TABLE OF CONTENTS

From the Editor Syed S. Andaleeb i Reflections on democracy Nurul Islam 1 and development in Bangladesh Public enterprise inefficiency Tanweer Akram 7 and the road to privatization in Bangladesh Garment exports from Bangladesh: Munir Quddus and 28 an update and evaluation Salim Rashid Amartya Sen and the 1974 Akhtar Hossain 39 famine: additional insights and policy implications The emergence of market-oriented M. Faisul Islam 64 reforms in Bangladesh: a critical appraisal Ground water policy framework Syed Zahir Sadeque 73 and equity issues: emerging realities and responses

JOURNAL OF BANGLADESH STUDIES (JBS) Editorial Board Ashraf Ali, D.Sc. (BDI) Bangladesh Development Initiative 15160 SE 54th Place, Bellevue, WA 98006 Syed Saad Andaleeb, Ph.D. (BDI) School of Business, The Pennsylvania State University, Erie Station Road, Erie, PA. 16563 Farida Khan, Ph.D. (AEDSB) Dept. of Economics, University of Wisconsin-Parkside, 900 Wood Road, Kenosha, WI 53141 Ruhul Kuddus, Ph.D. (BDI) Thomas Starzl Transplantation Institute and the Department of Surgery, University of Pittsburgh, School of Medicine, Pittsburgh, PA. 15260 Munir Quddus, Ph.D. (AEDSB) Dept. of Economics, University of Southern Indiana, 8600 University Blvd., Evansville, IN 47712

Note to Contributors

Journal of Bangladesh Studies (JBS) is a peer reviewed journal published by Bangladesh Development Initiative (BDI) and the Association for Economic and Development Studies on Bangladesh (AEDSB). The focus of this journal is, mainly, to promote the development of Bangladesh.

JBS is directed at individuals who are educated, involved, and interested in development issues. It targets a wide base of readers including academics, students, researchers, policy-makers, administrators, practitioners, donors and their agents, and anyone else who is interested in Bangladesh and its pursuit of development.

Articles are solicited from authors and experts engaged in a variety of fields including agriculture, anthropology, basic sciences, economics, education, engineering, management, political science, psychology, sociology, and related fields. This diversity of perspective is sought by JBS because comprehensive development must be addressed on the basis of a broad foundation of knowledge. Broadly, therefore, the articles should address the country’s development problems and prospects from a theoretical or analytical perspective prevalent in academic disciplines. Authors are encouraged to prescribe actions and measures that are meaningful, practicable, and amenable to the sector(s) or issues they address. Articles must also be comprehensible to the wide target audience. In other words, while the articles must be grounded in theory, analysis, and referenced work, they must also reach an audience outside the specific disciplines of the authors without being perceived as popular, journalistic writing. (continued on inside back cover).

Both short communications and full-length articles may be submitted. Analysis of recent developments, short reviews of newly published books, and expert comments on specific issues are treated as short communications which should be limited to about 2,000 words. A full-length article should provide a reasonable review of the literature and clearly articulate the nature of the problem or issue it addresses as its focus. JBS also invites critiques of articles published in the journal to foster debate and discussion. Critiques may be published on the basis of space availability (which is often constrained by budget restrictions) and the advice of the editorial board. Critiques must be about two JBS pages and must be written in a positive demeanor to ensure healthy discussion. JBS will attempt to obtain responses from the authors whose articles are critiqued. Citations in the text should reflect the author’s last name and year of publication: (Quddus 1993). If a particular page, section, or equation is cited, it should be placed within the parentheses (Quddus 1993, p. 87). References are to be presented using the Chicago Manual Style. Examples are as follows:

Rashid, Salim. (1995), “Migration and Bangladesh’s Economic Development,” Thoughts and Initiatives (a BDI journal), Vol. 2, No. 2, December: 23-52. Ali, Ashraf (1996), “On Formalization of Bangladesh’s Economy,” in Development Issues of Bangladesh, Ashraf Ali, M. Faizul Islam and Ruhul Kuddus, eds.University Press Limited, Dhaka, Bangladesh, 1996. Sobhan, Rehman (1993), Bangladesh: Problems of Governance, Dhaka: University Press Limited.

Endnotes are preferred to footnotes and references must be complete.

Three hard copies of the articles must be submitted first to the editor for the review process. The author’s identification, affiliation, mailing address, and e-mail address should be presented only on the title page. An abstract must also be included with the article. The editor may invite a submission subsequently via email and/or on disk using MS Word. WordPerfect files are also acceptable but a Word document is preferred. Revised and accepted articles should be submitted as hard copy and on a floppy disk (IBM or compatible). Opinions expressed in the selected articles are solely the responsibility of the author(s).

Two regular issues of JBS will be published annually. In addition, a special issue on the papers presented at the AEDSB annual meeting is also planned. Articles published in the JBS are not copyrighted. Articles recently published elsewhere may, on rare occasions, be republished in the JBS at the author’s responsibility. References that are forthcoming can be considered as such only if the article is in press. The editorial board’s decision regarding the acceptance of a submitted article is final. Submitted articles will not be returned to the authors. All papers should be submitted to the editor at the following address

Dr. Syed Saad Andaleeb; Associate Professor; School of Business The Pennsylvania State University at Erie, Station Road, Erie, PA 16563. Fax (814)-898-6223; e-mail ssa4@psu.edu

It gives me immense pleasure to present the first issue of the Journal of Bangladesh Studies (JBS). JBS is dedicated to fostering greater understanding of the problems of development in Bangladesh from a comprehensive perspective by addressing social, political, economic, legal, ethical, technological, and related issues. This multi-disciplinary approach is important because development must embrace the concept of diversity—the diversity of expertise, methods, analyses, and prescription—to provide better, more meaningful, and practicable answers that have continued to elude strategists, planners, administrators, and researchers involved with the development of Bangladesh. While progress has been made in a few sectors, there is much more that needs attention to claim comprehensive development. Thus, JBS seeks innovative and path-breaking ideas from contributors in different disciplines. The alternative perspectives are expected to provoke broad-based debate and discussion; they are also expected to challenge policy makers and practitioners to redefine the problems of development and to seek pioneering solutions that make a real difference. Preference will be given to articles that question the status quo and make a break from traditional thinking to introduce fresh insights that will ultimately become the core of mainstream policy dialogue and analysis. For example, it has been said that the development of Bangladesh has often been charted out by external elements such as the development agencies, donor groups, and their selected representatives. Additional research is needed to assess their real contributions and to seek ways in which their role is better integrated with indigenous expertise to spur development that is more responsive to the needs of the masses. Attention has also been devoted in recent times to the problem of corruption and its insidious effects on social, political, and economic development. But there is very little attempt to understand how certain core values such as self-respect, self-esteem, and dignity are linked to corruption. More precisely, it is important to understand why is it

that these core values have deteriorated so drastically, especially among many in positions of power, such that indulging in corrupt practices is, apparently, not viewed as a despicable and socially undesirable act any more. Anthropologists, social scientists, psychologists, economists, and members of other related disciplines must delve into these issues and provide answers. The crises of leadership and legitimacy that have continued to plague the country at all levels also deserve greater attention today in a country grid-locked by petty interests and self-seeking turf wars that have relegated the common man to obscurity. Questions such as who attains power, how do they attain it, and whether the country’s leadership has been in appropriate hands or in the hands of the lowest common denominator demands analytic and reasoned answers. The issue of identity has also come to the forefront in many forums in recent times. Whether the people of the land are Bangladeshis or Bangalees, and whether religious or cultural heritage should come first has apparently generated notable disagreement and discontent among sections of the country’s thought leaders. What is the role of such debate in the formation of identity? How can we also explain the reign of terror that has been unleashed with regularity upon the masses, and to what extent has it crippled the process of social and economic development? More importantly, how can the elements who are responsible—the mastaans, the power brokers, and their cronies—be taken out of the development equation in lawful ways? Technology is another area that must be better understood and adapted to the needs of Bangladesh. For example, whether there is a disjoint between available technology and the type of technology that is best suited to the stage of development of the country must be clearly articulated. This has implications for investments in alternative technologies. In the power sector, for example, technologies such as solar panels, wind-power, or micro-hydro systems may be better alternatives compared to conventional grid-based

FROM THE EDITOR

power systems with their attendant costs. Alignment strategies for dealing with information technology is another key issue that needs to be envisioned. Ways of battling pollution and its devastating effects on health also deserves continuing attention. The problems of poverty, inflation, investment, unemployment, productivity, resource shortages, and related issues must continue to be addressed in innovative ways. While esoteric equations and models have a role in understanding these issues, they must be translated more lucidly into action components for practitioners. Public health is another critical issue as is public education. The needs, the challenges, and the strategies that are vital to both sectors must be better articulated because of their bearing on development. What are the key issues in these sectors and what are the priorities? For example, a critical question in both sectors that demands far greater attention is: Why have people lost confidence in the nation’s capability to deliver health and education? Also, how much is the country losing in foreign exchange to neighboring countries? What should be done to stem the flow? The above examples are not meant to set the agenda for JBS; they are merely indicative of the complexities of development and the variety of interconnected issues that are yet to be adequately addressed. That there are many other important issues beyond those listed above is reflected in this volume. Nurul Islam’s article boldly confronts the realities and dynamics of power that, in his view, has been a major impediment to development. The tenuous entente between the military and political forces and the role of each in society has a long, unstable, and untrusting history that has taken its toll on development. Clearly the existing balance and distribution of power must continue to be questioned and the transition to democracy vigorously pursued. This overarching goal has significant implications for development as evidenced by the experiences of other countries that subscribe to democratic values and norms. Tanweer Akram highlights the inefficiencies of

public enterprise and tackles the question of privatization. The need to make information more widely available to private investors, the alternative methods of privatization, the need for FDI, the importance of financial sector discipline, and related issues are clearly articulated and deserve the attention of policy makers. Further research is needed in this area to determine the right balance between private and public enterprise in the context of Bangladesh. Munir Quddus and Salim Rashid address a vital sector—the garment industry—that has been the mainstay of the country’s source of employment (through both forward and backward linkages) and foreign exchange earnings in recent times. While growth has been solid and the sector has been resilient, the challenges it faces once the multi-fiber agreement is phased out by 2004 should urge policy makers to be proactive and to embark on appropriate strategies now to ensure good health and vitality of the sector when circumstances change. The country’s heavy reliance on this sector should also engender dialogue on whether and how to attain further diversification. Akhter Hossain introduces additional insights on the causes of the 1974 famine. His article, relying on Amartya Sen’s entitlement approach, is important in that it serves as a reminder that famines can be caused by situations other than a sudden decline in aggregate food availability. The importance of attending to critical issues such as inflation and exchange rates in formulating and managing economic policies is central to his paper. Faizul Islam’s article critically appraises the circumstances that have led to greater market-oriented reforms in Bangladesh. Corruption and mismanagement in the state owned enterprises and a variety of problems in the financial sector represent the core arguments of his paper that urges the need for greater market-oriented reforms. Finally, Syed Zahir Sadeque highlights a critical issue—ground water shortage—that portends grave consequences in many parts of Bangladesh. In a flood-prone country, the issue of water shortage is certainly intriguing if not astonishing. Yet, the country must confront the reality that a

shortage of this vital resource has important implications for personal health and hygiene, as well as economic activities. Significant issues are brought to the attention of those who must formulate a more comprehensive water-sharing policy that is equitable and pragmatic. On a somewhat pragmatic issue, I would like to urge readers to subscribe to JBS to encourage the researchers and to support a forum for analysis and debate on Bangladesh. Both individual (US $15) and institutional (US $100) subscriptions are encouraged to support the continuation of JBS. Back issues may also be ordered (US $10 plus S&H), but their availability cannot be guaranteed. All subscriptions should be sent to Syeda Khan, C/O BDI, 812 Hope Street, Pittsburgh, PA 15220. Finally, I would like to thank the many individuals who have contributed in a variety of ways to help launch the first issue. First, I would like to acknowledge the constant support that I received from the editorial board and the reviewers who responded very positively to the idea of the journal. JBS also owes a debt to its predecessor, Thoughts and Initiatives, that was painstakingly championed by Ashraf Ali. His ideas, as a member of the editorial board of JBS, will continue to help shape the journal. I would also like to thank John M. Magenau, III, Director, School of Business at Pennsylvania State University, Erie, for supporting the idea of the journal, especially because it had some budget implications. Sue Pennington took great pains to put together the journal in its present format from a diverse set of submissions using various word processing packages with mysterious codes and challenging graphics. Carolyn Dudas provided many technical solutions when the submitted documents strongly resisted format changes. However, some glitches still remain, reflecting our pioneering effort. These experiences led to our note to contributors to submit their papers principally as Word documents. Until we find a publisher, I hope contributors will cooperate. Martha Campbell from the Media and Instructional Support Center at Penn State Erie willingly designed the cover of JBS. My thanks to each of these individuals for their help. My goal is to raise JBS, in a reasonable time frame, to a stature where it is widely read and

cited, and sought by libraries, academics, researchers, policy makers, students, and others who study development. To achieve this goal, I need the help of many parties—experts, contributors, critics, readers, subscribers, the editorial board, and others. I shall look forward to partnering with all of you to make JBS a success. Syed Saad Andaleeb, Ph.D., Editor−JBS, School of Business, The Pennsylvania State University, Erie, Station Road, Erie, PA. 16563 (814)-898-6223, e-mail: ssa4@psu.edu.

REFLECTIONS ON DEMOCRACY AND DEVELOPMENT IN BANGLADESH

Nurul Islam

Research Fellow Emeritus, IFPRI

Development can be promoted either by a democratic government or a dictatorial regime. The primary conditions that promote development are high rates of savings and investment (both in physical and human capital), technical progress through R&D, and efficiency in resource use that are nurtured through competition both in home and foreign markets. A democratic system is not a necessary condition for development; an authoritarian system may also initiate and propel economic development. However, as economic growth gains momentum, living standards improve and economic opportunities and rights widen; the general population also wants greater political rights and freedom, greater participation in political life, greater freedom of expression, press, and association, and greater influence on the decision-making process. It is also argued that while development may be initiated or promoted and nurtured under an authoritarian regime for a period, there comes a stage when continued progress in the long run requires a degree of freedom of thought and expression—i.e., the freedom to innovate techniques and institutions, and to venture into unfamiliar and uncertain directions that are at odds with the suppression of free political thought and action.

With the pressure for political opening, if resisted, and if the authoritarian regime persists, the system becomes unstable; chaos and political upheavals with resulting disruption of economic life ensue. The gains from economic progress obtained during the duration of the “stable” authoritarianism are lost. These gains, obtained over a long period, are often lost during a brief period of cataclysmic dislocation. Thus, the cost of chaos and of the collapse of the political and economic structure may more than offset the gains during the preceding regime. Examples are that of Pakistan during Ayub regime, of Iran under the Shah of Iran, and ongoing turmoil and

instability in Indonesia. Also, there are several examples in Latin America. In a few cases, an authoritarian regime may respond constructively to the pressure for political opening up and make a relatively but not completely peaceful transition to a more democratic system. Examples of South Korea, Taiwan, and Thailand come to mind. Chile has made the transition, with occasional bumps and hiccups surfacing from time to time. The transition from an autocratic to a democratic system is likened to a process in which one who is accustomed to riding a wild horse decides to dismount. The risks of being thrown and being grievously injured are real. An authoritarian system does not have a built-in mechanism for a peaceful change of power, i.e. a peaceful succession system. Frequently, therefore, a succession struggle leads to instability, i.e. socio-political breakdown and chaos.

Democracy provides a stable, peaceful method of change in government. Thus, development that is promoted by a democratic regime is more likely to be sustained in the long run than a process of development promoted under the auspices of an authoritarian regime that sometimes vigorously pursues it in the short run. It is true that democratic regimes have a decision-making process that is clumsy and time consuming; it involves negotiations and compromises between competing interest groups often across a wide range in order to find a consensus. This process by its nature cannot be neat, quick, and decisive. For example, the need to deal with or accommodate the populist pressure to keep taxes low or to increase expenditure on public services imposes difficult negotiations that may not always succeed in reaching the desired outcome of high rate of savings and investment. But as against this, dictatorial regimes, in general, tend to have a high ratio of public expenditures relating to

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defense and security purposes, since the army has a significant, direct/indirect role, in preserving and protecting an authoritarian regime.

In the ultimate analysis, however, yearning for democracy is not a mere input to economic development but is an objective in itself. Both democracy (i.e., political rights and freedom) and economic development (higher living standards) are desired by most people. They are not considered as alternatives, even though in the short run they may sometimes present possibilities of trade off. The history of political experience of Bangladesh indicates that Bangladeshis want democracy, political freedom and rights, as well as development (Ahmed 1979). Their search for political democracy has, however, suffered from interruptions. As is customary with many authoritarian regimes, the latter were never totally free from all pressures for limited political opening. The successive military regimes in Bangladesh since 1975 sought some sort of political legitimacy, at best, under highly artificial and restrictive conditions; they sought acquiescence and acceptance by the masses. In 1991, the movement for restoration of democracy gained sufficient momentum to put an end to the military regime.

How to establish a well functioning democratic political system in Bangladesh is a critical challenge. Having spent a major part of Bangladesh’s history under the military authoritarian regimes, the political institutions and parties are only slowly willing or able to play by the rules of democratic politics, through a process of “ learning by doing.” They have no sustained prior experience of engaging in democratic politics. The limited participation in political life under the rules set by the military regime required them to play a subservient role in imparting legitimacy to the regime and in mobilizing support for or voicing muted criticism of its specific policies.

Democratic politics requires the art of compromise, a policy of “give and take,” and rejects a policy of “winner takes it all.” The majority needs to involve the minority in the decision-making process, knowing that today’s

majority may be tomorrow’s minority. Similarly, today’s minority behaves as a “responsible or loyal opposition” and does not obstruct “governance” by the majority, fearing that when it takes over the task of governing in the next round, it may face “obstructionist” politics (Sobhan 1993a; 1993b). Frequent, peaceful, fair, and free elections are the only way to encourage such a behavior pattern on the part of the political parties. This tends to ensure that the losing party in an election will accept the electoral verdict gracefully; the winning party will not be obsessed by arrogance of power, realizing that its power is temporary. While the minority, in the name of consensus as a basis of effective governance, cannot veto the majority decision, the majority must be seen to have gone a reasonable way to accept the demands or wishes of the minority. There is no shortcut in the way of developing the required norms of democratic behavior; only a process of trial and error over time accomplishes this. At the same time, it would not be proper to argue that since the western societies took hundred years or more to become full-fledged democracies, Bangladesh would also require such a long time. Firstly, in various fields of human endeavor, modern societies accomplished in a shorter span of time what historically took much longer in the past. Learning from history and past experience considerably expedites the process of change and adaptation. Advances in technology as well as in methods of organization and management have provided opportunities for the latecomers to “ leapfrog” many steps in social evolution. Secondly, there are examples of contemporary developing countries where norms of democratic behavior developed in the post World War II period in a relatively short period.

The intervention of the army in the political process in Bangladesh hindered the growth of democracy. The senior officers of the Bangladesh army, which has grown in size and strength since 1975 and is nurtured in the traditions of the Pakistan Army, had scant regard for the politicians and for the democratic process. They, in turn, transmitted their own inherited attitudes and prejudices against political democracy to the new and young

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recruits in the post-independence period. After, more than a decade and a half of military rule, even after the restoration of democracy in 1991, politicians have an ambivalent attitude towards the role of the army. In public, all political parties pay tribute in or out of season to the military by recalling their heroic role in the war of independence, even though many party adherents did not participate or were too young to participate in it. They also extol the role of the military as the guardians of sovereignty and independence of Bangladesh. These parties are provided generous financial and other material inducements in an apparent attempt to preempt any tendency on their part to intervene in the political process. There is also some tendency among factions in the different political parties to cultivate their favor so that, in case the army intervenes, they could enjoy the formal authority of running the civil administration under the patronage of the army in a pattern similar to that prevailing in Pakistan.

To cajole and “bribe” the military establishment by building up a strong army without any economic or strategic justification does not, in the long run, help establish unambiguous civilian control over it or discourage political adventurism on its part. It is frequently suggested that risks of political intervention by the army in Bangladesh have declined due to several factors: 1) there has been a significant change in the international climate, in the aftermath of the Cold War, against the political role of the army and in favor of political freedom and democracy; 2) for a heavily aid-dependent country like Bangladesh, the likelihood of an adverse external reaction to any military takeover serves as a restraining factor; 3) years of experience have convinced the army that to solve the development problems of Bangladesh is a very heavy responsibility that is difficult to fulfill; 4) it is far better to enjoy all the comfort and financial privileges far above the civilian level without any responsibility of running the country; and 5) the participation in the recent U.N. peace keeping missions has given it an additional resource and a measure of prestige and status at home and abroad.

What is needed, above all, is a highly organized public opinion that is strongly in favor of civilian control of the army, ruling out its political role or intervention, no matter how disorganized and chaotic the politicians are or how much they continue to squabble and maneuver.

The appropriate size and composition of military expenditures should be a matter of open debate and discussion in the public and political forums. As a percentage of the central government’s expenditure, the defense expenditure has increased from 9.4 percent in 1980 to 17.6 percent in 1993, whereas in India, it has declined from 14.1 percent to 12.8 percent. There has been a 12.4 percent increase in armed forces personnel in Bangladesh between 1987-94 and military assets (equipment) increased by 56.3 percent during this period. To argue that defense expenditures as a proportion of GNP/GDP are rather low in Bangladesh compared to many developing countries is beside the point. Firstly, what is relevant in the context of other countries’ security needs may not be relevant or appropriate for Bangladesh. Secondly, if other nations are wasting their resources, there is no reason why Bangladesh should do so. Being so heavily dependent on external assistance for its economic survival and growth, the opportunity costs of defense expenditures in Bangladesh are very high in view of its extreme poverty and scarcity of resources. Thirdly, one should recall that the saving investment rate and the tax/GNP ratios in Bangladesh are abysmally low--much lower than comparable countries in the developing world. This is all the more reason why a public debate, including that in the parliament, is needed as to (a) the nature and magnitude of Bangladesh’s security needs (threat of external aggression), and (b) the nature and extent of military response in order to meet such needs. No less important is the need to subject the cost effectiveness of the defense expenditures, i.e. its pattern and composition, to the same rigorous scrutiny of cost-benefit analysis as other competing public expenditures. For example, it is a widely held view that given the deteriorating state of law and order in the country, public

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expenditures on internal security forces, i.e. the police and associated services, is awfully inadequate. Their modernization and expansion should be given as much, if not higher, priority than the military expenditures. The accountability and scrutiny of military expenditures in Bangladesh are extremely superficial. All over the world, military expenditures are a major source of a high degree of corruption. The shroud of secrecy around the defense expenditures facilitates and encourages corruption. The published figures of defense expenditures do not often clearly show all the items of expenditure incurred by the defense establishments; there are defense-related expenditures that are shown in the budgets of the civilian ministries. The first step in the search for transparency is to allocate to the defense budgets all the expenditures relating to the army and military establishment under their appropriate headings.

It is worth serious examination whether Bangladesh should not encourage the use of military for development activities, especially in the infrastructure projects. They are used occasionally at times of emergency such as floods and cyclones for relief operations. The argument that such use will jeopardize the combat readiness of the armed forces is of doubtful validity and can be tested by experimenting with a number of pilot projects that will involve only a fraction of the army.

An important challenge that Bangladesh faces in developing a multi-party democratic system is the formulation of a national consensus for a policy towards India. This also has implications for defense expenditure in Bangladesh. India looms too large in the internal political debate, the relationship with India appears as an electoral issue at times of political campaigns, and political parties are characterized or defined in terms of their attitude towards India. This has roots in the politics of the Pakistan days and goes even further back to the Hindu-Muslim conflicts and tensions in the Indian subcontinent in the pre-independence days. The civil society, including newspapers, think-tanks, professional associations, trade unions, and chambers of commerce, etc. have a vital role to play in

encouraging public discussion on this subject and in generating public consensus. While the relationship with a dominant neighboring power would not be entirely free of tension, it should not vitiate an objective and unemotional examination of how and in what ways a viable strategic, diplomatic, and economic relationship with India can be established. A national consensus on the relationship with India would enable a concentration on national political and economic issues and put the political parties to test in terms of their performance in achieving domestic economic and political objectives.

Because of the unique historical circumstances of their origin, the evolution and development of the political parties in Bangladesh ended up with very strong leaders with almost absolute control over their party’s organizational and decision-making process. The internal governing structure of the political parties is far from fully democratic; there is no free play of diversity of opinions that reach a consensus on policy issues through a process of dialogue and debate within the individual party forums. The decisions are made by the party leaders and are carried out by the rest. This creates dissatisfaction within the party; lack of effective participation by senior party members breeds a lack of commitment to party policies. When there is no habit of open debate and consensus-building within an individual party platform, it is no wonder that the possibility of debate and consensus building across or among different parties remains a far cry. At present, the habit of autocratic control of the party apparatus is transferred to the national government when the particular political leader takes over the functions of the government. Over time, as the leaders who exercise absolute control over the party apparatus retire, competition and pluralism within each party may develop, leading to the growth of bottom-up rather than top-down leadership.

While the political system has not grown to meet the challenges of an open democratic society, the civil society in a broad sense has developed much faster (Blair 1993). The various components of civil society, i.e. organizations of various professional groups, research institutions, and a wide variety of non-

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governmental organizations, are engaged not only in consciousness raising efforts, but also in mobilizing, training, and providing a wide range of services frequently focused on disadvantaged groups, including women and children. The NGOs, therefore, perform a vital function in organizing various classes and types of groups based either on occupation, region, economic class, age, or sex.

The participants of NGOs, in general, develop greater confidence and an awareness of their civil and economic rights and opportunities; they are trained to think and articulate their social and economic needs, and to demand services to be provided by the government. This is a desirable development in Bangladesh; in the course of time, people’s increased awareness of socioeconomic issues affecting their lives, and their active participation in expanding socioeconomic opportunities would enhance their political awareness and affect the way and the extent to which they will participate in the political process. Two types of policies would expedite this process. One is a big push for universal literacy, as well as primary and secondary education. This would greatly improve awareness of both political and economic rights and opportunities on the part of the masses. Second is the growth of local governments with adequate resources and responsibilities to perform both developmental and administrative functions. This would bring the government to the people and make politicians directly responsible to their local electorate for their actions. This will greatly widen the democratic process, i.e. the participation of the people in decisions and actions affecting their lives.(Haggard and Webb 1994; Kohli 1993).

As democratic political institutions take root, simultaneously Bangladesh faces a challenge to develop a commitment on the part of the political leaders for economic development. Under what circumstances will a government in Bangladesh make a strong commitment to development? In general, the commitment to development can be traced to a visionary leader with a vision of the country’s economic future, and with a commitment to achieve the vision.

Visionary leaders emerge only once in a generation. They stand out alone and high. While participating in the rough and tumble of electoral processes buffeted by competing vested interests, they rise above short-term interests and inspire and mobilize a nation to follow their vision. As Winston Churchill once said, “a politician is interested in the next election, whereas a statesman is interested in the next generation.” Bangladesh does not have this good fortune. In many countries, the leadership has responded to the challenge of development, because of the perception of a political or an economic crisis that may threaten its continuance in power. It is not the existence of a crisis as much as the perception on the part of the leadership that such a crisis exists--or may develop--that stimulates and guides the leadership to overcome it through sustained efforts for development. A short-term crisis like flood or drought threatening food shortage or famine often elicited vigorous response from the governments irrespective of the nature of the leadership. However, long-term endemic poverty or underdevelopment does not necessarily create a perception of crisis that requires short-term emergency action; long-term stagnation is not perceived by them as a possible contributing factor to the loss of political power in the short run. Action to relieve long-term underdevelopment has to be sustained over a period of time and brings results only in the long run-which may accrue at the time of successor governments, thus giving credit to the latter. In the ultimate analysis, it is only an educated and intelligent, politically conscious, and organized electorate that can and does put pressure on the politicians to respond to its long-term concerns and needs. Through the expansion of education and of a conscious civil society, activated by a wide variety of groups or associations embracing different segments of society, a democratic polity with a major focus on socioeconomic development may gradually emerge. The signs of such a trend are visible and strong; one can only hope that the current political institutions will not slow down or interfere with this process but facilitate it.

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REFERENCES .

Ahmed, M. 1979. Bangladesh: Constitutional Quest for Autonomy. Dhaka: University Press Ltd

Blair, H. 1993. “Doing Democracy in the Third World: Developing an Applied Theory of Civil Society.” Paper prepared for the American Political Science Association Annual Meeting, Washington, D.C., September.

Copp, D. 1993. The Idea of Democracy. United Kingdom: Cambridge University Press.

Haggard, S., and R. Webb, eds. 1994. Voting for Reform, Democracy, Political Liberalization, and Economic Adjustment. New York: Oxford University Press.

Kohli, A. 1990. Democracy and Discontent: India’s Growing Crisis of Governability. United Kingdom: Cambridge University Press.

Sobhan, Rehman. 1993a. “The Political Context of Government.” in Bangladesh: Problems of Governance. Dhaka: University Press Ltd. 1993.

_______________ 1993b. “Democracy and the Nature of the State.” in Bangladesh: Problems of Governance. Dhaka: University Press Ltd.

