Transcript Presentation of A New Investment Regime for Bangladesh

A NEW INVESTMENT REGIME FOR
BANGLADESH
Dr. Selim Raihan
Professor of Economics, University of Dhaka
and Executive Director, SANEM
Presented at the MCCI-SANEM Discussion, Dhaka, August 1, 2015
2
WHAT ARE THE ISSUES?
• Bangladesh’s achievement in economic growth. Over the last 12 years the
average GDP growth rate has been 6%.
• The country has recently been upgraded from low income country (LIC) to
lower-middle income country (LMIC) as per World Bank’s classification.
• Aspiration of graduating from LDC status to middle income country by 2021
as per UN classification.
• However, there are concerns over getting stuck with the 6% growth rate.
• There are concerns over falling private investment in recent years.
• 7th five year plan sets the target of 8% GDP growth by 2020. This requires a
leap forward from the current level of 6% average growth.
• Bangladesh needs a new investment regime for the growth target of 8% to
be achieved.
4.9
GDP growth rate
6.0
6.1
2013-14
2012-13
2011-12
6.5
6.5
6.0
2010-11
7.1
6.6
6.3
6.0
5.0
5.6
5.3
2000s average = 5.7
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
4.4
5.3
5.9
1990s average = 4.8
2001-02
2000-01
1999-00
1998-99
5.2
4.9
1997-98
4.6
4.1
5.9
5.4
3.3
5.2
5.0
4.6
4.2
4.0
3.7
3.2
2.6
2.2
2.4
3.8
1996-97
1995-96
1994-95
1993-94
0.8
1980s average = 3.7
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
1985-86
1984-85
1983-84
1982-83
1981-82
1980-81
1979-80
3
GDP GROWTH RATE
2010s average = 6.3
GDP growth rate
Investment as % of GDP
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
1985-86
1984-85
1983-84
1982-83
20
1981-82
25
17.6
17.8
17.0
15.9
16.3
16.7
16.0
16.3
16.7
17.1
16.9
17.3
17.9
18.4
19.1
20.0
20.7
21.6
22.2
23.0
23.1
23.1
23.4
24.0
24.5
26.1
26.2
26.2
26.2
26.2
27.4
28.3
28.4
28.7
30
1980-81
14.4
15
1979-80
Investment-as % of GDP
4
INVESTMENT-GDP RATIO
35
8
10
7
6
5
4
3
2
1
0
GDP growth rate
Investment as % of GDP
2013-14
2012-13
2011-12
Investment
regime 3
2010-11
2009-10
2008-09
2007-08
Investment
regime 2
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
Investment
regime 1
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
1985-86
1984-85
1983-84
35
1982-83
1981-82
1980-81
1979-80
Investment-as % of GDP
INVESTMENT REGIMES
Investment
regime 4
30
25
20
15
10
8
7
6
5
4
3
2
1
0
5
Investment as % of GDP
Investment
regime 4
10
Share of private investment in total investment
80
70
60
50
40
30
% share of private investment in total
investment
2013-14
2012-13
2011-12
Investment
regime 3
2010-11
2009-10
2008-09
2007-08
2006-07
Investment
regime 2
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
Investment
regime 1
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
1989-90
1988-89
1987-88
1986-87
1985-86
1984-85
15
1983-84
20
1982-83
25
1981-82
30
59.4
59.1
54.0
55.2
57.5
50.8
49.3
53.3
53.1
53.0
55.9
59.0
63.7
63.4
64.6
67.9
65.8
70.3
69.5
67.3
68.1
71.9
74.2
73.2
74.4
75.5
78.1
79.2
80.2
78.9
80.8
79.6
76.6
77.1
35
1980-81
1979-80
Investment-as % of GDP
6
PRIVATE INVESTMENT
GDP growth rate
Investment as % of GDP
2013-14
2012-13
2011-12
5.0
8
7
6.1
Investment
regime 4
6.5
7.1
6.6
6.5
6.0
5.6
6.0
6.0
6.3
5.9
Investment
regime 3
2010-11
2009-10
2008-09
2007-08
5.3
5.3
4.9
5.2
5.4
4.9
4.6
4.4
4.1
4.6
5.0
Investment
regime 2
2006-07
Average
ICOR 4.24
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
3.3
5.9
Investment
regime 1
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
2.6
2.2
3.7
4.2
5.2
30
1989-90
1988-89
3.2
Average
ICOR 4.96
1987-88
1986-87
1985-86
1984-85
1983-84
25
4.0
3.8
35
1982-83
2.4
20
1981-82
1980-81
0.8
15
1979-80
Investment-as % of GDP
7
INCREMENTAL CAPITAL-OUTPUT RATIO
6
5
Average Average
ICOR 4.31 ICOR 4.54
10
4
3
2
1
0
8
FDI AS % OF GDP
Source: http://unctadstat.unctad.org/
9
SECTORAL SHARES OF FDI IN 2014
Agriculture
2.0%
Services
48.8%
Construction
0.5%
Source: Bangladesh Bank
Power, Gas &
Petroleum
Textiles &
3.1%
Wearing
Apparel
24.6%
Other
Manufacturing
20.9%
10
BANGLADESH CAMBODIA
Source: World Bank
INDIA
PAKISTAN
SRI LANKA
78
72
99
105
128
2014
127
140
