the households in most villages rent land. The renting households range from those without any land of their own to those middle-level peasants who try to supplement the produce grown on their own land with income from produce grown on additional land. Sharecropping is the most common form of tenancy agreement. Traditional sharecropping arrangements heavily favored the landlord over the sharecropper, with a fifty-fifty split of the produce and the tenant providing all inputs of labor and fertilizer. After decades of rural agitation, the 1984 Land Reforms Ordinance finally established the rule of three shares--one-third of the produce for the owner, one-third for the sharecropper, and one-third split according to the costs of cultivation. Poor peasants who could not obtain land as tenants had to work as agricultural laborers or find nonagricultural jobs. The 1984 Agricultural Labour Ordinance set the minimum daily wage for agricultural labor at 3.28 kilograms of rice or its cash equivalent. Employers who broke this rule could be brought to village courts and forced to pay compensation twice the amount of back wages. However, because village courts were dominated by landowners, there was still little official redress for the grievances of agricultural laborers. In fact, the structure of rural land control kept a great deal of power in the hands of relatively small groups of landlords.
The Comilla Model, which began in 1959, has been the most successful and influential example of cooperative agricultural development in Bangladesh. Projects in Comilla District provided more modern technologies to farmers: low-lift water pumps; low-cost hand-dug six-inch tube wells; pilot research on adapting thirty- five-horsepower tractors for rice cultivation; new crop and animal varieties; testing and introduction of such inputs as chemical fertilizers, pesticides, and high-yield varieties of seeds; and new storage and processing technology. These innovations attracted resources to local rural institutions, against the prevailing urban orientation of the leadership elite. They provided some counterweight to the trend of ambitious village people seeking to leave the countryside in favor of the cities or foreign countries. Comilla, which received substantial assistance from Michigan State University and the Ford Foundation, remains a widely admired accomplishment, and the Bangladesh Academy of Rural Development, which gave broad dissemination to published reports on Comilla's progress, is world-renowned because of it.
Despite progress toward greater industrialization, in the late 1980s agriculture still accounted for nearly 50 percent of the value of Bangladesh's GDP. Approximately 82 percent of the country's population lived in rural areas, virtually all of them making their living exclusively or substantially from agriculture. Domestic production increased at a relatively steady rate in the years following independence, but not fast enough to close the gap created by the continued rapid growth in population. According to official statistics, the real value of all crops and of agricultural production rose every year in the 1980s, but except for a 6.1-percent surge in FY 1981, the gains did not exceed 3.8 percent, and in 3 of the years it was less than 1 percent. The goal of food self-sufficiency by 1990 was asserted as part of the Third Five-Year Plan, but it could be achieved only under optimal conditions. Bangladesh was still importing an average of 2 million tons of food grains each year to meet minimum needs for the subsistence of the population. Most of the imports were on a grant or concessional basis from the United States, the World Food Programme, or other food aid donors.
The agricultural year begins in late February, when the weather is dry and getting warmer. Over a period of several weeks each field is plowed three or four times; using a wooden plow and two oxen, one man can plow 0.02 hectares in an eight-to ten-hour workday. In addition to plowing, field preparation for irrigation involves construction and maintenance of plot boundaries half a meter high, using earth and weeds from the field. These boundaries also serve to retain water in the plots when the rains come a few months later. Traditional methods of irrigation include pitcher, swing basket, and a hollowed-out log fixed on a pivot and fitted with a counterbalance. These methods have a natural grace and beauty and are still practiced in rural areas throughout Bangladesh. They offer the dual advantages of depending entirely on locally available materials and on human power for their operation. In those rural areas where electricity is available, tube wells with electric pumps are becoming an important irrigation device.
Absolute production has increased, and there has been an impressive diversification into a wide variety of seeds and new crops, such as wheat and vegetables. In fact, the patterns of agriculture have been virtually transformed. A previously self-contained and self-reliant subsistence economy has given way to one dependent on inputs, credit, markets, and administrative support from outside. But the price has been high--literally--and in the late 1980s was getting higher. Abu Muhammad Shajaat Ali, in his study of the agricultural village of Shyampur, describes the local economy as a "near-saturated agroecosystem." Continued population pressure has led in many areas to increases in output- per-unit area, but at very high rates of diminishing returns to inputs.