GARMENT EXPORTS FROM BANGLADESH: AN UPDATE AND EVALUATION

Munir Quddus

Professor of Economics and Chair University of Southern Indiana, USA

Salim Rashid

Professor of Economics University of Illinois, Urbana-Champaign, USA

ABSTRACT The success of readymade garment exports from Bangladesh over the past two decades has surpassed the most optimistic expectations. The paper reviews the literature on this industry, presents recent data on the sector's performance, and evaluates future trends in the international and domestic clothing industry. More specifically, the paper evaluates the negative impact of the 1998 floods on the industry. It concludes that although the impact of the flood was unexpectedly benign, the entrepreneurs face important challenges from the health of the domestic banking sector, the East Asian economic crisis, and the deregulation of the global clothing business as a result of the phasing out of the Multi-fibre agreement in the year 2005. Introduction

The tremendous success of readymade garment exports from Bangladesh over the last two decades has surpassed the most optimistic expectations. Today the apparel export sector is a multi-billion-dollar manufacturing and export industry in the country. The overall impact of the readymade garment exports is certainly one of the most significant social and economic developments in contemporary Bangladesh. With over one and a half million women workers employed in semi-skilled and skilled jobs producing clothing for exports, the development of the apparel export industry has had far-reaching implications for the society and economy of Bangladesh.

Literature Review Several authors have analyzed aspects of the garment industry in Bangladesh. Of the various aspects of the industry, the problems and the working conditions of female workers have received the greatest attention. There are several studies including the Bangladesh Institute of Development Studies (BIDS) study by Salma Chowdhury and Protima Mazumdar1 (1991) and the Bangladesh Unnayan Parisad 2(1990) study

on this topic. Both of these studies use accepted survey and research methodology to analyze a wealth of data on the social and economic background, problems and prospects of female workers in the RMG sector. Professor Muzaffar Ahmad looks at the industrial organization of the sector and discusses robustness and long-term viability of apparel manufacturing in Bangladesh.3 Wiig (1990) provides a good overview of this industry, especially the developments in the early years.4 One of the few studies on the Bangladesh apparel industry to be published in a reputed journal in the U.S. is that of Yung Whee Rhee (1990) who presents what he calls a “catalyst model” of development. The Bangladesh Planning Commission under the Trade and Industrial Policy (TIP) project also commissioned several studies on the industry. 5 Hossain and Brar (1992) consider some labor-related issues in the garment industry.6 Quddus (1993) presents a profile of the apparel sector in Bangladesh and discusses some other aspects of the industry.7 Quddus (1996) presents results from a survey of apparel entrepreneurs and evaluates the performance of entrepreneurs and their contribution to the success of this industry.8 Islam and Quddus (1996) present an overall analysis of the industry to evaluate its potential as a catalyst for the development of the rest of the Bangladesh economy.9

29

The 1998 Floods The floods that affected Bangladesh between July and September 1998 were among the worst natural disasters impacting Bangladesh in recent history. With the benefit of hindsight it is apparent that the damage to the manufacturing base and the general infrastructure was neither as severe nor as permanent as was estimated at the time of the crisis. Once again the spirit of entrepreneurship and survival that characterizes the ordinary citizens of Bangladesh brought about a remarkably quick recovery in the economic and commercial lives of the people. This was also true for the apparel export sector that has in the past repeatedly demonstrated its resilience and sturdiness. The floods directly impacted thirty million people for three long months, caused 1100 deaths, and destroyed partially or completely 15,000 kilometers of roads, 14,000 schools, hundreds of bridges and as many as 500,000 homes. The total damage to private and public property is estimated to be about $3.4 billion. In addition, the shock to the economy may reduce GDP growth from about 6 per cent to 2 per cent. The total loss to the economy was estimated to be at least Tk. 12,000 crore.10 The manufacturing sector was disrupted because many urban areas were inundated by floodwaters for a long period. The floods affected many areas where manufacturing is concentrated, such as Dhaka, Narayangang, Savor, Tongi, Rupganj, and Narsindi. Eighty percent of the 500,000 handlooms sustained damage, of which 50 percent were seriously affected in terms of assets and raw materials. As a result, manufacturing was expected to grow at only 3% during this fiscal year compared to 6.7 percent in the previous year. Fueled by higher food prices, the inflation rate shot up and was expected to be around 8 percent for the year.11

The Bangladesh Garment Industry

For Bangladesh, the readymade garment export industry has been the proverbial goose that lays the golden eggs for over fifteen years now. The sector now dominates the modern economy in both export earnings, secondary impact and

employment generated. The events in 1998 serve to highlight the vulnerability of this industry to both internal and external shocks on the demand and supply side. Given the dominance of the sector in the overall modern economy of Bangladesh, this vulnerability should be a matter of some concern to the policymakers in Bangladesh. Although in gross terms the sector’s contributions to the country’s export earnings is around 74 percent, in net terms the share would be much less partially because the backward linkages in textile have been slow to develop. The dependence on a single sector, no matter how resilient or sturdy that sector is, is a matter of policy concern. We believe the policymakers in Bangladesh should work to reduce this dependence by moving quickly to develop the other export industries using the lessons learned from the success of apparel exports. Support for the apparel sector should not be reduced. In fact, another way to reduce the vulnerability is to diversify the product and the market mix. It is heartening to observe that the knit products are rapidly gaining share in overall garment exports as these products are sold in quota-free markets and reflect the strength of Bangladeshi producers in the fully competitive global apparel markets. Preliminary data and informal evidence indicate that this sector seems to have weathered the devastating floods relatively well. The floods did create a crisis for the tightly scheduled export industry, but to its credit the firms responded swiftly and creatively to the unexpected dislocation and transportation disruptions. The industry is one hundred percent export-oriented and therefore insulated from domestic demand shocks; however, it remains vulnerable to domestic supply shocks and the smooth functioning of the banking, transportation and other forward and backward linkage sectors of the economy. The Dhaka-Chittagong road remains the main transportation link connecting the production units, mostly situated in and around Dhaka and the port in Chittagong, where the raw material and the finished products are shipped in and out. Despite increased dependence on air transportation, trucks remain the main vehicles for transporting raw materials and finished products for Bangladesh garment exports. The floods disrupted the normal flow of traffic on

30

this road. Eventually, this road link was completely severed for several days when large sections of the road went under water for a few weeks during the latter phase of the floods. This delinking of the road connection between Dhaka and the port in Chittagong was as serious a threat as one can imagine for the garment exporters. The industry responded by calling upon the Bangladesh navy to help with trawlers and renting a plane from Thai Air that was used to directly fly garment consignments from the Dhaka airport to the Chittagong airport several times a day. According to industry sources, the list of flood-related damage to the garment industry is extensive.12 According to the September 1998 BGMEA newsletter, garments worth taka 1,000 crore ($208 million) could not be exported on time due to the disruption of the Dhaka-Chittagong road. Finished products worth $231 million were stockpiled and twenty percent of these may end up in a “stock-lot” situation.13 The estimated production loss was put at $120 million. As many as 250 apparel factories were partly or completely submerged during the floods. Attendance and worker productivity in factories was down as much as 35 percent during the worst period of the floods. As many as 300,000 workers were unable to work as their homes and families were stricken by the flood conditions. Many more workers fell sick from waterborne diseases. Besides natural disasters, there were several other crises that impacted the garment industry in 1998. The disruption of the Chittagong port due to labor disputes was certainly one of them. BGMEA, the industry association, has repeatedly requested the government to ban labor strikes in the Chittagong port for national security reasons. Another source of disruption for the industry was the perennial problem of hartals or general strikes called for and enforced by the political opposition. Although the leader of the main opposition party has declared, in a major concession to this industry, that the garment industry would be exempt from such hartals, in practice the situation is more difficult. Lastly, the psychological impact of these events on the existing and potential buyers cannot be overstated. Buyers in the global garment

markets remain highly sensitive to the risks of unfulfilled orders. As a result of the floods, the image of Bangladesh as a somewhat unpredictable supply source may have been strengthened since the floods received considerable world media attention. Historically, apparel exports have grown at an average rate of 24 percent annually, roughly doubling every three years since 1984. In 1996-1997 the exports in gross terms equaled three billion dollars. These should reach the six-billion-dollar range by the year 2,000 and in the ten-billion-dollar range by the year 2004 when the Multi-Fiber Arrangement (MFA) quotas are expected to end, ushering in a truly global and competitive market. Among the many factors, the one most responsible for the success of this industry is the entrepreneurial spirit it has displayed. The garment entrepreneurs should receive a national "innovators" award for taking creative initiatives to overcome the crises in 1998. The list of the hurdles the industry had to overcome this year includes not only the floods related dislocations but other internal constraints as well. Among the steps taken by the entrepreneurs to improve the competitiveness of the industry were initiation of monthly meetings with the union leadership, implementation of child labor agreement, and attempts to gain market share as a result of the East Asian crisis by asking the U.S. to increase its quotas for Bangladeshi apparels.

Recent Performance of the Apparel Export Sector

From Table 1, it is clear in both value and volume terms that during the months of July and August, when the country was in the grip of floods, the industry was able to continue production and exports at a somewhat normal pace. From the production and export data for the period, there is little indication of the disruptions caused by the floods. On the contrary, monthly data for the flood period reveals an increase in exports over the average monthly exports for the previous fiscal year. In current dollar terms, the average monthly exports of $369 million in the July-August period was 17 percent higher than the $315 million average monthly exports over the entire

31

1997-1998 fiscal year. In volume terms, the numbers also support this conclusion. The monthly exports of 9, 325 (000 dozen) over the July-August 1998 period exceed the monthly average of 8,182 (000 dozen) for the 1997-1998 fiscal year by 14%. What explains this seeming contradiction? One possible explanation is that anticipating the disruptions, some of the producers may have accelerated their production efforts. The doubling of efforts by individual manufacturers as well as the industry as a whole may have paid off. Perhaps the numbers also indicate that the steps taken by the industry to overcome the crisis were by and large successful. Lastly, the garment export industry is somewhat seasonal and these may be in the high volume season. Even though the production and export schedule was maintained by the industry, this does not imply that the floods were inconsequential. The apparel exports industry has a built-in lag between orders and delivery. It is expected that the orders that would have normally been received in the summer months would be adversely affected due to the negative publicity and uncertainty about the outcome during the months when floods submerged the country. This would show up in exports several months later. Table 1 also reveals that during the 1997-1998 fiscal year (before the floods), apparel exports from Bangladesh grew by twenty-six and twenty-one percent in value and volume terms, respectively, over the previous year. There is some indication that the profit margins for the industry may be improving. This is surprising given the very difficult trading environment during this period resulting from the East Asian economic crisis. To further investigate, we calculate the value per unit for apparel exports. From the information in Table 1, we find that the average unit value for all categories of apparel exported in 1997-1998 was $38.51 per dozen or $ 3.20 per apparel unit. This represents a four percent increase in prices over the previous year when the average price per unit was $37.05 per dozen or $ 3.08 per apparel unit. Given the fact the Bangladeshi currency was repeatedly devalued against the U.S. dollar over this period, the export price of the Bangladeshi apparels seems to be holding up rather well. There is no doubt that Bangladesh

is no longer the new kid on the block producing only the simplest and the least sophisticated designs. Some of the larger companies have started producing for the upper end of the retail market for department stores such as J.C. Penney. The garment exporters have used their considerable political clout with the policymakers to ask for devaluation in the local currency against the U.S. dollar. Their demand does have merit as the recent East Asian economic crisis caused sudden and substantial depreciation in the currencies of competing nations that export apparel to the same markets. However, the policymakers are constrained since devaluation, although helpful for the local garment exporters in regaining their competitiveness, would certainly increase the import bill and adversely impact import of capital products. The connection between devaluation and profit margins for the exporters is also unclear as profits also depend on labor costs, price paid for the intermediate accessories and world market conditions. Table 2 presents export figures on the major apparel items from Bangladesh. Especially in sweaters and Jackets, but generally in every item, the monthly average exports have increased. Table 3 shows the share of the major markets for Bangladesh made apparel. The European Union share is the largest for the most recent fiscal year (51.26 percent over 43.6 percent for the U.S. market). Table 4 presents the export figures of woven and knit products from Bangladesh in each of the sixteen market destinations that are important for Bangladesh. Table 5 shows that in Europe, Germany is the biggest market for the made-in-Bangladesh garments. What implications does the success of the apparel exports have for the economy of Bangladesh? The positive impacts are considerable and their significance cannot be overemphasized. This is the largest industry in the manufacturing sector and also the biggest earner of foreign exchange. In terms of gross foreign exchange receipts, in the most recent period for which there is data (July 1997- May 1998) export of readymade garments earned

32

$3392.45 billion or 73.18 percent of the total export earnings of Bangladesh. This relative share of apparel exports has steadily increased for several years now indicating that, in both absolute and relative terms, the industry has dominated the modern economy of Bangladesh for some time now. In addition, the positive sociological, demographic, political and economic impact of employing 1.5 million in the manufacturing sector is huge. This is especially true since ninety percent of these workers are women, many of whom have migrated from the countryside. The forward and backward linkage industries and services such as textiles, accessories, transportation, and packaging have also been large beneficiaries. The public exchequer has also gained and foreign investors have been exposed to Bangladesh as a result of this success. However, the biggest gainer must be the private entrepreneur in Bangladesh who now has a role model to follow. The spirit of entrepreneurship is thriving in Bangladesh. The proof for this view is the success of the apparel export sector.

The Future of Garment Exports and the Economy of Bangladesh

Growth in overall exports from Bangladesh peaked in 1994-1995 at 40 percent a year, but growth has remained strong. In the July 1997-February 1998 period, total export earnings equaled $3.3 billion or 16.4% above the exports over the same period in the previous year.14 The garment and knitwear exports accounted for the bulk of these exports. The knitwear sector especially has been highly dynamic in recent years. Given the fact that this market is outside the purview of MFA and not protected by quotas, this bodes well for the post MFA future of the industry. Bangladesh apparel exports can now point to a proven track record of successfully competing in a non-protected global competitive environment. Unfortunately, other potentially promising exports from Bangladesh such as leather, jute goods, and frozen foods have not fared as well over this period. This has accentuated the already narrow export base of the country and is certainly a matter of concern. The excess dependence on foreign exchange earnings and export growth on garments and

knitwear calls for policy attempts to diversify the export base of Bangladesh. What can be said about the future performance of the apparel export industry in Bangladesh? What are the downside risks for apparel exports from Bangladesh? Focusing on the most recent disaster, the debilitating floods of 1998 that shaved off several percentage points from the expected GDP growth this year, we have ignored another major crisis the industry seems to have weathered very well. We refer to the East Asian economic debacle of 1997-1998. The financial panic and the following economic meltdown that afflicted scores of dynamic economies neighboring Bangladesh - Malaysia, Indonesia, Thailand, Philippine and South Korea- certainly have been a restraining element in the economic performance of this sector. What are the links between the East Asian economies and garment exports from Bangladesh? There are several avenues by which negative economic shocks from these emerging economies have impacted Bangladesh. First, several of these nations are also big apparel exporters to the same markets where Bangladesh sells its apparels. The steep depreciation in their currency has made them more competitive, especially in the quota-free apparel markets. Even in the markets protected by quotas, this would be a deflationary force pulling down the unit prices and the profit margins for Bangladesh exporters. Second, using the time-tested formula, most of these economies are trying to export themselves out of their severe recessions. This has greatly increased competition for Bangladesh exports. Third, to assist them in their time of need, the U.S. and other developed nations have already relaxed quota restrictions on exports from the worst affected economies, making the playing field less level for Bangladeshi exporters. Fourth, prior to this crisis some of these nations were potentially big investors in Bangladesh in the textile and infrastructure projects. Their economic troubles have meant a dramatic scaling back in their direct investments in Bangladesh. On the plus side, the return of expatriate workers from this region has swelled the urban labor

33

force from which garment factories recruit their workers. Next, if some of these economies weaken, causing an economic or political collapse, their ability to compete in the global markets would be impaired. This could mean new opportunities for their competitors in the short run. Finally, Bangladesh has tried to leverage the crises by demanding from the U.S. equal quota concessions, pointing out that it has been very successful in reducing the child worker problem in the apparel manufacturing sector. The lobbying for a thirty percent (same as given to others for relief) increase in quotas has yet to bear fruit, but the prospects look good. In our view, the biggest threat to apparel exports in Bangladesh comes from the financial sector. Although we do not anticipate a financial panic similar to the Asian crises as the foreign investment (hot money) and short-term borrowing has been rather limited in Bangladesh, the common element is that of a weak banking sector with very little transparency and accountability. Elements of crony capitalism and moral hazard are certainly present in Bangladesh, especially in the nationalized banking sector and in credit markets. According to the World Bank-Asian Development Bank report, the financial sector in Bangladesh remains fragile with 33 percent of the portfolios of the Nationalized Commercial Banks (NCBs) and domestic private banks in the non-performing category.15 Notwithstanding the fifty billion taka of taxpayers money, that was used to re-capitalize the NCBs in the early 1990s, the system-wide capital inadequacy today is estimated to be taka 133 billion.16 This situation could cause the entire banking system to collapse as a result of an external shock or even a domestic event such as a run on a major bank. One important lesson from the East Asian crisis is that moral hazard and the resulting financial panic can be deadly for any economy, even one whose fundamentals are otherwise sound. Without fundamental reforms in the banking sector and the financial sector, the economy of Bangladesh remains susceptible to a financial panic where a speculative price bubble crashing in the real estate sector or elsewhere could start a systemic self-fulfilling type of panic. Such a collapse would seriously impact apparel exports, which are critically dependent

on the workings of a healthy banking system for the institutional set up for exports and for short-term financing. Other potential hazards include an overvaluation of the taka compared to the currency of its competitors. Despite the repeated devaluation in the recent past, according to the World Bank the taka remains overvalued in real terms. This could undermine the long term competitiveness of the industry. Finally, in 2004, under the Uruguay Round Agreement on Textiles and Clothing, the MFA quotas would be phased out. Bangladesh would lose its preferential access to its most important markets and would have to compete with India, China and other apparel exporters in a truly global competitive environment. Many apparel entrepreneurs in Bangladesh are not ready for this change although the industry as a whole probably would hold its own in the post MFA world. Finally, we would like to emphasize that the biggest source of potential problems for apparel exports are likely to be home grown, not external. First, the politicians could seriously damage this sector by creating instability and attempting to achieve their goals by violent means in the streets instead of the parliament. Second, the bankers and the bureaucrats and the politicians in power remain a source of threat. In their attempt to further extract rent from this sector, they could undermine the dynamic entrepreneurship that has characterized this industry. Third, the law enforcement agencies, by allowing the mastans and toll collectors to create a climate of terror, may debilitate commerce and production in the economy. Labor disturbances and frequent disruptions in the Chittagong port remain a source of concern to the apparel exporters. The practice of monthly meetings with union leaders and factory owners initiated by BGMEA is a step in the right direction. Garment workers remain one of the hardest working segments of the labor force in Bangladesh, and their working conditions and benefits must improve as the industry matures. In the long-run, this would be the best defense against union aggitation. Investing in worker training and in improved working conditions would certainly enhance productivity. The

34

apparel factory owners must be proactive instead of being reactive on this important issue. According to a recent World Bank publication, “exports and job-oriented manufacturing must hold the key to national development over the next quarter century. To make this possible, the limited but important industrial success achieved so far, mainly in an export enclave environment, needs to be replicated throughout the economy.” 17 The document goes on to suggest that the maximum gains in industrial production are not expected from the traditional sectors like jute, but from the labor-intensive export-oriented production that brings the benefits of global integration to the nation. Another virtue of this sector is that it is largely driven by private entrepreneurs who have in many ways become the models for entrepreneurs in other industries of the economy.

35

Tab

le 1

: A

ppar

el E

xpor

ts f

rom

Ban

glad

esh

in V

alue

and

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ume

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ands

of

doze

ns)

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in

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otal

s

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otal

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thly

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thly

199

2-93

1,

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48

103.

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204.

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17.0

5 1,

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02

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36

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58

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1.25

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3,76

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199

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26

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70

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62,5

11.9

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199

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199

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199

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16

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199

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(JU

LY

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US

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17

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36

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0%

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093.

00

6,

464.

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232.

00

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.00

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325.

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13

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S

ourc

e: B

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n B

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u (E

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DT

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actu

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calc

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mon

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d gr

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able

2:

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App

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dfro

m B

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of $

)

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vera

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thly

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vera

ge

199

3-94

80

5.34

67

.11

225.

90

18.8

3 80

.56

6.71

12

6.85

10

.57

0.00

0.

00

199

4-95

79

1.20

65

.93

232.

24

19.3

5 10

1.23

8.

44

146.

83

12.2

4 0.

00

0.00

199

5-96

80

7.66

67

.31

366.

36

30.5

3 11

2.02

9.

34

171.

73

14.3

1 70

.41

5.87

199

6-97

75

9.57

63

.30

391.

21

32.6

0 23

0.98

19

.25

309.

21

25.7

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6.60

16

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199

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96

1.13

80

.09

388.

50

32.3

8 33

3.28

27

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467.

19

38.9

3 29

6.29

24

.69

199

8-99

(JU

L-

AU

G)

201.

12

100.

56

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5 24

.53

60.5

1 30

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105.

25

52.6

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40.8

1

S

ourc

e: B

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urea

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f B

angl

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actu

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A)

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calc

ulat

ions

of

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s an

d gr

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fac

tors

36

Table 3: Export Markets for Bangladesh Apparels

YEAR

EXPORTS TO THE U.S.

(millions, $)

U.S. MARKET

SHARE (%)

EUROPEAN UNION SHARE

(%)

CANADA AND

OTHERS (%)

1991-1992 581.1 49.14 46.62 4.23 1992-1993 703.96 48.71 46.46 4.82 1993-1994 592.46 38.08 55.96 5.95 1994-1995 1006.08 45.07 49.67 5.08 1995-1996 1001.68 39.33 54.12 6.56 1996-1997 1245.14 41.49 54.11 2.1 1997-1998 1494.02 43.6 51.26 5.14

Source: Bangladesh Exports Promotion Bureau (EPB) RDTI Cell of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) Our own calculations of monthly averages and growth factors

37

Table 4: Apparel Exports to Major Markets (1997 - 1998)

TOTAL APPAREL EXPORT IN MILLION US$

WOVEN KNIT TOTAL % OF TOTAL

COUNTRY

USA 1,443.21 228.69 1,671.90 44.21%

CANADA 66.89 27.88 94.77 2.51%

AUSTRIA 12.13 5.84 17.97 0.48%

BELGIUM 78.91 60.37 139.28 3.68%

DENMARK 16.69 23.81 40.50 1.07%

FINLAND 9.55 4.23 13.78 0.36%

FRANCE 206.78 137.43 344.21 9.10%

GERMANY 352.78 130.09 482.87 12.77%

GREECE 2.40 1.41 3.81 0.10%

IRELAND 5.17 3.30 8.47 0.22%

ITALY 171.42 46.11 217.53 5.75%

NETHERLANDS 127.94 75.47 203.41 5.38%

PORTUGAL 1.97 0.83 2.80 0.07%

SPAIN 32.26 10.75 43.01 1.14%

SWEDEN 31.34 14.63 45.97 1.22%

UK 226.33 144.78 371.11 9.81%

OTHERS 58.66 21.89 80.55 2.13%

TOTAL 2,844.43 937.51 3,781.94 100.00%

Source: Export Promotion Bureaus (EPB)

Table 5: Top Five European Destinations for Bangladesh Apparel (July 1997- May 1998)

RANK COUNTRIES VALUE

(Millions, $)

1 Germany 434.77 2 United Kingdom 343.89 3 France 305.72 4 Netherlands 183.63 5 Italy 195.82

Source: Bangladesh Exports Promotion Bureau (EPB) RDTI Cell of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) Our own calculations of monthly averages and growth factors

38

1 Chaudhuri, Salma and Pratima Paul-Majumdar, The Conditions of Garment Workers in Bangladesh - An Appraisal, Report, Bangladesh Institute of Development Studies, October 1991. 2 Bangladesh Unnayan Parisad, A Study On Female Garment Workers in Bangladesh, draft report, Dhaka, May 1990. 3 Ahmad, Muzaffar, "Readymade Garments Industry in Bangladesh," Bangladesh Journal of Political Economy, Vol. 9, No. 2, 1988, 94-122. 4 Wiig, Arne, "Non-tariff Barriers to Trade and Development--the case of garment industry in Bangladesh," in Norbye (edited) Bangladesh Faces the Future, University Press Limited, Dhaka, 1990. 5 Ather, S. A., "The Readymade Garments Industry: Current Status, Problems and Prospects," Doc-TIP-MPU-B-11, June 1987. 6 Hossain, Najmul and Jagjit Brar, "The Garment Workers of Bangladesh: Earnings and Perceptions Towards Unionism," Journal of Business Administration, Vol. 14, No. 4, 1988. 7 Quddus, Munir., Entrepreneurship in the Apparel Export Industry of Bangladesh," Journal of Asian Business, Vol. 9, No. 4, Fall 1993, 24-46 8 Quddus, Munir, “Apparel Exports From Bangladesh: Brilliant Entrepreneurship or Spurious Success? Journal of Asian Business, Vol. 12, No. 4, Winter 1996, 51-70. 9 Islam, Anisul M, and Quddus, Munir, “The Export Garment Industry in Bangladesh: A Potential Catalyst for Breakthrough,” in Wahid and Weis (edited) The Economy of Bangladesh: Problems and Prospects, Praeger, Westport, 1996. 10 Reports published in the Amitech (News from Bangladesh) (http://216.32.117.57/news/), Internet editions of various daily newspapers in Bangladesh. 11 BGMEA Newsletter, September 1998, Special Issue, November 1998, and other issues. 12 BGMEA Newsletter, September 1998 issue. 13 This loss would be less than 5 percent of the total production that is in the $3.7 billion range. 14 According to Tofail Ahmed, the Commerce Minister, the readymade garment sector’s gross earnings in 1997-1998 financial year were $3.78 billion or 73 percent of total export earnings of Bangladesh. BGMEA Newsletter, Special Issue, 1998, page 8. 15 The World Bank and The Asian Development Bank, Bangladesh, Economic Trends and the Policy Agenda, May 1998, page 16. 16 Ibid. 17 World Bank 2020 Report.

ACKNOWLEDGMENTS We would like to thank Professor Syed S. Andaleeb for his helpful comments on an earlier draft of this paper. The usual disclaimer applies.

PUBLIC ENTERPRISE INEFFICIENCY AND THE ROAD TO PRIVATIZATION IN BANGLADESH

Tanweer Akram

Abstract

This essay provides an overview of public enterprises inefficiency and discusses the main issues concerning the privatization program in Bangladesh. The paper points out how the country’s privatization program can be improved. Keywords: Privatization, Public Enterprises, Bangladesh.

The Scope of this Essay This essay provides an overview of public enterprise inefficiency in Bangladesh and issues related to the problem of privatization of public enterprises in Bangladesh. The main argument of this essay is that there is ample scope for improving the country’s privatization program. The terms and conditions of sale must be well defined and upheld. The potential buyers must have access to material information about the firms. The financial sector must be disciplined. In order to show the importance of financial sector discipline, empirical findings on the debt-default status of privatized enterprises in Bangladesh are presented. The proceeds from privatization can be used for workers’ compensation and labor training since in the short-run labor retrenchment due to dismissal of excess workforce may lead to social and political problems unless alternative arrangements are available for workers. Prudential regulatory environment is required to protect the interests of the consumers when public monopolies are transferred to the private sector. Privatization program needs to be carried out within a defined time frame. The effectiveness of the privatization program has to be assessed on the basis of (a) microeconomic results in terms of improved firm-level productive efficiency and allocative efficiency, and (b) macro-economic results in terms of reduced fiscal burden and improved asset quality of the banking sector. This essay concludes by pointing out that privatization should be regarded not an end in itself but as a mean towards improving economic growth and development in Bangladesh.

Literature Review

Despite the importance of public enterprises to Bangladesh’s economy, the literature on public enterprises is quite limited. The major study of the public enterprises in Bangladesh is Sobhan and Ahmad (1982). It discusses the problems of public enterprises in the 1970s from the planners’ viewpoint. Islam (1975); Yusuf (1985); and Ahmad (1987) give an overview of the nationalization and the performance of public enterprises. Although there is no comprehensive study of privatization of public enterprises, there has been a growing research interest in privatization. A number of policy makers have written on privatization focussing on the evolution of policy changes and the process of privatization (Ahmad 1991; Chowdhury 1987; and Muhith 1993). Humphrey (1992 [1990]) provides a detailed inside account of the origins privatization program, its implementation and scope. Its main focus is the privatization program of early 1980s during the Ersahd regime. It does not evaluate the post-privatization efficiency of firms. Mallon and Stern (1991) present the background to the reform of industrial and commercial policies in the early 1980s. In particular they dissect the changing role of various interest groups and how policies are formulated in Bangladesh. Sobhan and Mahmood (1980) analyze and compare the performance of nationalized and privatized firms in the jute and the textile sector. They do not find convincing evidence of superior performance of privatized firms. Lorch (1991) studies the post-privatization operation of the textile industry. He also does not detect any indication of improved productivity,

8

profitability, or performance. Bhaskhar (1993) relates the Bangladesh experience of privatization to some policy problems of privatization in developing countries. Bhaskar and Khan (1995) analyze the post-privatization employment patterns of white-collar and blue-collar workers. Sen (1997) reports the results of a useful survey of privatized firms in Bangladesh. Dolwah (1997), a World Bank sponsored case study of firms privatized between 1991 to 1996, claims that privatization has been successful. Akram (1998a) reinterprets Sen’s (1997) survey results. Akram (1998b and 1998c) investigates the tax registration and the debt-default status of privatized firms. As part of its research program on governance and development, the Centre for Policy Dialogue (CPD) has recently initiated a research project on privatization. Akram (1999) provides a review of the literature on the political economy of privatization in Bangladesh. The international experience in the privatization of public enterprises is diverse. While there are many examples of successful privatization, it is by no means established that the change of ownership will necessarily improve performance, particularly when other institutions and policies remain unchanged. Privatization is not a substitute for the growth of the private sector and the emergence of new firms. A number of lessons can be drawn from the international experience of privatization (Kikeri et al 1992). Favorable macroeconomic circumstances, liberal economic policies, competitive markets, and prudential regulatory framework are conducive to successful privatization. The authorities can address the social cost of unemployment due to privatization through severance payments, retraining, and employment assistance. Successful privatization depends on well-defined objectives, sound preparation for sale, appropriate pricing and valuation, and transparency in transactions.

