Over time and across countries, differences in living standards ultimately come down to the differences in productivity. Productivity growth in developing countries, in turn, reflect two processes: structural changes in the economy and adoption of new technologies and better practices from more advanced economies (the so-called “catch up” growth). Bangladesh has been experiencing both processes over the past few decades.
First, consider the structural change. Barring the resource-rich countries, sustained economic development over the past few centuries have all involved people moving from relatively less productive rural farms to higher productivity jobs in city factories.
Bangladesh is no exception. While two-thirds of workers tilled the farm in the early 1990s, less than two-fifths worked in agriculture by 2019. Meanwhile, the industry’s share of total employment doubled to over a fifth in that time.
The transformation is also visible in terms of output. While agriculture constituted a third of the country’s output in the early 1980s, by the late 2010s it had shrunk to about an eighth. Over the same time, the industry’s share had risen from about a fifth to a third.
In addition to this structural change, economic development involves productivity improvement within each sector of the economy. Let us start with agriculture. Unsurprisingly for a densely populated delta, many more people are crammed into farms in Bangladesh than elsewhere, making the average Bangladeshi farmer less productive than their peers in neighbouring countries.
But the average Bangladeshi farm has kept pace with (or outpaced) those from the neighbouring countries over the past half-century by adapting green revolution practices from developed countries to the local circumstances.
It is a more mixed picture in the industry sector. On the one hand, the average Bangladeshi worker in this sector has been more productive than their Pakistani or Vietnamese peers. On the other hand, they have fallen behind those from elsewhere in the region.
The relatively weak productivity performance in Bangladesh’s industry sector reflects the fact that the country’s manufacturing is heavily concentrated in ready-made garment and related products. These products are the entry point for industrialisation, and successful countries move on to producing as toys, light electrical goods, bicycles and such like over time (and eventually to more complex electronic products or heavier machines). Bangladesh has failed to move up the value-added ladder.
Economic Complexity Index is a measure of how sophisticated a country’s economy is in terms of goods and services produced. More sophisticated countries are ranked higher. Bangladesh has fallen behind its Asian neighbours over the past quarter-century.
The garments sector has undoubtedly played a positive role in Bangladesh’s development process. But there is a clear need to diversify the country’s production. Unfortunately, such diversification may be more difficult than commonly perceived. Bangladesh still has a reserve army of millions of rural poor, and women’s share of total employment is still lower than Vietnam or Thailand. As a result, left to market forces, there is little incentive for industrialists to venture out to more risky enterprises.
Unproductive service sector
Meanwhile, the productivity picture is even direr in the services sector that accounts for the bulk of the economy. Services are economic activities such as retail and wholesale trade, transport and communication, finances, health and education and other such transactions. How people have are availing services has changed markedly over the decades. People have long stopped bullock carts as means of transportation, for example.
Consumer products that were not available in Dhaka a few decades ago are now available even in rural grocery stores. And smartphones are allowing for all sorts of economic opportunities unimaginable even a decade ago. That is, productivity within the services sector has grown over the decades as well. But when compared with the neighbours, Bangladesh’s service sector appears to be woefully unproductive.
Bureaucracy, corruption and nepotism, lack of competent and qualified managers, political interference in dispute settlement, inadequate infrastructure – one can think of many reasons why Bangladesh’s service sector remains so unproductive. Sadly, these same reasons also applied five decades ago.
This article first appeared in Dhaka Tribune.