Conflictive politics: A severe blow to the economy

economy-blow

The conflictive politics which is currently raging in Bangladesh has received considerable international attention. The outward manifestation of the conflict has taken the form of blockade, strike, and damage to vehicles as well as to transport infrastructure. These incidents have also led to many deaths as a result of actions by either law enforcing agencies or others.
Many analysts, including myself, have drawn attention to the potential negative impact of the violent protests on the country’s economic performance. Such negative impact is particularly disturbing because the country’s economy is already on a downhill path. Growth of GDP decelerated from 6.7% in FY11 to 6.2% in FY12 and 6% in FY13. There have been attempts by some organisations to estimate the daily loss of the country’s GDP due to hartals. These estimates vary widely. This paper does not seek to make any quantitative estimate of the loss from the unfortunate events of the recent past. The objective is to identify the channels of transmission of the negative consequences.

Analytical framework and transmission channels
The impact of shocks on an economy can be evaluated from different perceptions. The analysis in this paper examines this issue from two broad perspectives — production side which affects aggregate supply, and expenditure side which affects aggregate demand. The two sides together determine a country’s GDP at well as its inflation. These variables are of crucial importance for the welfare of the citizens of any country.
(a) Supply side
In order to evaluate the impact of recent occurrences from the production side, it is useful to start from an examination of the product in the structure of the economy. Data on major sectors, which collectively account for about 70% of the country’s GDP, are presented below.
Table 1: Contribution of major sectors to real GDP (1995-96 prices)
Agriculture sector in Bangladesh has performed reasonably well. There has been considerable increase in productivity, leading to near self-sufficiency in food. The increase in productivity has been driven by cultivation of a variety of high-yielding variations of crops, most of which are dependent on irrigation. Media reports suggest that cultivation of robi crops in the current season has already been adversely affected by the failure to transport diesel required to operate irrigation pumps. The continuation of the present deadlock is likely to affect cultivation of the crops as well.
Manufacturing industry in Bangladesh is heavily dependent on imported raw materials and intermediate inputs. Besides, industrial production is inherently energy-intensive. The supply of energy is significantly determined by the import of petroleum products such as diesel and furnace oil. The blockades have created container congestion as importers are not unloading and sending goods to user destinations fearing arson on the way. Thus, industrial production is bound to suffer. Note that raw materials, intermediate inputs and petroleum and petroleum products constitute about 60% of our imports.
Domestic trade has become a serious victim of the current situation. Failure to transport goods to the wholesale and retail trade centres is the underlying cause. Besides, many shops remain closed. Even if a few of them choose to open, taking the risk of damage, buyers cannot reach them.
Transport and communications is not merely and important value-adding sector in itself, it is also a vital input for all the other sectors. Production, distribution, export and consumption of the products of all sectors require transport services, which are currently suffering major disruption.
Real estate sector has been suffering due to sluggish demand caused by slower GDP growth as noted earlier. The position of this sector is likely to get worse because construction cost will rise as the cost of transport of required materials (cement, rod, sand, etc.) will increase, and in many cases construction will be delayed.
(b) Demand side
Aggregate demand consists of consumption, investment and net exports (i.e. exports minus imports). Consumption and investment are divided into two categories — the government sector and the private sector. Private consumption amounts to about 75% of the country’s aggregate demand, with government consumption accounting for a little over 5%. The corresponding figures for investment are about 19% and 7.5%.
Private consumption is likely to suffer because of the fall in income caused by the problems on the supply side noted earlier. During the election year, government consumption expenditure may go up (the government recently increased the remuneration of government officials). But, it is unlikely to compensate for the fall in private consumption, which is the overwhelmingly dominant component of aggregate demand. Private consumption will also fall due to fall in remittances.
The Daily Star reported on December 3 that political unrest pulled down remittances by 14.5% in November 2013 compared to the preceding month. During July-November period of the current year, remittances declined by over 9% compared to the same period of the last year.
Private investment as a proportion of aggregate demand has been falling over the past few years. This trend will be aggravated by the continuing violence. Political stability, maintenance of law and order, security of transportation of goods, sound governance, adequacy of various other types of infrastructure services are some of the basic preconditions for private sector investment. It is obvious that the current upheavals will cause deterioration in all these preconditions. There had been some up-tick in investment by government in recent years. But it appears that the political situation will be an important factor in pulling it down.
The implementation of annual development programme (ADP), through which government investment is primarily channeled, is in the negative territory. During July-October period of the current year, the amount of expenditure through ADP was nearly Tk.1,000 crore less than the corresponding period of the last year.
As regards exports, emphasis has to be given on enhancing exports since curtailing imports is bound to have adverse affect on production in an economy which relies heavily on imported raw materials, intermediate inputs and capital machinery. But exports require domestic production, which is currently under threat. Moreover, the present situation will worsen the image problem of our main export industry — the garment industry — which has been tarnished severely by the Rana Plaza tragedy.

Concluding observations
Viewed through the prism of either aggregate supply or aggregate demand, Bangladesh economy is facing severe challenges caused by on-going conflictive politics. The fulfillment of growth targets set in the sixth Five-Year Plan and our ambition to achieve middle income status by 2021 are fading into distant dreams. A quick exit from the present quagmire demands an immediate consensus among the major political parties about the nature of election time government that can ensure a free, fair and credible election with widest possible participation.

The writer is a former Advisor to the Caretaker Government, Ministries of Finance and Planning, and presently a visiting professor in Brac University.

Source: The Daily Star

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