However, contrary to Galal et al (1994) case studies, which suggest that privatization generally brings great benefits, it is not clear that the impact of privatization on welfare is always positive or that the potential gains are realized. Enterprise performance, productivity, and profitability may not improve. The impact on fiscal burden may not reduce if the authorities continue to subsidize privatized firms. The experience in former Soviet Union and low-income countries show little evidence of higher growth even after several years of liberalization, privatization, and macroeconomic stabilization and structural adjustment. The varied experience of privatization provides impetus for a strategic privatization policy in Bangladesh designed to ensure the realization of maximum gains from the transfer of ownership. I . Public Enterpr ise Inefficiency The profit-loss time series of public sector corporations in Bangladesh given in Table 1 below covers from 1982-83 to 1996-97 and includes the projected figures for the financial year 1997-98. All figures are in nominal Taka terms. The public enterprises have proved to be unsuccessful firms as their financial performance demonstrates. Public enterprises incur chronic losses and continue to rely on state funded equity injections and credit from the banking system. Losses and reliance on the state for equity injections and credit are symptoms of the weakness of the public enterprise regime in Bangladesh. Since public enterprises are unable to secure profits, there is no surplus generated from capital invested in public enterprises to be used for social expenditure. Public enterprises receive direct state subsidies (transfers), as shown in Table 2. Public enterprises, except for the gas and petroleum extraction and distribution companies, do not pay much dividends, as shown in Table 3.

9

Tab

le 1

Pro

fit

and

Los

s of

Pub

lic E

nter

pris

es

In M

illi

on T

akas

N

ame

of t

he S

ecto

r C

orpo

rati

on

1982

-19

83

1983

-19

84

1984

-19

85

1985

-19

86

1986

-19

87

1987

-19

88

1988

-19

89

1989

-19

90

1990

-19

91

1991

-19

92

1992

-19

93

1993

-19

94

1994

-19

95

1995

-19

96

1996

-19

97

1997

-19

98

Man

ufac

turi

ng

B S

teel

& E

ngin

eeri

ng C

orp

-273

-2

02

-135

-8

5 -4

9 -6

2 -7

8 -3

65

-861

-1

,078

-1

,292

-9

03

-650

-6

45

-694

-4

42

B S

ugar

& F

ood

Indu

stri

es C

orp

218

189

-234

-3

36

-315

-1

25

-237

17

0 -1

21

-722

-8

62

-150

78

-3

78

-679

-6

44

B C

hem

ical

Indu

stri

es C

orp

158

121

131

105

-86

198

374

455

-343

-5

54

206

255

-754

-1

,214

-2

,305

23

8 B

Tex

tile

Mill

s C

orp

23

112

42

-566

-2

45

-354

-2

2 -1

88

-584

-4

34

-1,3

55

-1,5

39

-1,1

42

-1,3

44

-1,2

48

-882

B

Jut

e M

ills

Cor

p 18

4 -3

10

-1,4

62

-1,5

83

-420

-1

,431

-1

,882

-3

,709

-2

,473

-3

,175

-5

,233

-6

40

-314

-9

62

-1,0

05

-480

B

For

est I

ndus

trie

s D

evel

opm

ent C

orp

33

34

48

28

10

-16

17

-39

-62

-142

-1

32

-113

12

30

1 12

4 13

0 Su

btot

al

343

-56

-1,6

10

-2,4

37

-1,1

05

-1,7

90

-1,8

28

-3,6

76

-4,4

44

-6,1

05

-8,6

68

-3,0

90

-2,7

70

-4,2

42

-5,8

07

-2,0

80

Util

ities

Po

wer

Dev

elop

men

t Boa

rd

417

453

199

-285

17

2 -8

9 -3

63

-3,3

75

-2,8

02

-7,4

82

-4,2

62

-3,8

92

-6,4

69

-765

-3

,196

-1

,085

D

haka

Ele

ctri

c Su

pply

Aut

hori

ty

0 0

0 0

0 0

0 0

0 -8

53

-988

-1

,851

-1

,985

-1

,392

-1

,574

-1

,622

D

haka

WA

SA

-1

1 -2

0 0

-10

20

14

19

16

-4

5 11

36

-2

0 -6

7 14

28

C

hitta

gong

WA

SA

-3

6

5 -2

6

-2

-31

-63

-64

-57

-38

-27

-26

-33

-43

-30

B O

il G

as &

Min

eral

Cor

p 72

12

2 89

-2

7 -1

55

100

-159

-2

65

288

510

709

986

1,17

0 1,

436

1,08

8 1,

052

Subt

otal

47

5 56

1 29

3 -3

24

43

23

-534

-3

,687

-2

,582

-7

,877

-4

,568

-4

,748

-7

,330

-8

21

-3,7

11

-1,6

57

Tra

nspo

rt a

nd C

omm

unic

atio

n

B S

hipp

ing

Cor

p 24

4

6 -1

17

-101

37

-2

44

-245

-5

27

-542

-1

72

-158

-1

29

-149

57

11

0 B

IMA

N

123

163

-23

-57

-352

-2

66

33

117

-249

34

8 67

9 71

4 71

9 49

6 40

8 92

5 B

Inla

nd W

ater

Tra

nspo

rt C

orp

-20

-5

-11

-45

-55

-53

-73

-37

-37

-69

-30

-25

-7

17

100

109

Mon

gla

Port

Aut

hori

ty

-18

-36

67

74

118

216

191

197

193

230

220

154

203

204

123

129

Chi

ttago

ng P

ort A

utho

rity

23

9 13

2 24

2 20

7 36

6 43

1 39

2 46

8 50

8 48

6 44

1 48

4 64

0 92

4 49

1 46

7 B

Roa

d T

rans

port

Cor

p -1

26

-123

-1

43

-174

-1

83

-214

-2

35

-259

-2

46

-221

-2

41

-113

-8

8 -5

4 -4

9 -2

3 T

radi

ng

B P

etro

leum

Cor

p 59

7 2,

000

1,83

5 1,

044

1,41

0 84

0 1,

236

387

2,48

8 3,

512

3,80

0 4,

600

1,01

7 75

7 -4

,481

-4

,940

B

Jut

e C

orp

-271

-1

48

-444

-1

,623

-1

18

-1,8

41

-1,4

77

-1,3

24

-142

-1

,657

-2

,038

-7

5 -6

3 -1

9 -1

8 -1

6 T

radi

ng C

orp

of B

angl

ades

h 18

28

11

24

47

41

45

34

7

22

-94

179

16

-14

23

43

Con

stru

ctio

n

C

hitta

gong

Dev

elop

men

t Aut

hori

ty

1 2

4 -4

28

42

89

53

49

20

19

31

39

38

17

52

R

AJU

K

48

78

78

92

134

110

126

79

75

138

143

200

191

164

47

50

Khu

lna

Dev

elop

men

t Aut

hori

ty

8 7

20

2 4

-1

15

11

13

7 6

20

68

42

26

17

Agr

icul

ture

B

angl

ades

h Fi

sher

ies

Dev

elop

men

t Cor

p 2

-2

-25

-27

-1

-18

-26

-11

-20

-9

-11

-1

-9

9 -2

7 -7

B

Agr

icul

ture

Dev

elop

men

t Cor

p -3

4 -1

30

-113

-4

39

-525

78

15

2 13

3 78

-1

05

-112

-1

29

-118

-1

34

-234

-2

27

Serv

ices

/Mis

cella

neou

s

B

Fre

edom

Fig

hter

s W

elfa

re T

rust

2

5 6

-5

-11

-28

20

24

35

5 -8

1

22

48

68

112

B F

ilm D

evel

opm

ent C

orp

2 2

1 2

2 2

2 1

-20

-16

10

17

25

22

10

12

B E

xpor

t Pro

cess

ing

Zon

e A

utho

rity

0

0 -9

-1

0 -8

1

3 -1

2 -2

-1

23

29

52

90

72

48

B

Sm

all &

Cot

tage

Ind

ustr

ies

Cor

p -4

-3

-5

0

0 0

0 1

1 -6

-4

1 -3

4 -7

-1

9 -3

1 -3

4 B

Inla

nd W

ater

Tra

nspo

rt A

utho

rity

-1

1 -1

3 19

-5

2 -4

8 -5

-1

-2

1 -3

1 1

-6

-51

-166

-2

15

-9

-16

Rur

al E

lect

rifi

catio

n B

oard

0

0 0

0 -3

-2

6 -3

5 31

79

84

17

5 16

6 22

3 23

9 19

2 21

8 B

Par

jato

n C

orp

1

3 19

16

-5

13

13

13

10

9

19

113

24

8 36

57

B

Ser

icul

ture

Boa

rd

0 0

-1

-2

-2

0 -1

-1

-2

-2

-2

-1

4 -1

-1

4 -1

4 -1

4 B

Han

dloo

m B

oard

0

0 0

9 2

0 0

0 -4

-3

0

2 3

-2

0 0

Subt

otal

58

1 1,

964

1,53

4 -1

,085

69

9 -6

41

225

-361

2,

256

2,23

1 2,

780

6,11

0 2,

654

2,43

8 -3

,193

-2

,928

T

otal

1,

399

2,46

9 21

7 -3

,846

-3

63

-2,4

08

-2,1

37

-7,7

24

-4,7

70

-11,

751

-10,

456

-1,7

28

-7,4

46

-2,6

25

-12,

711

-6,6

65

So

urce

: Mon

itori

ng C

ell,

Min

istr

y of

Fin

ance

, GoB

9

10

Tab

le 2

Pub

lic E

nter

pris

e Su

bsid

y

In m

illi

on T

aka

Cor

pora

tion

19

90-9

1 19

91-9

2 19

92-9

3 19

93-9

4 19

94-9

5 19

95-9

6 19

96-9

7 19

97-9

8

B C

hem

ica

Indu

stri

es C

orp

21.7

30

.0

30.0

30

.0

30.0

30

.0

30.0

30

.0

B S

ugar

& E

ngin

eeri

ng C

orp

12.0

8.

0 3.

0 1.

0 1.

0 1.

0 1.

0 1.

0

B J

ute

Mill

s C

orp

473.

1 39

2.7

2,53

6.0

2,49

8.6

2,35

2.0

2,27

2.0

0.0

0.0

B I

nlan

d W

ater

Tra

nspo

rt C

orp

5.0

5.0

5.0

5.0

5.0

5.0

5.0

5.0

Raj

shah

i Dev

elop

men

t Aut

hori

ty

0.5

0.5

0.7

0.7

0.7

0.7

0.7

0.7

B F

reed

om F

ight

ers

Wel

fare

Tru

st

5.0

55.0

60

.0

66.3

78

.1

66.0

66

.0

66.0

B I

nlan

d W

ater

Tra

nspo

rt A

utho

rity

10

7.5

125.

0 14

0.3

126.

0 13

3.0

138.

0 13

8.0

161.

5

B S

mal

l & C

otta

ge I

ndus

trie

s C

orp

86.7

99

.5

117.

5 12

0.0

142.

6 13

7.0

138.

0 13

8.0

Rur

al E

lect

rifi

catio

n B

oard

11

4.4

170.

0 17

3.0

170.

0 17

0.0

150.

0 18

0.0

180.

0

B H

andl

oom

Boa

rd

14.8

17

.5

20.5

25

.2

30.0

30

.0

30.0

30

.0

B S

eric

ultu

re B

oard

13

.4

15.1

18

.1

17.2

21

.0

20.4

21

.8

21.8

Tot

al

854.

1 91

8.3

3,10

4.1

3,06

0.0

2,96

3.4

2,85

0.1

610.

5 63

4.0

Sour

ce: B

angl

ades

h E

cono

mic

Rev

iew

, var

ious

yea

rs

10

11

Table 3

Dividends from Public Enterpr ises In million Taka

Sector Corporation 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Manufacturing

BSFIC 10.0 0.0 0.0 0.0 3.7 0.0 10.0

BCIC 0.0 100.0 100.0 0.0 0.0 3.8 0.0

BFIDC 0.0 0.0 0.0 0.0 0.0 0.0 2.0

Utilities

BOGMC 150.0 300.0 300.0 600.0 700.0 956.8 1,020.0

CWASA 1.0 1.0 1.0 1.0 1.2 15.0 3.0

DWASA 2.0 5.0 5.0 6.0 5.6 0.0 15.0

Transport

Biman 10.0 10.0 15.0 20.0 20.0 0.0 0.0

CPA 150.0 200.0 50.0 200.0 200.0 200.0 350.0

MPA 50.0 60.0 60.0 60.0 65.0 65.0 90.0

Trade

BPC 3,000.0 3,250.0 4,000.0 1,000.0 660.0 600.0 68.0

TCB 21.0 2.5 20.0 10.0 10.0 0.0 5.0

Agriculture

BFDC 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Construction

Rajuk 10.0 10.0 10.0 10.0 0.0 5.0 20.0

CDA 1.5 1.7 2.0 2.0 2.0 2.5 3.0

KDA 0.5 0.5 0.5 0.5 1.0 0.8 0.8

RDA 0.1 0.3 0.3 0.3 0.3 0.4 0.5

Services

BFilmDC 0.5 0.0 0.0 1.0 1.5 1.5 4.0

BPRC 1.0 4.0 5.0 4.0 0.0 5.0 5.0

CAA 10.0 15.0 11.3 30.0 15.0 35.0 45.0

BEPZ 0.0 0.0 0.0 0.0 0.0 1.0 2.5

BTeaBoard 4.0 4.0 0.0 0.0 0.0 1.0 2.0

Total 3,421.6 3,964.0 4,580.1 1,944.8 1,685.3 1,892.8 1,645.8

Source: Bangladesh Economic Review,various years.

12

The Manufactur ing Sector

The public enterprises engaged in manufacturing have been losing money consistently since 1983-84. The jute sector public enterprises and steel & engineering public enterprises have been incurring losses. From the mid-1980s, the textile enterprises began losing money as well. Enterprises in the sugar & food sector and the chemical sector have lost considerable amount of money from time to time. Table 4, provides a summary of the main production and financial data of the manufacturing public enterprises in recent years.

Utilities

Public utilities have been losing money since the late 1980s. The loss of public utilities in Bangladesh arise not because public utilities are forced by regulation to produce a level of output which cannot cover its long-run average cost. The public utilities incur losses but due to “system loss,” corruption, excess employment, and inefficient management. The Power Development Board (PDB) has been losing money since mid-1980. Its losses in the 1990s are quite substantial. Dhaka Electric Supply Authority (DESA) has been unprofitable since its inception. Dhaka and Chittagong Water Supply Authorities (DWASA & CWASA) have often earned profits and often made losses as well. The Bangladesh Oil, Gas, and Mineral Corporation (BOGMC) is profitable, owing to its market dominance.

Other Enterpr ises

Among other public enterprises, Bangladesh Petroleum Corporation (BPC) is the most important one. It earned profits until 1995-1996 but incurred losses in the last financial year. It expects to lose money again in the

present financial year. Bangladesh Jute Corporation (BJC) used to be a big money-loser until its shutdown the early 1990s. Bangladesh Road Transport Corporation (BRTC) continues to lose money although the high number of entries in this sector suggests that transport is a profitable sector. The two Port Authorities, in Chittagong and in Mongla, earn profits. The performances of the other public enterprises vary from year to year. Assessment of the Direct Cost of Inefficiency

Persistent financial losses of public enterprises in Bangladesh suggest that these firms have severe management problems. The heavy losses are a symptom of the malaise that affects public enterprises. Besides losing money and earning low rates of return, every year most public enterprises in Bangladesh obtain equity injections from the state and substantial amount of loans from the nationalized banking sector. Table 5 provides the stock of the outstanding and the overdue loans owned by the public enterprises to the nationalized commercial banks. As of December 1997, 35 cent of these loans were overdue. The share of outstanding loans as a proportion of national income diverted to the public enterprises have declined from 4.6 percent of GDP in 1982 to less than 2 percent of GDP in 1996. Nevertheless, public enterprise borrowing is a major part of public sector debt. Public enterprises are also responsible for a large share of the public sector’s loan default: The public enterprises’ outstanding and overdue loans amounted to respectively 81 percent and 78 percent of public sector’s outstanding and overdue loans. Table 6 provides June 1997 figures for the stocks of overdue and outstanding loans of the public enterprises amongst overall public borrowing. Public enterprises’ debt-servicing profile is also very poor, as Table 7 shows.

13

Tab

le 4

Pro

duct

ion

and

Fin

anci

al P

osit

ion

of P

ublic

Ent

erpr

ises

Cor

pora

tion

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

BC

IC

Pro

duct

ion

Ure

a (

mil

lion

MT

) 1.

475

2.05

9 2.

185

1.98

1 2.

134

1.64

8 1.

915

TSP

(m

illio

n M

T)

0.13

6 0.

16

0.17

7 0.

158

0.10

7 0.

132

0.15

New

spri

nt (

mil

lion

MT

) 0.

049

0.04

9 0.

047

0.04

3 0.

04

0.02

8 0.

027

Pap

er (

mil

lion

MT

) 0.

041

0.04

3 0.

046

0.04

0.

042

0.04

0.

04

Cem

ent (

mil

lion

MT

) 0.

273

0.05

1 0.

121

1.1

0.18

0.

168

0.17

Sal

es (

mil

lion

Tk)

12

,621

.10

14,5

02.8

0 14

,820

.70

14,2

85.5

0 13

,449

.30

11,6

09

14,1

83.5

0

Cos

t (m

illio

n T

k)

12,1

15.7

0 13

,078

.20

13,8

16.4

0 14

,303

.90

14,1

92.6

0 13

,615

.80

14,5

00.9

0

Ope

rati

ng P

rofi

t (m

illio

n T

k)

505.

3 14

24.6

10

00.4

-1

8.5

-743

.3

-200

6.8

-317

.4

Net

Pro

fit (

mill

ion

Tk)

-5

53.7

20

5.7

254.

8 -7

54.8

-1

213.

5 -2

379.

2 -1

050.

2

BT

MC

Pro

duct

ion

Thr

ead

(mil

lion

Kg)

42

.179

34

.006

17

.088

17

.003

14

.903

6.

777

15.3

17

Clo

th (

mil

lion

Kg)

47

.816

33

.765

14

.139

5.

17

3.10

3 0.

865

na

Sal

es (

mil

lion

Tk)

3,

179.

3 3,

189.

6 2,

361.

8 2,

412.

2 1,

689.

5 81

5.7

896.

2

Cos

t (m

illio

n T

k)

3,26

4.8

4,05

3.4

3,49

4.8

3,23

4.8

2,72

2.2

2,11

8.0

1,48

1.6

Ope

rati

ng P

rofi

t (m

illio

n T

k)

-85.

4 -8

63.8

-1

133.

1 -8

22.6

-1

032.

27

-130

2.3

-585

.4

Net

Pro

fit (

mill

ion

Tk)

-5

53.8

-1

446.

5 -1

538.

7 -1

170.

4 -1

343.

7 -1

632.

6 -8

25.5

BSF

IC

Pro

duct

ion

Sug

ar (

mil

lion

MT

) 0.

196

0.18

7 0.

222

0.20

7 0.

184

0.13

5 0.

165

Spi

rit (

mil

lion

MT

) 0.

219

2.01

61

3.19

9 3.

649

2.19

7 2.

711

2.4

Sal

es (

mil

lion

Tk)

5,

512.

8 5,

411.

8 5,

133.

3 4,

840.

6 7,

304.

6 3,

560.

7 4,

325.

9

Cos

t (m

illio

n T

k)

5,78

1.6

5,95

5.1

5,10

7.7

4,57

6.7

7,46

9.6

4,10

5.3

4,59

3.7

Ope

rati

ng P

rofi

t (m

illio

n T

k)

-268

.8

-543

.4

25.5

26

3.9

-165

54

4.6

-267

.8

Net

Pro

fit (

mill

ion

Tk)

-7

22

-867

.6

-196

25

.3

-377

.6

-652

.9

-397

.6

14

Tab

le 4

(C

ont’

d.)

BJM

C

Pro

duct

ion

(vol

ume)

Hes

sain

('0

00' M

T)

69.9

73

.0

86.4

88

.4

81.3

78

.8

71.9

Sac

king

('0

00' M

T)

118.

4 15

4.1

173.

8 14

2.5

156.

9 14

6.0

160.

8

CB

C (

'000

' MT

) 40

.1

36.9

32

.2

34.4

31

.6

22.9

31

.1

Rev

enue

(m

illio

n T

k)

6,76

1.4

5,77

5.4

8,20

5.6

8,52

8.5

9,16

1.9

6,63

3.1

6,83

6.1

Cos

t (m

illio

n T

k)

9,04

0.0

8,97

6.8

8,58

5.5

8,63

9.2

9,91

8.8

8,62

7.6

8,28

9.3

Ope

rati

ng P

rofi

t (m

illio

n T

k)

-2,2

78.6

-3

,201

.4

-379

.9

-110

.7

-757

.0

-1,9

94.5

1,

453.

2

Net

Pro

fit (

mill

ion

Tk)

-3

,175

.0

-5,2

33.5

-6

40.5

-3

14.3

-9

62.0

-2

,517

.1

-2,2

46.4

BSE

C

Pro

duct

ion

Bus

, Tru

ck, C

ar (

No)

1,

207

530

606

1,10

2 1,

232

1,23

4 1,

200

Mot

or C

ycle

(N

o)

7,97

8 8,

165

6,10

8 5,

646

7,20

0 7,

009

7,00

0

Dis

el E

ngin

e (N

o)

343

102

490

520

600

525

600

Sal

es (

mil

lion

Tk)

2,

589.

1 3,

061.

0 2,

866.

0 3,

488.

8 3,

444.

6 2,

840.

3 3,

764.

6

Cos

t (m

illio

n T

k)

3,09

7.0

3,45

4.5

3,21

0.6

3,65

7.0

3,34

6.6

2,96

3.1

3,82

3.9

Ope

rati

ng P

rofi

t (m

illio

n T

k)

-507

.1

-399

.5

-344

.4

-78.

2 98

.0

-122

.8

-59.

3

Net

Pro

fit (

mill

ion

Tk)

-1

,077

.9

-1,2

92.0

-1

,102

.2

-683

.6

-645

.1

-1,0

32.8

-9

84.6

Sour

ce: B

angl

ades

h E

cono

mic

Rev

iew

, var

ious

yea

rs.

15

Table 5

NCB Overdue & Outstanding Loans Stock (December 1997)

In million Taka Sector Corporation Outsanding Loan Overdue Loan Ratio Manufacturing

BTMC 6,341.2 5,503.3 86.8 BSEC 7,986.5 4,779.5 59.8 BSFIC 1,942.9 294.6 15.2 BCIC 1,408.0 370.3 26.3 BFIDC 0.0 0.0 na BJMC 16,237.6 772.7 4.8 33,916.2 11,720.4 34.6

Utilities BOGMC 0.1 0.1 100.0 PDB 315.3 14.8 4.7 DESA 0.0 0.0 na CWASA 0.0 0.0 na DWASA 0.0 0.0 na 315.4 14.9 4.7

Transport BSC 1,174.2 769.1 65.5 BIWTC 1.0 0.1 10.0 Biman 0.0 0.0 na BRTC 120.8 120.8 100.0 CPA 0.0 0.0 na MPA 0.0 0.0 na 1,296.0 890.0 68.7

Commercial BPC 4,922.5 1.9 0.0 BJC 0.0 0.0 na TCD 0.0 0.0 na 4,922.5 1.9 0.0

Agriculture BADC 1,934.3 1,933.8 100.0 BFDC 4.8 0.0 0.0 1,939.1 1,933.8 99.7

Services BSCIC 133.2 133.2 100.0 BIFDC 354.0 307.6 86.9 BWD 39.9 4.2 10.5 BTB 50.7 50.7 100.0 BPC 15.1 0.0 0.0 BFDC 0.6 0.6 100.0 BSB 2.5 0.0 0.0 REB 2.7 0.0 0.0 598.7 496.3 82.9

Total 42,987.0 15,057.3 35.0 Source: Bangladesh Bank (December 1997)

16

Tab

le 6

In m

illi

on T

aka

Out

stan

ding

%

Out

stan

ding

O

verd

ue

% o

f O

verd

ue

Rat

io (%

) G

over

nmen

t Dep

artm

ents

2,

395.

5 5.

1 1,

669.

7 8.

4 40

.5

Aut

onom

ous

Bod

ies

2,11

3.2

4.5

1,94

6.3

9.8

92.1

Non

-Fin

anic

al N

atio

naliz

ed C

orpo

rati

ons

38,3

76.7

81

.5

15,5

60.0

78

.6

40.6

N

on-F

inan

ical

Ent

ities

(ot

hers

) 1,

976.

9 4.

2 49

8.8

2.5

25.2

Fina

ncia

l Ent

ities

1,

326.

3 2.

8 12

.6

0.1

1.0

Loc

al A

utho

ritie

s 91

7.0

1.9

109.

6 0.

6 12

.0

Tot

al

47,1

05.6

10

0.0

19,7

97.0

10

0.0

42.0

Sour

ce: B

angl

ades

h B

ank,

GoB

, 199

8

17

Table 7

NCB's Debt Service L iabilities In million Taka

Sector Corporation 1994-95 1995-96 1995-96 1995-96 1996-97 1996-97 1997-98 1997-98

Due Paid Due Paid Due Paid Due Paid Manufacturing

BTMC 970.9 100.8 971.0 0.0 1,357.4 0.0 999.6 0.0 BSEC 553.4 26.0 545.8 31.9 1,887.4 28.7 2,440.1 0.0 BSFIC 245.7 0.0 253.2 14.3 405.9 9.0 417.7 10.0 BCIC 5,625.8 2,862.9 3,807.4 2,322.2 9,655.8 1,813.4 12,153.8 639.3 BFADC 82.1 1.1 995.6 0.5 382.4 1.0 182.2 0.0 BJMC 1,076.7 0.0 1,123.2 50.0 1,123.2 0.0 1,123.3 0.0

Utilities BOGMC 3,837.8 2,462.0 3,906.1 2,636.6 7,551.2 2,892.3 10,970.3 2,053.8 PDB 10,458.3 1,472.3 10,501.6 1,513.7 13,916.1 2,500.0 16,553.7 250.0 DESA 0.0 0.0 0.0 0.0 0.0 0.0 34.5 0.0 CWASA 274.5 3.8 279.5 8.7 21.2 3.6 527.4 12.7 DWASA 509.4 56.8 547.6 100.0 60.8 50.0 620.4 75.0

Transport BSC 661.7 0.0 724.1 0.0 1,375.9 0.0 2,089.8 0.0 BIWTC 256.4 0.0 275.8 11.8 604.2 10.0 963.8 11.0 Biman 81.4 0.0 82.9 0.0 104.2 0.0 125.5 0.0 BRTC 552.9 0.0 527.3 0.0 1,020.0 0.0 1,515.6 0.0 CPA 835.1 0.0 980.7 228.7 618.8 224.0 749.4 109.1 MPA 88.0 0.0 88.0 0.0 88.0 0.0 88.0 0.0

Commercial BPC 700.9 515.7 651.3 1,135.8 722.4 660.4 363.8 321.1 BJC 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TCB 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Agriculture BADC 325.3 0.0 325.3 0.5 1,619.9 0.0 1,042.9 0.0 BFDC 818.3 1.0 815.8 0.0 1,134.3 4.0 1,530.8 5.0

Construction RAJUK 53.6 0.0 51.0 0.8 51.0 0.0 0.0 0.0 CDA 1.7 1.7 1.4 1.4 12.0 7.5 31.3 0.0 KDA 10.4 3.5 9.9 0.0 10.2 0.0 267.9 0.0 RDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Services BFFWT 105.6 0.0 113.8 0.0 6.7 10.0 166.0 0.0 BFilmDC 149.3 15.0 147.8 1.4 162.4 19.4 192.4 15.0 BPRC 173.7 10.0 173.7 1.0 198.5 19.1 145.4 4.8 CAA 48.6 0.0 48.6 0.0 58.2 0.0 67.9 0.0 BIWTA 139.1 24.3 141.2 2.5 387.1 50.0 601.9 13.3 BSCIC 10.9 2.7 15.7 1.7 6.7 15.0 11.8 124.5 BEPZ 68.6 8.8 11.3 0.0 21.7 12.5 146.9 0.0 BWDB 663.6 363.3 675.1 379.5 1,021.6 543.8 1,780.7 0.0 REB 1,064.4 254.0 386.2 386.2 108.7 434.7 106.4 320.8 BTB 137.0 0.0 139.1 0.0 139.1 0.0 139.1 0.0 BHB 38.4 0.0 39.2 0.0 0.2 0.0 45.1 0.0 BSB 12.3 0.0 12.3 1.1 12.5 0.0 12.5 0.0

Total 30,631.8 8,185.7 29,368.5 8,830.3 45,845.7 9,308.4 58,207.9 3,965.4 Source: Bangladesh Economic Review, various years.

