Published in The Financial Express on Wednesday, 16 April 2014.
Economic Analysis
Costs of political turmoil: Lost growth and slower poverty reduction
Zahid Hussain and Johannes Zutt
Since January 2013, political parties enforced 85 days of nation-wide general strikes (hartals) and blockades, of which 45 days were in July-January, FY14. Unlike in the past, these political agitations were not limited to Dhaka and a few major cities. They were as intense in smaller cities and towns across Bangladesh. In addition, the hartals lasted not for 12 or 24 hours at a time, but often for a whole week, and blockades for indefinite periods. How much did these disruptions cost the economy?
A TOLL ON PRODUCTIVITY AND CONFIDENCE: From an economic point of view, the impact of such an intense and prolonged political impasse can be conceived as the composite of a supply shock and an adverse shift in expectations/confidence. Disruptions caused by the turmoil reduced the economy’s ability to produce from a given level of inputs. A permanent supply shock of this type lowers growth and increases inflation. The turmoil also made consumers and businesses more worried about the future. As a result, consumers tended to consume less and save more at a given level of disposable income than before, and businesses tended to wait and see in executing their investment decisions. In addition, foreign buyers sought alternative sources of supply. These resulted in a decrease in aggregate demand, leading to further lower growth while muting the impact of the supply shock on inflation, other things being equal.
It seems reasonable to assume that the adverse productivity effect of the turmoil is irreversible, at least partially. The disruptions lasted long enough to make it impossible for firms and workers to make up all the losses suffered. Although many businesses worked weekends and nights to make up the loss of working days, there were just too many days lost to be fully made up. Note that – because of political uncertainties, the image crisis in the ready-made garments (RMG) industry, a slowdown in manpower exports and associated problems in Gulf Cooperation Council (GCC) markets facing Bangladeshi workers, a growing gas shortage, an improving yet persisting power deficit, and growing congestion in the critical road networks – growth was projected to slow, following two consecutive years of decline, even before the political impasse turned into prolonged hartal and blockades as well as street violence.
IMPACT ON GROWTH: Media reports have been replete with stories on the extent and variety of economic damages purportedly caused by the political agitation. One of the worst hit was the RMG sector, the major export earner, with delivery schedules going haywire and new orders drying up, due to uncertainties with respect to the industry’s ability to deliver on time. The Center for Policy Dialogue (CPD) collated information from a number of sources covering four sectors – agriculture, RMG, transport and tourism – and estimated the loss to these sectors at Tk. 490 billion (4.7 per cent of gross domestic product or GDP). No such estimates are available for losses incurred by other sectors such as retail, wholesale, hotels and restaurants, non-RMG manufacturing, construction and real estate development, the financial sector and numerous other services. Many business and professional bodies have come up with estimated costs of Tk. 1000 billion (9.6 per cent of GDP) for the economy as a whole. In most cases, the losses include gross sales or loss of sales due to cancellation of orders (in the case of exports) and loss of assets (burning of trucks and buses, power stations, schools).
The loss of value-addition is only a fraction of this estimated gross loss. To get a sense of the magnitude of lost value-added, we first estimated the benchmark GDP at current prices for fiscal year (FY) 14, using the projected sector growth rates had there been no political disruption. These are deflated to get the projected benchmark real GDP for FY14. Nominal value-added per day was calculated by dividing the FY14 benchmark sector nominal value-added by the number of days in a year. While the number of formal productive days varies from sector to sector, the historical experience on the work culture in Bangladesh shows that time is indeed fungible. Weekends become working days when working days cannot be used for work. By using 365 we err on the conservative side in estimating value-added per day, which is the most critical determinant of the estimated loss in value added and growth.
The value-added per day is multiplied by the number of lost days not made up by sectors to estimate the total loss of value-added in each sector. The estimated losses are subtracted from the benchmark to get nominal value-added that takes into account the impact of political turmoil. We then deflated the result to get the projected real GDP for FY14.
This produces a total value-added loss of about $1.4 billion, of which 86 per cent was in services, 11 per cent in industry and the remaining 3.0 per cent in agriculture. The loss reduces the growth rate from the 6.2 per cent benchmark to 5.4 per cent.
IMPACT ON POVERTY REDUCTION: With the economy growing on average 6.3 per cent since 2010, when the poverty rate was 31.5 per cent (just 2.5 percentage points short of the Millennium Development Goal or MDG target), poverty incidence is likely to have declined by over 8.6 percentage points during FY11-13. Had the economy grown at the benchmark rate of 6.2 per cent, poverty would have declined further by 2.7 percentage points in FY14. Instead, because of the costs of political turmoil, the economy is projected to grow by 5.4 per cent. This is likely to have reduced the pace of poverty reduction by 0.4 percentage points (from 2.7 to 2.3 percentage points). Assuming that higher economic growth better sustains improvements in the share of total income going to wages (as opposed to capital) and therefore makes societies more equal, slower growth is likely to have dragged progress on boosting shared prosperity (measured as the income of the bottom 40 per cent in any given country) as well by depressing both employment and real wage growth. To accelerate progress towards the post-2015 goal of eliminating extreme poverty, Bangladesh will need to sustain higher growth rates.
The authors are respectively Lead Economist and Country Director (Bangladesh and Nepal), the World Bank. E-mail: mmahbub@worldbank.org