Shyampur exemplified the transformation going on in parts of the rural countryside affected by a modern market economy. The income of farmers in Shyampur, because of its proximity to Dhaka's high-demand urban markets, was greater than in more typical villages of Bangladesh. According to Ali, 31 percent of Shyampur's families in 1980 had a farm income greater than US$278 (Tk7,500) per year; 40 percent earned between US$93 and US$278; and the remaining 29 percent earned less than US$93. Eighty-four percent of farmers were also engaged for at least 100 days per year in off- farm work in small businesses or industrial occupations, with 70 percent of them earning between US$75 and US$295 and 23 percent receiving more than that. Virtually all of this employment was for males. As of 1980, it was rare for village females to be employed outside the household. The work they did in raising poultry, cultivating kitchen gardens, husking paddy, collecting fuel, and assisting neighboring families was not figured into calculations of income.
The ownership of agricultural land remained one of the most difficult problems in the Bangladesh countryside. During British rule, elite large landowners, many of them absentee landowners, owned most of the land in East Bengal. After 1947 new laws abolished large estates and set limits on the amount of land one person could own. Many big Hindu landlords moved to India, but the wealthy Muslims who bought up their holdings became a new landlord elite. Legal ceilings on landownership resulted in little extra land for distribution to the poor because landlords arranged ways to vest ownership in the names of relatives. As a result, in most villages a few families controlled enough land to live comfortably and market a surplus for cash, while a large percentage of families had either no land or not enough to support themselves. Studies have suggested that in the mid-1980s the richest 10 percent of the village population controlled between 25 and 50 percent of the land, while the bottom 60 percent of the population controlled less than 25 percent. The disparities between the richest and poorest villagers appeared to be widening over time. The large number of landless or nearly landless peasants reduced the average landholding to only less than one hectare, down more than a third since 1971. Because Islamic inheritance law as practiced in Bangladesh calls for equal division of assets among all the sons, the large population increases led to increased fragmentation of landholdings and further impoverishment. Inheritance, purchase, and sale left the land of many families subdivided into a number of separate plots located in different areas of the village.
The ready availability of large numbers of poor laborers and the fragmented character of many landholdings has perpetuated a labor- intensive style of agriculture and unequal tenancy relations. At least a third of the households in most villages rent land. The renting households range from those without any land of their own to those middle-level peasants who try to supplement the produce grown on their own land with income from produce grown on additional land. Sharecropping is the most common form of tenancy agreement. Traditional sharecropping arrangements heavily favored the landlord over the sharecropper, with a fifty-fifty split of the produce and the tenant providing all inputs of labor and fertilizer. After decades of rural agitation, the 1984 Land Reforms Ordinance finally established the rule of three shares--one-third of the produce for the owner, one-third for the sharecropper, and one-third split according to the costs of cultivation. Poor peasants who could not obtain land as tenants had to work as agricultural laborers or find nonagricultural jobs. The 1984 Agricultural Labour Ordinance set the minimum daily wage for agricultural labor at 3.28 kilograms of rice or its cash equivalent. Employers who broke this rule could be brought to village courts and forced to pay compensation twice the amount of back wages. However, because village courts were dominated by landowners, there was still little official redress for the grievances of agricultural laborers. In fact, the structure of rural land control kept a great deal of power in the hands of relatively small groups of landlords.
The Comilla Model, which began in 1959, has been the most successful and influential example of cooperative agricultural development in Bangladesh. Projects in Comilla District provided more modern technologies to farmers: low-lift water pumps; low-cost hand-dug six-inch tube wells; pilot research on adapting thirty- five-horsepower tractors for rice cultivation; new crop and animal varieties; testing and introduction of such inputs as chemical fertilizers, pesticides, and high-yield varieties of seeds; and new storage and processing technology. These innovations attracted resources to local rural institutions, against the prevailing urban orientation of the leadership elite. They provided some counterweight to the trend of ambitious village people seeking to leave the countryside in favor of the cities or foreign countries. Comilla, which received substantial assistance from Michigan State University and the Ford Foundation, remains a widely admired accomplishment, and the Bangladesh Academy of Rural Development, which gave broad dissemination to published reports on Comilla's progress, is world-renowned because of it.
Food Crops
Rice
The dominant food crop of Bangladesh is rice, accounting for about 75 percent of agricultural land use (and 28 percent of GDP). Rice production increased every year in the 1980s (through 1987) except FY 1981, but the annual increases have generally been modest, barely keeping pace with the population. Rice production exceeded 15 million tons for the first time in FY 1986. In the mid-1980s, Bangladesh was the fourth largest rice producer in the world, but its productivity was low compared with other Asian countries, such as Malaysia and Indonesia. Highyield varieties of seed, application of fertilizer, and irrigation have increased yields, although these inputs also raise the cost of production and chiefly benefit the richer cultivators.
