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CPD study on business competitiveness mentioned

The partner institution, Centre for Policy Dialogue [CPD] performs the background work in Bangladesh. GCI index for 2015 in Bangladesh is based on data for the year 2014 and is based on 56 units, mostly locally owned and is located in Dhaka.

Published in Daily Sun on Tuesday, 27 October 2015.

Investment Climate: Genesis and Bangladesh Context

Dr Mir Obaidur Rahman

Investment climate delineates the set of location-specific variables that help an investor to scrutinise the opportunities, incentives and threats in investment decision. Country-specific institutional and policy arrangements, technological advancement and the adaptability, state of physical infrastructure and political environment are some of the important parameters that may be used for the determination of relative ranking in investment decision making in comparison to other countries. A healthy investment climate can significantly impact productivity, growth and employment in an economy. Indeed, consistent and sound sector-specific policies may lead to augmented growth in the overall economic development.

There are several indices that an investor may consider for investment in a foreign country. Ease of Doing Business Index [DBI] that deals with the modalities of business laws and regulations developed by the World Bank is such an index and compiled for 189 economies.  A high ranking [lower value] based on 10 topics related to business environment such as number of days a business can be started and closed; the efficiency with which contracts are enforced is an indication that the regulatory environment is conducive to business operation. Another important dimension is the Distance to Frontier measure [DTF] that provides the gap in terms of deficiency in each of the area and also with the overall rank with reference to a regional target.

Economic Freedom Index [EFI] published by the Wall Street Journal and the Heritage Foundation rank 186 economies on the criteria of 10 issues related to freedom of economic agents in areas such as trade, business, and investment and property rights. World Economic Forum [WEF] at Davos, Switzerland publishes another index known as Global Competitiveness Index [GCI] in its Global Competitiveness Report [GCR].

The partner institution, Centre for Policy Dialogue [CPD] performs the background work in Bangladesh. GCI index for 2015 in Bangladesh is based on data for the year 2014 and is based on 56 units, mostly locally owned and is located in Dhaka. GCR presents the findings in a comprehensive manner; the overall business environment of different countries in an international settings.

This index is a robust measure and surveys the current status of important investment decision criteria in an international setting such as infrastructure, institutions, educational level and innovation with other important macroeconomic indicators. Singapore and Hong Kong [administrative unit of China] from Asia is among the first top 10 countries in the world.

All these three indices can guide both domestic investment and Foreign Direct Investment (FDI). A study on the Bangladesh position in all these indices may shed light on the current status of domestic and also FDI, the crucial deficiency in an international setting and the imperatives to address these loopholes for better investment climate. Investment as a percentage of GDP in Bangladesh is 26 per cent that provide a static growth of 6.5 per cent. Growth level of above 7 per cent warrants investment above 30 per cent of GDP so that the country may attain the status of mid-level country by 2021. The optimum value of FDI as a percentage of GDP ranges between 5-6 per cent of GDP; but the average value during 2010-2014 for Bangladesh is 0.9 per cent. The average value in India is 1.7 per cent but in Singapore the average value is above 25 per cent.

A look into the different index value of these indices may be a guide for low FDI in Bangladesh. Take the case of GCI which is compiled for 140 countries for 2015; Bangladesh is in the midway [3.8] in this index. Though the index reflects a marginal improvement from the previous year from 109th to 107th position but the relative position deteriorates in many of the criteria. The outstanding achievement is observed in macroeconomic environment [from 72 to 49 with score of 4.98, comparable to many advanced economies] and health and primary education but in certain areas crucial for business such as infrastructure, higher education, technological readiness and institutional soundness and political instability the country lags significantly. Infrastructural inadequacy, institutional malfunctioning and poor quality of higher education are more discernible and constitute a predominant challenge for the economy.

Historically, inadequate infrastructure, bureaucratic lapses and corruption are major deterrents to investment. Other indices such as EFI and Ease of Doing Business Index corroborate this point. The Economic Freedom Score of Bangladesh is 53.9; below both in world average of 60.4 and regional averages of 58.6.  The rank is 131 out of 186 countries and the country as in 27th position out of 42 countries in the Asia-Pacific region. This represents an overall static position with marginal improvement in a few areas. The recently concluded Trans-Pacific Partnership [TPP] deal among 12 nations comprising 40 per cent of the world economy is considered to be threat for Bangladesh. Bangladesh is not a member country of TPP. Vietnam, a member country in this transaction deal is in a better position than Bangladesh in many of crucial variables of investment climate. Vietnam can gain competitive advantage over Bangladesh especially in readymade garments despite low labour cost in Bangladesh and also with the current status of GSP.

With an overall rank of 173 out of 189 economies in the Ease of Doing Business Index comprising of ten criteria, no significant changes are observed over time in Bangladesh in the ranking. Deterioration in ranking is observed in dealing with construction permits, getting credit, paying taxes and in property registration. The distance to frontier measure [DTF] summarises the key indicators for each topic benchmarked against regional averages. Out of ten criteria, the economy of Bangladesh lags much behind regional competitors. Only in starting a business [Value 82] Bangladesh is closer to its neighbours but in other criteria such as registering property, getting electricity, enforcing contracts and getting credit with numerical value of 33, 17, 21 and 30 respectively trails much behind its neighbours.

It is not fair to draw a grim picture on investment climate but to stress that the incremental change over the few years needs to be sustained with pragmatic policies. It is indeed noteworthy to observe the excellent macroeconomic environment, an important push factor in the study of investment climate but a few lapses in financial disciplines related to the loan operation may trigger instability in financial market. A supportive monetary policy and an active neutral role of Bangladesh Bank can avert such a chaotic disorder in macroeconomic management.

The demographic dividend is a boon for Bangladesh for competitive edge in labour-intensive industries e.g., readymade garments, textiles and leather products.  The investment in energy and power, pharmaceutical, information technology and infrastructures can accelerate and generate momentum in the growth process. The policy framework should attempt to harness these potentialities.

The writer is a professor of Economics, United International University.


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