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Bangladesh - Economy History

East Bengal -- the region that was to become East Pakistan and later Bangladesh -- was a prosperous region of South Asia until modern times. It had the advantages of a mild, almost tropical climate, fertile soil, ample water, and an abundance of fish, wildlife, and fruit. The standard of living compared favorably with other parts of South Asia. As early as the thirteenth century, the region was developing as an agrarian economy. It was not entirely without commercial centers, and Dhaka in particular grew into an important entrepôt during the Mughal Empire. The British on their arrival in the early seventeenth century, chose to develop Calcutta as their commercial and administrative center in South Asia. The development of East Bengal was thereafter limited to agriculture. The colonial infrastructure of the eighteenth and nineteenth centuries reinforced East Bengal's function as the primary producer -- chiefly of rice and jute -- for processors and traders in Calcutta and beyond.

The economic situation facing Bangladesh as it emerged from the war of independence in 1971 included the highest rural population density in the entire world, an annual population growth rate between 2.5 and 3 percent, chronic malnutrition for perhaps the majority of the people, and the dislocation of between 8 and 10 million people who had fled to India and returned to independent Bangladesh by 1972. The new nation had few experienced entrepreneurs, managers, administrators, engineers, or technicians. There were critical shortages of essential food grains and other staples because of wartime disruptions.

External markets for jute had been lost because of the instability of supply and the increasing popularity of synthetic substitutes. Foreign exchange resources were minuscule, and the banking and monetary system was unreliable. Although Bangladesh had a large work force, the vast reserves of undertrained and underpaid workers were largely illiterate, unskilled, and underemployed. Commercially exploitable industrial resources, except for natural gas, were lacking. Inflation, especially for essential consumer goods, ran between 300 and 400 percent.

The war of independence had crippled the transportation system. Hundreds of road and railroad bridges had been destroyed or damaged, and rolling stock was inadequate and in poor repair. The new country was still recovering from a severe cyclone that hit the area in 1970 and cause 250,000 deaths.

India, by no means a wealthy country and without a tradition of giving aid to other nations, came forward immediately with massive economic assistance in the first months after the fighting ended. Between December 1971 and January 1972, India committed US$232 million in aid to Bangladesh, almost all of it for immediate disbursement. The largest single element in Indian aid was 900,000 tons of food grains. The United States and the World Bank thereafter became leading foreign aid donors, and the World Bank organized a consortium known as the Bangladesh Aid Group, comprising twenty-six international financial institutions and foreign governments interested in assisting Bangladesh's development.

Since independence in 1971, Bangladesh has received more than $30 billion in grant aid and loan commitments from foreign donors, about $15 billion of which has been disbursed. Major donors include the World Bank, the Asian Development Bank, the UN Development Program, the United States, Japan, Saudi Arabia, and west European countries. Bangladesh historically has run a large trade deficit, financed largely through aid receipts and remittances from workers overseas. Foreign reserves dropped markedly in 2001 but stabilized in the $3 billion to $4 billion range (or about 3 months' import cover). In January 2007, reserves stood at $3.74 billion, and they increased to $5.39 billion by January 2008, according to the Bank of Bangladesh, the central bank.

Following the violent events of 1971 during the fight for independence, Bangladesh -- with the help of large infusions of donor relief and development aid -- slowly began to turn its attention to developing new industrial capacity and rehabilitating its economy. The static economic model adopted by its early leadership, however--including the nationalization of much of the industrial sector--resulted in inefficiency and economic stagnation. Beginning in late 1975, the government gradually gave greater scope to private sector participation in the economy, a pattern that has continued. A few state-owned enterprises have been privatized, but many, including major portions of the banking and jute sectors, remain under government control. Population growth, inefficiency in the public sector, resistance to developing the country's richest natural resources, and limited capital have all continued to restrict economic growth.

In the mid-1980s, there were encouraging, if halting, signs of progress. Economic policies aimed at encouraging private enterprise and investment, denationalizing public industries, reinstating budgetary discipline, and liberalizing the import regime were accelerated. From 1991 to 1993, the government successfully followed an enhanced structural adjustment facility (ESAF) with the International Monetary Fund (IMF) but failed to follow through on reforms in large part because of preoccupation with the government's domestic political troubles.

In the late 1990s the government's economic policies became more entrenched, and some of the early gains were lost, which was highlighted by a precipitous drop in foreign direct investment in 2000 and 2001. In June 2003 the IMF approved 3-year, $490-million plan as part of the Poverty Reduction and Growth Facility (PRGF) for Bangladesh that aimed to support the government's economic reform program up to 2006. Seventy million dollars was made available immediately. In the same vein the World Bank approved $536 million in interest-free loans.

Efforts to achieve Bangladesh's macroeconomic goals have been problematic. The privatization of public sector industries has proceeded at a slow pace--due in part to worker unrest in affected industries--although on June 30, 2002, the government took a bold step as it closed down the Adamjee Jute Mill, the country's largest and most costly state-owned enterprise. The government also has proven unable to resist demands for wage hikes in government-owned industries. Access to capital is impeded. State-owned banks, which control about three-fourths of deposits and loans, carry classified loan burdens of about 50%.