The cultivation of rice in Bangladesh varies according to seasonal changes in the water supply. The largest harvest is aman, occurring in November and December and accounting for more than half of annual production. Some rice for the aman harvest is sown in the spring through the broadcast method, matures during the summer rains, and is harvested in the fall. The higher yielding method involves starting the seeds in special beds and transplanting during the summer monsoon. The second harvest is aus, involving traditional strains but more often including high-yielding, dwarf varieties. Rice for the aus harvest is sown in March or April, benefits from April and May rains, matures during in the summer rain, and is harvested during the summer. With the increasing use of irrigation, there has been a growing focus on another rice-growing season extending during the dry season from October to March. The production of this boro rice, including high-yield varieties, expanded rapidly until the mid-1980s, when production leveled off at just below 4 million tons. Where irrigation is feasible, it is normal for fields throughout Bangladesh to produce rice for two harvests annually. Between rice-growing seasons, farmers will do everything possible to prevent the land from lying fallow and will grow vegetables, peanuts, pulses, or oilseeds if water and fertilizer are available.
The dominant food crop of Bangladesh is rice, accounting for about 75 percent of agricultural land use (and 28 percent of GDP). Rice production increased every year in the 1980s (through 1987) except FY 1981, but the annual increases have generally been modest, barely keeping pace with the population. Rice production exceeded 15 million tons for the first time in FY 1986. In the mid-1980s, Bangladesh was the fourth largest rice producer in the world, but its productivity was low compared with other Asian countries, such as Malaysia and Indonesia. Highyield varieties of seed, application of fertilizer, and irrigation have increased yields, although these inputs also raise the cost of production and chiefly benefit the richer cultivators.
The cultivation of rice in Bangladesh varies according to seasonal changes in the water supply. The largest harvest is aman, occurring in November and December and accounting for more than half of annual production. Some rice for the aman harvest is sown in the spring through the broadcast method, matures during the summer rains, and is harvested in the fall. The higher yielding method involves starting the seeds in special beds and transplanting during the summer monsoon. The second harvest is aus, involving traditional strains but more often including high-yielding, dwarf varieties. Rice for the aus harvest is sown in March or April, benefits from April and May rains, matures during in the summer rain, and is harvested during the summer. With the increasing use of irrigation, there has been a growing focus on another rice-growing season extending during the dry season from October to March. The production of this boro rice, including high-yield varieties, expanded rapidly until the mid-1980s, when production leveled off at just below 4 million tons. Where irrigation is feasible, it is normal for fields throughout Bangladesh to produce rice for two harvests annually. Between rice-growing seasons, farmers will do everything possible to prevent the land from lying fallow and will grow vegetables, peanuts, pulses, or oilseeds if water and fertilizer are available.
Wheat
Wheat is not a traditional crop in Bangladesh, and in the late 1980s little was consumed in rural areas. During the 1960s and early 1970s, however, it was the only commodity for which local consumption increased because external food aid was most often provided in the form of wheat. In the first half of the 1980s, domestic wheat production rose to more than 1 million tons per year but was still only 7 to 9 percent of total food grain production. Record production of nearly 1.5 million tons was achieved in FY 1985, but the following year saw a decrease to just over 1 million tons. About half the wheat is grown on irrigated land. The proportion of land devoted to wheat remained essentially unchanged between 1980 and 1986, at a little less than 6 percent of total planted area.
Wheat also accounts for the great bulk of imported food grains, exceeding 1 million tons annually and going higher than 1.8 million tons in FY 1984, FY 1985, and FY 1987. The great bulk of the imported wheat is financed under aid programs of the United States, the European Economic Community, and the World Food Programme.
Wheat also accounts for the great bulk of imported food grains, exceeding 1 million tons annually and going higher than 1.8 million tons in FY 1984, FY 1985, and FY 1987. The great bulk of the imported wheat is financed under aid programs of the United States, the European Economic Community, and the World Food Programme.
Other Food Crops
Food grains are cultivated primarily for subsistence. Only a small percentage of total production makes its way into commercial channels. Other Bangladeshi food crops, however, are grown chiefly for the domestic market. They include potatoes and sweet potatoes, with a combined record production of 1.9 million tons in FY 1984; oilseeds, with an annual average production of 250,000 tons; and fruits such as bananas, jackfruit, mangoes, and pineapples. Estimates of sugarcane production put annual production at more than 7 million tons per year, most of it processed into a coarse, unrefined sugar known as gur, and sold domestically.