18

Costs of Public Sector Inefficiency

Public sector inefficiency has also indirect adverse effects on the economy. Firstly, public sector’s excessive wage bill exerts upward pressure on private sector remuneration. Although the public enterprises’ wages and salaries are not high, the excess number of workers raises the wage bill. Secondly, since the social security of public enterprise workers is a “pay-as-you-go” pure transfer scheme, it not only puts pressure on the exchequer but also Indirect slows the rate of capital accumulation while reducing the steady state capital stock. Thirdly, public sector inefficiency can reduce the competitiveness of the private sector because it raises capital costs (machinery, building materials) and input costs of raw materials (such as chemicals, and steel), utility services (such as electricity, water, and telecommunication costs), and transport. If the public enterprise does not face a hard budget constraint, its output prices are unrelated to its production costs. Thus, the private firm in the same industry that is constrained by its budget cannot price its commodities at par with the public enterprise and is at a competitive disadvantage. In essence, the inefficiency of the public sector has substantial negative spillovers on the economy.

Non-viable Public Enterpr ises

The record of heavy losses, continued injection of equity of public enterprises, and borrowing from the banking sector suggests that some of public sector firms may not be economically viable even under commercially motivated management whether public or private. Those enterprises that are not viable, determined on the basis of economic calculation, would be closed down and liquidated. Closure and liquidation of non-viable enterprises is much better than continued subsidization, at the expenses of the public exchequer, of inefficient use of labor and capital in the production of commodities that consumers are unwilling to purchase and those in which the country has no comparative advantage. The sooner non-viable enterprises are shut down and liquidated the better it is in terms of social welfare: Resources currently used to subsidize them can be used in

more productive endeavors. The same argument applies for privatized and private firms. The argument for eliminating subsidies for non-viable private firms is stronger since subsidies given to private firms benefit a few at the cost of the public.

I I . The Question of Pr ivatization The are several objectives of privatization of commercial public enterprises. Firstly, to eliminate the fiscal burden of subsidies and the banking system’s support to the public enterprises; secondly, to improve productive efficiency of these firms; and thirdly, to increase the social and the private rate of return to capital. In Bangladesh, the losses of public enterprises, political consensus in favor of market-oriented economic policy among the major political parties, and donor pressure have placed privatization of public enterprises high on the policy agenda. Neither past attempts to reform public enterprises nor continued equity injections and new loans provided to public enterprises has been able to improve performance of public enterprises and mitigate public sector’s overall losses. However, sectors in which Bangladesh is regarded as having had some measure of success, namely the ready-made garment textile industry, agriculture, and non-government organizations’ micro-credit schemes, have been mainly driven by private initiatives. Presumably, then, private sector management of enterprises currently under public management has the potential to increase productivity and performance if private initiative can replicate its success elsewhere in industrial management. However, can privatization actually improve firm efficiency? More specifically, what are policy steps that the authorities can take to ensure that privatization improves firm efficiency? The failure of the public enterprise regime does not imply that transfer of ownership from public sector to the private sector will in itself turn loss-making and inefficient enterprises into profitable and productive ones. Obviously there is no alternative to shutting down economically non-

19

viable enterprise. The country’s economic policy regime and institutions must clearly convey right signals to entrepreneurs since in an highly interventionist economic regime where it is more profitable to engage in rent-seeking behavior than productive endeavors, private agents shall devote resource to capturing rents. Privatization program can be successful as an element in the set of prudential economic policies that includes enforcement of the rule of law, stable fiscal and monetary regimes, discipline in the banking and financial sectors, competition and export-oriented trade policies, proper regulation of monopolies, and sound exit policies. The transfer of ownership from public sector to private sector will create the incentives for improving performance if and only if there are strict and well enforced impartial rules and institutional mechanism based on competition and the equality of opportunity. At present the authorities in Bangladesh are contemplating a comprehensive privatization program to overcome public enterprise inefficiency. The authorities have an official privatization policy (Government of Bangladesh, 1996). But the privatization program in Bangladesh is beset with problems. This section discusses some of the main challenges of the privatization program in Bangladesh.

Access to Data and Mater ial Information

The authorities should provide not only potential buyers but also researchers with reliable economic and accounting time series and cross section data, and material information about the firm to be sold. Past annual reports and corporate level studies should also be accessible. The authorities have not yet made available brochures with considerable information to attract buyers. Relevant and detailed information about privatized firms and firms to be privatized are not readily available. To properly evaluate corporate performance in Bangladesh, researchers will be obliged to develop independent and reliable data.

Methods of Pr ivatization

The policy states that the enterprises can be sold either by international tender or public offer of

shares. The authorities have declared that they would prefer to use Employee Stock Option Program (ESOP) if the workers of the enterprise are willing to buy it. According to the authorities, an ESOP shall be attempted in the textile sector. If workers choose not to exercise ESOP, then other means of privatization shall be sought.

ESOP, Small Savers, and Pr ivatization

The policy of attempting to apply ESOP is probably motivated by political expediency because it suggests that the authorities are eager to serve the interest of workers. However, the application of ESOP may be limited to few firms due to several reasons. Firstly, workers may not have the resources and savings to buy enterprises or access to working capital or the expertise to operate and manage an enterprise. Secondly, workers may not be interested in putting a bulk of their wealth and savings in one asset. Workers may want to hold a diversified set of portfolio. Thirdly, ESOP may not be universally applicable. Only where workers have fairly well developed organizations, sophisticated knowledge base to operate firm effectively, and so forth, would ESOP prove useful. ESOP is appropriate for sectors where most of the value added originates from simple, semi-skilled, direct labor and the level of technology and capital required is low and the scale of operation relatively small. Where ESOP is not applicable, the authorities may reserve some shares of enterprises to be divested for workers’ , selling such shares at a discount, to make the privatization program more palatable to workers’ organizations.

At present various non-government organizations have been able to pool the savings of lower income social groups through micro-credit schemes and income-generating activities. Some of these non-government organizations have developed managerial expertise and have gained experience in operating commercial ventures. These organizations might be encouraged to participate in the privatization program and develop institutional mechanisms that will enable employees and small savers to purchase equities in a diverse range of privatized

20

and private firms. The micro-lending organizations can bring in better management and commercial expertise, and good surveillance over privatized corporations. They may be able provide useful feedback to shareholders and improved quality of shareholder services.

Terms and Conditions of the Sale Short-term and long-term liabilities have to be clearly defined prior to privatization. A clear and consistent demarcation of liabilities needs to established and upheld. If, however, the state does write-off long-term debt following privatization, it will be a transfer to the buyer of the firm. The policy also states the buyer shall assume full legal responsibility for all pending court cases against the enterprise.

There should be absolutely no scope for renegotiating the terms and the conditions of privatization after the sale. Scope for renegotiating creates opportunities for rent seeking and gives advantages to privatized firms over other firms in the sector.

Foreign Investors The authorities have been trying, without much success, to attract foreign investors. Despite increased interest of multinational companies in the hydrocarbon sector, the volume of actual foreign direct investment in Bangladesh remains unimpressive and the state management of joint ventures and collaboration is poor. The authorities should take a more sophisticated and pragmatic approach to foreign investment. Political volatility and the complexity of dealing with maze of bureaucracy are the main deterrents to attracting investment despite potentially high rates of return from investment in Bangladesh. Foreign investors will remain reluctant to buy and run public enterprises until and unless domestic investors take an active interest. Earning the confidence of local investors is necessary prerequisite for attracting foreign investors.

Bank Guarantees When the price for the public enterprise to be purchased by an entrepreneur is not paid in cash, the buyer is required to provide a bank guarantee. But a guarantee from a bank with poor asset quality, low profitability, and poor management is worth very little. If the bank guarantee is issued by a nationalized commercial bank, then ultimately it is the state that assumes the responsibility for the buyer’s credit. Such guarantees can have adverse effects by creating an incentive to default. Indeed, state bank’s guarantee may be contrary to the objective of privatization as the public ends up assuming the burden if the buyer defaults. If bank guarantees are issued by private commercial banks with a record and propensity for insider loans, such guarantee would be of little value. Bank guarantees would be acceptable when the bank can assume the responsibility for default and has the financial ability to meet its obligations without recourse to the state exchequer. Only guarantees from financially solvent banks are reliable and trustworthy. If the authorities sell enterprises partly on credit, a strong mechanism for credit collection is required. Discipline in the banking and the non-banking financial system is necessary for the success of the privatization policy because otherwise there will be both incentives and means for rent-seeking. Without proper incentives, buyers may borrow from banks against collateral of little value, refuse to repay bank loans, try to delay payments to the state, and so on.

The Impor tance of Financial Sector Discipline

The debt-default status of privatized firms, using the list in Sen’s (1997) survey1 and information provided by the central bank, unequivocally demonstrates the importance of discipline in financial sector if the benefits of privatization are to be at all obtained. The attached tables reveal some striking information about privatized firms’ persistent dependence on state credits and de facto state subsidies.

21

Table 8

Loan Profile of Pr ivatized Firms

# of Firms Amount In million Taka Total number of firms 201 Firms for which information is unavailable 73 Firms for which information is available 128 Firms with overdue loans 77 12,652.0 Firms with outstanding but no overdue loans 33 2,697.8 Firms with neither overdue nor oustadning loans 18 Firms with overdue and outstanding loans 110 15,349.8

Source: Bangladesh Bank (1998)

Table 9

Outstanding Loans of Pr ivatized Firms Range Amount of Outstanding Loans No of Enterpr ise In million Taka 1.0 - 5.0 28.2 13 5.1 - 10.0 29.4 4 10.1 - 20.0 164.8 11 20.1 - 50.0 49.7 15 50.1 - 100.0 1,495.7 19 100.1 - 500.0 10,522.4 44 500.1 - 1,000.0 2,611.6 4 Total 15,349.8 110

Source: Bangladesh Bank (1998)

Table 10

Overdue Loans of Pr ivatized Firms Range Amount of Overdue Loan No of Enterpr ises In million Taka Up to 5.0 26.3 10 5.1 - 10.0 79.2 11 10.1 - 20.0 105.8 7 20.1 - 50.0 720.4 20 50.1 -100.0 1,057.30 15 100.1 -500.0 3,707.50 14 Total 5,696.90 77

Source: Bangladesh Bank (1998)

22

As Table 8 shows, out of the 201 privatized firms, 77 firms have overdue (classified) and outstanding loans, 33 firms have outstanding but no overdue loans, and only 18 firms have neither outstanding nor overdue loans. The total volume of outstanding loan amounts to Taka 15.35 billion (US$326 million) of which Taka 12.65 billion (US$270 million) is owed by the 77 firms that have overdue loans. Table 9 shows the distribution of outstanding loans and Table 10 shows the distribution of overdue loans. The average (mean) amount of outstanding loan is nearly Taka 140 million (US$3 million) per firm, while the average (mean) amount of overdue loan is nearly Taka 74 million (US$1.6 million) per firm. Table 9 and Table 10 also reveal have substantial amount of overdue and outstanding loans is highly concentrated among few privatized firms. The amount of overdue and outstanding loans is quite high. The classification of non-performing debt in Bangladesh does not meet conservative and prudential standards generally accepted among international banks. How much of the outstanding loans owed by the defaulting firms shall be repaid remains to be seen; if past experience of debt recovery is any guide, then one may assume that very little will be recovered. The accumulation of overdue loans indicates the inability and/or the unwillingness of the management of the firms to service their loans. These firms are unwilling or unable to service their loans due to either the failure to realize profits, or managerial inefficiency or, perhaps, diversion of profits for personal gains rather than serving debts. If the management of the privatized firm expects that the bank will not eventually force it to repay, then it has no incentive to repay its debt. The authorities have been either unwilling or unable to retrieve debts from firms that have borrowed heavily and exceeded the time limit to repay. The failure to recover loans has ruined the reputation of the bank authorities. The absence of credible threats prompts the firm to default loans because the management knows

that such default will impose little or no penalty. If the owner of the privatized firm bought public enterprises with public funds, it can regarded a publicly sponsored leveraged privatization or publicly subsidized privatization.

The inability to repay loans within a specified period of time indicates either deliberate ploy for non-repayment, or managerial incompetence. In either case, the appropriate action on the part of the authorities would be compel the firm to meet its obligations to its creditors, its employees, and its customers in accordance with the provisions of the law. If the firm is unable to meet its obligations, then it should be sold off to (a) pay its creditors and employees; and (b) transferred it to new buyers who expect to provide the firm a more effective management and, thus, realize positive profits. Such action can be regarded as “ re-privatization.”2 The imposition of financial discipline on firms is a natural and necessary process for efficient management, capital accumulation, and growth in a market economy.3 Without imposing financial discipline and enforcing strict adherence to prudential banking standards, privatization in Bangladesh will not and cannot succeed. Given the country’s experience with debt-default, it is perfectly justified to disqualify identified defaulters from buying public enterprises. The authorities should allow buyers to sell “privatization bonds” in the capital market to raise funds to buy enterprise, provided capital market regulations are well enforced. However, the state, the nationalized commercial banks, and state owned non-bank financial institutions must not underwrite or purchase bonds issued to finance the leveraged buyout of the public enterprise. In essence, there should not be any state subsidy to the buyer of the enterprise. The private sector must assume full financial and economic responsibility for running the enterprise.

Labor Retrenchment

Owing to the widespread preponderance of client-patron relationships in Bangladesh, public

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enterprises employ excess number of workers (Bhaskar and Khan, 1995). As firms downsize under private ownership, many jobs will be abolished and some workers will be replaced. As a result, after privatization there will be, at least in the short run, an increase in unemployment in the country because not all dismissed workers will be able to find jobs. The working class will oppose privatization unless its losses are compensated. To mitigate the circumstances of unemployment workers, reduce workers’ opposition to privatization, and placate trade union resistance, the authorities may use funds obtained from privatization of public enterprises for (a) workers’ compensation, and (b) labor training and relocation programs. Labor retraining program shall improve labor productivity and enable retrenched workers find employment in other firms. At present, there are only a limited number of vocational training institutes in Bangladesh. State policies should support vocational training and skill development programs. Such steps are required not only to address the problems of workers in the short-run but also because the country needs trained and productive workers in many sectors with potential for growth. In the long run, if privatized firms are successful, new jobs will be created as output increases and additional investment is made from higher profits under better management.

Transformation Dynamics of Enterpr ises Some of manufacturing public enterprises are in poor financial condition, face adverse market demand for their products, possess old and decrepit machinery, employ unmotivated workers, staff, and officers and have accumulated so much liabilities that no one would be interested in purchasing these firms. The authorities may have to completely write off or assume all liabilities to attract buyers. Those enterprises beyond redemption must be shut down and immediately liquidated. Despite many unattractive features, many public enterprises are located in prime industrial sites, and have good real estate market values and fixed assets (buildings, machinery, and utility

connections), established brand names, ties with buyers, suppliers, skilled workforce and knowledgeable managers which will make them attractive to investors. Some of potential buyers of privatized enterprises would be able to transform unprofitable enterprises into profitable ones by putting in additional investment, new technology, and better management. Some of the buyers will switch the firm from one line of products or industry to another to obtain higher profits and growth. Some of the buyers shall shutdown the existing firm to convert the property into ventures that they expect to yield higher profits, such as construction, retail, or service activities. Some privatized firms will incur losses, fail, become bankrupt, close, and eventually liquidate themselves and exit. Such transformations should not be regard as faults of privatization or be misconstrued as specters of de-industrialization. The conversion of manufacturing establishments into non-manufacturing ventures and vice versa, the exit and elimination of inefficient firms, and the entry and emergence of new firms are cardinal features of market mediation that enables an economy to evolve in accordance with changing tastes and technology. The effective operation of a market economy requires constant transformation, new investment and entries, and bankruptcies and exits.

Capital Market and Pr ivatization The lack of a well established, robust, and thriving capital market dampers the prospect of a successful privatization program in Bangladesh. The equity market in Bangladesh is still quite small in terms of both market capitalization, the number of listed securities, actively traded securities, and the number of individual and institutional traders. The authorities’ regulatory framework, capacity and enforcement is fragile. Public enthusiasm in the capital markets was sharply curtailed after the steep decline in asset prices following the speculative frenzy, euphoria, and punting from mid 1996 till early 1997 in the virtually unregulated “over the counter” stock market. The speculative bubble was unsustainable because the rise in prices was not warranted by increases in corporate net income, operating income, profit, or growth.

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The capital market must be adeptly regulated for investors’ confidence to be reestablished.

Regulatory Framework for Pr ivatized Monopolies and Oligopolies

The present policy framework does not contain any mechanism for creating and enforcing regulatory and competition policies. If the authorities carry forth the privatization program, then the state would eventually also transfer public monopolies in infrastructure, utilities, telecommunication, and transport to the private sector. However, in order to ensure gains from privatizing in non-competitive sectors, industry regulations must be in place and be implemented rigorously to protect consumer interests and social objectives. Properly regulated monopolies transferred to the private sector would have limited ability to abuse market power and would be governed by a good set of incentives that promote improvement of productivity and service. For Bangladesh, privatization and private sector entry in the provision of utilities should be accompanied with a strong, credible, and transparent regulatory framework that limits the scope for abusing market power and appropriating rents. The authorities should ensure that privatized oligopoly firms conform to agreements, maintain standards, do not engage in collusive practices, and refrain from outright fraud.

Speed, Time Framework, and Program Effectiveness

Although the authorities have announced that 54 firms are to be privatized within the financial year 1997-98, this target was not met. The pace of the program is slow even though the authorities are determined to privatize a large number of enterprises within two or three years. The parameters and scope of privatization has not yet been agreed upon at the highest executive level. The policy does not provide a time framework for the completion of the privatization program in Bangladesh. An indicative timetable for privatization with set goals for each stage of privatization would send strong signals to investors and create confidence

in the authorities commitment to an effective and goal-oriented privatization program. A slow and/or ill planned privatization program can demoralize workers and managers in the public sector. The management of enterprises may engage in capital depletion if they have no stake in the privatization process. At present, they fear that they will lose their job security after the transfer of ownership from the public sector to the private sector. Privatization should be carried out quickly, retaining the loyalty and morale of the firm’s workforce, and reducing the scope for asset depletion. According to the policy, the state shall ensure that the transfer of the privatized enterprises is complete within 90 days of signing of the agreement. But the authorities have had problems adhering to such deadlines. The less delay there is in the transfer process, the better it is for corporate management. Privatization Act The authorities should make the forthcoming Privatization Act available for generating public discussion before sending it to National Parliament for approval. The goal of Privatization Act would be to strengthen the country’s privatization program. This gives the authorities an opportunity to clearly state the objectives of the country’s privatization program, and set in motion a smooth and transparent institutional mechanism(s) for transferring enterprises from the public sector to the private sector. The Act ought to ensure the transparency and the credibility of the privatization process. In order to achieve credibility, the authorities should be able to give sound justification for the valuation of firms to be sold and the mechanism for transfer of ownership. The Privatization Board’s decisions will be credible if it is subject to independent analysis and scrutiny.

Analysis of Post-Pr ivatization Performance

The privatization of commercial public enterprises in Bangladesh has several objectives.

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Firstly, to eliminate the fiscal burden of subsidies and the banking system’s support to the public enterprises. Secondly, to improve productive efficiency of these firms. Thirdly, to increase the social and the private rate of return to capital. To determine whether privatization program has been successful, the authorities and the firm’s management should provide independent researchers access to firm-level production and financial data, and macroeconomic data from the tax agencies, the central bank, and the line ministries. Such analysis will be valuable not only to the authorities but also to the general public, the corporations, banks, and potential investors.

Corporate Governance and the Production Environment

For effective corporate governance a strategic buyer or group needs to establish effective managerial control on the firm’s operations, strategy, and plans. Privatization will be beneficial if it brings about better management of the firm’s capital and human resources. There has to be a pool of potential entrepreneurs ready to take over and manage the privatized firm. This implies that there must be a competitive market for corporate control. Sound management and improved corporate performance depends not only on the managers but also on the surveillance of shareholders, banks and other financial institutions, regulatory bodies, and good accounting, auditing and legal practices and standards. Bangladesh’s production environment is characterized by rampant corruption, political tensions between the party in power and the parties out of power, frequent strikes, natural disasters, and poor infrastructure. The lack of a favorable production environment in Bangladesh do not bode well for privatization and probably explains why privatization and other policy changes have not yet generated higher levels of investment and growth. The production conditions in Bangladesh can drastically improve if there is a visionary and able political leadership, change in the incentive regime, and strictly and impartial enforcement of the rules of the game.

Conclusion

This paper underscores the importance of a balanced and non-dogmatic approach to privatization in Bangladesh. Bangladesh will continue to be mixed economy in which the state-owned enterprises and financial institutions retain a vital role, even as more firms emerge in the private sector and some firms are privatized. If firms fail to repay debts then their assets and collateral must be seized, sold, and transferred to more efficient management, in accordance with the normal functioning of the market process. Without discipline in the financial sector, there shall be no gains from privatization. Irrespective of the status of their ownership, inefficient and loss-making firms cannot continue to be indefinite drain on the state budget. As for the remaining public enterprises, Their pricing structures should be adjusted, the scope of activities redefined, employment policy reassessed, and equity injection program rationalized. Inefficient and loss-making firms will have to be shutdown. The goals of privatization must be clearly defined. The process of privatization must be transparent, and carried out rapidly and efficiently. The authorities should address the problem associated with labor retrenchment by providing a reasonable amount of termination payments and investing in labor retraining and redeployment schemes. Privatized monopolies and oligopoly firms shall have to be well regulated. A proper set of incentives for the privatized firm is required to obtain the benefits that private management of the firm is supposed to bring about. Mallon and Stern (1991) observe that many business groups in Bangladesh are more eager to perpetuate the privileges rather than press for the relaxation of controls. If an economy is distorted and/or the state authorities are unable to enforce impartial rules, privatized firms can profit more from directly unproductive profit-seeking activities rather than productive and welfare-enhancing activities. For instance, analysis of the tax registration profile of privatized firms in Bangladesh (Akram 1998b) illustrates that privatized firms may be engaged

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in tax evasion because the state’s tax surveillance and administrative capacity is weak, inefficient, and ineffective. The low probability of detection and the low penalty cost if detected allows a large number of privatized firms failing to meet the minimum tax registration requirement. Privatization would improve revenue generation if under private management (a) the firm increases sales and profits, and (b) pays its due tax. But if a privatized firm does not comply with the minimum requirement of tax registration(s) and slips out of the tax net, then revenue shall not rise. Successful privatization and private sector development require institutions and institutional practices that promote activity and support the smooth operation of markets and production processes. Proper execution of privatization and implementation of complementary policy steps (such as the strengthening of tax administration, discipline in the financial sector, and so on) is required to secure the presumed gains from the privatization of public enterprises. Businesspersons, domestic and foreign, have been less than enthusiastic about investing in Bangladesh because of perceived political instability and frequent strikes, highly politicized labor market and union problems, the absence of conducive business environment, rampant corruption and lawlessness, excessive regulations and bureaucratic interference, poor infrastructure, and natural disasters. In general, privatization should be implemented as integrated part of an authentic liberal economic order that incorporates fair laws and their strict enforcement, fiscal and monetary discipline, competition, and prudential microeconomic regulations, and rewards productive endeavors. Privatization of public enterprises in Bangladesh would have to be accompanied by a set of polices that ensure that entrepreneurs profit from productive endeavors, not at the expense of the public. Privatization is not an end in itself but merely a means towards increasing efficiency, and fostering economic growth and development.

REFERENCES 1. Ahmad, Muzaffer (1987). State and

Development: Essays on Public Enterprise. Dhaka, Bangladesh: University Press Ltd.

2. Ahmad, Sultan (1991). “Trends of Privatization in the Asian-Pacific Region with particular reference to Bangladesh,” Asian Affairs 3: (July-September) 35-80.

3. Akram, Tanweer (1998a). “Entry, Exit, Efficiency, & The Question of Privatization,” Centre for Policy Dialogue Working Paper.

4. Akram, Tanweer (1998b). “Tax Registration Profile of Privatized Firms,” Centre for Policy Dialogue Working Paper.

5. Akram, Tanweer (1998c). “Publicly Subsidized Privatization: A Simple Model of Dysfunctional Privatization,” Centre for Policy Dialogue Working Paper.

6. Akram, Tanweer (1999). “The Political Economy of Privatization of Public Enterprises in Bangladesh: A Critical Review of the Literature,” unpublished manuscript.

7. Bangladesh Bank, various years. Bangladesh Bank Bulletin. Dhaka, Bangladesh: Bangladesh Bank.

8. Bhaskar, Venkataraman (1993). “Privatization in Developing Countries: Theoretical Issues and the Experience of Bangladesh,” UNCTAD Review 0(4): 83-98.

9. Bhaskar, Venkataraman and Mushtaq Khan (1995). “Privatization and Employment: A Study of the Jute Industry in Bangladesh,” American Economic Review 85(1): 267-273.

10. Chowdhury, Tawfiq Elahi (1987). “Privatization of State Enterprises in Bangladesh 1976-84,” in Georffrey Lamb and Rachel Weavings, eds., Managing Policy Reform in the Real World: Asian Experience. Washington DC: The World Bank, 1992.

11. Dowlah, C. A. F., (1997). “Privatization Experience in Bangladesh: 1991-96.” Dhaka, Bangladesh: The World Bank.

12. Galal, Ahmed; Leroy Jones; Pankaj Tandon; and Ingo Vogelsang (19940. Welfare Consequences of Selling Public Enterprises: An Empirical Analysis. Washington DC: Oxford University Press for the World Bank.

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13. Government of Bangladesh, various years. Bangladesh Economic Review. Dhaka, Bangladesh: Ministry of Finance, Government of Bangladesh.

14. Government of Bangladesh (1996). Privatization Policy. Dhaka, Bangladesh: Privatization Board, Government of Bangladesh.

15. Humphrey, Clare (1992 [1990]). Privatization in Bangladesh: Economic Transition in a Poor Country, Asian Edition. Dhaka, Bangladesh: University Press Ltd.

16. Islam, Shamsul (1975). Public Corporation in Bangladesh. Dhaka, Bangladesh: Local Government Institute.

17. Kikeri, Sunita; John Nellis; and Mary Shirley (1992). Privatization: The Lessons of Experience. Washington DC: The World Bank.

18. Lorch, Klaus (1991). “Privatization Through Private Sale: The Bangladesh Textile Industry,” in Ravi Ramamurti and Raymond Vernon, ed., Privatization and Control of State-owned Enterprises, Washington DC: The World Bank, 1991.

19. Mallon, Richard D., and Joseph J. Stern (1991). “The Political Economy of Trade and Industrial Policy Reform in Bangladesh,” in Dwight H. Perkins and Michael Romer, ed., Reforming Economic Systems in Developing Countries. Cambridge, Massachusetts: Harvard Institute for International Development, 1991.

20. Sen, Binayak (1997). “Whither Privatization: Results of an Exploratory Survey of the Disinvested Industries in Bangladesh.” Dhaka, Bangladesh: Ministry of Finance, Government of Bangladesh.

21. Sobhan, Rehman and Muzaffer Ahmad (1982). Public Enterprise in an Intermediate Regime: A Study in the Political Economy of Bangladesh. Dhaka, Bangladesh: Bangladesh Institute of Development Studies.

22. Sobhan, Rehman and Syed Akhtar Mahmood (1991). “The Economic Performance of Denationalized Industries in Bangladesh: The Case of the Jute and

Cotton Textile Industries,” BIDS Research Report New Series 129 (June).

23. Yusuf, Fazlul Hassan (1985). Nationalization of Industries in Bangladesh. Dhaka, Bangladesh: National Institute of Local Government.

1 Akram (1998a) provides a critical review of the results in Sen’s (1997) survey of privatized firms. 2 Professor Rehman Sobhan has coined the term “ re-privatization” and has articulated its importance. 3 Akram (1998a) discusses this point at length.

ACKNOWLEDGEMENTS

The author benefited from discussions with officials from the Privatization Board, the National Board of Revenut, Bangladesh Bank, financial institutions, and scholars and participants at a Privatization Board seminar. The author is grateful to Mr. S. M. Akram, Member of Parliament (Chairman, Public Accounts Committee, National Parliament); Dr. Syed Saad Andaleeb (Editor, Journal of Bangladesh Studies); Professor Rehman Sobhan (Executive Chairman, Centre for Policy Dialogue); and two anonymous referees for their thoughtful comments on earlier drafts of this paper. The research was supported by Visiting Research Fellowship at the Centre for Policy Dialogue, Dhaka, Bangladesh. The standard disclaimer applies.

PROFESSOR AMARTYA SEN AND THE 1974 BANGLADESH FAMINE

Akhtar Hossain

International Economist

IMF-Singapore Regional Training Institute, Singapore And

Senior Lecturer in Economics The University of Newcastle, Australia

Abstract

This paper investigates (within Professor Amartya Sen’s entitlement approach) some aspects of economic events that led to the 1974 Bangladesh famine. It argues that this famine was not caused by a sudden decline in the aggregate availability of food by natural disasters; rather, the genesis of it can be traced to expansionary economic policies that the government of Bangladesh undertook immediately after the independence of the country. In fact the process of famine started in 1972 when inflation took off in an otherwise price stable country. By the time inflation exploded in 1974 a large section of the rural people belonging to the lower middle class had already slid downward into the poverty trap. Their exchange entitlement failed when rural employment opportunities decreased due to floods and food prices rose sharply due to precautionary and speculative attacks on food markets. The paper concludes by drawing some policy implications within a broader political economy perspective.

I. INTRODUCTION In his 1981 book Poverty and Famines, Noble Laureate in Economic Science Amartya Sen has provided an economic analysis of four contemporary famines within the paradigm of what he calls the "entitlement approach". This is not an alternative but an encompassing framework in which the conventional explanation for famines in terms of the food availability decline (FAD) (caused by, say, natural disasters or wars) is nested (Ravallion, 1997). Within the entitlement approach, famines can occur when there is an entitlement failure for certain groups of people in a society with and without a sharp contraction in the aggregate availability of food. Sen (1981:162) thus puts the issue in a broader context, suggesting that "[t]he entitlement approach views famines as economic disasters, not as just food crises". He then argues convincingly how an entitlement failure, rather than a decline in the aggregate availability of food, caused the Bangladesh famine: The food availability approach

offers very little in the way of

explanation of the Bangladesh famine of 1974. The total output, as well as availability figures for Bangladesh as a whole, points precisely in the opposite direction, as do the inter-district figures of production as well as availability. Whatever the Bangladesh famine of 1974 might have been, it wasn't a FAD famine [Sen, 1981:141].

