Published in The Daily Star on Thursday, 22 March 2018
BANGLADESH’S GRADUATION FROM THE LDC GROUP: PITFALLS AND PROMISES
Learning from peers and graduates
This is part two of a series of articles based on the Centre for Policy Dialogue’s (CPD) research on Bangladesh’s graduation out of the LDC group. Read the first, third, fourth, fifth and final parts.
Dr Debapriya Bhattacharya and Sarah Sabin Khan
The outlook for the United Nations’ (UN) list of least developed countries (LDCs) is finally looking optimistic after 47 years of lacklustre performance since the category’s establishment in 1971. There have been 52 inclusions and only five graduations to date according to the UN Committee for Development Policy’s (CDP) triennial reviews. Bangladesh, an LDC, remains on track for graduation. The country has meet the graduation criteria and is highly likely to graduate as early as 2024. In view of the imminent graduation, Bangladesh will be well advised to monitor co-graduating countries and learn from the experiences of past graduates.
Bangladesh’s graduation is expected to be a landmark success in contemporary development experience. The five countries that graduated from the LDC category are all characterised by smallness in terms of size of economy and population—Botswana is a landlocked developing country, Cape Verde, the Maldives and Samoa, are small island developing states (SIDS) and Equatorial Guinea is a small oil-exporting developing country. Bangladesh’s graduation would be important since it is the first large developing country—in terms of population, size of economy, exports and poverty alleviation—poised to leave behind the LDC status. Within the LDCs, Bangladesh accounts for 16.83 percent of the population, 19.34 percent of GDP and 17.66 percent of world trade.
Comparison with peers
The UN Conference on Trade and Development has predicted that at least 10 countries will graduate from the LDC category between 2017 and 2021. Of these, Equatorial Guinea graduated in 2017, Angola and Vanuatu have been recommended for graduation, Kiribati, Timor-Leste and Tuvalu are under review for recommendations and Bhutan, Nepal, São Tomé and Príncipe, and the Solomon Islands became eligible for graduation for the first time in 2015. Comparing Bangladesh’s performance with these countries across various economic indicators highlight some interesting insights.
Over the last five years, Bangladesh had a higher growth in its real gross domestic product (GDP)—an average of 6.31 percent over 2010-14 period—than its graduating peers. Despite being one of the largest recipients of official development assistance (ODA) among LDCs, Bangladesh’s dependence on ODA (1.32 percent of Gross National Income) was relatively low and has been declining over the 2010-14 period compared to its graduating Asian counterparts. Bangladesh has also been one of the largest beneficiaries of remittances by volume, regardless of a sharp decline in 2015. In terms of the contribution of remittances to GDP, Bangladesh (9.15 percent) lags behind Nepal (27.52) but outperforms all other co-graduating countries on average during the 2011-15 period. The manufacturing sector has also been stronger in Bangladesh than other graduating countries both in terms of share of total value added and share of employment over both the 2005-09 and 2010-14 periods.
Changes in key indicators of former LDCs and comparison with Bangladesh
However, Bangladesh is a small recipient of foreign direct investment compared to most of the co-graduating countries (only 1 percent of GDP over the 2011-2015 period). It is a poor performer with respect to mobilising domestic resources and has one of the lowest tax-GDP ratios in the world, let alone among LDCs. Between 2004 and 2014, average tax revenue as a percentage of GDP for Bangladesh was 8 percent as opposed to 11 percent, 12 percent, 15 percent and 39 percent for Bhutan, Nepal, graduating oil-exporting African LDCs and graduating SIDS, respectively, according to the World Bank. Moreover, Bangladesh is estimated to have the second least productive labour force among graduating LDCs and projected improvements are at a much slower rate than most others according to statistics provided by the International Labour Organisation. The country also seriously lags behind in terms of export diversification with an export concentration index of 0.40 compared to Bhutan’s 0.36 and Nepal’s 0.14.
Past graduation experience
Useful insights can also be gained from comparing where Bangladesh stands along key economic indicators a few years before its likely graduation, with where former LDCs (except Equatorial Guinea) stood before their own. While Bangladesh’s real GDP growth over the past five years is comparable with that of Cape Verde before its graduation, Bangladesh’s growth is slower compared to what it had been for Botswana (10.55 percent) and the Maldives (9.09 percent). Bangladesh is also relatively better off in terms of its current account and merchandise exports (as a share of world trade), though relatively worse off in terms of FDI (as a share of GDP) and tax-GDP ratio.
Post-graduation developments in former LDCs are quite instructive in drawing lessons for Bangladesh. Curiously, following graduation, real GDP growth slowed down for almost all former LDCs (except Samoa) which reinforces the need for smooth transition efforts to avoid economic shocks and stagnation. ODA as a percentage of GNI and remittances as percentages of GDP also fell in all former LDCs after graduation. Changes in pre-graduation levels of current account balances, tax-GDP ratio and share of world merchandise exports varied across countries. However, FDI as a percentage of GDP invariably increased across countries, may be as a result of improved investor confidence associated with leaving the LDC status behind.
Lessons for Bangladesh
Bangladesh can draw on the important lessons that emerged from the review of policy approaches towards graduation pursued by former LDCs, which also highlighted certain post-graduation challenges. Strong governance also stands out as a key factor in graduation and smooth transition, with priorities being appropriate policies that promote prudent macroeconomic management, an enabling investment climate, structural shifts towards productive and high value-added industries, aptly aligned ODA disbursements, and proactive management of trade relations affected by graduation. Post-graduation challenges include accessing alternative types of concessional finance, continuing engagement with development partners and cautiously managing external debt as well as fiscal and current account deficits. Bangladesh would need to emphasise more on domestic resource mobilisation as well as attract FDI to overcome these challenges.
Bangladesh’s imminent graduation from the LDC category will set an instructive reform point for other LDCs. However, to sustain the graduation momentum and to make the process inclusive and sustainable, the country needs to devise a strategic path drawing on the comparative perspectives based on current peers and the past graduates.
Debapriya Bhattacharya and Sarah Sabin Khan are Distinguished Fellow and Research Associate at the Centre for Policy Dialogue (CPD), respectively.