Industrial Crops
Jute
The importance of one cash crop overshadows all else as the source of Bangladesh's export earnings. Bangladesh is the world's largest producer of jute, a fibrous substance used in making burlap, sacks, mats, rope and twine, and carpet backing. Jute is sold on the international market either raw or in the form of manufactured goods. This so-called "golden fiber" is cultivated on the same land as rice; thus each season farmers must decide which crop to plant.
During the colonial period, when East Bengal was used by the British to produce primary goods for processing elsewhere, raw jute was the main product. Calcutta became the manufacturing center where jute was transformed into twine and rope, sacking material, and carpet backing. The partition of British India in 1947 put an international boundary between the source of the basic commodity and the manufacturing center and imposed a great burden on Pakistan to compensate for the disruption of the industry that was its greatest source of foreign earnings. Between 1947 and 1971 jute mills were constructed in East Pakistan, but industrialization proceeded slowly.
In the 1960s, petroleum-based synthetics entered the market, competing with jute for practically all of its uses. The upheavals culminating in the emergence of independent Bangladesh drove many traditional buyers of jute to shift to synthetics. World trade in jute and jute goods declined absolutely from 1.8 million tons in 1970 to 1.5 million tons in 1982. Despite some major year-to-year swings, prices fell precipitously through the mid-1980s. Prices were too low to cover the costs of production, but the government nonetheless deemed it essential to subsidize growers and industry and ensure the continued existence of as large a foreign market as possible. Ironically, Bangladesh's indispendable foreigh exchange earner was thus itself a drain on the economy.
There have been enormous year-to-year fluctuations both of producer prices and of production. An extreme example occurred between FY 1984 and FY 1986. Carry-over stocks had been run down since the previous production surge in FY 1980, and serious floods in 1984 resulted in unanticipated production losses. The price doubled to US$600 per ton at the export level, which triggered the traditional response of farmers; they planted much more of their land in jute, and between one year and the next production rose more than 50 percent, from 5.1 million bales in FY 1985 to 8.6 million bales the following year. History proved true to itself yet again when export prices then fell by 50 percent at the export level and by more than 30 percent at the farm-gate level. The drop would have been even greater had the government not intervened. It bought 30 percent of the crop through the Bangladesh Jute Corporation and persuaded private mills to buy more raw jute than justified by their own projections of demand.
Jute is a highly labor-intensive crop, much more so than rice, but the yield per hectare is also higher than is generally achieved for rice. When the farm-gate price for jute is 50 percent higher than the price for rice, farmers respond by planting more land in jute at the expense of rice. With the expansion of irrigation facilities in the 1980s, the economic incentives to stick with rice have increased, but there may be scope for increasing jute production by substituting it for the low-yield broadcast aus rice grown on unirrigated land during the same season as jute.
The fact that jute production is so labor intensive has played to Bangladesh's strength, given the country's large rural underemployment. Because wage rates in Bangladesh have been lower than in other jute-producing countries and because Bangladesh has the ideal growing conditions for jute, the country has benefited from encouraging its production even when world price and demand projections have offered bleak prospects. High as Bangladesh's share of world trade has been--in 1985 it amounted to 77 percent of all raw jute trade and 45 percent of jute goods--there are realistic possibilities for expanding the share still further. The World Bank has estimated that Bangladesh's share could rise to 84 percent for raw jute and 55 percent for manufactures. Jute production appeared in the late 1980s to be an essential part of the long-term development plan because, for all the troubles and struggles associated with its planting and marketing, no alternative activity offered any promise of being more profitable.
Many economists believe the key to preservation of the viability of jute as an international commodity lies in maintaining price and supply stability. That has proved a difficult task. Of thirty major primary commodities traded internationally, only about six have as much price and supply instability as jute. Demand is highly sensitive to price increases, but not nearly as sensitive to decreases; once a portion of the market is lost to synthetics, it is very difficult to win it back through price competition. For example, in FY 1986 export sales remained low despite a 35-percent decline in export prices; the fall in world oil prices had also resulted in declines in the prices of polypropylene substitutes for jute as well, and most buyers that had switched to synthetics chose not to return to jute. In the late 1980s, there was nothing in the offing to arrest the trend of several decades of decreasing global demand for jute and declines in the value of jute relative to the goods Bangladesh must import to meet the basic needs of a desperately poor economy.