Sen was correct in his diagnosis of the immediate cause of the famine. He did not, however, examine in detail the economic events that led to the entitlement failure of the rural poor, including landless wage labourers, artisans, and transport workers. In particular, he did not investigate the sources of high inflation and inflationary expectations during the early years of independence and link them with the rise in the relative price of food during or prior to the famine. An investigation of these economic events is crucial in determining conditions that might have given rise to the

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entitlement failure of the rural poor. This paper is, however, not a critique of Sen's study. It is devoted to an investigation (within Sen's entitlement approach) of economic events that led to the famine. The main appeal of Sen's approach is that it provides an explanation of why the famine occurred even though there was no "real scarcity of food" in the Smithian sense. Chadha and Teja (1989) have adapted Sen's approach to the Bangladesh famine within a macroeconomic framework. According to them, the genesis of this famine can be traced to expansionary policies that the government of Bangladesh undertook immediately after the independence of the country. Their macroeconomic model has at least four sub-models, namely: (1) a monetarist model of inflation; (2) an hyperinflationary model of money demand (Cagan, 1956); (3) a portfolio shift model of the relative price of food under financial repression; and (4) an efficiency wage model for farm workers. These sub-models (or their variants) constitute the analytical basis of the present paper. II. SOURCES OF INFLATION, 1972-1975 Although the Bangladesh famine occurred during the months of September to November in 1974, the process of famine started in 1972 when inflation took off in an otherwise price stable country. Bangladesh did not have social security provisions for the poor and the nominal wage rate adjusted only partly to the rise in the price level (Ravallion, 1987). Thus the incidence of poverty increased with the rise in inflation. By the time inflation exploded in 1974 a large section of the rural people, especially the lower middle class, had already slid downward into the poverty trap. Their exchange entitlement failed when rural employment opportunities decreased drastically due to floods and food prices rose sharply due to precautionary and speculative attacks to food markets. Therefore an investigation of the causes of famine should begin with the identification of factors that might have caused high inflation during the period 1972 to 1975.

(a) Inflation: A Monetary Phenomenon? I begin with the hypothesis that excess money supply was the primary cause of inflation in Bangladesh during the period 1972 to 1975. The excess money supply was created from both the supply and demand sides of the money market. In other words, the growth rate of the nominal money supply was greater than the growth rate of real income, multiplied by the income elasticity of demand for real balances.1 There were three main sources of the monetary expansion during the period 1972 to 1974, namely: (1) the monetisation of budget deficits; (2) credits to loss-making nationalised industries; and (3) the build up of foreign exchange reserves from a negligible level (Table 1). On the demand side of the money market, there were three types of shocks, namely: (1) the war of destruction and the dislocation of productive resources; (2) floods and droughts; and (3) a sharp rise in the OPEC oil prices that individually and jointly slowed down the recovery of the economy and hence the growth of money demand. Once inflation was ignited by an excess money supply, inflationary expectations were built up when the government failed to introduce effective stabilisation measures. High inflationary expectations lowered money demand sharply and generated an explosive inflationary situation during or prior to the famine. (b) Early Studies and Their Findings There have been a number of studies on Bangladesh's inflation for the early 1970s. They are Ahsan (1974), Alamgir (1980), Bose (1973), Rahim (1973) and Siddique (1975). Alamgir's widely-quoted study on the Bangladesh famine provides a monetary explanation for the inflationary process. The other studies by Ahsan (1974), Bose (1973), Rahim (1973) and Siddique (1975) have also emphasised the monetary roots of inflation in a war-ravaged economy. The studies by Alamgir (1980), Bose (1973) and Siddique (1975) had an academic focus and were published in academic outlets. However the articles of Ahsan (1974) and Rahim (1973), who were then respectively the Research Director and the

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Economic Adviser of the Bangladesh Bank, were published in the in-house publication of the Bangladesh Bank: the Bangladesh Bank Bulletin. Notwithstanding the fact that the latter authors published articles within their personal capacity, their opinions were significant for at least two reasons. First, as central bank high officials, they had access to inside information on monetary developments within the economy. Second, having become concerned about the impact of excessive monetary expansion on inflation, they took "risky" personal decisions by expressing their views publicly. It is to be noted that none of the authors cited above has a die-hard monetarist orientation; yet, they pointed out the monetary roots of inflation. They were not alone. Many government officials, academics and journalists, such as Lifschultz (1974a), were aware of what was going on. In essence, all the early studies reveal that the government and the general public were aware of the monetary roots of inflation. It would be apparent in later discussion that this public

information played a crucial role in generating high inflationary expectations. Instead of making efforts to stabilise the economy by dampening inflationary expectations, the government popularized the "myth" that the anti-state elements (for example, smugglers and hoarders of foodgrains) were behind the scarcities of essential goods. Even though they were major players in food markets by the time famine occurred, there were no economic explanations from the government for why smuggling and hoarding of foodgrains took place in the first place. While this question will be investigated later, the rest of this section provides some information on how the government's monetary and exchange rate mismanagement sowed the seeds of high inflation. (c) Monetary Developments: Too Much

Money Chasing Too Few Goods? As indicated earlier, Bangladesh was a relatively price stable country during the 1960s with an inflation rate of less than 5 per cent per annum (Hossain and Rashid, 1996). Inflation

TABLE 1 SOURCES OF EXPANSION OF THE NARROW MONEY SUPPLY, 1971/72-1973/74a ___________________________________________________________________________________________________________________________ 17 December 1971 30 June 1972 29 June 1973 to 30 June 1972 to 29 June 1973 to 28 June 1974 ___________________________________________________________________________________________________________________________ Expansion of the Narrow Money Supplyb +982 (100.0) +2103 (100.0) +1205 (100.0) A. Net Domestic Credit -340 (34.6) +727 (34.6) +513 (42.6) (i) Private Sector -466 (-47.5) -190 (9.0) +501 (41.6) (ii) Nationalised Sector +675 (68.7) +1713 (81.5) +1078 (89.5) (iii) Change in Time Deposits -549 (55.9) -795 (37.8) -1066 (88.5) B. Government Fiscal Operations +839 (85.4) +1316 (62.6) +1439 (119.4) C. International Transactions +821 (83.6) -532 (25.3) -1136 (94.3) D. Residual Items -338 (34.4) +592 (28.2) +390 (32.4) Total (A+B+C+D) +982 (100.0) +2103 (100.0) +1205 (100.0) ___________________________________________________________________________________________________________________________ NOTES: a The figures for monetary expansion (and its various components) are in millions of taka. They are compiled by the author based on Siddique

(1975: Tables VII, VIII and IX). b + = expansion; - = contraction. c The figures in parentheses are the percentage changes in the expansion of the narrow money supply. SOURCE: Selected Economic Indicators, Bangladesh Bank.

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jumped during the second half of 1971 to about 20 per cent for two main reasons. First, there was a disruption of economic activity during the Independence War. Second, floods lowered food crop production by about 15 per cent. These supply shocks were, however, associated with a contraction of the money supply by about 20 per cent.2 This acted as a circuit breaker of inflation and inflationary expectations, especially when the general public showed no signs of panic and remained calm despite the war situation. Bose (1972:303) suggests that the abnormal situation prevailing during the war prevented traders and large farmers from "indulging in" speculation and hoarding and "thereby accentuating grain shortage in the market and pushing up prices". All these factors prevented inflation from going out of control. A sudden explosive growth of the money supply immediately after independence represented the abandonment of the monetary conservatism of the Pakistani era. The official monetary statistics in Table 2 suggest that the

narrow money supply increased by 71 per cent during the calendar year 1972. For the next two years, the narrow money supply increased by 18 per cent and 16 per cent respectively. Besides the fact that these money supply growth rates by themselves were high in a war-ravaged economy, there were large quantities of counterfeit as well as both Pakistani and Indian currencies in circulation that sowed the seeds of high inflation. Here follows an elaboration of these phenomena. Recall that Bangladesh became independent on 16 December 1971. To begin, the country did not have its own printed currency notes (taka) when a new government was formed in December 1971. The government allowed the use of inherited Pakistani currency notes as a legal tender (as a temporary measure), but with a token alteration. That is, those currency notes that were transacted through banks and other financial institutions were stamped with an official seal, indicating that they represented the taka. In January 1972 the government undertook another major monetary decision on

TABLE 2 MONEY SUPPLY GROWTH AND INFLATION, BANGLADESH, 1971-1975 __________________________________________________________________________________________________________________________ Narrow Money Broad Money Consumer Price Supply (% Change) Supply (% Change) Index (% Change) __________________________________________________________________________________________________________________________ 1971 June-December -19.44 -12.87 17.69 1972 January-June 21.91 25.69 17.53 July-December 31.83 26.24 25.93 January-December 70.54 67.91 51.79 1973 January-June 1.64 4.17 13.71 July-December 14.47 12.12 12.43 January-December 18.06 21.36 33.42 1974 January-June 0.82 3.58 21.67 July-December 15.54 13.49 36.13 January-December 15.74 18.46 72.40 1975 January-June -9.42 -2.72 -10.64 July-December 23.80 17.42 -9.33 January-December 4.07 8.78 -17.97 ________________________________________________________________________________________________________________ NOTES AND SOURCES: + Percentage change figures for the monetary aggregates are the author's calculation based on the Bangladesh Bank Bulletin (several issues)

and the Economic Indicators of Bangladesh (several issues). ++ Data for the consumer price index for middle class government employees in Dhaka are the author's compilation based on a number of

publications, namely the Monthly Statistical Bulletin of Bangladesh March 1972 (June 1971 to December 1971), IFS Supplement on Price Statistics 1986 (January to May 1972), the Bangladesh Bank Bulletin (several issues) and the Economic Indicators of Bangladesh (several issues) (for the remaining period). The base years of the index in different publications have been changed to derive the series with a common

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the exchange rate front. It fixed the exchange rate of the taka with the British pound sterling after devaluing the taka by about 50 per cent. These currency and exchange rate arrangements solved initial problems relating to financial transactions (both domestic and international). Some new problems were, however, created when the exchange rate of the taka with the Indian rupee was set at parity and the government allowed the use of India's currency notes for transactions within Bangladesh as a "quasi-legal" tender. Note that after the surrender of the Pakistani military on 16 December 1971, Bangladesh remained under the control of the Indian occupation forces until March/April 1972. During this period the Indian advisers played a major role in administering the country, including making decisions on economic and monetary affairs. Whoever might have been responsible for making economic decisions, many of them, especially those related to money and exchange rate arrangements, were controversial. For example, it is not known why the government allowed the use of the Indian currency notes for transactions within Bangladesh, especially when the Pakistani currency notes (representing the taka) were already in circulation. Without fully appreciating the implications of exchange rate arrangements with India, the government also set the exchange rate of the taka with the Indian rupee at parity. Furthermore, for unknown reasons, the government arranged the printing of the taka notes in India. The following discussion will show how these decisions went against the economic interests of Bangladesh. . Table 3 shows that prior to Bangladesh's independence in December 1971, the exchange rate of Pakistan's rupee (per US dollar) was 4.792, while the exchange rate of India's rupees (per US dollar) was 7.509. This meant that the establishment of parity between the taka and the Indian rupee effectively raised the value of the Indian rupee vis-à-vis that of the Pakistani rupee (representing the taka) by about 54 per cent. This created an immediate problem for Bangladesh. Recall that the Pakistani rupee was historically overvalued. So it might appear that the government took a sensible decision to devalue the taka with the pound sterling to the

extent necessary to ensure a parity with the Indian rupee as a benchmark. But when this decision was undertaken along with an extraordinary privilege for India that allowed this country to use its own currency notes for transactions within Bangladesh, there was an instant, albeit unexpected, windfall for India's residents for the following reason. Note that the devaluation of the taka with the pound sterling did not immediately raise the domestic price level proportionately. For example, while the rate of devaluation of the taka with the pound sterling was about 54 per cent, the consumer price index increased by 18 per cent during the first six months of 1972. The result was that the purchasing power of India's rupee over Bangladesh's tradable products (domestic and imported) raised substantially during the early months of independence. India's residents took advantage of this unexpected monetary development in their favour, especially when they were able to use their own currency notes for the purchase of goods inside Bangladesh. In popular parlance, this meant the procession of truckloads of Bangladesh's products for India, leaving a huge quantity of India's currency notes in the hands of the people of Bangladesh.3 The newspaper reports at that time showed why this was not an insignificant matter. The long border between Bangladesh and India was practically open during the early months of independence. As Bangladesh itself was under the occupation of the Indian military, there were no practical difficulties in the outflow of goods from Bangladesh to India. It was widely reported that the Indian military itself engaged in the purchase of huge quantities of both consumer and capital goods from Bangladesh using India's currency notes and then transferred those goods to India. The Indian military might have another advantage. During and in the aftermath of the war a large quantity of the Pakistani currency notes fell in the hands of the Indian military (after the Pakistani military and its collaborators surrendered to the Indian military.) Instead of returning those currency notes to the government of Bangladesh, the Indian military might have used them as war booty and purchased goods from Bangladesh (Ahmed, 1984; Barua, 1978; Maniruzzaman, 1980; Wright, 1988).

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Bangladesh experienced two additional monetary problems. First, the circulation of huge quantities of counterfeit takas, possibly originated in India. (The low quality currency notes that were printed in India were, in particular, targeted by counterfeiters.) Second, there was a smuggling of Pakistani currency notes into Bangladesh from Pakistan itself. Following the massive devaluation of the Pakistani rupee in April-May 1972 to the extent of about 130 per cent against the US dollar, there was a mismatch of cross rates for this currency. For example, in June 1972 the exchange rate of the Pakistani rupee (per US dollar) was Rs 11.031 in Pakistan, while the exchange rate of the same currency in Bangladesh (that represented the taka) was Rs/Tk 7.363 per US dollar. As the difference between the Pakistani currency notes in circulation in both Pakistan and Bangladesh was a "token rubber stamp seal", the smuggling of the Pakistani currency notes to Bangladesh became highly profitable. Third, the governments of Pakistan and Bangladesh did not coordinate their decisions to demonetise the 50-rupee Pakistani currency note after Bangladesh became independence. This led to smuggling of this currency note from Pakistan into Bangladesh when the date of de-monetisation of this note in Bangladesh lagged by 10 days of a similar decision taken in Pakistan. Wright (1988:144-145) puts together all such monetary policy problems that affected the Bangladesh economy:

In May 1973, there was a currency crisis in Bangladesh, caused by the printing of massive amounts of counterfeit money. This seriously damaged relations between India and Bangladesh because the official notes which Bangladesh was using at the time were printed in India, and India also seemed to be the source of forged taka.... There were other causes for the currency crisis. During the last days of the 1971 fighting, a large amount of Pakistani currency was channelled into India either by those who had looted banks and other places where currency was available, or through refugees, politicians and businessmen. By this means, smuggled Pakistani (and, later, Bangladeshi) currency came into the hands of Indians, who converted it to Indian currency. There were indeed "some dishonest Indians" but there was also some mishandling of currency problems by the Bangladesh government, which was inexperienced in such matters. For example, Pakistan demonetised its fifty-rupee note three months after the

TABLE 3 EXCHANGE RATES OF THE CURRENCIES OF BANGLADESH, INDIA AND PAKISTAN (PER US DOLLAR)+ ___________________________________________________________________________________________________________________________ Month Bangladesh India Pakistan ___________________________________________________________________________________________________________________________ 1972 1973 1971 1972 1973 1971 1972 1973 ___________________________________________________________________________________________________________________________ January 7.375 8.051 7.539 7.375 8.051 4.781 4.793 11.031 February 7.284 7.819 7.505 7.284 7.819 4.754 4.793 9.900 March 7.237 7.658 7.505 7.237 7.658 4.752 4.793 9.900 April 7.267 7.639 7.499 7.267 7.639 4.754 4.793 9.900 May 7.262 7.494 7.499 7.262 7.494 4.752 7.912 9.900 June 7.363 7.363 7.502 7.363 7.363 4.751 11.031 9.900 July 7.764 7.462 7.502 7.764 7.462 4.752 11.031 9.900 August 7.742 7.658 7.547 7.742 7.658 4.731 11.031 9.900 September 7.740 7.835 7.576 7.771 7.835 4.793 11.031 9.900 October 7.916 7.813 7.559 7.916 7.812 4.793 11.031 9.900 November 8.064 7.936 7.559 8.065 7.937 4.793 11.031 9.900 December 8.089 8.179 7.509 8.089 8.179 4.793 11.031 9.900 ___________________________________________________________________________________________________________________________ NOTE: + The exchange rate figures are period averages. SOURCE: IMF, IFS Supplement on Exchange Rates No.9, 1985.

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1971 war, but Bangladesh did not coordinate its demonetisation with Pakistan and left it until ten days later. In the intervening period, large amounts of Pakistani currency were smuggled into Bangladesh and huge profits were made by exchanging it for legal tender before the deadline expired. The loser was the Bangladesh economy, and the profits were shared amongst a number of Bangladeshis, Indians and Pakistanis who were able to exploit the Bangladesh government's inexperience in monetary policy

The above discussion on monetary issues establishes the point that in a war-ravaged economy, the circulation of money (official, foreign and counterfeit) was excessive during the first year of independence. It has been explained in Hossain (1999) that such monetary expansion was largely exogenous. The excessive money supply created the classic symptom of high or hyperinflation that: "too much money chasing too few goods". Once inflation took-off in 1972 and then was sustained in 1973, inflationary expectations were built up as the people lost confidence in the ability of the government to stabilise the economy. High inflationary expectations lowered money demand sharply and created an

explosive inflationary situation by the time the famine occurred in 1974. This explains why, although the money supply growth rate decelerated during the years of 1973 and 1974, the velocity of money increased rapidly and that fuelled the inflationary fire. Siddique (1975), in a statistical study, showed that inflationary expectations caused the sharp rise in the velocity of money from the mid-1973.4 (d) Supply Shocks There were a series of domestic and external supply shocks that affected the Bangladesh economy during the period 1971 to 1974. A contentious issue is whether these shocks were the primary source of inflation during the above period. Note that this is part of an old debate on the issue whether there exists a stable relationship between supply shocks and inflation (Hossain, 1989). As Bangladesh remains predominantly an agricultural country and its agriculture faces frequent adverse supply shocks, one's natural inclination is to link such shocks with inflation. This is not necessarily always correct. Given the importance of this issue in the present context, it will be investigated here on a case-by-case basis from an historical perspective. Floods and droughts are part of Bangladesh's agriculture. Adverse agricultural supply shocks generally lower agricultural production and raise the relative price of agricultural products, albeit temporarily. Subsequent good harvests within a year or so moderate or reverse the rise

TABLE 4 LOSS OF RICE CROP OUTPUT BY FLOODS AND DROUGHTS, BANGLADESH, 1970-1977 Year Rice Production Flood and Drought Loss (Million Tons) Million Tons % of Potential Production ___________________________________________________________________________________________ 1970 11.82 0.22 1.83 1971 10.97 1.95 15.09 1972 9.79 0.31 3.07 1973 9.93 0.25 2.46 1974 11.72 0.65 5.25 1975 11.11 1.54 12.17 1976 12.56 0.16 1.26 1977 11.57 0.95 7.59 Average 11.18 0.75 6.09 ___________________________________________________________________________________________ NOTE: Potential rice production = rice production plus flood and drought loss.

TABLE 5 IMPORT OF FOODGRAINS, BANGLADESH, 1970/71-1974/75 __________________________________________________________________________________________________ Year Import of Food Import as Per Cent Foodgrains Gap of Food Requirement __________________________________________________________________________________________________ 1971-1972 1688 1800 15.9 1972-1973 2825 1423 25.9 1973-1974 1667 506 14.9 1974-1975 2290 1062 19.9 __________________________________________________________________________________________________ NOTES: + Figures for the import of foodgrains and food gap are in thousand tons. ++ Food gap equals food requirement less net output. SOURCE: Alamgir (1980:221).

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in agricultural prices. Unless the agricultural supply shocks are devastating for all the crops harvested throughout the year (a rare phenomenon!), the prices of all farm products are unlikely to rise simultaneously to have a significant impact on the general price level. Historical experience shows that as major agricultural supply shocks are few and far between, there does not exist a stable relationship between such shocks and inflation. For example, despite occasional food crop failures, there were not even two years in a row with high inflation in Bangladesh during the 1950s and 1960s. Fluctuations of crop prices, rather than inflation, were the major problem for the rural people in Bangladesh (Hossain, 1989). Papanek (1981) suggests that, despite large crop price fluctuations, there were two reasons behind the overall price stability in United Pakistan. First, inflationary expectations were not built up in the minds of the people. Second, the government maintained a conservative monetary and fiscal policy with the explicit aim of maintaining price stability. The following discussion will reveal that food crop-damage by floods and droughts was not the primary source of Bangladesh's inflation during the period 1972 to 1975. Table 4 shows that the average annual food crop loss by floods and droughts was about 6 per cent during the period 1970 to 1977. The question is whether a food crop loss of this magnitude was the primary source of high inflation during the period 1972 to 1974. Note that the rice crop loss due to floods and droughts was unusual in two years (that is, 1971 and 1975). The point of contention is whether a 15 per cent loss of rice crop output during 1971 had a flow-on effect on the general price level in subsequent years. To begin, even a staple food crop loss by a natural disaster does not necessarily lead to inflation. In an open economy, food items can be imported to fill in food gaps. This usually happened during the 1950s and 1960s when the government imported foodgrain under foreign aid programs. As Alamgir (1980) points out, the 1971 crop loss was also mitigated by imported foodgrain under food aid programs during the first two years of independence. Table 5 shows

that the volume of imported foodgrain was actually higher than the food gap for all but one year during the period 1971 to 1975. Although the volume of food imports during 1971/72 was smaller than the food gap by 112 thousand tons, the volume of food imports during the next year exceeded the food gap by 1412 thousand tons. Even the volumes of food imports during the next two years were higher than the corresponding food gaps. This explains why food prices were relatively stable during the years of 1972 and 1973 (Table 6). It is somewhat ironic for those who expected a famine after the Independence War that the food prices were stable during 1972-1973. Bose (1972) went a step further and came up with the idea that the potential famine of Bangladesh during 1971/72 was actually "exported to India". He also made the observation that, contrary to popular views, Bangladesh's agriculture did not suffer much from the Pakistani military intervention: ... the total foodgrain saving in

Bangla Desh resulting from the massive killing of people by the Pakistan armed forces and the exodus of millions as refugees amounted to at least 0.50 million tons for the period under consideration. The quantity is nearly one half of the annual foodgrain imports to Bangla Desh in recent years. Thus a potential famine in Bangla Desh has been "exported" to India.

Agriculture has also suffered

to some extent due to the reign of army terror and destruction in the countryside and the breakdown in the supply of certain inputs like fertilisers and insecticides from urban areas. But the economy has withstood the ravages of war largely because it has been mainly a subsistence type agricultural economy with barely 8 per cent (5.2 per cent

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according to 1961 census) of the population living in urban areas, and dependence of agricultural production on industrial inputs has been only marginal. Therefore, the level of economic activity in rural areas has not drastically declined and employment and income of the very poor, mainly wage earning people in the countryside has not suffered as much as one would otherwise imagine. Also considerable depletion of population in most areas has tended to increase employment for those who remained.

It is wrong to assume that in a

labour surplus agriculture depletion of a certain proportion of population in various localities necessarily causes labour shortage and decline in agricultural production (Bose, 1972:299,303,306).

In short, although the 1971 food crop loss was unusual, it did not have a significant flow-on effect on food prices during the years of 1972 and 1973. Table 4 shows the randomness of crop damage by floods and droughts. For example, after the large shock in 1971, the average annual damage of rice production by floods and droughts was just 3.6 per cent for the next three years (1972-1974). A crop loss of this magnitude can be considered usual for Bangladesh, in the sense that its effects on prices and other macroeconomic variables are unlikely to be significant. Like the 1971 food crop damage, it was during 1974/75 that food crop loss by floods and droughts was high at about 12 per cent. As indicated earlier, the floods of 1974 occurred during the months of June to September and peaked during the months of August to September (Etienne, 1977). Although these floods damaged food crops and destroyed employment opportunities for rural workers,

they do not fit well with the sharp rise in the relative price of food that started as early as January/February 1974 (Table 6). When all these points are put together, it is difficult to establish a stable relationship between floods and inflation in Bangladesh during the period 1972 to 1975. This does not, however, mean that these and other shocks, namely the OPEC oil shock in September 1973, did not have some impact on the general price level. They jointly and individually created economic uncertainties, raised price expectations and contributed to inflation in 1974. But they were unlikely to be the primary source of inflation that was ignited in1972.

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IV. THE RISE IN THE RELATIVE PRICE OF FOOD

It is widely accepted that the immediate cause of the famine was the sharp rise in the relative price of food during 1974. One contentious issue is why did the price of food rise when the per-capita availability of food was higher in 1974 compared with that in the preceding years

of 1972 and 1973? There was a relatively good Aman harvest of 6.7 million tons during the months of November 1973 to January 1974 compared with the harvest of this food crop of 5.6 million tons in the previous year. Nevertheless the relative price of food started to rise in the open market immediately after the harvesting season. The food price continued to rise until it reached the peak in March 1975. Thereafter food prices stabilised but dropped only when the government was overthrown by a military coup on 15 August 1975 (Table 6). An investigation of factors that might have caused the famine is thus considered by many as equivalent to an investigation of factors that

raised the relative price of food. At the official level, there were four reasons for the rise in the relative price of food during 1974. First, floods and droughts caused heavy losses of food crops and raised their prices. Second, facing a shortage of foreign exchange, the government was unable to import foodgrains to fill in the food gap created by floods. Third, the US government, for political

reasons, cut off food aid under PL-480 during the crucial month of September in 1974. This led to speculative hoarding and caused the food crisis. Fourth, food prices in international markets rose sharply, causing a rise in domestic food prices. Even though there are elements of truth in each of these explanations of the food crisis, they do not tell the whole story. First, Amartya Sen and others, for example, have shown that the per-capita availability of food during 1974 was higher (despite floods and droughts) than that in the preceding years of 1972 and 1973. This suggests that the loss of food crops by floods was not large enough to lower the level of food

TABLE 6 THE RELATIVE PRICE OF FOOD, BANGLADESH, 1973M1-1975M12 __________________________________________________________________________________________________ 100x(FPI/CPI) 100x(RPR/WP) 1972 1973 1974 1975 1973 1974 1975 __________________________________________________________________________________________________ January 102.3 104.3 119.1 95.8 103.7 187.8 February 100.6 101.4 116.2 102.2 104.2 181.0 March 100.8 102.1 113.7 112.8 109.8 182.3 April 100.5 103.9 110.1 130.4 124.6 170.4 May 99.3 103.8 107.3 135.9 117.2 167.1 June 104.8 99.6 107.8 107.6 130.3 124.4 162.4 July 104.1 107.4 107.8 108.9 119.9 137.4 157.8 August 107.3 104.5 112.2 106.4 116.6 152.9 147.3 September 109.1 105.2 118.3 106.6 115.1 147.4 130.2 October 109.9 113.0 121.9 105.8 117.2 156.2 125.6 November 106.9 104.4 122.3 83.7 109.8 169.3 131.7 December 105.9 105.1 122.8 101.0 102.1 169.7 127.2 __________________________________________________________________________________________________ NOTE: + CPI is the consumer price index for middle class government employees in Dhaka; FPI is the food price

index for middle class government employees in Dhaka; RPR is the unweighted average of the indices of retail prices of coarse quality rice in Dhaka, Chittagong and Rajshahi; and WP is the wholesale price index in Bangladesh.

SOURCES: Author's computation based on the Bangladesh Bank Bulletin (December, 1973) and the Economic Indicators of Bangladesh (various issues).

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availability to such a level that would have caused the sharp rise in the relative price of food. As indicated earlier, there was also mismatch between the time when floods occurred and the time when food prices started to rise. Second, there was no convincing economic explanation from the government why the balance of payments crisis developed in the first place. Third, by the time the US government made the decision to cut-off food aid to Bangladesh, the country was already in the grip of famine. It is explained below why the arrival of about 20 thousand tons of foodgrains without interruption would have made little difference to the suffering of the rural poor. Fourth, Ravallion (1987) has examined whether food prices in the domestic markets of Bangladesh were insulated from those of world markets. He has drawn the following conclusion based on his test results for the 36 months from July 1972 to June 1975:

... domestic markets in Bangladesh were effectively segmented from world markets during this period. The domestic price instability is not attributable to conditions in foreign markets [Ravallion, 1987:95].

