How To Get More Of It

Political economy of investment

Abul Barkat

Development without investment is improbable. And in the case of Bangladesh, accelerating the process of development without sustained large-scale investment in both productive and human development fronts is more so. The prime reasons necessitating accelerated investment are as follows: per capita income is still one of the lowest in the world with only US$ 406 for 140 million people where density of population is about 850 per sq.km; annual growth rate fluctuates between 4% and 5% with a low base; industrial base is still at its embryonic stage; non-farm and off-farm activities are still at their initial stages; income inequalities are not only high but increasing; surplus in food production has been achieved but distribution remains highly inequitable leading to acute starvation and underfeeding; landlessness and marginalisation among rural peasantry and urban poor are highly pronounced poor people's ownership of and access to productive resources are getting contracted; youth poverty situation is getting worse 40% of the 44 million youth population are unemployed; and health and education of the poor, especially those of the poor women and children are being compromised at the cost of unproductive government expenses.

All these negative factors are in operation in Bangladesh although she is endowed with many positive factors to accelerate the process of development. These positive factors include low demand of the general mass from the government most people are happy with very limited access to employment, primary health and basic education; resilience of people and their inherent strength to cope with difficult situations; availability of huge amount of khas agriculturalnon-agricultural land and waterbodies; abundance of water resources; availability of high quality natural gas-coal key sources for electricity production, while the household access to electricity is only 32%. If development is about using these positive factors to reduce the impact of negative factors, then this is possible only with large scale investment for which an investmentfriendly climate has to be ensured. This is pure and simple a politico-economic agenda, requiring sustained political commitment and good governance to materialise it.

The good tidings include an increasing integration with the global economy in 1990's trade has been doubled reaching 31% of the GDP by 2001, deregulation of foreign investment to a large extent; boost in the accelerated repatriation of profit and income; formulation of conducive-to-development industrial policy reforms, which has lifted import controls, encouraged export, rationalised tariff; shifting from fixed to floating exchange rate.

All these gains could not be realised to the desired level due to the strong prevalence of the discouraging factors including the following: deteriorating law and order situation; weak state capacity to govern and deliver services primarily attributed to the lack of transparency and accountability of public institutions; growing mistrust on the judiciary; slow growth of domestic investment in productive sectors; lack of interest of the investors some foreign investors have already withdrawn; slow pace of reforms in the institutional and regulatory framework; lost momentum of liberalisation, especially in infrastructure cost of shipping a container of garments from Chittagong to US markets is about twice as high as shipping from Bombay or Shaghai and this traces back to inefficiency and corruption in the port; less emphasis on prioritisation and sequencing of liberalisation; high share of non-performing loans out of total US$ 47 billion loans disbursed during the last 20 years 73.2% are 'bad debt'; meagre foreign direct investment about $620 million annually during 1992-2000, which is one of the lowest in emerging Asia (3-7 times less than in Cambodia and Vietnam).

Structural weaknesses deter investment-mediated development process. The present day investment situation is a matter of structure, which was formed in a historical process. The initial 15 years (1975-1990) of development and investment in Bangladesh can be denoted as development within mis-governance by authoritarian regimes including pure military rule and legitimised civil system of military rule. The outcome of which was at least two-fold: first, increased vulnerability in term of not attracting both domestic and foreign private capital inflows in the form of foreign direct investment, portfolio investment, foreign currency loans, and suppliers' credit and loans. Second, slowing down of the process of democratic transition, a sine qua non for paving the way for an investment-friendly environment. After twenty years of independence, in 1990, the development journey started with a deep-rooted corrupt system. The last 15 years (1990-2005) can be denoted as the time of “Parliamentary democracy” operating within an inherited corrupt system. The unfortunate indications include narrow party-based politicisation, which acts as both cause and effect of bad investment climate, and expanded clientism indicated through lack of cohesion, mistrust, partisanism in bureaucracy, escalation of inefficiency, misuse of public office etc.

The extent of inefficiency in human resource management in the government has reached a point from which it breeds further inefficiency and wastage in the system. This could be seen as a factor retarding the process of engaged governance, which is absolutely necessary to ensure smooth flow of investment and job creation.