135
134
142
2013
173
170
EASE OF DOING BUSINESS
RANKING OUT OF 189 COUNTRIES
VIETNAM
11
LOGISTIC PERFORMANCE INDEX IN 2014
Source: World Bank
12
STRUCTURAL TRANSFORMATION
Share in GDP
Data Source: BBS
Share in Employment
CONCENTRATION IN MANUFACTURING
GDP AND EMPLOYMENT
Share in Manufacturing GDP
Data Source: BBS
Share in Manufacturing Employment
13
EXPORT CONCENTRATION
Export Basket in 1995 with around
4.6 billion US$
Export Basket in 2013 with more than
31 billion US$
• RMG at a cross-road: Comparative advantage and competitive advantage
• What are the other sectors?
14
15
WHAT SHOULD THE OBJECTIVE OF
NEW REGIME IN BANGLADESH?
• Increase domestic private investment and FDI targeting broader
economic diversification and export diversification.
• Emphasis should be not only on raising the level of investment but also
on the efficiency of investment. Importance should be attached to
more on efficiency gains.
16
THREE MAJOR AREAS
• Policy reform
• Institutional reform
• Infrastructure
17
WHY POLICY REFORM?
• No major policy reform over the last two decades.
• The marginal benefits of the first generation reforms have
diminished quite significantly.
18
NEED FOR SECOND GENERATION REFORMS
• A new paradigm of macro, trade and investment policies
aiming at economic diversification
• Export policy: Existing policy is ineffective in export diversification.
Issue of comparative advantage in quality products. Meeting the
global and regional standards.
• Import policy: Tariffs rates need to be further brought down and
rationalized for economic diversification.
• Fiscal policy: Tax-GDP ratio is the lowest in this region. Tax-incentive
structure is imbalanced.
19
NEED FOR SECOND GENERATION
REFORMS…
• Monetary policy: The cost of capital is too high for emerging sectors.
Need for financial sector institutional reforms. Current monetary policy
just maintains the status quo.
• Industrial policy: Very conventional. No effective direction on
supporting the emerging and dynamic sectors. Pre-dominantly focus is
on the manufacturing sector.
• FDI policy: Practical solution to problems. Incentives to foreign
investors. Create success examples. One of the major issues is land.
Macro management vs micro management.
20
POLICY REFORM:
RETHINKING INDUSTRIAL POLICY
• Industrial policy is about incentive structure.
• Time-bound support to emerging dynamic sectors
• Effective designing of the incentive structure
• Pioneering firm: Discovery cost
• Export of value-added vs. gross exports
• ‘Manufacturing content’ of services and ‘Services value-added’ in
gross exports
21
WHY INSTITUTIONAL REFORM?
• Reform of economic and political institutions for efficiency gains.
• Reform of economic institutions:
• Improving the bureaucracy quality
• Management of corruption
• Contract viability: reducing the risk of contract modification or cancellation.
• Management of labor regime.
• Reform of political institutions:
• Reducing political uncertainties and establishing political stability
• Generating political capital for larger private sector investment and accelerated
economic growth.
22
WHAT ARE THE ISSUES WITH
INFRASTRUCTURE?
• Weak infrastructure is a big concern.
• Electricity and gas: Increased production vs. entitlement failure.
• Delayed implementation of the infrastructural projects. Increase cost.
• Need for efficient public investment in social and physical
infrastructures facilitating further private investment.
23
IS SEZ A SOLUTION?
• Need to seriously think about how to make SEZs successful.
• Location, infrastructure, logistics and professional zone management
are four key factors determining success of SEZs.
• A major reason for the success of SEZs in China was the creation of
complementary infrastructure, power, roads and ports.
• Difference between the models followed by China and India— while
China created a limited number of large, self-sustainable, confined
enclaves near port facilities to boost exports, India opted to license a
large number of SEZs without ensuring proper infrastructure outside the
zones.
• Other concerns of WTO compliance.