The remainder of this section provides an explanation for the rise in the relative price of food within a macroeconomic framework.5 It incorporates the impact of floods on food prices primarily through price expectations and also investigates two contentious issues, namely, the hoarding and smuggling of foodgrains. The latter issues are crucial in understanding the mechanisms through which some manageable economic problems turned into an economic disaster. (a) Hoarding of Foodgrains It was not the aggregate availability of foodgrains per se but the actual demand for and supply of foodgrains in the open market that determined the price of food during or prior to the famine. On the demand side of the food

market, there were a number of factors behind the precautionary and speculative demand for foodgrains, namely: economic uncertainties in the midst of high inflation, a deteriorating law and order situation, massive corruption, and the lack of confidence of the people in the ability of the government to stabilise the economy. Having faced an uncertain economic situation, consumers (as a precautionary measure) bought more foodgrains than what they needed for present consumption. It is, however, to be noted that although the rich and middle class consumers were able to realise their increased precautionary demand for foodgrains, the poor consumers (due to liquidity constraints) were able to realise only a portion of their increased demand for foodgrains. This was generally achieved by switching demand from non-food items to food items, given that their real income remained constant if not decreased. Along with consumers who hoarded foodgrains for future consumption, speculators hoarded large quantities of foodgrains when they anticipated a sharp rise in the price of food (Alamgir, 1980). Many of these hoarders and speculators belonged to the nouveau riche class who made their fortunes through various means (legal and illegal), namely government licenses, permits, rations, and extortions. Many other types of corrupt activities flourished after the independence of the country (Barua, 1978; Maniruzzaman, 1980). Thus people with political connections and/or access to resources of the state were able to make fortunes. They were also in a position to consolidate their economic positions through hoarding of foodgrains (Lifschultz, 1974a,b). The situation deteriorated further when bona fide rice traders in big cities started the speculative hoarding of foodgrains in an anticipation of the food crisis. Their expectations of food prices were based primarily on the actual or potential damage that was caused to food crops by floods. As the country had only a limited amount of foreign exchange reserve, rice traders were generally pessimistic about the ability of the government to import foodgrains to the extent necessary to fill in the food gap. Ravallion (1987) has studied the behaviour of rice traders in Dhaka

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and showed how the price forecasting errors of them led to excessive hoarding. On the supply side of the food market, both rice traders and farmers released less foodgrains in the open market. When the food crisis developed, the leakage of foodgrains from the official rationing system into the open market also dried up. Note that when the economic condition was relatively normal, the affluent recipients of foodgrains from the urban rationing system used to sell such foodgrains in the open market and reaped a handsome premium. This kept the open food market stable by increasing the aggregate supply of food. When everybody was expecting a sharp rise in the price of food, the affluent recipients of foodgrains from the rationing system stopped releasing rationed foodgrains into the open market in an anticipation of even higher food prices in the future. Looking from both the demand and supply sides of the food market, it thus appears that the food crisis was essentially a self-fulfilling prophecy. While the behaviour of all participants in the food market was rational from an individual's viewpoint, their joint action caused panic in the food market.6 The food price rose sharply when rising inflationary expectations raised the demand for food while the supply of food decreased as farmers and traders released less food in the market. By the time floods engulfed the country, there was a consumer panic. After that it did not take much time for consumers and hoarders to empty the food market. This was the time when food prices reached such a high level that it was beyond the purchasing power of the rural poor or unemployed. (b) Smuggling of Foodgrains Along with precautionary and speculative hoarding, the smuggling of foodgrains to India by "anti-state elements" was part of the official explanation of food crisis during 1974. There was, however, no economic explanation for why foodgrains were smuggled out when there were apparent food shortages within the country. On the question of the volume of smuggling of foodgrains, there are two schools

of thought. The widely accepted view is that there was a large scale smuggling of foodgrains to India since Bangladesh gained independence. Over time, this dwindled the food stock and caused the food crisis by the time famine occurred (Alamgir, 1980; Ahmad, 1984; Maniruzzaman, 1980). An alternative view is that as food prices in India were lower vis-à-vis those in Bangladesh during or prior to the famine, it does not make sense to suggest that there was a large scale smuggling of foodgrains to India. Citing a survey study by Reddaway and Rahman (1975), Sen (1981) appears to be supportive of this latter view. Although Sen was correct to raise a valid theoretical point, he did not go into depth to find out if there were any other reasons behind the smuggling of foodgrains, raw jute, and other essential products. To begin, it is to be noted that the smuggling of essential products from Bangladesh to India was not necessarily a normal commercial transaction based on the price differentials of those products between these countries. In all intents and purposes smuggling was a conduit of capital flight from Bangladesh to India. Rahim (1973:8) provided this interpretation immediately after independence:

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In a two-way flow of smuggling, the composition of goods availability may change without altering the total availability. However, ... the form of smuggling that we have been experiencing in Bangladesh is not really in the form of illegal trade rather in capital flight. It is suggested that huge Bangladesh currency notes are being smuggled to foreign countries and sold at a discount. These currency notes are subsequently used for purchasing goods from Bangladesh resulting in an one-way outflow of goods from Bangladesh to abroad.

There were at least two groups of people who were engaged in capital flight from Bangladesh during the early 1970s. First, as already indicated, a section of the interlocking political and business elite amassed large fortunes through all types of illegal practices that flourished in a heavily regulated economy (Maniruzzaman, 1980; Islam, 1985). The nouveau riche class did not have investment opportunities within the country so that they could legitimise their fortunes. Islam (1977) points out that this was one of the reasons why the government gradually relaxed the prohibition of large-scale investment in the private sector under a socialist model of development. However, not many people took the opportunity to invest within the country. Many of them became too concerned about the security of their newly accumulated wealth, even though they had political connections and virtual "immunity from prosecution". When the country plunged into anarchy, various left-leaning armed political activists exposed the illegal activities of elites in the society (Barua, 1978; Maniruzzaman, 1980). This created further psychological pressure on the nouveau riche class (if not a mortal fear) and led them to transfer capital to India as a perfect destination. Second, the minority Hindu community in Bangladesh remained insecure, even after the country's independence, as the law and order

situation deteriorated rapidly. Most of them lost their property during the early phase of the Independence War to the hands of people who either supported the Pakistani military or just took advantage of the military's policy of "elimination" of the Hindu community. After the independence of the country, the newly established political elite (and its supporters) either grabbed or attempted to grab whatever properties were left to this weak and vulnerable section of the community. Consequently, many Hindu community members sold their properties with a heavy discount and remitted funds to India. Such capital flight was either part of their decision to emigrate to India or to create a safety nest for the future under the supervision of their relations who might have settled in that country much earlier. For both these groups of people involved in capital flight, the trouble was to find a channel through which they could transfer funds without hassle or detection. Private capital outflows were officially prohibited. Foreign currencies (except the Indian currency notes that were used for transactions within Bangladesh) were not readily available even in black markets. As both exporting and importing trade were conducted mostly by the state bodies, the scope for either underinvoicing of exports or overinvoicing of imports was not wide open for private individuals. Other mechanisms of capital flight, such as inflated overseas medical bills and educational expenses and funds for foreign travel, were available only to a limited extent. Having faced such practical difficulties in transferring capital, the main option remaining for asset-holders was to smuggle out the taka notes (and precious metals) into India where there were active black markets for those currency notes and precious metals. Private money-changers in India generally converted the taka notes into the Indian currency with a heavy discount. They, in turn, sold the taka notes to smugglers who purchased those essential products from Bangladesh that had excess demand in India. This was the common mechanism for capital flight from Bangladesh to India, and it satisfied the interests of all parties concerned. This also explains why

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foodgrains were smuggled out from Bangladesh into India even when the food price differential was not large enough to induce such smuggling during or prior to the famine. Alamgir (1980) points out that smuggling was done by big operators who collected rice at places inland and moved it across the border by boats, barges, trucks and so forth. Many political leaders and their supporters were actively involved in the smuggling of foodgrains, raw jute and other products with the connivance of police and other law-enforcing authorities. The following quote from Ravallion (1987:78-79) is revealing: ... the government's use of

military action against hoarders and smugglers in May 1974 was soon terminated when the army apprehended numerous members of the Awami League (Maniruzzaman, 1975). By late 1974, many observers, including the Finance Minister, Tajuddin Ahmed, claimed that the famine was as much the result of the government's activities as of bad weather.

(c) Politics of Food Aid Many authors, such as Ravallion (1997), Sobhan (1978) and Taslim (1998), have emphasised that the withholding of food aid to Bangladesh by the US government, for political reasons, during the critical months of food shortage contributed to the famine. The cut-off of food aid at a time when the country was devastated by floods raised inflationary expectations and caused economic uncertainties that induced the precautionary and speculative hoarding of foodgrains. While the American action was deplorable, it is however an exaggeration to claim that the threat to cut off food aid of about 20 thousand tons in September 1974 was the prime cause of famine. This was just one among many other factors that raised food prices by raising price expectations and creating economic uncertainties. As already discussed, the process of famine started when inflation took off in

1972 due to indisciplined monetary and fiscal policy. Moreover, a deteriorating law and order situation and the rapid growth of "black money" were linked with the smuggling and hoarding of foodgrains. By the time famine struck the nation, the situation was so explosive and volatile that there would have been little difference to the suffering of the rural poor even if the US food aid arrived without an interruption. The government officially declared famine in late September, but some langarkhanas (free food for destitute centres) were already opened in early September under private initiatives (Sen, 1981). The people were on "famine diet" as early as March 1974. Following is a quote from Alamgir (1980:119,128,129) that gives a vivid picture of unfolding of the tragedy: ... by the end of March

1974, leading newspapers in the country were reporting that people were eating alternative "famine foods". It was also reported that begging and promiscuity were increasing. Lack of food and employment was forcing people to leave villages for cities and towns... The usual response of the government was either that the reported worsening of the food situation was exaggerated or that there was no reason for undue alarm since the administration was in full command of the situation... By the end of August, the whole of Bangladesh turned into an agonizing spectacle of confusion and human suffering. With the addition of flood, it was 1943 re-enacted. Streams of hungry people (men, women, and children), who were nothing but skeletons, trekked into towns in search of food... Long travels had depleted

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the victims' energy even further and after a few days of "wandering" around the streets of the city they simply collapsed and died.... It seemed flood had provided an excellent excuse to the administration to escape its own responsibility in the handling of food crisis and its failure to avert the famine.

(d) Balance-of-Payments Crisis One of the correlates of the famine was the inability of the government to import foodgrains due to a foreign exchange constraint. The point which has been emphasised repeatedly is that it was not the shortage of foodgrains per se that caused the food crisis. The major problems were the misgovernance of the state and the populist nature of economic policies. Despite the adequate availability of food within the country, the government was unable to stabilise the food market because the people lost confidence in the government's ability to stabilise the economy. There is little doubt that a large scale import of foodgrains by the government would have stabilised the food market. However, to be realistic, not many poor countries have command over large foreign resources that enable them to import whatever they need to meet domestic production shortfalls. Both sound economic policies and economic planning and strategies dealing with shocks are crucial for macroeconomic management. For Bangladesh, a key question is why the foreign exchange crisis developed in the first place. A review of exchange rate policy would reveal that Bangladesh's balance of payments crisis was primarily the consequence of indisciplined economic policies. The grossly overvalued real exchange rate created by its high inflation vis-à-vis that of its trading partners created unsustainable trade deficits. In the absence of adequate capital inflows, sustained trade

deficits dwindled foreign exchange reserves. From an analytical perspective, the fixed exchange rate system that Bangladesh adopted was simply incompatible with its expansionary economic policies. The main point, that an overvalued currency created the balance of payments crisis, can be explained using the example of raw jute. Raw jute was the major export item of Bangladesh during the early years of independence. The smuggling of this item to India sharply reduced Bangladesh's export earnings. For example, the volume of raw jute export in 1970 was 35 lakhs of bales that reduced to just 15.5 lakhs of bales during 1974/1975 (Ahmed, 1984; Hossain, 1989; Maniruzzaman, 1980). What was the cause of smuggling of raw jute to India? Was it a purely law and order problem as many commentators would like to suggest? As indicated earlier, the deteriorating law and order situation was partly behind capital flight in which raw jute acted as a conduit. But the exchange rate arrangements of Bangladesh with India were much to blame for the decline of official export earnings. Recall that given the official parity between the taka and the Indian rupee, the taka became grossly overvalued with the Indian rupee because inflation in Bangladesh was around four times higher than that in India during the period 1972 to 1975 (Hossain and Rashid, 1996). The overvalued exchange rate of the taka created disincentives to jute growers (thereby reduced jute acreage/production) and also provided incentives for the smuggling of raw jute to India (Lifschultz, 1974a). A similar explanation was given by Ahmed (1984), Hagen (1973), Wright (1988) and others. Thus, in short, the inability of the government to import foodgrains cannot be considered a sudden random event that occurred only during 1974. It was the consequence of both economic policies and the fixed exchange rate arrangements that were in place since 1972. (e) Empirical Results The earlier sections suggest that excess money supply caused inflation. As the increase in the general price level was associated with a rise in the relative price of food, it is possible to argue

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that the factors which increased the price level might have raised the relative price of food. In order to find out whether the money supply growth rate contributed to the growth of the relative price of food, the following regression equation has been used for estimation purposes: ∆ln (FPI/CPI)t = α0 + Σβi ∆ln Mj t-i + Σηi ln FOt-i + Σλi ln CDt-i + Σψi ln FMt-i + υt (i = 0,1,2..;j = 1,2)(6) where FPI is the food price index, CPI is the consumer price index, Mj is the stock of narrow or broad money, FO is the off-take of foodgrains from government stocks through the rationing system, FM is imported foodgrains, CD is a measure of crop damage by floods and other natural causes, and υ is a random error term that captures the effects of random factors, including economic growth. The expected signs of the parameters are as follows: βi>0, ηi<0, λi>0 and ψi<0. Given the availability of data, this equation has been estimated for the period 1972M8 to 1975M8. After experimenting with the general form of the specification with at least two lagged terms, the estimated equations reported in Table 7 have been found to fit the data best. The regression results in Table 7 show that the coefficients of current and one period lagged money supply growth bear a positive sign and are significant at the 5 or 10 per cent level. This suggests that the growth rate of the money supply raised the relative price of food. Note that these results are somewhat different from those of Ravallion (1987) who did not find a significant impact of the money supply growth on the price of food. The coefficients of crop damage and food imports bear their expected signs, but only the coefficient of food imports is significant. This shows that a rise in food imports had a dampening effect on the relative price of food. V. AGRICULTURAL WAGES AND EMPLOYMENT Like the Bengal famine of 1943, the Bangladesh famine of 1974 was essentially a

rural phenomenon. Alamgir (1980:14) calls it a class famine, in the sense that "the burden of foodgrain intake deficiency per-capita and excess mortality falls primarily on the weaker sections of the population with little staying power". The famine victims included mainly the assetless rural poor, namely wage labourers, transport workers, village craftsmen, and petty traders. The wage labourers became famine victims when their wage incomes decreased sharply due to the simultaneous decline in both the wage rate and employment. Moreover the sharp rise in the relative price of food lowered the food purchasing power of their wage incomes. On the basis of a famine survey by the Bangladesh Institute of Development Studies, Alamgir (1980) estimated the decrease in the level of rural employment between July-October 1973 and July-October 1974. Table 8 shows that the level of employment of landless labourers decreased sharply in the famine area. This decrease in the level of employment was due to a decrease in demand for wage labour. The question is why the level of employment fell despite a decrease in the real wage rate. Chadha and Teja (1989) suggest that the rise in involuntary unemployment during the famine was caused by the unwillingness of employers to hire workers at a very low real wage rate because the low real wage rate meant the possibility of undernourishment and of low work effort of workers. This explanation for the decrease in labour demand is not satisfactory. The efficiency wage theory has been found inconsistent with empirical evidence from both Bangladesh and India (Ahmed, 1981; Bardhan, 1984; Binswanger and Rosenzweig, 1984). Ravallion (1987) suggests that the efficiency wage theory was also inconsistent with empirical evidence from Bangladesh during the famine. The explanation which comes closest to reality is that the rise in involuntary rural unemployment during the famine was the consequence of a series of supply shocks of different magnitude beginning from 1971 up to 1974. These supply shocks had a cumulative adverse effect on both farm and non-farm activities. The immediate shock was the country-wide flood in

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1974 that damaged major crops and lowered the employment opportunities of wage labourers. As most non-farm activities in rural areas were linked with farm activities, the decrease in farm activities had a flow on effect on non-farm activities. This lowered employment opportunities for various service providers, namely village craftsmen, petty traders, and transport workers.

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TABLE 7 REGRESSION RESULTS OF THE GROWTH OF RELATIVE PRICE OF FOOD (∆∆∆∆ln (FPI/CPI) __________________________________________________________________________________________________ (With M1) (With M2) __________________________________________________________________________________________________ C -0.03 -0.03 (0.47) (0.53) ∆ln M1t 0.18 (1.96) ∆ln M2t 0.21 (2.05) ∆ln M1t-1 0.20 (2.28) ∆ln M2t-1 0.18 (1.69) ln FIMt -0.01 -0.01 (2.89) (2.67) ln CDt 0.02 (0.02) (1.31) (1.35) Seasonal dummies R2 0.44 0.41 DW 1.83 1.66 Sample Period 1972M8-75M8 1972M8-75M8 Diagnostics: A:Serial Correlation:F(12,10) 1.04 0.79 B: Functional form: F(1,21) 1.42 3.48 C: Normality: X2(2) 2.41 2.67 D: Heteroskedasticity: F(1,36) 0.01 1.16 F-test (Ho: ββββ0 = ββββ1 = 0) F(2,22)= 4.02 F(2,22)=3.32 __________________________________________________________________________________________________ NOTES: + R2 is the adjusted coefficient of determination, DW is the Durbin-Watson statistic and the figures in parenthesis are absolute t-ratios. ++ The equation was also estimated in disequilibrium form. The coefficient of the lagged dependent variable has been found insignificant while the

coefficients of all other variables were found to remain broadly unchanged. DATA SOURCES: See Data Appendix.

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When the economic condition began to deteriorate, the rich and medium farmers experienced the pressure of actual or perceived economic stress. Facing economic distress, they reacted in two ways. First, as a cost cutting measure, they used family labour more intensively for farm activities that would otherwise have been done by wage labourers. Such a substitution of family labour for wage labour lowered the demand for wage labour. Second, most non-essential farm and non-farm activities were deferred until the economic condition had improved.7

On the supply side, the sharp rise in the relative price of food increased the supply of wage labour for two reasons. First, the decrease of the "food wage rate" was associated with the decrease of the reservation wage rate of wage labourers and, for survival, they offered more labour for sale. Second, new workers (children, destitute women and the old) entered the labour market under economic distress. In short, the simultaneous decline in the real wage rate and employment under economic stress was not necessarily a case of complete market failure; rather, it manifested the "perverse behaviour" of workers under economic distress. VI. POLITICS OF FOOD DISTRIBUTION Famine becomes a greater tragedy when the government of a famine-struck country fails to act as an honest distributor of available food among the most needy. It is generally the case that the government which presides over a famine does not remain above the politics of food distribution. Even during the crisis,

politicians in power serve their own interests by sharing resources with those groups of people who need them the least for survival. For example, as the modern state machinery is located in cities, the city residents are generally protected at any cost. This makes famine a rural phenomenon. The Bangladesh government's famine relief efforts were limited and unorganised. The government was inadequately prepared to face the challenge. As it happened during the 1943 famine, the rural rich people remained unscathed from the 1974 famine. Most food surplus farmers indeed benefited from the food crisis. For example, for political reasons, there were not much efforts from the government for domestic food procurement from surplus farmers through the existing levy system. As Alamgir (1980) suggests, the government's domestic food procurement program was a "dismal failure". When the misfortune hit the nation, the urban food politics got priority over the suffering of rural masses. Whatever happened to the rural community, the government ensured subsidised food to all the urban people on a priority basis through the rationing system (Sobhan, 1978). To begin, whatever might have been the original rationale behind the introduction of food rationing in Bengal during the 1940s, it later turned out to be an arm of political-patronage and favour. The political objective of the Bangladesh government behind the continuation of food rationing became apparent the way it allowed the distribution of foodgrains during the famine (Lifschultz, 1974b). The food rationing was also an inherently

TABLE 8 PERCENTAGE DECLINE IN EMPLOYMENT OF HIRED LABOURERS BETWEEN JULY-OCTOBER 1973 AND JULY-OCTOBER 1974

__________________________________________________________________________________________________ Area Landowners Landless labourers All villagers __________________________________________________________________________________________________ All area 5.0 18.7 4.6 Famine area 33.9 34.5 24.5 Non-famine area -7.7 6.4 -2.4 __________________________________________________________________________________________________ SOURCE: Alamgir (1980:346).

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corrupt system. As the differential between the market and ration prices of foodgrains was large, most ration dealers, political touts, and urban dwellers used the rationing system as a milch cow. At the time when the government's food stock was reduced to a minimum, there was a proliferation of bogus ration cards for households that never existed. In addition, the inclusion of fictitious names in existing ration cards created an additional demand for rationed foodgrains and other essentials. When food prices started to rise sharply in open markets, the whole establishment directly or indirectly connected with the rationing of food and other essentials made a fortune. By the time food crisis developed, food distribution through the rationing system became too chaotic to trace leakages. For example, it was a common knowledge that at least 50 per cent of whatever small quantities of foodgrains were allocated for distribution among the rural poor through the rationing system went missing or ended up in the hands of hoarders and smugglers. This made ration dealers the most fortunate people. Given the political atmosphere, they generally operated under the protection of political touts linked with the ruling party. This explains why the US food aid, if it had arrived uninterrupted, might have been distributed among lucky urban-dwellers and/or ended up in the hands of hoarders, speculators and smugglers, and would have had little impact on the situation of those who suffered most. VII. SUMMARY AND POLICY IMPLICATIONS This paper has investigated (within Sen's entitlement approach) aspects of key economic events that led to the 1974 Bangladesh famine. To begin with, this famine was not caused by a sudden decline in the aggregate availability of food by natural disasters. The process of famine started in 1972 when inflation took off in an otherwise price stable country. By the time inflation exploded in 1974 a large section of the rural people belonging to the lower middle class had already slid downward into the poverty trap. Their exchange entitlement failed when rural employment opportunities decreased due to floods and food prices rose sharply due to the precautionary and speculative hoarding

of foodgrains. An investigation of the sources of inflation suggests that rapid money supply growth, along with large quantities of counterfeit and foreign currencies in circulation, created the classic symptom of high or hyperinflation: "too much money chasing too few goods". In a war-ravaged economy a sudden explosive growth of the money supply in 1972 accelerated inflation that year. Although inflation decelerated in 1973, it remained at a high level. Inflationary expectations were then built up when the people lost confidence in the ability of the government to stabilise the economy. High inflationary expectations lowered money demand and created an explosive inflationary situation by the time the famine occurred. While the high rates of inflation over three years created the environment for an economic disaster, the immediate cause of the famine was the sharp rise in the relative price of food. It has been found that the money supply growth rate contributed to the growth rate of the relative price of food. The rise in the relative price of food lowered the food purchasing power of wage incomes of rural workers and pushed them toward the famine trap, especially when floods destroyed their employment opportunities. On the basis of both empirical findings and the discussion on various economic and non-economic issues, it is possible to draw some policy implications within a broader perspective. First, in the absence of a strong political opposition and/or an effective Parliament, there remains a temptation on the part of government in a developing country to undertake populist macroeconomic policies in order to achieve short term political objectives. Populist policies are generally unsustainable and cause economic problems that ultimately hurt the very poor people in whose name those policies are undertaken in the first place. Second, neither hoarding nor smuggling of foodgrains is a pure law and order problem. They are the symptoms of macroeconomic imbalances, price distortions, market segmentation and, above all, the lack of confidence of the people in the ability of the government to stabilise the economy. A

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misunderstanding of the causes of hoarding and smuggling of foodgrains may lead to governmental actions that could be counter productive. Third, an inefficient, inflexible and unaccountable administrative system cannot handle a famine. A government that relies on the political support of interest groups and thrives on dispensing political and economic favours cannot also handle an economic disaster. Fourth, without freedom of speech and an independent media, it is difficult to mobilise the people against a government for not undertaking measures that may prevent a famine. Although Bangladesh had a newly framed constitution in which human rights, independent press, independent judiciary, and so on featured prominently, the reality was very different. The ordinary people were afraid to raise their voice against the government. With the exception of a few insignificant political party publications, the print media was owned and controlled by the government or its supporters. The electronic media was absolutely under the control of the government. The foreign press had limited access to information and its interest in publishing events in a less important country like Bangladesh was not that high (Ahmed, 1984; Barua, 1978; Maniruzzaman, 1980; Novak, 1993). In his 1981 book Amartya Sen was "circumspective" in his view on democracy in Bangladesh. He somewhat rectified it in his 1996 essay on the Bangladesh famine. In this essay he was right in speculating what could have happened if the country was blessed with a democratic government. Fifth, foreign economic dependence is an easy option for poor countries as their governments are unwilling to antagonise the economically and politically powerful interest groups for resource mobilisation. Such a dependency may work well when the time is good but can create a nasty situation when the interests of donors and recipients of aid do not match. The 1974 incident between the United States and Bangladesh was not an isolated event; similar incidents are common in international relations. One lesson from this sad episode is that for a poor country like Bangladesh, a superpower can be a master but would remain always an unreliable, unequal partner. Sixth, although natural disasters, such as floods and droughts,

cannot easily be avoided, they create a famine only when the employment opportunities of rural workers are destroyed. To sever the linkage between natural disasters and entitlement failures, there is a need for diversification of employment opportunities for rural workers. For example, the availability of employment opportunities for rural workers in small scale, labour-intensive rural industries that have forward linkages with the urban sector can neutralise or minimise any sudden loss of agricultural employment opportunities. Finally, famines are generally tragic magnifications of normal market and government failures. Building up of economic and political institutions for improved functioning of markets and ensuring government accountability are crucial to reducing the chances of famine. Weak social and physical infrastructure, weak unprepared government, and a relatively closed political regime, all enhance vulnerability to famine (Ravallion, 1997).

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NOTES *A longer version of this paper will appear as a chapter in my forthcoming book (Hossain, 1999). 1.The essence of this monetary hypothesis can be illustrated by invoking the real money market equilibrium condition: md(y,πe) = M/P, where md is real balances that can be considered an increasing function of real income (y) and a decreasing function of expected inflation (πe). When the money demand function takes a semi-logarithmic form, then the money market equilibrium condition can be expressed as: π = µ - ηy gy + ηp ∆πe, where π is the growth rate of the price level (P), µ is the growth rate of the money supply (M), ηy is the income elasticity of demand for money, gy is the growth rate of real income, ηp is the semi-elasticity of demand for money with respect to expected inflation and ∆πe is a change in expected inflation. This expression can be used to determine whether a certain money supply growth rate could be inflationary. 2. This decrease in the money supply was due to capital flight during the last phase of the Independence War when there was an exodus of West Pakistani people from Bangladesh and also many Bangladeshi people took refuge in India. 3. Most of these notes were later transferred to

India as capital flight. 4. This can be shown as follows. Let the velocity of money (Vm) be expressed as: Vm = y/f(y,πe), where y is real income and πe is expected inflation. Substitute this expression in the equation of exchange: M.[y/f(y,πe)] = Py, where M is the stock of money and P is the price level. This shows that, if both y and M remain constant, P becomes an increasing function of πe. See Mundell (1971) for a similar specification of the velocity of money. 5. Although Sen (1981) did not examine in detail the factors behind the sharp rise in the price of food, he has expressed his preference for a macroeconomic analysis of the food crisis.

6. Quddus and Rashid (1994:10) aptly put it: Food is a necessity. Consumers are

risk-averse, greatly so, when it comes to storable food. When the consumers expect prices to increase, they attempt to beat the higher prices by buying now. In the absence of a futures market, the only way to "cover" one's exposure to future higher food bills is to buy now in the spot market. This can be looked upon as a form of "self-insurance". Since other ways to reduce or transfer the risk are unavailable, the consumer uses the only alternative available: store food. Therefore, under these conditions, panic buying, hoarding, private storage, and withholding all can be considered "optimizing". Either expected profits are maximized, expected costs are being minimized, or risks are being optimized. Of course, when everyone acts in concert on similar expectations, a crisis develops.

. 7. The demand for all types of services in rural areas decreased sharply during the famine for the simple reason that they were not essential and were deferred until the situation became normal. When most people in the rural areas were worried about their own survival, the first thing that a potential user of a non-essential service had done was to stop its use altogether. It did not matter much whether the artisan in question was well-fed or not. The question of work effort comes only if an employer decides to employ someone in the first place. Sen (1981) correctly points out that the lack of employment opportunities were the reason for the decline in wages.

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DATA APPENDIX DEFINITIONS OF VARIABLES AND DATA SOURCES M1 = Stock of narrow money

(currency plus demand deposits, excluding inter-bank items). Millions of taka at current prices. Sources: Various issues of both the Economic Indicators of Bangladesh and the Bangladesh Bank Bulletin.

M2 = Stock of broad money

(currency plus demand deposits, excluding inter-bank items). Millions of taka at current prices. Sources: Various issues of both the Economic Indicators of Bangladesh and the Bangladesh Bank Bulletin.

CPI = Consumer price index for

middle class government employees in Dhaka city. Sources: Various issues of both Economic Trends and the Bangladesh Bank Bulletin.

FPI = Food price index for middle

class government employees in Dhaka city. Sources: Various issues of both Economic Trends and the Bangladesh Bank Bulletin.

FM = Imports of foodgrains (Tons).

Source: Alamgir (1980). FO = Offtake of foodgrains. Source:

Various issues of the Economic Indicators of Bangladesh.

CD = Crop damage by floods (The

Daily Ittefaq). Source: Ravallion (1987).

