Term Paper for the course

ECO 502 (Advanced Macroeconomics)

“Macroeconomics Performance of Bangladesh since

Independence”

Submitted to

Dr. Mudabber Ahmed

Professor and Chairperson of Economics Department

Submitted by

Israt Jahan Nisha

ID 2014-1-88-003

Submission Date: 14.08.15

Department of Economics

East West University

Abstract

Bangladesh is one of the least developed countries. The economy of Bangladesh suffers from

both supply side and demand side problems. This study has been undertaken with a view to

investigate management of macro economic conditions of the country since its independence.

This paper aims at exploring what the country has achieved over the last forty years since

independence and what she missed. The paper uses data from different secondary sources such

as World Bank, United Nations, Bangladesh bank, Bangladesh Bureau of Statistics and so on.

Table of contents

Topics Page number

1. Introduction 1

2. Real Factor

2.1: Average growth rate of GDP 2-3

2.2 Sectoral Contributions to GDP Growth 3-4

2.3Trend of Structural Transformation of Broad Sectoral Shares in GDP 4

2.4 Consumption as Percent of GDP 5

2.5 Investment as Percent of GDP 5-6

2.6. Savings as Percent of GDP 6

2.7 Contributions to GDP 7

2.8 Inflation 8-10

3. Conclusion 10

4. Bibliography 11

1. Introduction

There has been a huge economic progress in Bangladesh since its independence. None can dare

to call it a “bottomless basket” anymore. Rather many countries in the world borrow from this

basket. Nonetheless, it could have achieved much more had it utilized its labor force efficiently.

Lack of energy infrastructure and skill in our labor force may hold us flourishing at the pace we

desire. To accelerate economic growth and to sustain our economic progress, we need to control

our population growth, add skill to our labor force, conserve cultivable land, and mitigate

environmental pollution. To ensure improvements in these counts, good governance is essential.

The objective of this term paper is to have an overview on nature, motion, prospect and

limitations of macroeconomic scenario prevailing in the country with various information of

different sectors of economy and their analytical results. Recommendations as regards to tax

calculations, fund allocation, and ensuing transparency and accountability of public fund for

ensuing national budget are also the objectives of this term paper. This paper has emphasized on

the nature of macroeconomic performance of the country since independence. To get such nature

and motion, the information has been compared in some cases year to year, in some cases as a

whole four to five years.

The economic policy of a country represents economic growth, full employment, price stability

and balance of payment stability. This paper is represented the economic policy through

assessing different macroeconomic indicators.

2. Real sector:

2.1: Average growth rate of GDP:

The table 2.1 shows the growth rate based on 5-year average and table 2.2 shows the growth

rate over the decades, where base year of real GDP in both tables are 1995-96 and measure

the compound growth of GDP.

It is observed that:

During the first decade after independence average GDP growth more or less

remained below 4%. Since the late eighties it started moving upward.

In the nineties it grew at an average rate of 5%, between fiscal year 2001-2005 the

economy posted an average growth rate of 5.4%.

During the period 2006-2008, it grew at an average rate of 6.4%.

Commonly held belief is that Bangladesh could reach even a higher growth trajectory provided

the growth constraints be kept to a minimum. The major constraints include:

o poor governance

o rampant corruption

o infrastructural bottlenecks (electricity, energy shortage, poor sea and airport

management, crowded roads)

o underdeveloped financial markets,

o inefficient bureaucracy

o failure to attract FDI.

2.2: Sectoral Contributions to GDP Growth (Based on 5-Year Average):

The figure 2.2 shows the sectoral contributions to GDP growth based on 5-year average, where

compound growth is measured, but for 2005-06 to 2007-08, it is 3-year compound growth.

The growth in the agriculture sector showed decreasing trend during 1980-81 to 1994-95,

but the sector grew almost at an average rate of 5% during 1995-96 to 1999-2000; fell to

2.5% average growth during 2000-01 to 2004-05 period but over the last three years it

grew at average rate of 4.4%. ƒ

The GDP growth was largely propelled by the industry sector which has exhibited

average growth rates in excess of GDP growth over the entire period. Over the last three

years, it grew at an average rate of 8.3%. ƒ

Since the early nineties, growth in the service sector has been showing an increasing

trend and over the last three years, it grew by 6.7% on average. ƒ

The key to the growth of Bangladesh economy lies in more industrialization with

realising the fullest potentials of agricultural sector.

2.3 Trend of Structural Transformation of Broad Sectoral Shares in GDP (at

Constant Prices):

Note: Sectoral share for 1972-73 to 1978-79 have been converted to the 1995-96 GDP series

by backward calculation.

The key findings include:

While in the early seventies, the share of the agriculture sector to GDP was more than

38%, it fell to 21% by 2007-08. ƒ

In contrast, the share of the industry sector rose from only 15.5% in 1972-73 to

around 30% in 2007-08. ƒ

The largest sector of the economy is the service sector, representing about half of

GDP. Its share has remained relatively stable over time, representing about 46% of

GDP in the early seventies and has remained within the range of 48% to 50% since. ƒ

There has been a considerable shift from agriculture sector to the industry sector.

