A Quiet Transition

During the early phases of economic development most people in a country find employment in agricultural and related activities. As other sectors grow with economic development, the share of the labour force engaged in agriculture starts declining, and that of industry and service sector rises. The shares of agriculture in Bangladesh in both total labour force and GDP have steadily declined (see Table 1). Agriculture accommodated nearly four-fifths of the labour force during the early 1970s. By 2010 the share came down to less than one-half. Over three-fifths of GDP originated in the agricultural sector four decades ago, but now the share is about one-fifth. However, this decline in the importance of agriculture in the national economy did not mean a reduction either of agricultural output or of employment. On the contrary, agricultural output grew quite robustly. Cereal output (rice and wheat) that stood at only 10 million tons in 1972-73 increased three and half times by 2010-11. Employment in agriculture also increased substantially.

Table 1: Share of Agriculture in labour force and GDP (percent)

Source: Labour Force Survey and Bangladesh Economic Review, various issues

The process of development in an agrarian economy with surplus labour was studied by Nobel laureate economist Arthur Lewis (1954). He hypothesised that the economy of a poor developing country, especially in Asia, was characterised by a large agricultural sector with an ‘unlimited’ supply of labour. The presence of surplus labour put a cap on both agricultural and non-agricultural real wage. Market forces drove down the agricultural real wage to a subsistence level. The nascent industrial sector could draw on the pool of surplus labour at this low wage. The profits of industries were reinvested such that the productivity of labour increased in the industrial sector. But since the wage rate was tied to the agricultural sector it remained low, thereby raising the profit rate in the industrial sector. The higher profits were reinvested to further increase the capital stock, which raised the profitability of the sector. The process continued until the surplus labour was exhausted. Beyond this point, the industrial sector had to compete with the agricultural sector for labour which resulted in an increase in the real wage rate. Thereafter the expansion of either the industrial or the agricultural sector or both could be achieved only at the expense of higher wages. Lewis termed this stage of development as the ‘turning point’.

There is some relevance of Lewis model for the economy of Bangladesh. Throughout the first three decades of its existence, its agricultural sector was dominated by subsistence farms and the supply of labour was plentiful. There is some evidence that agricultural wages hardly increased over the first three decades of Bangladesh’s existence. This is shown by the two real wage lines in Chart 1 below. There is some controversy regarding how the real wage index should be constructed. The controversy arises from the use of different deflators such as CPI or coarse rice price.Bangladesh Economic Review, published each year by the Ministry of Finance at the time of presenting annual budget, provide both nominal and real wage indices of hired labourers by several categories. However, Review’s agricultural real wage data are available only from 1977-78 and cease at 2008-09. The real wage graphs in Chart 1 were drawn by deflating nominal wage index data by GDP deflator and CPI data of Bangladesh Bureau of Statistics. These data were re-estimated with respect to a single base year 1969-70 by using the growth rates of the nominal indices. The two series move very close together.

The agricultural real wage suffered a very large drop in the aftermath of our Liberation War. In the four years between 1970-71 and 1974-75 the real wage declined by a whopping 43 percent. A horrific famine struck the nation in 1974-75 that resulted in a large number of deaths due to starvation and related causes. This very sharp decline in the real wage, caused largely by very large increases in food prices, especially rice prices, and a lack of employment opportunities, must have been the major contributors to the people’s misery.

Agricultural real wage rose by fits and spurts since 1974-75, but it did not attain the pre-liberation level until 1992-93 according to the CPI adjusted real wage index. However, it fell below the pre-liberation level again in 1994-95 and did not rise above that level until 2002-03. Both indices indicate that the agricultural real wage rose above its 1969-70 level by 2002-03.

The period of low agricultural wage coincided with the growth of the manufacturing sector led by readymade garment industry. Large scale migration to overseas destinations for employment began during the second half of the 1970s. Both these developments greatly influenced the pattern of economic development in Bangladesh.

The persistence of low wage greatly benefitted the growth of the RMG industry. Together with quotas and duty free access, the low real wage afforded large profits for the RMG entrepreneurs. These profits were ploughed back into the industry so that it grew rapidly in terms of both turnover and employment. From an almost non-existent industry at the beginning of the 1980s, it grew into the second largest exporter in the world in about three decades. Total garment export in 2013-14 stood at US$24.5 billion. The industry now employs nearly four million workers, mostly female. Overseas employment increased tremendously with an estimated nine million people, mostly unskilled labour, leaving Bangladesh to work overseas. Total remittances exceeded US$14 billion last year.

According to the Lewis model of economic development with surplus labour, agricultural wage can increase only if the industrial wage increases; that is, the driving force of the economy is the industrial sector. The real wage in the industrial sector suffered a greater decline relative to that of the agricultural sector in the wake of the Liberation War. Agricultural real wage (CPI adjusted) declined by 34.4 percent between 1971-72 and 1974-75. During the same period the industrial real wage declined by 56.2 percent. The large reduction in the industrial real wage must have had a negative influence on the agricultural real wage. It was not until 1985-86 that the industrial real wage exceeded that in 1969-70.

The most remarkable aspect of the real wage movement in agriculture is that for nearly three decades it moved up and down without showing any sustained increase such that the real wage in 2005-06 was barely higher than that in 1969-70. But since then it has been on rapid ascent; since 2007-08 the real wage increased by nearly one and half times within just five years. Never in the history of agriculture of Bangladesh was such a large increase achieved in such a short time. Importantly, the real wage increased continuously since 2004-05.

And in about the same time, the share of agriculture in employment fell below 50 percent.

This large and sustained increase in the agricultural real wage over the last eight years might be an indication of the exhaustion of surplus labour in agriculture. More intense cultivation of arable land, urban industrial growth, and in particular overseas migration seem to have drawn off the surplus labour. It would seem that the economy reached the ‘turning point’ of Lewis at around the mid-2000s. If so, Bangladesh has moved out of the subsistence economy phase with ‘unlimited supply of labour’ to a competitive economy where any net increase in labour demand is likely to see an increase in the real wage rate. An expansion of employment in any sector would now require an improvement in productivity.

Source: bdnews24