REFERENCES Ahmed, I. (1981), "Wage Determination in Bangladesh Agriculture", Oxford Economic Papers, Vol.33, No.2, pp.298-322. Ahmed, M. (1984), Bangladesh: Era of Sheikh Mujibur Rahman, Wiesbaden, Stenier. Ahsan, A.S.M.F. (1974), "A Supplementary Scheme for Controlling Inflation in Bangladesh", Bangladesh Bank Bulletin, Vol:12 (June), pp.1-9. Alamgir, M. (1980), Famine in South Asia: Political Economy of Mass Starvation, Cambridge, Massachusetts, Oelgeschlager, Gunn and Hain Publishers. Bangladesh Bank (various issues), Bangladesh Bank Bulletin, Dhaka. Bangladesh Bank (various issues), Economic Trends, Dhaka. Bangladesh Bank (various issues), Selected Economic Indicators, Dhaka Bangladesh Bureau of Statistics, Economic Indicators of Bangladesh, various issues. Bangladesh Bureau of Statistics (various issues), Monthly Statistical Bulletin of Bangladesh, Dhaka. Bangladesh Bureau of Statistics (1979), Statistical Pocketbook of Bangladesh, Dhaka. Bardhan, P. (1984), Land, Labor and Rural Poverty: Essays in Development Economics, Columbia University Press, New York. Barua, T.K. (1978), Political Elite in Bangladesh, Peter Lang, Bern.

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Binswanger, H. and M. Rosenzweig (1984), "Contractual Arrangements, Employment and Wages in Rural Labor Markets: A Critical Review," in Contractual Arrangements, Employment and Wages in Rural Labor Markets in Asia, Yale University Press, New Haven. Bose, S.R. (1972), "Foodgrain Availability and Possibilities of Famine in Bangla Desh", Economic and Political Weekly (February), 1972, pp.293-306. Bose, S.R. (1973), "The Price Situation in Bangladesh - A Preliminary Analysis", Bangladesh Economic Review, I,3, pp.243-268. Cagan, P. (1956), "The Monetary Dynamics of Hyperinflation". In Friedman, M. (ed.) Studies in the Quantity Theory of Money, Chicago University Press, Chicago. Chadha, B. and Teja, R. (1989), "Macroeconomics and Famine," Working Paper WP/89/25, International Monetary Fund, Washington, D.C. Etienne, G. (1977), Bangladesh: Development in Perspective, Geneva, Graduate Institute of International Studies. Hagen, T. (1978), Report on CORR Programme in Bangladesh, Vol. 1, Lucerne (mimeo), May, 1973. (Cited in Barua, p.118). Hendry, D., A. Pagan and J. Sargan (1984), "Dynamic Specification," in Z. Griliches and M. Intriligator (eds.), Handbook of Econometrics, North-Holland, Amsterdam. Hossain, A. (1989), Inflation, Economic Growth and the Balance of Payments in Bangladesh: A Macroeconometric Study, 1974-1985. PhD Thesis, School of Economics, La Trobe University, Australia. Hossain, A. (1999), Exchange Rates, International Economics and the Macroeconomic Performance of the Emerging Market Economy of Bangladesh , University Press Limited, Dhaka (in press).

Hossain, A. and Rashid, S. (1996), In Quest of Development: The Political Economy of South Asia, University Press Limited, Dhaka. IMF, IFS Yearbook (various years), Washington, D.C.. IMF, IFS Supplement on Price Statistics 1986, Washington, D.C. IMF, IFS Supplement on Exchange Rates No.9, 1985, Washington, D.C. Islam, N. (1977), Development Planning in Bangladesh: A Study in Political Economy, Hurst and Company, London. Islam, S.S. (1985), "The Role of the State in the Economic Development of Bangladesh During the Mujib Regime (1972-1975)," Journal of Developing Areas, XIX, 2, pp.185-208. Lifschultz, L. (1974a), "Bangladesh: A State of Siege", Far Eastern Economic Review, August 30, pp.47-51. Lifschultz, L. (1974b), "Reaping a Harvest of Misery" Far Eastern Economic Review, October 25, pp.29-30. Maniruzzaman, T. (1975), "Bangladesh in 1974: Economic Crisis and Political Polarization", Asian Survey, Vol.15, pp.117-128. Maniruzzaman, T. (1980), Bangladesh Revolution and Its Aftermath, Bangladesh Books International, Dhaka. Mundell, R. (1971), Monetary Theory, Goodyear Publishing Company, California. Novak, J. (1993), Bangladesh: Reflections on the Water, Indiana University Press, Bloomington. Papanek, G. (1981), "Comment" on Stabilization Policies in Pakistan: The 1970-77 Experience" by Guisinger. In Cline, W and Weintraub, S. (eds.) Economic Stabilization in Developing Countries, Brookings Institution,

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Washington, D.C.. Quddus, M. and S. Rashid (1994), "Some Myths About Disaster Management in Bangladesh," Asian Affairs, pp.5-17. Rahim, A.M.A.. (1973), "Some Aspects of Inflation Theories in the Context of Bangladesh," Bangladesh Bank Bulletin (September), pp.1-15. Ravallion, M. (1987), Markets and Famines, Oxford, Clarendon Press. Ravallion, M. (1997), "Famines and Economics", Journal of Economic Literature, XXXV (September), pp.1205-1242. Reddaway, W.B. and M. Rahman (1975), "The Scale of Smuggling out of Bangladesh", Research Report, New Series No.2, Bangladesh Institute of Development Studies, Dhaka. Sen, A.K. (1981), Poverty and Famines: An Essay on Entitlement and Deprivation, Oxford, Clarendon Press. Sen, A.K. (1996), "Famine as Alienation". In Abdullah, A. and Khan, A.R. (eds.) State, Market and Development, University Press Limited, Dhaka. Sharif, M. (1991), "Poverty and the Forward-Falling Labor Supply Function: A Microeconomic Analysis," World Development, Vol.19, No.8, pp.1075-1093. Siddique, A.K.M. (1975), "Money and Inflation in Bangladesh", Bangladesh Development Studies, Vol.3, No.1, pp.27-42. Sobhan, R. (1978), "Politics of Food and Famine in Bangladesh," Economic and Political Weekly, Vol.40, pp.1973-1980.

Taslim, M.A. (1998), “Macroeconomic Policies and Problems in Bangladesh During the Mujib Regime: A Comment”, Canadian Journal of Development Studies, Vol.19, No.2, pp.377-386. Wright, D. (1988), Bangladesh: Origins and Indian Ocean Relations, New Delhi, Sterling Publishers Private Limited. Revised: 26 October 1999

THE EMERGENCE OF MARKET-ORIENTED REFORMS IN BANGLADESH: A CRITICAL APPRAISAL

M. Faizul Islam,

Southeastern University, Washington, D.C.

Abstract This paper critically examines the emergence of market reforms since the mid 1970s. These reforms received increased attention in the 1990s. Forty percent of the country’s manufacturing assets and four major commercial banks, which are financially insolvent, are yet to be denationalized. The size of the government has increased. Foreign investment which has increased very recently, is being encouraged to develop the infrastructure, telecommunications, gas and power sectors. Lack of transparency, accountability, government’s determination, and investors’ enthusiasm, as well as political unrest and the opposition from labor unions are acting as impediments to market-based reforms in Bangladesh.

Introduction When most of the developing countries became liberated from colonial rule in the middle part of this century, it was a norm to adopt ‘ socialism’ as the most viable economic system. The conventional wisdom at the time was that socialism was the only mechanism through which economic justice could be delivered to the vast majority of the people. Bangladesh was no exception when it won independence in 1971. However, the belief about the merits of socialism was short-lived. There was a divergence between the principles and practices of socialism from the outset. Although the state became the owner of the major assets and resources of the economy, mismanagement, pilferage and corruption became rampant. Output and productivity were down, and losses began to soar. Socialism as promised or envisioned, failed to benefit the average person. In short, the common masses came to realize that under (the disguise of) socialism, they were worse off. With a change in the government, the weaknesses of socialism were confronted and reforms began to be introduced as early as 1976 with the denationalization of state-owned enterprises (SOEs). With the fall of the Berlin Wall in 1989, and as capitalism triumphed over the globe, market reforms in Bangladesh began to receive

increased attention. The experiences with the socialist experiment and the emergence of markets are discussed next. A survey of the literature is presented in section three. Section four presents the rationale and the march towards market reforms in Bangladesh. Section four concludes the paper. The Socialist Experiment and the Emergence

of Markets Centralized planning failed in allocating resources efficiently. The prices of goods and services were set by the government. As expected, these prices (and costs) did not reflect actual market conditions. The state- owned enterprises (SOEs) were also poorly managed--often by incompetent, inexperienced, and unqualified personnel. Unrealistic pricing and output targets were set without regard to market realities. As a result, the SOEs produced high priced, inferior products. Due to a lack of incentives and the presence of strong labor unions, productivity of labor was less than wage compensation. Furthermore, because of cost overruns and declining revenues, state enterprises were incurring huge losses. The government was compelled to subsidize these losses. Increased government intervention induced a higher level of corruption. which flourished for several reasons: 1) The public sector wages were

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so low that a family could not survive on a typical official’ s salary. Since wages were not performance-based, public officials’ incomes were not linked to what they produced. As such, a public official’ s only recourse was to create additional red tape and delays to induce bribery. 2) The distortions in the policy and regulatory regime created the atmosphere for corruption and the institutions of restraint were weak. 3) Kickbacks and bribery were pervasive and involved officials from top to bottom in the government. The public officials had wide discretion and little accountability and there was lack of transparency and enforcement of laws. The presence of corruption violated public trust and inhibited economic growth. When bribery became unpredictable, it made it difficult to estimate the costs. In order words, price failed to serve as a signaling mechanism. The failure of the state in managing the economy efficiently paved the way for the emergence of markets.

Survey of Literature Although the issue of market-oriented reforms in Bangladesh has drawn increased attention in the 1990s, the number of academic papers written on this topic is very limited. Akram (1999) provided a critical overview of the privatization policy in Bangladesh. The government’s stated current privatization policy is to augment the role of private sector in promoting economic development. In the paper, he presented the various methods of privatization by the government like international tendering, auctioning, negotiated sales, and employees stock option program (ESOP) of SOEs. The terms and conditions of sale and bank guarantees as stipulated by the government were spelled out. The criteria utilized in market valuation and tendering was laid out. It also provided the speed and time framework of privatization of SOEs as envisioned by the government. He pointed out that the present policies could be improved if, for example, the methods, terms, and

conditions of sale of the SOEs are modified, well defined and upheld. He cautioned that ESOPs as a method to dispose SOEs may be motivated by political expediency. If the goal of using ESOPs is to encourage employees to become owners, then the authorities should earmark a limited number of shares for purchase by the employees at a discount. In his paper, he also argued that discipline in the financial sector is a necessary condition for the success of the privatization program. The capital market in Bangladesh remains underdeveloped. There is lack of complete and perfect knowledge to investors. The financial data and statements of listed companies are unreliable and inaccurate; and the methods used for preparing financial statements lack credibility because generally accepted accounting principles are not applied. The article stressed that the objective of the privatization policy should be to increase economic growth through improved management of resources. The policy should ensure that owners of divested units benefit from risk-taking. Under no circumstances, should the potential buyers be led to believe that these units are being doled out by the government. In essence, the privatization policy should not be regarded as an end itself, but as a mechanism for improving economic efficiency and boosting economic growth. Ahmad (1998) argued against the denationalization of SOEs in Bangladesh. He pointed out that SOEs were set up in newly independent developing countries, where local entrepreneurship was lacking. As was the norm, these developing countries embarked upon an import-substitution industrial policy. Many of the import-substituting SOEs enjoyed protection both from foreign and domestic competition. SOEs’ inefficiencies resulted from these two sources. He believes that in a liberalized milieu, these inefficiencies will disappear. Referring to the divested units in Bangladesh, he pointed out that some owners of these divested units used them as speculative investment. These owners lacked the commitment in managing them as profitable units. Wherever possible, the assets of divested units were later liquidated.

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Based on the above analysis, he suggested that losses of the SOEs could be checked by promoting a more competitive environment in the economy. Mere transfer of ownership of SOEs to the private sector will not turn losses into profits. The World Bank (1995) examined the reforms of SOEs and financial sectors in Bangladesh. The study stated that the SOEs represented the biggest public failure in Bangladesh. Their losses were financed out of the public exchequer, thus weakening the financial system. The slow progress in divestment was not a cure for the deep-seated woes of the SOEs. Through 1993, the privatization efforts were slow. The study also provided the strategy for reforming and improving the efficiencies of SOEs. The claim that 500 odd small and medium industries that were divested were later closed was rebutted by this study by pointing out that in a competitive market, entry and exit are not uncommon. When businesses were shut down, it should not be seen as a sign of weakness. Instead, this transition may represent a shift of resources to more efficient uses of the physical assets. The report also pointed out that Bangladesh has a small and underdeveloped financial sector. The major barrier to financial sector development has been the government’s ownership of the dominant financial institutions and its role in allocating credit. The study concluded that SOEs act as a strong impediment to faster, private-sector led growth in Bangladesh. However, international experience clearly suggested that privatization, when done right, worked well. Humphrey (1990) suggested that privatization in Bangladesh was a mixed bag. The emergence of the private sector did not bring prosperity to a backward, subsistence economy. The success or failure of the privatization program was contingent more upon macro rather than micro factors. He recommended that the primary focus should be on the privatization of the overall economy instead of confining it to the sectoral level. He found that privatized jute and textiles firms outperformed their counterparts consistently and concluded that

privatization alone cannot promote economic prosperity; it must be backed by economic and fiscal policies, as well as political will.

The Rationale and the March Toward Market-Oriented Reforms

Before evaluating the progress that has been achieved in market reforms, it is important to reinforce its principles briefly. In an unrestricted market, prices of goods and services are freely determined by its demand and supply or by the interaction of buyers and sellers. With profits, businesses expand, with losses they shut down. Prices serve as a signaling mechanism, which leads to an efficient allocation of resources. Profit-motives, risk-taking and innovations are ingredients of wealth creation and economic growth. Deviation from market principles can lead to economic disasters as evidenced, for example, in South Korea recently.1 To limit the scope of this paper, the progress towards market reforms had been evaluated under four categories: denationalization, public finance, financial liberalization, and foreign direct investment. Denationalization: According to the Privatization Yearbook (1996, p. 252), at the height of nationalization in 1973, the state owned 92 percent of the country’s manufacturing assets and ran over 800 manufacturing companies. The first round of market reform began in 1976. The government returned very small units of abandoned property to Pakistani owners. The second phase of denationalization took place in the first half of the 1980s and covered mostly jute and textile mills owned by Bangladeshi owners before Independence. In the second half of the 1980s, there was wider participation of investors in the process. By 1985, 26 textile mills and more than 30 jute mills were nationalized. The divestiture of state-owned enterprises (SOEs) from 1975 through 1980s was not drastic. These divestitures added less than Taka 2 billion to the government’s capital receipts, as reported by The World Bank (1995, p. 105). To expedite the privatization effort, the Industrial Policy of 1991 was enacted under which only air

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travel, railways, production and distribution of power, and defense industries were reserved for the public sector. SOEs in other sectors were to be privatized step by step. Full foreign ownership of businesses was also permitted. By mid 1990s, the government still owned over 200 insolvent SOEs with about 40 percent of the country’s manufacturing assets. The financial performance of SOEs as shown in Chart 1 has been dismal. According to the World Bank (1999), “ the gross losses of the SOEs during fiscal year 1996-98 could have financed 90 percent of the cost of constructing the Bangobandhu Multipurpose Bridge--estimated projected cost $0.9 billion.” In recent years, the private sector has been encouraged in power, telecommunications and domestic air transport sectors. The government is yet to divest the utilities and energy sectors. According to The World Bank-Asian Development Bank (1998, p. 14), the Privatization Board has initiated the privatization of 32 public enterprises since 1996. Only 5 small enterprises have actually been handed over to the private sector. There are several reasons why the denationalization drive has slowed: i) complex bureaucracy, red-tape and institutional problems, ii) the failure to build a consensus among labor unions, SOEs and the public, iii) the lack of enthusiasm on the part of prospective buyers to

purchase financially-strapped SOEs for sale, and

iv) because the Privatization Board lacked both the mandate and operational freedom. It is true that there may have been some unpleasant experiences with several divested units in the past, in that some owners of these units had utilized them for speculative purposes. However, these judgmental errors or loopholes in the divestiture policy should not become an alibi to derail or abandon the privatization program. Although such a practice by unscrupulous investors should not be condoned, several points are worth mentioning. 1) Like any policy, the divestiture policy is subjected to trail and error. Drawing lessons from previous mistakes, the divestiture policy should ensure that divested units do not end up with speculative investors in future. 2) What makes a market economy more vibrant is the presence of the so-called “creative destruction.” Some existing firms or industries disappear while new ones emerge and resources are reallocated continually. 3) Historically, Bangladeshis were never a nation of entrepreneurs. Business, whether as a profession, career or trade was looked down upon in the Bangladeshi society. Only the mediocre member in the family may have moved on to pursue non-productive business or rent-seeking activities. Thanks to the garment industry, Bangladeshis, for the first time, are developing their entrepreneurial knowledge, spirit and know-how. It is naive to expect that Bangladeshis would become successful entrepreneurs overnight; it is also naive to expect all divested units to remain in business or generate profits forever.2 What should be done with the existing insolvent SOEs? The government should absorb the losses and liquidate them as soon as possible. Delays in its divestiture merely burden the public exchequer. Until they are sold off, the SOEs should strive to break-even financially at the very least. Bangladesh can implement the steps being undertaken, particularly, in South Korea . Public Finance: The size of the government’s encroachment in the economy can be measured by analyzing its fiscal policy. One of the ways this policy can be quantified is by the size of budget deficits and the budget deficit/Gross Domestic

Chart 1: Profit/Losses of SOEs(Millions of Taka)

1985 1990 1995-15000

-10000

-5000

0

5000

Source: The W orld Bank

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Product ratio shown in Charts 2 and 3 respectively. The relationship between economic growth and budget deficit/GDP ratio is shown in Charts 4 and 5 respectively. Increases in the budget deficits are likely to choke off or “crowd-out” the private sector. What are its implications? In the wake of limited savings, government expenditures may be financed out of these limited funds, depriving the private sector

from borrowing. That is, the public sector merely grows at the expense of the private sector. The overall growth of the economy remains unaltered. The government can also finance its expenditures through “deficit-financing” which can turn out to be inflationary.3 As Chart 2 indicates, the budget deficit has increased in absolute amounts. However, the budget deficit/GDP ratio has been declining which is shown in Chart 3.

From 1984 through 1992, the budget deficit/GDP ratio grew smaller despite steady economic growth rates, (see Chart 4). However, the growth rates and budget deficit/GDP ratio from 1992 through 1998, have remained relatively stable. It can be observed from Chart 5 that the budget deficit/GDP ratio and inflation apparently appeared to be unrelated. What conclusions can be drawn? 1) The decrease in the budget deficit/GDP ratio should not be construed with complacency. 2) Increased efforts

should be made to ensure that this proportion is reduced even further, because levels of concessional aid flows to Bangladesh have diminished in recent years. 3) If the government were to absorb the losses of SOEs before selling it to the private sector, the budget deficit would likely soar. 4) These budget deficits can be reduced by downsizing the government. The size of the government has effectively doubled. According to the World Development Report (1997, p. 86), the number of ministries increased from 21 to 35 over twenty years (1971-1991), and directorates

Chart 2: Budget Deficits(Billions of Taka)

1985 1990 1995-100

-80

-60

-40

-20

0

Source: The W orld Bank

Chart 3: Budget Deficit as a Share of GDP

(In percent)

1985 1990 1995-10

-9

-8

-7

-6

-5

-4

-3

Source: The W orld Bank

Chart 4: The Relationship Betw een Economic Grow th and Budget Deficit/GDP

(In percent)

1985 1990 1995-10

-5

0

5

10

Economic growth

Budget Deficit/GDP

Source: The W orld Bank and the IMF

Chart 5: The Relationship Between Inflation and Budget Deficit/GDP

(In percent)

1985 1990 1995-15

-10

-5

0

5

10

15

Inflation

Budget Defict/GDP

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increased from 109 to 221 between 1990 and 1994. In addition to its expansionary effects on government expenditures, this expansion has made regulation more intrusive. 5) The period from 1992 through 1998 indicates that the growing budget deficits were, most likely, constraining economic growth, (see Charts 4 and 5).3, 4 6) Bangladesh experiences both ‘cost-push’ and ‘demand-pull’ inflation. 7) To be consistent with the market philosophy, tax revenues and government expenditures should be as small as possible in size, coupled with a non-inflationary balanced-budget. 8) The government should refrain from economic activities which are well-suited for the private sector. By and large, the government’s activities should be confined to the provision of public goods and the safeguard of the legal system. Financial Liberalization: The Economist (May 15, 1999, p.90) lists six dimensions of financial liberalization. These are i) abolishing credit controls ii) deregulating interest rates iii) allowing free entry into the banking/financial-services industry iv) making banks autonomous v) putting banks in private ownership and vi) freeing capital-flows. Based on these criteria, financial liberalization in Bangladesh is evaluated in this section Because of the government’s ownership of dominant financial institutions from 1971 through early 1980s, financial sector liberalization hardly took place. Government determined and allocated funds to sectors, projects and vested interests. It was not until early 1980s, that two government-owned banks were denationalized by selling them to their former owners. Interest rates on deposits were raised to reflect positive real return on deposits. Private banks were allowed to enter the financial industry. Despite government’s slow progress in reforming the financial sector over the years, the banking sector is dominated by four nationalized commercial banks (NCBs) even today. These banks provided credit to borrowers and sectors as determined by the government. Non-performing loans account for around 33 percent of the combined portfolio of the NCBs (and domestic

private banks). This is due to the fact that the NCBs are saddled with bad debt from SOEs. As reported in the Economic Intelligence Unit (1998-99, p. 26), several large private-sector defaulters wield much political influence. In the early 1990s, as much as Taka 50 billion was spent by the government for the recapitalization of the NCBs which have become capital-deficient again.5 Eventually, the NCBs have to be privatized. The World Bank (1999, p. 43), in the meantime, recommends that branches with chronic losses should be closed. Surplus staff should be laid off. NCBs should be manned by new professional management and retrained staff. Based on the Companies Act, the NCBs should be registered as companies with the objective of disposing them off to prospective buyers. The portfolios and units of NCBs may require restructuring. Recapitalization of NCBs which is estimated to be Taka 85 billion or about 5 percent of GDP should be contingent upon good governance and genuine reform culminating in privatization. The Bangladesh Bank--the nation’s central bank– operates under the Ministry of Finance. Among others, the Bangladesh Bank is responsible for formulating and implementing the monetary and exchange rate policies.6 Ideally, the government should support and uphold the Bangladesh Bank to the standards of central banks in the United States, Switzerland and Germany in terms of institutional, regulatory, administrative and operational framework. The Bangladesh Bank has abandoned setting floor rates from February 1997. This decision by the central bank now enables the interest rate to be determined more or less by market forces. The Bangladeshi Taka is pegged to a basket of currencies of Bangladesh’s major trading partners. The 1997 Asian financial crisis has discouraged the central bank to make Bangladeshi taka fully convertible. The government has made current-account fully convertible in 1994 and capital-account partially convertible in 1996. Foreign Domestic Investment (FDI): The importance of foreign investment in Bangladesh can hardly be exaggerated. To attain an economic

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growth rate in the 7-8 percent range, investment has to be increased significantly. Because of declining levels of official development assistance in recent years and inadequate domestic savings, FDI presents opportunities for overcoming domestic resource constraints. The Board of Investment was created as a ‘one-stop shop’ where investors can cut through red-tape associated with foreign trade and business start-ups. Chart 6 shows that the foreign domestic investment has increased manifold in recent years.7 Recently, the government has opened up the infrastructure and telecommunications sector to the private sector, both domestic and foreign. With nearly 13 trillion cubic feet of proven and recoverable gas reserves (perhaps as large as Indonesia’s), more than half of $388 million in fiscal year 1997 came to the gas sector alone. Contracts for four barge-mounted power plants have already been signed and other contracts are in the pipeline. Deregulation of the telecommunications sector has created scope for private operators to run mobile cellular phones systems, operate rural telephone

exchanges, provide paging and trunk facilities and become Internet service providers. Initially, the foreign investors are Norway’s Telenor and Malaysia’s Telecom. Because of the inability of Bangladesh’s Telegraph and Telephone--the public sector operator--to provide services to its clients, the private sector is likely to fill in the vacuum. Bangladesh is among the first developing countries where private sector has become involved in promoting the telephone industry.

There is also a rising trend of FDI flows in manufacturing and services outside the export processing zones (EPZs). A private container-handling terminal at Chittagong is expected to draw $200 million over the next two years. Bangladesh still remains attractive to foreign investors for the following reasons: i) the government has been liberalizing rules favoring FDI slowly but surely, ii) the change of government in 1990 and 1996 through democratic means,8 iii) cheap labor, untapped resources and the potential to make profits, and iv) continual improvements in transportation and communications. However, red-tape, corruption and the political instability in the form of strikes or “hartals” are keeping foreign investors at bay.9

Conclusion Bangladesh has made some progress in introducing market-oriented reforms. Much remains to be done, and the sooner the better. The government should continue to expedite denationalizing industries (SOEs), financial institutions (NCBs), transportation (ex. marine shipping) and communications. The denationalizing policy should ensure that divested units are not sold to speculative investors. Until the existing SOEs are divested, these government enterprises should operate to break-even financially. By and large, the means of production should be left to the private sector. The role of the government in the economy should be minimal. Government policies do not create jobs or wealth. It is the private sector coupled with prudent fiscal and monetary policies that foster the economic of people. Government intrusion should be curtailed by dismantling redundant ministries and directorates. Government policies should be business-friendly and free of red-tape. Corruption should be curbed by downsizing the government and transparency and accountability should be introduced at all levels. The compensation of the government employees should be based on market conditions or some

Chart 6: Foreign Direct Investment(Millions of US$)

1991 1992 1993 1994 1995 1996 1997 19980

200

400

600

800

1,000

Source: The W orld Bank

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form of performance-based incentives. It is imperative that the (opposition) political parties refrain from observing strikes. These behaviors create uncertainty, which discourages domestic investors from engaging in entrepreneurial activities, and also drives away foreign investors. Bangladesh can draw vivid lessons from the 1997 financial crisis in East Asia. The symptoms that led to this crisis are more or less prevalent in Bangladesh today. Before it erupts into a crisis, the government should take pre-emptive measures similar to the ones taken particularly in South Korea and Thailand, following the outbreak of the contagion.

End Notes 1 For example, Bangladesh can learn from the experiences of the 1997 financial crisis of South Korea. A lack of market-based resource allocation and a highly regulated economy were among some of the causes why South Korea was struck by the financial crisis. For example, about 50 percent of Gross Domestic Product in South Korea was controlled by a handful of conglomerates or chaebol. Because of their close ties to the government, they had easy access to capital. The collusive ties between government, banks and conglomerates, that built up Korea Inc. also lay behind its recent economic crisis. They lacked the agility to rapidly changing opportunities and needs. However, following the election of President Kim in late 1997 and the pressure from the International Monetary Fund, reforms started to take place. The Korean economy recovered very quickly. Despite opposition from labor unions and vested interest groups, cash-strapped or debt-laden chaebol is being divested. Daewoo-the second largest chaebol deserves illustration. It epitomized the best and worst of the Korean economy. Because of their close ties to government and access to capital, the conglomerates had a clear incentive to expand imprudently causing moral hazard. Daewoo piled up a corporate debt of $47 billion, more than the national foreign debt of Poland or Malaysia. On August 16, 1999 creditors of Daewoo group approved a restructuring plan that shrinks the

failing conglomerate from 25 affiliated companies down to six automobile-related units. In sum, the Kim government has made it clear that there would be no more state-directed financing to help chaebol expand into strategic industries. Also, the government would not provide guarantees to support their ill-conceived and over-ambitious expansion plans. Under his tenure, he is letting market forces alone to allocate resources, deregulate and open the Korean economy fully to outside participation. 2 In the United States, only 20 percent of the firms survive after completing the first year in business. 3 Weather-related problems and political chaos--hartals, strikes have constrained economic growth too. 4 In the October 4, 1998, issue of “ The Wall Street Journal ,“ an op-ed article “Less Government, More Growth” by Gwartney revealed that in his study of 23 members of the Organization for Economic Cooperation and Development (OECD) from 1960 through 1996, there was a striking positive relationship between the size of the government and economic growth. 5 The banking sector in Bangladesh may be sitting on a time bomb. Compared to Western standards, the percentage of non-performing loans is too high. Also, the internationally accepted 8 percent capital-adequacy ratio is not being adhered to. Bangladesh can avoid an impending disaster by taking the necessary and bold steps. The subsequent measures undertaken in some of the Asian countries affected by the 1997 financial crisis can serve as a guide. 6 The functions and responsibilities of the central bank are not clearly spelled out. It lacks the autonomy in licensing new banks, monetary and exchange rate policies and supervision of NCBs. It has no control over its own budget or in the determination of its own staff’ s salary. 7 This figure looks encouraging when compared to the $600 million of foreign investment which flowed into our giant neighbor India not too long ago in 1993.

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8 Under a democratic setting, any person or political party has the right to vent out its disagreement or discontentment. However, they have no right to do so through disrupting production activities or daily work-schedule. 9 If the next general election tentatively scheduled for 2000 is free and fair, and the government is democratically elected, confidence among both foreign and domestic investors would rise. Because three consecutive free and fair elections would suggest that democracy in Bangladesh is more or less firmly footed.

