How To Get More Of It

Pivotal role of governance

Dr. Reza Kibria

The statements of policymakers and the stance of government policies in this country under the BNP-Jamaat-I-Islami government reflect either a lack of understanding or an unwillingness to confront the real reasons behind the failure of Bangladesh to attract significant Foreign Direct Investment (FDI). For a country such as Bangladesh, barring any dramatic technological breakthrough in agriculture, it is FDI that holds out the best hope for faster economic growth. In contrast, foreign portfolio investment poses much greater risks to a small economy with underdeveloped financial markets (and a weak regulatory framework) in terms of the potential scale and volatility of short-term capital flows, and carries no real benefits.

It is not just levels of FDI that we should be concerned about, however: its composition and quality do matter. Investments in extractive industries, for example, should certainly be welcomed, but they do not always boost employment significantly or promote the broad-based sustainable growth needed to reduce unemployment and poverty. The concern is that investments in the most attractive industries those with large domestic linkages (and high value-added), high technology- and management skills-transfer potential and above-average productivity growth rates - tend to pass us by. The higher costs and greater risks entailed in investing in this country are said to stem from inadequacies of infrastructure, high levels of political and official corruption, poor and selective enforcement of laws and a lack of transparency and predictability in the incentives and taxation framework. All these problems relate to weaknesses in governance that will be discussed below.

The recently expressed interest of India's Tata Group notwithstanding, and despite rosy BOI projections based on “investment intentions”, Bangladesh will continue to lag behind the countries of the region as a destination for FDI unless it improves the quality of governance. It is much more than an “image” problem that we are dealing with here, although the current government's conspicuous failure in halting the downward spiral in the law and order situation has no doubt severely dented the already fragile image of the country in the eyes of international investors. Some of the more favourable factors in assessments of Bangladesh have been the generally prudent stance of fiscal and financial policies and overall macroeconomic stability of the past two decades, but even these may be jeopardized by the current government's failure to act in the face of emerging internal and external financial imbalances. We must recognize, however, that even with another government in place the problems of governance that have assumed crisis proportions in the past four years will not simply disappear. These governance issues need to be purposefully addressed by a combination of long-term policies to build more effective institutions to ensure accountability. These actions will need to be sustained in the face of powerful entrenched interests, and will necessitate developing a broadly based coalition in favour of these reforms.

Weaknesses in both physical and social infrastructure are closely associated with the prevalence of corruption as well as bad policies. The pattern of budgetary allocations in the past four years in particular- have tended to favour government consumption as well as activities (notably in non-donor-funded “development” programs) where the scope for graft is greatest and the possibility of effective monitoring of spending is the least. Those working with government are well-aware of the infrastructure projects sourced from improbably high-cost suppliers. These “padded” projects directly impinge upon the government's ability to fund high-return investments in social infrastructure. The interests involved in these special deals are sometimes so influential as to be able to block effective media investigation and even neutralize any incipient political protests. The consequences of the overall deterioration in governance can be seen in every social sector. There are reports of a worsening quality of services in public healthcare facilities and falling standards in medical training (where political affiliations are now taken into account in admissions). The decline in educational standards in the public sector is even more alarming, and perhaps carries the greatest risks for the future as differences in education standards further widen the gulf between the rich and poor in this country.