The government has an ongoing responsibility to monitor the jute situation, to intervene when necessary, and to preserve the economic viability of the commodity responsible for one-third of the nation's foreign trade earnings. It sets floor prices and becomes the buyer of last resort. In 1986 buffer-stock operations were extended through the Bangladesh Jute Corporation and resulted in the government's buying 30 percent of the entire crop. These stocks then become available for use by the government-owned Bangladesh Jute Mills Corporation or for sale to private mills or overseas customers. But in this case, the limitations of this government tool were demonstrated the next year, when the jute crop was of normal volume but the price of raw jute fell a further 35 percent, to the lowest levels in a decade. The government could not arrest the decline because its financial resources and storage capacity were already stretched to the breaking point.
Some hope for a better future has been placed in cooperation among jute-producing countries through the International Jute Organization, based in Dhaka. Member countries in 1988 were the producing countries of Bangladesh, Bhutan, China, India, Nepal, and Thailand and more than twenty consuming countries, including the United States. The goals of the fledgling International Jute Organization were appropriately modest to begin with, centering on better dissemination of basic information, coordination of agricultural and industrial research and of economic studies, and steps toward coordination of marketing. It remained to be seen in mid-1988 whether this poorly financed new organization, representing the first feeble effort at a coordinated approach to the problems of jute, would be effective in arresting its long decline as an important international commodity.
The importance of one cash crop overshadows all else as the source of Bangladesh's export earnings. Bangladesh is the world's largest producer of jute, a fibrous substance used in making burlap, sacks, mats, rope and twine, and carpet backing. Jute is sold on the international market either raw or in the form of manufactured goods. This so-called "golden fiber" is cultivated on the same land as rice; thus each season farmers must decide which crop to plant.
During the colonial period, when East Bengal was used by the British to produce primary goods for processing elsewhere, raw jute was the main product. Calcutta became the manufacturing center where jute was transformed into twine and rope, sacking material, and carpet backing. The partition of British India in 1947 put an international boundary between the source of the basic commodity and the manufacturing center and imposed a great burden on Pakistan to compensate for the disruption of the industry that was its greatest source of foreign earnings. Between 1947 and 1971 jute mills were constructed in East Pakistan, but industrialization proceeded slowly.
In the 1960s, petroleum-based synthetics entered the market, competing with jute for practically all of its uses. The upheavals culminating in the emergence of independent Bangladesh drove many traditional buyers of jute to shift to synthetics. World trade in jute and jute goods declined absolutely from 1.8 million tons in 1970 to 1.5 million tons in 1982. Despite some major year-to-year swings, prices fell precipitously through the mid-1980s. Prices were too low to cover the costs of production, but the government nonetheless deemed it essential to subsidize growers and industry and ensure the continued existence of as large a foreign market as possible. Ironically, Bangladesh's indispendable foreigh exchange earner was thus itself a drain on the economy.
There have been enormous year-to-year fluctuations both of producer prices and of production. An extreme example occurred between FY 1984 and FY 1986. Carry-over stocks had been run down since the previous production surge in FY 1980, and serious floods in 1984 resulted in unanticipated production losses. The price doubled to US$600 per ton at the export level, which triggered the traditional response of farmers; they planted much more of their land in jute, and between one year and the next production rose more than 50 percent, from 5.1 million bales in FY 1985 to 8.6 million bales the following year. History proved true to itself yet again when export prices then fell by 50 percent at the export level and by more than 30 percent at the farm-gate level. The drop would have been even greater had the government not intervened. It bought 30 percent of the crop through the Bangladesh Jute Corporation and persuaded private mills to buy more raw jute than justified by their own projections of demand.
Jute is a highly labor-intensive crop, much more so than rice, but the yield per hectare is also higher than is generally achieved for rice. When the farm-gate price for jute is 50 percent higher than the price for rice, farmers respond by planting more land in jute at the expense of rice. With the expansion of irrigation facilities in the 1980s, the economic incentives to stick with rice have increased, but there may be scope for increasing jute production by substituting it for the low-yield broadcast aus rice grown on unirrigated land during the same season as jute.
The fact that jute production is so labor intensive has played to Bangladesh's strength, given the country's large rural underemployment. Because wage rates in Bangladesh have been lower than in other jute-producing countries and because Bangladesh has the ideal growing conditions for jute, the country has benefited from encouraging its production even when world price and demand projections have offered bleak prospects. High as Bangladesh's share of world trade has been--in 1985 it amounted to 77 percent of all raw jute trade and 45 percent of jute goods--there are realistic possibilities for expanding the share still further. The World Bank has estimated that Bangladesh's share could rise to 84 percent for raw jute and 55 percent for manufactures. Jute production appeared in the late 1980s to be an essential part of the long-term development plan because, for all the troubles and struggles associated with its planting and marketing, no alternative activity offered any promise of being more profitable.