On balance, in 1990's the real GDP growth averaged 4.8% (with declined volatility) credited to increased private investment and further integration with global economy reflected in the increased export, especially in the RMG sector (although the fate of RMG after MFA-phase out is still unclear). The GDP growth has fallen short of growth potential. Started with similar per capita incomes (in PPP$), two decades ago, compared to a Bangladeshi citizen a typical Indian citizen receives 50% more income and a Chinese 3 times more. And, projections show that reaching MDG goals in Bangladesh will require at least a 7% GDP growth with distributive justice.

And ensuring this distributive justice has become a nightmare because of the overall economic criminalisation of the Bangladesh society, which has boosted the effective demand for criminalisation of politics. This politico-economic criminalisation acts as a major “blockade factor” constraining all necessary investments and endeavours to facilitate human development. It is thus that within the existing huge “trap of exclusion” investment per se will not work. Indeed, recent work on economic growth has shown that there is only a fairly weak (statistical) relationship between the quality of investment and the rate of economic growth. In many instances, this is due to a dysfunctional and distorted institutional and policy environment where neither public nor private investment produces the benefits that it should. The central issue here is not just to accelerate growth but to ensure inclusiveness of that growth, or in other words, ensure that growth benefits the poor. This will require a concerted effort to improve the investment climate and continue to increase the inclusiveness of development and growth. Better governance is critical to both the investment climate and inclusion.

Further, increasing inclusion will require sustained improvements in education and health, closing the gender divide, and capitalising on highly effective voice of the civil society. It would be appropriate to conclude that the obvious way out shall include, among other things, the improvements in the investment climate accompanying mitigation of the structural weaknesses through various political, economic, social, administrative, and legal reforms.

When buyers and investors come scouting

Is the overall investment climate so bleak?
The domestic capital due to the very nature of the capital, which is highly prone to being part of the trading and commission agency is averse to transforming into productive capital.

Investment usually flows if investment-friendly environment exists. Such investment-friendly environment presupposes sustained availability of the following: cheap labour power; raw materials; infrastructure facilities electricity, gas, transport, communication, IT; freedom from labour unrest and 'trade unionism'; speedy movement of papers; speedy resolution of disputes; developed banking; tax-excise-VAT incentives; corruption-free environment or low extent of corruption; congenial law and order situation; good governance and transparency; political stability; guarantee to secure uninterrupted and adequate profit; scopes for repatriation of profit. Viewed from the standpoint of investment-facilitating factors, it would be not an exaggeration to conclude that the overall investment climate in Bangladesh is non-conducive to the potential investors and entrepreneurs.

The cost of doing business, due to the factors stated above, is excessively high. This is evident from a recent study in which firms have reported constraints to operation as major or very severe (Figure 1).

Figure 1: Firms reported constraints to operation as major or very severe (%)
The relative rise and sharp fall in FDI during the last two governments indicate that the governance really matters, and image is a sine qua non for attraction. For example, the total inward FDI received during 1991-96 was US $ 324 million, which shot up over ten-times to reach US$3,804 million during 1996-01; and then it has dramatically fallen from US $ 280 million in 2000 to only US $ 79 million in 2001 and then further down to US $ 45 million in 2002. How to explain such rise and fall in inward FDI? First of all, the 1996-01 government intensified its efforts to welcome FDI particularly in energy sector, which resulted in shooting up of FDI from a low of US $ 25 million to US $ 725 million. This phenomenon coincides with the time of high image building following the Water Sharing Treaty with India, Peace Treaty with the indigenous people of CHT, attainment of self-sufficiency in food production largely attributable to prudent agricultural policy, President Clinton's visit to Bangladesh, etc.

In order to fully comprehend the real situation, it would be appropriate to note the following: The religious fundamentalism has gained much visibility and momentum; the use of fire arms and double-edged weapons has also been relatively widespread spawning insecurity and pulling democracy at stake.

Secondly, one should keep in mind that the FDI market is a supplier's (investor's) market, not the demander's market. In this regard, it is worth mentioning that, according to Bangladesh Foreign Investors Chamber of Commerce and Industries and the American Chamber of Commerce and Industries, Dhaka, about 20 American TNCs pulled out from Bangladesh recently. Also, declaring one of the Ministers as unresponsive, the Danish and Netherlands governments withdrew million of dollars of grant.

Foreign investors have moved funds into the Dhaka Stock Exchange, but they have moved them out again. In 1995-96 there was a US $ 23 million net outflow. And foreign direct investment has proved no more positive in the same year it was only around US $ 5 million. The most consistent flow of foreign investment has gone into the two export processing zones in Dhaka and Chittagong. It should be kept in mind that, the remittances from Bangladeshis working abroad are at least ten times higher than the FDI. Unless the domestic economic governance is streamlined, the factors that can help attract FDI for productive pursuits will not be in place.