Improving governance will necessitate long-term programs for institutional regeneration and renewal in the different cadres of the civil service, police and the security services. This will involve improving training programs (which must incorporate integrity frameworks that provide guidance on the appropriate conduct of civil servants) and restoring the esprit de corps for a demoralized civil service. Ironically, under the current government the new “performance oriented “ system of promotions on the basis of perceived ability rather than seniority has completely destroyed any remnants of institutional integrity. Reportedly, the only criterion for promotion now is unquestioning loyalty to ruling party leaders (to the extent of willingness to condone or commit illegal acts). Senior civil servants have gradually abdicated any role in policymaking or strategic planning in key areas, preferring to deal largely with the operational matters with financial implications that their ministers are often preoccupied with. The consequences for bureaucratic decision-making and the efficiency of policy implementation have been disastrous, eroding public and investor confidence in the quality, predictability and direction of public policy. Bizarre decisions that appear to flout the public interest occasionally reach the newspapers, but the concern is that the spotlight of the media falls on a few isolated cases. A free press is perhaps the most effective guarantor of the public interest, but in order to operate effectively the restrictions on public access to information about government operations must be loosened. The civil service itself must be retrained and perhaps even reconstituted to ensure that members put their duty to the Republic and to the public interest first. Training in ethical standards for public servants must be combined with: improved pay and conditions, greater accountability, a shift in the focus of budgetary policies from inputs to outputs; the introduction of performance standards (including the use of user surveys and independent reviews, as well as benchmarking); better and more systematic monitoring of performance (moving beyond compliance audits of the budget to cost-effectiveness and value-for-money audits) and the use of effective sanctions for malfeasance. Some of these things can be legislated, but let there be no doubt that real changes will involve altering mind-sets, which is a much more difficult process.

The independence of the judiciary and the modernization of the legal infrastructure and judicial procedures are critical elements of any program of governance reforms. The retrograde steps of the current government in this regard have been well-documented, and it is fair to say that the legal system in this country is under siege by a group determined to exert control. Fairly drastic measures will need to be taken to undo the damage that has been done, particularly the risks posed by the politicisation of the upper judiciary. A weakened judiciary increases the incentive for corruption, as investors without recourse to an impartial judiciary seek to protect their interests by buying influence in the bureaucracy or political leadership. For large potential investors in particular, legal issues will remain a major concern, as the enforcement of contracts becomes subject to many uncertainties, including the effects of official influence.

A major problem for Bangladesh has been the all-pervasive corruption that has not only created uncertainties in the policy environment but also raised the costs of doing business for foreign and domestic investors alike. It is sometimes argued that many successful fast-growth economies particularly those of Southeast Asia have also been marked by considerable corruption. Perhaps there is a difference in scale or extent, but the most important point is that these countries have done well not because of, but despite, such corruption. Some foreign companies with lax domestic laws regarding corrupt practices in overseas operations have actually done relatively well in this environment (particularly in government procurement). Where these are not the lowest cost suppliers/producers the economic costs to Bangladesh have been immense. Most foreign investors, however, would be quite content with a “level playing field” and stable policies.

Corruption in Bangladesh in recent years has been characterised by its scale and openness, and its impact is exacerbated by the need of virtually every business in this country to make “protection” payments to criminals who operate under the aegis of political leaders. Some potential investors, such as members of the Bengali diaspora - who, like members of other diaspora (China, Vietnam) could otherwise be expected to lead the way for foreign investment in their countries of origin are dissuaded from investing in this country by the prospect of having to deal with these criminal elements. There is a belief in Bangladesh that corruption and extortion can be carried out with impunity, given the capability to bribe or intimidate the potential instruments of accountability, investigation and punishment. The politicisation and undermining of the institutions of the State has further contributed to the spread of corruption at every level. The much-vaunted reforms intended to create a strengthened and “independent” Anti-Corruption Commission represent only wishful and muddle-headed thinking on the part of some donors and carries little public credibility. Without real commitment from the highest levels of government there should not be any expectation that this agency can be effective. Such an agency would be taken more seriously if it were seen to have the capability to uncover and punish wrongdoing not only of those who have held positions of power in the past, but those currently holding office. Much broader institutional changes are needed, with measures such as the introduction of an integrity framework and code of ethics for politicians and officials, as proposed by the opposition in recent months. Greater transparency in government operations (with improved access of the public and the press to information), together with further deregulation and liberalization and curtailment of discretionary authority is needed. Most importantly, to stem the tide of corruption the top leadership of this country must lead by example. Until this happens corruption will not only impose an extra burden on all economic activities, it will continue to create uncertainties regarding the policy and regulatory environment and erode the government's ability to provide high quality public goods and services.

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The author is an economist.