2.4 Consumption as Percent of GDP (Based on 5-Year Average):

Figure 2.4 shows that: ƒ

Total consumption as percent of GDP fell by 9 percentage points during 1980-81 to

2007-08. ƒ

During this period, private consumption fell by 10 percentage points, while public

consumption increased slightly above 1 percentage point.

2.5 Investment as Percent of GDP (Based on 5-Year Average):

Figure 2.5 shows that: ƒ

Investment remained stagnated during the eighties ƒ

It started picking up from the early nineties backed by private investment while there was

a declining trend in public investment. ƒ

While the shift in investment is conducive for a private sector-led growth, public sector

investment for infrastructure and human capital is critical for sustaining economic growth

and putting Bangladesh economy on a higher growth path. To achieve double-digit

growth, the investment-to GDP ratio needs to be increased to about 30% of GDP.

2.6. Savings as Percent of GDP (Based on 5-Year Average):

Figure 2.6 shows the savings patterns within the economy. The key findings include: ƒ

From 1990 to 1995, the average domestic savings and national savings stood at 13.3%

and 18.9% respectively; during the last three years the domestic savings grew to 20.2%

and the national savings 28.6% on an average. ƒ

The mobilisation of further domestic resources and transforming national savings into

investible surpluses are critical for the growth of the economy.

2.7 Contributions to GDP (As Percent of GDP):

Figure 2.7 shows that: ƒ

The largest component of GDP is consumption. Since 1980-81 there has been a secular

decline of consumption as percent of GDP. ƒ

In contrast, the share of investment went up from 17.6% in 1980-81 to 24.2% in 2007-08.

Export as percent of GDP was 4.1% in 1980-19981 and it went up to 16.0 % in 2007-08.

Likewise import as percent of GDP was 13.3% in 1980-81 and went up to 27.4% in

2007-08.

2.8 Inflation

2.8.1 Trend in Inflation (Annual Percent Change):

Figure 2.8.1 shows the historical trend of inflation in Bangladesh: ƒ

Inflation fell dramatically in the late eighties inflation from the double-digit increases

recorded in the mid 1980s. It dropped to single-digit year-over-year increases. ƒ

In 1990-91, 1994-95, 1997-98 spikes in the trend line were above 8% which were driven

by the natural calamities and supply shocks. ƒ

In 2000-01, annual inflation rate came down to its lowest point of below 2%, mainly due

to lower prices of food items, but has been on an upward path since then. In 2007-08, it

again touched two-digit rate largely the result of rising international prices of fertilizers,

fuel and foods, higher business cost due to corruption and malgovernance.

2.8.2 Trend in Food and Non-Food Inflation at National Level:

Figure 2.8.2 shows that: ƒ

The inflation in Bangladesh is basically food price induced. The high rate of inflation is

accompanied by higher food inflation than non-food inflation. The high inflation rate in

1997-98 is the result of the catastrophic country-wide flood which caused a heavy

damage of agricultural production.

2.8.3 Monthly Rate of Inflation (Point-to-Point):

Figure 2.8.3 shows that: ƒ

Although there was a spike in the inflation rate at the beginning of 2007-08, due to both

food and non-food prices, it since fallen, primarily due to the fall in prices of food, fuel

and fertilizers commodities in the international market.

3. Conclusion:

Since independence Bangladesh has made commendable progress in various macroeconomic and

social development indicators which is reflected in various development indexes of World Bank

and the United Nations. However, we could have achieved much more had we utilized the full

potential of our labor force. On the basis of analytical results of various economic parameters as

mentioned above it can be said that Bangladesh is a country of steady and sustainable growth.

GDP growth rate is on an average 6% to 7%. Poverty level is in declining trend. Bangladesh’s

strong growth and success in poverty alleviation have also attracted the international

communities’ attention. But as a growing country despite having a steady growth there are also

some shortcomings regarding full employment, monetary policy and price stability. To make the

economic growth more dynamic, to protect the high rate of inflation, to reduce the inequality of

the society steps may be taken to increase the share of direct tax. For increasing the share of

direct tax new tax payers need to be identified. It is pertinent to mention that five percent of high

income level people are holding almost 27% of GDP. To keep the inflation within the tolerable

range through controlling the demand pull inflation the annual money and credit growth may be

consistent with the growth rate of commodities.

4. Bibliography:

1. Ali, MM and Medhakar, A. January 2012. “Management of Macro Economic Performance of

Bangladesh: An Empirical Analysis”, International Review of Business Research Papers.

Volume 8 No. 1. Pp 64-83.

2. Center for Policy Dialogue. “Analytical Review of Bangladesh’s Macroeconomic

Performance in Fiscal Year 2014”.

3. FCA, Hossain, SM. 2015. “An Analysis on Macroeconomic Performance of Bangladesh.”

The Institute of Chartered Accountants of Bangladesh

4. Helal, M and Hossain, MA. 2013. “Four Decades of Economic Development of Bangladesh:

An Assessment”, Journal of the Asiatic Society of Bangladesh. Volume 58(2), PP 335-362.