Many economists believe the key to preservation of the viability of jute as an international commodity lies in maintaining price and supply stability. That has proved a difficult task. Of thirty major primary commodities traded internationally, only about six have as much price and supply instability as jute. Demand is highly sensitive to price increases, but not nearly as sensitive to decreases; once a portion of the market is lost to synthetics, it is very difficult to win it back through price competition. For example, in FY 1986 export sales remained low despite a 35-percent decline in export prices; the fall in world oil prices had also resulted in declines in the prices of polypropylene substitutes for jute as well, and most buyers that had switched to synthetics chose not to return to jute. In the late 1980s, there was nothing in the offing to arrest the trend of several decades of decreasing global demand for jute and declines in the value of jute relative to the goods Bangladesh must import to meet the basic needs of a desperately poor economy.
The government has an ongoing responsibility to monitor the jute situation, to intervene when necessary, and to preserve the economic viability of the commodity responsible for one-third of the nation's foreign trade earnings. It sets floor prices and becomes the buyer of last resort. In 1986 buffer-stock operations were extended through the Bangladesh Jute Corporation and resulted in the government's buying 30 percent of the entire crop. These stocks then become available for use by the government-owned Bangladesh Jute Mills Corporation or for sale to private mills or overseas customers. But in this case, the limitations of this government tool were demonstrated the next year, when the jute crop was of normal volume but the price of raw jute fell a further 35 percent, to the lowest levels in a decade. The government could not arrest the decline because its financial resources and storage capacity were already stretched to the breaking point.
Some hope for a better future has been placed in cooperation among jute-producing countries through the International Jute Organization, based in Dhaka. Member countries in 1988 were the producing countries of Bangladesh, Bhutan, China, India, Nepal, and Thailand and more than twenty consuming countries, including the United States. The goals of the fledgling International Jute Organization were appropriately modest to begin with, centering on better dissemination of basic information, coordination of agricultural and industrial research and of economic studies, and steps toward coordination of marketing. It remained to be seen in mid-1988 whether this poorly financed new organization, representing the first feeble effort at a coordinated approach to the problems of jute, would be effective in arresting its long decline as an important international commodity.
Forestry Products
Wood is the main fuel for cooking and other domestic requirements. It is not surprising that population pressure has had an adverse effect on the indigenous forests. By 1980 only about 16 percent of the land was forested, and forests had all but disappeared from the densely populated and intensively cultivated deltaic plain. Aid organizations in the mid-1980s began looking into the possibility of stimulating small-scale forestry to restore a resource for which there was no affordable substitute.
The largest areas of forest are in the Chittagong Hills and the Sundarbans. The evergreen and deciduous forests of the Chittagong Hills cover more than 4,600 square kilometers and are the source of teak for heavy construction and boat building, as well as other forest products. Domesticated elephants are still used to haul logs. The Sundarbans, a tidal mangrove forest covering nearly 6,000 square kilometers along the Bay of Bengal, is the source of timber used for a variety of purposes, including pulp for the domestic paper industry, poles for electric power distribution, and leaves for thatching for dwellings. There is also a profitable semiwild honey industry based in the Sundarbans for those intrepid or desperate enough to risk it. Not only are the bees sometimes uncooperative, but the Sundarbans is also the home of the Royal Bengal Tiger, and several instances are reported each year of honey collectors or lumbermen being killed by man-eaters.
The largest areas of forest are in the Chittagong Hills and the Sundarbans. The evergreen and deciduous forests of the Chittagong Hills cover more than 4,600 square kilometers and are the source of teak for heavy construction and boat building, as well as other forest products. Domesticated elephants are still used to haul logs. The Sundarbans, a tidal mangrove forest covering nearly 6,000 square kilometers along the Bay of Bengal, is the source of timber used for a variety of purposes, including pulp for the domestic paper industry, poles for electric power distribution, and leaves for thatching for dwellings. There is also a profitable semiwild honey industry based in the Sundarbans for those intrepid or desperate enough to risk it. Not only are the bees sometimes uncooperative, but the Sundarbans is also the home of the Royal Bengal Tiger, and several instances are reported each year of honey collectors or lumbermen being killed by man-eaters.
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