Deterring factors
Bangladesh is a signatory to various international treaties relating to investment. But the service ends there. The people involved in channelising FDI more often are not aware of the issues, covered by these treaties, and as such the risks of investment remain.

Another important factor is lack of 'the view from the other side'. From the investors' perspective, despite all the incentives and allurements laid out, a multinational enterprise before investing in a country, will always try to get first hand information from his country mate who has already invested in that country, just like before tasting something new, a person will ask others who has tasted it, how it tastes. The signals a prospective investor gets from existing investors about their business experience in Bangladesh more often than not discourages prospective investors from investing here. This image and reputation problem retards the positive decision making of investors.

Rigid bureaucracy and official hierarchy prevent decision-making at lower levels, and is a significant factor in adding to the costs of doing business here. Thus the representatives of the concerned Ministries and organizations involved in FDI in the one-stop service could not give on-the spot decisions to a would-be investors' roadmap, such as sanctioning of land, electric connection, equity, etc. Such issues had to be relayed back to their respective Head Offices and decisions came from there.

One of the major weaknesses in the management of investments, foreign or local, in Bangladesh has been dominated by love for approval of investment units owned or patronised by vested political quarters. The result of this lopsided favour to politically influential investors has been reflected in the minimal change of country-wise investment portfolio in Bangladesh even over a relatively long timeframe during 1991-2005.

Both domestic and foreign investors frequently report their obligations to pay extra fees for obtaining such government services as allotment of post office boxes, provision of electricity and telephone lines, various licences, customs clearance etc. Examples of higher-level corruption are those that take place frequently in the awarding of public and private tenders. Business people consider Bangladesh Customs to be among the worst, a thoroughly corrupt organisation in which officials routinely exert their power to influence the tariff value of imports and to expedite or delay import and export processing at the ports.

Rules pertaining to investment in Bangladesh are usually
not well-publicised or transparent. This lack of transparency is practiced by bureaucrats, businesses, professionals, trade unions and political parties having vested interests in a system by way of using confidentiality as an essential norm in policy formulation.

Businesspersons have to seek support for action from the bureaucrats, but bureaucrats' support is impossible without the recommendations or intervention of the higher political levels. The poorly paid civil servants have regarded business people as exploitative, and regard themselves as having a near monopoly on economic acumen and patriotism. Despite fear from risks to their careers from illegal activities, the incidents of solicitation of bribes from foreign investors are rampant.

Public administration reforms in Bangladesh have not yet been able to bring about minimum levels of honesty and transparency in the bureaucracy, which is central to policy formulation and practices toward improved investment climate.

The mechanism of protection of property rights is not transparent and is a point of concern to the investors in Bangladesh. There are two particular reasons for the lack of transparency of this mechanism, such as: the ingrained culture of delay in disposal of legal cases, especially the ones under the jurisdiction of Civil Procedure Code; and insufficiency of enactments necessary for addressing property rights issues.

Possibility of a congenial environment
I have made an attempt to argue that investment per se may not be important, rather mass investment both public and private, both domestic and foreign can be attuned to serving the purposes of both economic growth and ensuring benefits of growth to the poor. This can be achieved through concerted efforts to improve the investment climate, which in turn can be ensured only through better governance.

Three key points on future possibilities are in order: (1) It is possible to change investment climate by changing the institutions and policies in ways that will spur investment. (2) It is possible to ensure both pro-investment climate and address the issue of social inclusion through governance reforms. The strengthening of government institutions and rule of law will do a lot to improve the climate for productivity, jobs, economic growth and human development. (3) It is possible to make growth more inclusive by implementing a development agenda in which development will be viewed as a freedom-mediated process to ensure five substantive freedoms for all: political freedom, economic opportunities, social facilities, transparency guarantee, and protective security. This is basically an issue of creating opportunities for choice towards full life.

In an era of globalisation and interdependence of economies, the following broad groups of issues need proactive thinking to promote higher investment for economic development of Bangladesh: political will, commitment and stability; good governance to minimize the costs of doing business; conducive infrastructure; development of capital market; and image building of Bangladesh.

Illustration: Sabyasachi Mistry

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The author is Professor, Economics, University of Dhaka and General Secretary, Bangladesh Economic Association.