References Ahmad, S., (1998) “State Owned Enterprises - An Interpretation of Evidence” in Sobhan, R., et. al. (ed) Reform of State-Owned Enterprises and Privatization Dhaka: Centre for Policy Dialogue Monograph 2, Pathak Samabesh, pp. 80-89. Akram, T., (1999) “Bangladesh’s Privatization Policy” Journal of Emerging Markets, 4(2), Summer, scanner. Humphrey, C., (1990) Privatization in Bangladesh: Economic Transition in a Poor Country Boulder: Westview Press. Privatization Yearbook (1996) London: Watson, Farley & Williams The Economic Intelligence Unit Country Profile: Bangladesh: The United Kingdom: 1989-99. The Economist, May 15, 1999. The World Bank (1999) Bangladesh: Key Challenges for the Next Millennium, April. The World Bank (1997) World Development Report, Oxford University Press. The World Bank (1995) Bangladesh: From Stabilization to Growth. The World Bank and The Asian Development Bank (1998) Bangladesh: Economic Trends and

the Policy Agenda, May. I would like to thank Professor Syed Saad Andaleeb and two other referees for their helpful comments. The usual disclaimer applies.

GROUND WATER POLICY FRAMEWORK AND EQUITY ISSUES: EMERGING REALITIES AND RESPONSES

Syed Zahir Sadeque

Social Scientist

International Centre for Integrated Mountain Development (ICIMOD)

GPO Box # 3226, Kathmandu, Nepal Email: Sadeque@icimod.org.np

Background Bangladesh is country of 120 million people living within an area of 1,47,570 sq. Kilometers, largely formed by the floodplain and delta of two major river system of Asia: Brahmaputra (called Jamuna in Bangladesh) and the Ganges (for most part called Padma in Bangladesh). The semi-tropical high rainfall area (from a mean annual of 1500-4000mm) is crisscrossed with numerous rivers (most of which originate outside the country) and their tributaries. Considering the soil characteristics, high rainfall and flow of surface water from a very large catchment area, the county is generally endowed with good but uneven ground water resources. The rainfall is monsoon determined and is concentrated during the months of June-September. The remaining eight months receive about 20 percent of the annual rainfall. There is a distinct hot and dry period during March-May and water shortages are acute in parts of the country during this period. This is also the period of winter rice cultivation requiring constant irrigation that compounds the water scarcity further. Thus, in a situation where water sources are abundant, sharing them within communities has never been a historical problem. However, in recent times, as their supply has become increasingly competitive with claims by multiple users, conflicts have arisen over their use. The existing legal and institutional structure and regime is rather unprepared to deal with these newly emerging issues. While communities are addressing the crisis with

homegrown solutions, public policies are still not well articulated by the authorities. This paper explores some areas of the legal and institutional mechanism and procedures that deals with sharing of this important common resource, and the options ahead to ensure equitable use of ground water to meet both food production as well as domestic needs.

Ground Water in Bangladesh: conditions, development objectives and the mismatch

The hydro-geological conditions in Bangladesh allow inexpensive extraction of ground water with simple technologies almost everywhere in the country. In terms of the water table, there are four major areas: Low Water Table Area (LWTA) where water is available below 8 meters, Shallow Water Table Area (SWTA) where water is available within 7 meters, Coastal Saline Area (CSA) where water at shallow depths is saline, and the hilly terrain of Chittagong Hill Tracts (CHT) Area where water is available at much lower depths. In the early eighties, about 75 percent of the country was under the SWTA, while around 8 percent of the country was under LWTA. The CSA and CHTA area are rather static, although, due to upstream withdrawal of surface water by India during the dry months, salinity is increasing in the coastal areas of Bangladesh. Over the years, the LWTA is increasing rapidly and the forecast is that it will subsume around 50 percent of the country by the year 2000 (DPHE, undated). In the SWT area, water is extracted by common No. 6 handpumps for drinking water purposes, while mechanized shallow pumps draw water

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for irrigation; the depth for both being within 7 meters. In the LWT area deep-set handpumps are used for drinking purposes while mechanized deep tube wells are common for irrigating crops. The required depth of these tubewells is considerably below the shallow water table (7 meters) and varies according to soil conditions and water table. The CSA and CHTA use different types of deep tubewells and technologies for extracting ground water from far greater depths.

Successive governments in Bangladesh have always been involved in the provisioning of water for all purposes with varying level of involvement. Until recently, it was the exclusive responsibility of the government to provide drinking water. In the rural areas, this has changed considerably in the recent past as individuals are sinking and operating No. 6 suction mode handpumps in increasing numbers (Sadeque and Turnquist, 1995). Despite the impressive private sector participation in SWTA, other areas are still dependent upon government provisioning of water and the available technologies are relatively more expensive. In the absence of piped water system in the rural areas, beneficiary contribution remains limited to a small down payment at the time of installation and minor repairs only. For ground water irrigation however, the introduction of mechanized pumping, although government induced has become almost totally privatized now. Prevalent technologies are mechanically operated Shallow Tubewells (STW) and Deep Tubewells (DTW), and farmers either buy them individually or form a group to buy one. The availability of ground water in most areas has resulted in proliferation of tubewells both for drinking and irrigation purposes. Currently there are over 2.5 million handpumps in operation, less than one third of which are government provided and the rest are privately owned. It is estimated that around half a million STWs and nearly 35 thousand DTWs are currently in operation for irrigation purposes. The STWs, due to their low cost, are increasing rapidly and around 40-45 thousand are added every year. Irrigation season in Bangladesh is the months of February-May,

when the water table also remains at its lowest, and precipitation is minimum. It is during this period that the mechanized irrigation pumps are increasingly viewed as a competitor to handpumps that provide drinking water.

This crisis has been exacerbated in recent years as irrigation coverage has increased dramatically, further lowering the ground water level. Since its emergence as an independent country in December 1971, Bangladesh has continued to face problems in meeting its food needs. Increasing food production through improved practices, which invariably requires irrigation water, has always been the driving force of the development strategy in Bangladesh. With the withdrawal of increasing amount of water in upstream countries (primarily India), and the sinking of an ever- increasing number of mechanized tubewells, lowering of ground water level in the dry season has become a reality. In this competition for ground water, simple, low cost technologies, like hand tubewells, used mostly for drinking and other domestic uses, lose out. As water has always been found in abundance, rules/norms for using this common resource has never been codified and people are confused about confronting the emerging reality--the scarcity of this seemingly abundant resource. This paper explores the context of this emerging situation for ground water in relation to existing legal and institutional issues. For the ground water sector, there is evidence that due to cultural and religious sanctions water is not denied to anyone; however, exchanges do occur between parties. Often recipients of drinking water have to provide equal amount of surface water to the irrigation channel in order to receive clean water from mechanized tubewells during the lean period. As more and more handpumps become inoperable due to the irrigation triggered draw-down, people are questioning the relentless use of ground water resources for the benefit of irrigated agriculture, practiced by people owning land in the irrigation block. The equity implications complicate the conflicts further as rich landowners either own or control irrigation pumps (and, therefore,

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water during the dry period) and are major beneficiaries of irrigation. Therefore, the emerging informal rules over the harvest of this open resource are affected by existing power relations in the society. What remains to be analyzed is to what extent are the conflicts arising out of ground water use supporting the development of informal rules and whether the agreed consensus is equitable and sustainable as an option compared to technocratic administrative controls, which have been conceived in the past to regulate the sinking of deep drawing mechanized tubewells. Food self-sufficiency has always been a top priority in successive five-year development plans of Bangladesh. To achieve that goal, huge investments were made in flood control and irrigation development. The Fourth Five Year Plan (1990-95) noted that in order to achieve food autarky the country needs to transform the agriculture sector from “ rainfed to irrigated agriculture” (The Fourth Five Year Plan, 1990). Ground water based minor irrigation has been the mainstay of this transformation. After the deregulation of the minor irrigation sector and privatization of all equipment in the late eighties, the sector began witnessing a phenomenal growth in the number of mechanized pumps. Although the more expensive DTWs registered a slower growth, the STWs grew by 40-50 thousand each year during the 1990-95 period. In the LWT areas, DTWs are the major source of irrigation. DTWs, typically of 2 cusec capacity can irrigate 25 hectares of rice land. DTWs, when in operation, create a conical depression in the water table and pump out water from that displacement. That is why they are associated with temporary draw-down of water table in the adjoining areas. Typically, in the relatively elevated LWT areas of North-west Bangladesh, ordinary No. 6 handpumps become inoperative during the dry months when water table recedes below 7 meters. With the large scale introduction of DTWs and STWs, the water table, during the dry months, has receded further, rendering more and more hand tubewells (HTW) inoperative. The numerous traditional low cost HTWs have thus become useless in the LWT area.

Beginning in 1986, the Government of Bangladesh-UNICEF Rural Water Supply and Sanitation Program has started sinking a new lift mode pump, locally known as “Tara Pump”, which can access water from water table upto 15 meters. For the LWT areas this is the appropriate pump for drinking water supply. As a technology, it is well proven and accepted; however, it is still not widely available and is usually 5-6 times more expensive. It is also a manual lift mode pump rather than the prevalent suction mode technology and although it is manufactured locally by the private sector, it is still only available through the public sector distribution system. Thus, we note that the overriding consideration in water resource management has been to address the growing food demand. Such considerations can and do jeopardize the needs of other areas, notably the water-sanitation sector. Thus, food production priorities are in conflict with social sector objectives. The development objectives of Bangladesh are yet to address such internal contradictions. As a result, a mismatch of objectives and expectations are very much noticeable. Ground Water Use Policies and Regulations:

The Legal and Institutional Regime Historically, rights and ownership issues concerning ground water have never been viewed seriously. This is contrary to surface water, which has been regulated and utilized by central authorities even prior to the arrival of British colonialists in the eighteenth century. Central authorities have regularly reviewed control of surface water and regulations have been developed over the years. As early as the nineteenth century, under the Irrigation Act of 1876, diversion or overuse of surface water compared to the existing natural flow of water has to be notified by government if such plans are underway. The idea behind this is twofold: first the affected people may make alternative arrangements and claim compensation (Khan and Khan: 1987). Similar issues with amendments were included in subsequent surface water regulations of 1952, and in 1983

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during the Bangladesh period. However, no such regulatory framework concerning the rights of ground water by its users as well as the stakeholders exists. It is not even considered as a similar activity like mining, that many other countries consider (Ali et. al. 1987). During the early eighties, there were efforts to regulate ground water use by defining the siting conditions of mechanized DTWs, but the regulations were never seriously enforced, as part of the deregulating and liberalizing the economy. Tubewell sinking (for irrigation) was deregulated during the mid-eighties and no controls whatsoever exist today. Thus, we find that there is ambiguity in defining the ground water resource and the rights over it. Historically, in academic research, there remains some confusion and controversy over “Common property and open access regimes” , “Common pool and resources and common property regimes” , and “Resource system” (Ostrom: 1996, P..i). Such confusion at the conceptual level also lends itself to field levels as we see the case of ground water in Bangladesh. It is neither in the private domain, nor entirely in the public domain. As far as its extraction and use in agriculture, industry, or domestic sectors is concerned, both the private and public sector are involved. However, extraction of water for selling to other users is not possible by the private sector, which would have resulted in its being an extractable commodity because all sub-soil products are, by law, under the government’s jurisdiction. However, the selling of water by farmers and other groups is permissible to increase the command area of irrigation wells. Competition over ground water resources between mechanically powered Deep Tube wells (DTW) and manual handpumps for drinking water supply are forcing communities and authorities to think about instituting regulations over the use of ground water. Technocratic and regulatory approaches favor a zoning and regulatory control perspective. However, as conflicts are increasing, people and communities are beginning to develop local level controls and self-management of this

critical open access resource. Unlike the other major open access resource--surface water of rivers--whose use faces some regulations in terms of diversion or lessening of flow, as well as fishing rights, the ground water resource is still very much in a laissez faire state. It is also not a common resource for communities to regulate its use, as its extraction is dependent upon technologies without which it is not available unlike forests and pastures, which are there for people to use. With an average annual rainfall of 1500-4000 mm, presence of numerous rivers flowing through the country and floodplain depressions and marshlands, it is often difficult to comprehend that the water table in Bangladesh, at least in certain areas, is actually declining consistently. The availability of groundwater is dependent on properties of groundwater storage reservoir and the annual recharge from rainfall, rivers and flooding. Seasonal lowering of groundwater level caused by increasing ground water use runs the risk of periodic tubewell failure due to large annual variability of rainfall distribution (National Water Plan, 1990). Therefore the Water Plan has accepted the seasonal failure of handpumps and goes on to conclude that only Deep Tubewells can realize complete development of agricultural potential (NWP, P. 10-71, 1990). It may be pointed out that water resource development in Bangladesh has always considered food production as the goal and guiding principle for planning and investment purposes. Therefore, the NWP was more concerned with availability of irrigation water rather than domestic use requirements. Water resource management is increasingly assuming a critical role for the growing population of Bangladesh due to burgeoning demand and increasing conflict between alternative uses. Water is both a public and private good and therefore the allocation system must take into account the needs of all users, particularly the poor. It is also an economic and a scarce commodity and therefore its use should be determined by opportunity cost pricing. However, that should not ignore such basic needs as access to safe drinking water,

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sanitation and hygiene practices. As water is a common resource and has wide ranging uses, its development and management should involve all users and beneficiaries. Although the government, since 1990, has enunciated comprehensive survey of water resources and development strategies, Bangladesh still does not have an approved water policy. Consequently the planners and managers of water resources operate with a segmented approach and is target oriented. Efforts are usually disjointed and supply driven and are usually detrimental to national interests, ignoring such important principles as equity and sustainability in water harvesting, water balance, conjunctive use of water, and efficient utilization of an unitary economic resource. Inspite of the absence of a stated policy, Bangladesh does have a set of laws (some dating back to the British colonial and Pakistani period) governing the use and control of water. Most relevant of them are The Bengal Irrigation Act, 1876, Bangladesh Irrigation Water Rate Ordinance, 1983, East Bengal Embankment and Drainage Act, 1952, State Acquisition and Tenancy Act, 1950 and Ground Water Management Ordinance, 1985, (subsequently held in abeyance). The Irrigation Acts were designed to determine Levy of water rates, while the Embankment and Drainage Act defined the construction, O&M of embankments and drainage structures. The Acquisition Act of 1950 recognized the rights of State on subsoil resources (ground water). With the passing of the State Acquisition and Tenancy Act of 1950, the ambiguity on the control and ownership of subsoil water stemming from English Common Law tradition dissipated. Although State ownership of ground water became recognized with that Act, it was never treated accordingly and remained in the common domain--neither public nor private. This means that individuals or groups outside the Municipal areas (Municipal areas have laws regulating sinking of mechanized deep wells) can sink deep wells for irrigation or any other industrial purposes (domestic use needs are met

by shallow wells). This principle still determines the control and use of water as will be elaborated in the next section. The Groundwater Management Ordinance of 1985 was the first attempt to regulate the fast growing minor irrigation sector. The purpose of The Ground Water Management Ordinance was to address siting, installation and spacing of minor irrigation equipment (STW, DTW). It was promulgated during the heyday of regulations in the economy and agricultural development like other sectors of the economy, were led by parastatals. However, the Ordinance, which aimed at regulating siting, installation and spacing of DTWs and STWs, met with severe resistance since it was promulgated. It was never acted upon seriously as deregulating moves were already underway and the parastatal organization (Bangladesh Agricultural Development Corporation, BADC) entrusted with its implementation was itself being downsized, completely surrendering the irrigation related responsibilities to the private sector. There are several government agencies under different ministries dealing with water issues. Their mandates are different and therefore the priorities they set out are also often conflicting. Therefore, planning and management of water resources, under such conditions, are for obvious reasons rather disjointed, disregarding critical factors in their use and allocation principles. Surface water is under the authority of Ministry of Irrigation and Water Resources. Ground water activities are carried out and monitored by individuals, Water Resources Ministry, Ministry of Environment, and agencies under Local Government Ministry. The legal framework on control and ownership of ground water is held under Common Law traditions, leaving the scope of regulation rather difficult. However, inspite of not having a stated policy, the National Water Plan of 1990, 1991 and the Bangladesh Water and Flood Management Strategy, as well as the Five Year Development Plans address all the important issues as part of the water resource management strategy. As often is the case the plan

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documents contain all the right rhetoric but are rarely put to use. Lack of a single institutional focus and mechanism as well as the absence of a comprehensive policy that is binding on all, is the cause of such adhoc-ism in the sector. Particularly important is the question of water rights and allocation principles, which is not addressed in any of these ordinances or strategy papers. As has been mentioned earlier, the overriding concerns with water in Bangladesh centers around flooding and water management issues. Due to abundance of both surface and ground water, and as no major conflict beyond local level has yet emerged in terms of control of the resource, the water rights and allocation principles are yet to be accorded the importance it deserves. However, as we notice the declining water table, particularly in the dry season and as more localized conflicts arise in rural areas over the use of ground water, it is time that planners and administrators dealing with water should consider revamping the existing regulations by recognizing the water rights of individuals, communities, and sectors before it becomes too complicated and goes out of hand.

Conjunctive Use of Water: The Bone of Contention

As stated earlier, there are two principal sectors of water use in the rural areas: agriculture and drinking water supply. Supply of irrigation water has been the responsibility of both Water Resource and Agriculture Ministry in the past, while provisioning of domestic water services belonged to Local Government Ministry. However, water sector in general has seen privatization efforts in the recent past to attain greater efficiency and for reducing budgetary allocations. In a seemingly water abundant country like Bangladesh, scarcity has never featured prominently and coordination amongst Ministries and agencies to deal with the scarcity issue has never been a priority. Recent deregulation of the water market may have exacerbated the problem. The NWP, 1990 recognizes the serious conflict between expanding irrigation abstractions and viability of potable water supplies obtained through

suction hand tubewells (No. 6 HTWs). As the HTWs are mostly sunk in homestead plots which are on an average greater than 1 meters above the crop field level, operation of mechanized STWs for irrigation also affect the availability of ground water for HTWs. The NWP conducted several sophisticated tests showing the adverse effects of irrigation abstraction upon the HTWs in Northwestern districts (NWP, Vol. 1, and P.8-14-18). In the LWT area of North-west Bangladesh (Rajshahi, Naogaon, Chapai Nawabganj and Natore Districts), increasing irrigation activity has severely affected drinking water supply abstracted from HTWs. As water rights are largely undefined and uncodified in Bangladesh, it is critically important to study the issues surrounding conjunctive use of water particularly for irrigation, drinking water supply, fisheries and the impact upon each of these sub-sectors. Recent micro-studies reveal some interesting findings on the rights of ground water. Some of these findings from field research conducted in two villages, namely Ilisha Bari and Hat Govindpur in Rajshahi and Chapai Nawabganj districts respectively, form the core of the next section.

Impact of Declining Ground Water on Drinking Water Supply

Over the years, winter (Boro) rice has become a critical source of food and income for the North-Western villages. These areas used to be rain-fed and single cropped. With the introduction of DTWs they have become double cropped areas; and due to higher productivity and less uncertainty, Boro rice has become the major harvest for the villagers. Each year beginning in February the irrigation machines (DTW) start functioning and after a month or so the HTWs begin to run dry as the water table recedes well below their suction capacity. The seasonal handpump failure continues during March-May for this region. The entire population of both the villages begins their vigil for collecting drinking water. The couple of Tara Pumps in their village are their only alternative. These pumps are built with a capacity to supply water

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to about 10-15 households. But during this long 3-4 month period they are always in operation as more and more people start obtaining water from these pumps. These pumps are provided by the government Rural Water Supply and Sanitation (RWSS) Program to groups of ten households. The Caretakers (the household that organizes the signature collection of allotees and usually pays the contribution sum), who are the de facto owners of the pump, institute new rules for use of the pumps during this period. As they (caretakers) are also responsible for maintenance, the extra pressure on the pumps becomes a source of irritation for them. Previous studies on access and equity issues of public HTW, have also noted that the caretaker households control access to tubewells and make rules about non-owners’ access (Sadeque and Turnquist, 1995). Although religious and cultural norms preclude total exclusionary tactics by the controlling household, the caretaker family places restrictions of various sorts especially at times of crisis. Some of the restrictions faced by the non-owning families in Ilisha Bari and Hat Govindpur are summarized below: • Caretaker family has the right to jump

queue. • Complete restriction on taking water for

domestic purposes, other than drinking, cooking.

• Families related to caretakers have

better, often unrestricted access. • Low caste people (there are several

Hindu families, both low caste and upper caste in these villages) are tactfully discouraged.

• Restrictions on account of the pretext

that children are careless users. • Restrictions on account of privacy of

caretaker family. The Tara pumps meant for tiding over the lean

period have created a set of rules around its use. This is quite contrary to the objectives of their installation in the first place. As they are limited in number, and the only ones to operate during the dry season, the allotted group, fearing over-use by non-members or break down of the pumps are instituting restrictive use by non-members. Therefore, it is evident that volumetric restrictions, and a general note of discouragement hangs over non-group (Tara pump allotted) members. Volumetric restrictions affect the lives of people in many ways. Health-hygiene of people suffers most, as sufficient quantity of safe water is not available. In the study area prevalence of various skin diseases were noticed, with the women and children as the worst sufferer as bathing water is scarce. Children do without bathing for consecutive days. Going without bathing during the hot and humid March-May days, and even scarcity of clean water for Oju (ablution) for Muslim adults is cruelly felt by the local residents. Adult men take bath in ponds, which usually has a couple of feet of muddy water. In a country where the monsoon season (June-September) brings in enormous amount of rain and a third of the country is regularly inundated, scarcity of water for bathing is a tragedy that these helpless people cannot comprehend. Upstream withdrawal of water by India from the major rivers of these two districts--Ganges, Atrai, and Mahananda--have compounded their woes. But, it is the increased ground water abstractions for irrigation that is directly linked with the lowering of the water table beyond the limits of common suction pumps which is adversely affecting the lives of LWTA people without unrestricted access to improved technology that can ensure clean water for them. As the Tara Pumps are meant for drinking water and are situated in homestead clusters, they are favored as the source of drinking water during the dry months. However, people sometimes secure drinking water from DTWs irrigating the crop field. But as they are further away from homesteads and women and children are the principal carriers of water, DTWs are not a favored source. Although the capacities of the DTWs are far greater and users need not touch

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the machines to collect water, it is nonetheless not that convenient or easily accessible by people. Costs are associated with the sinking and operation of DTWs and it is now mostly private. Therefore, public welfare at private cost has become problematic. Increased power costs and uncertainty of electrical power availability has further compounded the problem. For the farming community of these LWTA winter rice cultivation has become increasingly critical for household food security as increasing aridity in the region and high input prices now mean that cultivating minor crops has become unprofitable and the only alternative is irrigation based cereal production. Due to these factors there are some restrictions on fetching water from DTWs imposed by the operators and managers as well. They are summarized as below: • Non-irrigating households are least

favored in collecting DTW water. • Women cannot bathe in the open area of

the crop field. • Washing cannot be carried out at the

DTW pump site. • Physical limits exist on carrying water

from distant crop fields where DTWs are located.

• Operation of DTWs take place at odd hours (usually late evenings).

Irrigating households feel that since they are the ones paying for the irrigation pumps and their maintenance, they should have exclusive right to the water. To discourage others to carry water from the pumps, DTWs are often run at odd hours like late at night or early morning. This is also due to technical reasons to minimize evaporation losses and availability of electricity during non-peak hours. However, such restrictions affect non-irrigating households, as irrigation pumps are often the only running water source in many neighborhoods. Dry season water shortage is a phenomenon that LWTA people are and will have to live with. Although many of the rural people are not knowledgeable about the technical issues associated with declining ground water table,

they perceive some causality with the operation of DTWs and the lowering of ground water level. People in our study area are yet to articulate sophisticated arguments regarding the indivisibility of ground water resources for public welfare. But they are aware that for a natural resource like water, exclusionary policies and subtractibility from one’s welfare due to use by others is unjust. People who do not have access to technologies that can extract water from deeper levels during the period of declining water table view the expansion of ground water based irrigation as contributing to their misery. They argue, often rightly, that the deep tubewells are sucking water from the reach of public handpumps Ground water is a finite resource; a consistent decline of its level over the years is indicative. However, recharges can fill up used portions under ideal conditions. But nonetheless, they are often not replenished to their original state and the effects are visible. Hydrographic data indicate a slow but consistent decline of ground water over the years, which is in addition to seasonal draw-down (NWP, 1990). Therefore, it cannot be treated as an open access resource like open water and deep-sea fishing. Our study area people also voiced their concern in the same vein, regarding the nature of this “God given resource” , or natural resource in academic lexicon. The immutability of water as a natural resource for the benefit and sustenance of everybody is engraved in the perception and world view of the rural inhabitants, who are feeling the erosion of their inalienable right to this resource. They point out that access to deep water table extracting technology by some is rendering the resource (water) to become alienable. In spite of the competition over ground water resources for irrigation and drinking water supply and the conflicts and resentments arising out of it, there is evidence of emerging consensus in sharing this finite economic resource. In both Ilisha Bari and Hat Govindpur, we came across several examples of self-management in sharing this common resource. Water is a critical life support

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resource. Providing water to the thirsty is a cherished virtue and a sign of piety in Islam. Culturally, water is also synonymous with life in all communities and therefore access to it cannot be denied. In both villages and in other areas, people can access water fairly easily and secure a pitcher or two of DTW water. But under drought-like conditions, people are often encouraged to bring in equal amount of surface water (available in ponds, ditches, and canals). This is becoming more of a norm in certain areas, where the irrigation command area is extensive and lowering water table affects all tubewells. This exchange practice, although not highly discriminatory is a real threat to public health. Carrying muddy water from ditches runs the risk of contaminating the water pitchers carrying drinking and cooking water. As incidence of water borne diseases are very high during this period, public health experts see further deterioration of health conditions of people due to this practice in addition to the dermatological problems associated with lack of clean bathing water. Another form of cooperation that is emerging in the area is operation of the DTWs in the early morning hours. Usually the pumps are operated during evening hours to minimize evaporation losses, which also partly holds for early morning hours. Early morning is also the peak water use time for rural households. Many households are collecting water from DTWs at these hours. However, it is only possible to carry a limited amount of water from distant crop fields. People are also allowed to bathe in some DTWs (but usually no washing of clothes with soaps), but obviously only the men and children can take advantage of this. Some of these cooperative arrangements were beginning to emerge in the late eighties when regulatory steps to control siting and installation of tubewells (Bangladesh Groundwater Management Ordinance, 1985) were in the process of implementation and regulatory control was at its highest level. People realized that negotiation was better than having controls imposed by central and distant authorities, which may not be in the interest of either

parties. Additionally, regulations would result in bureaucratic control and therefore encourage corruption. Technologies are not scale neutral, nor are they gender neutral. Agricultural modernization programs in developing societies have never quite come to terms with this issue. Irrigation water and the emerging water markets are often no exception to this anathema. We have already noted how women suffer due to lack of access to clean water during the lean period. As household in-charge they are the prime users and collectors of water. Improved technologies for harnessing water from deeper levels have thus disproportionately affected them. Access to new technology is likely to create newer configurations in the sharing of benefits. Those who are excluded from the technology are likely to lose out and differentiation will increase at a brisker pace. The opportunities in supplying drinking water on the other hand are quite promising and are able to bypass these problems. Higher value of drinking water, which also requires lower volumes, makes drinking water supply an ideal case for self-management and decentralization. Policy Options for balancing the conflicting

Needs Seasonal draw-down of water table in the LWT area has become a reality, and so are the problems associated with its conjunctive uses. As the LWT area is increasing, to ensure the sustainability of the so-called almost universal coverage (stated to be 97% in 1995, by UNICEF) of safe drinking water, certain policy actions are needed. Foremost among these is a clear enunciation of water use priorities and declaration of a comprehensive water policy. Any future statement on this must depart from the conventional thinking of target fixing and supply driven response. The economic value of water must be accorded due consideration in the policy statement. Community participation and special attention to the needs of women, children and vulnerable groups must also be

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given priority in tandem with economic valuation. They need not to be mutually exclusive, as numerous examples of water delivery system around the world testifies (Narayan 1995). Technology choice, demand preference, and the opportunity for capacity building at the user level (where appropriate) and institutional level also should be looked at when developing the policy statement. A host of short and medium term recommendations to deal with the seasonal water scarcity in the LWT area are suggested below: 1. Investigate possibilities of facilitating

group ownership of Tara pumps as opposed to present allotment to groups with nominal contribution sum. This will lessen the subsidy burden for the government (currently approximately 85%) and allow for more distribution with the same resources, as well as encourage ownership of the program by beneficiary groups.

2. Although the Tara Pumps are

manufactured by the private sector, the government exclusively distributes them. Initiatives for private sector distribution should be encouraged. NGOs and nationalized commercial banks may consider providing micro loans for the purchase of Tara pumps. This must be complemented by improved capacity building in operation and maintenance, developing private sector marketing strategy for the hardware and spares, and monitoring their social acceptability.

3. Cost sharing rather than flat

contribution sum, as is the case now, should be introduced for HTWs (including the more expensive ones). This, along with the earlier recommendation on Tara pump distribution policy, is likely to support gradual replacement of ordinary HTWs by Tara pumps in the LWT area.

4. Water sharing for domestic purposes

should be formalized for all irrigation DTWs. Each DTW may construct small overhead tank and a few pipe connections at the site for the benefit of HTW users during the dry season. Cost for irrigation water is still the lowest compared to all other sectors, as people only pay for operation and maintenance of public system and a little more to include capital costs under private system. Irrigators should, therefore, easily accept the sharing of ground water for domestic use during the lean period. Besides, as a finite and unitary resource, substractability of welfare by one group is possible and irrigators should be made aware of this.

5. Policy support for changes in cropping

pattern should be seriously considered. This would greatly reduce the water needs for crops and thus allow additional water to be diverted for domestic use.

6. Finally long term investment projects

with possible donor assistance will have to be negotiated to replace the increasingly inoperable HTWs with deeper reaching Tara pumps and other alternatives.

Conclusion and Agenda for Future Research Ground water is a common resource, neither under complete state authority nor in the private domain. It is now increasingly being used for productive purposes (mainly irrigation). It is also facing intense demand from other conjunctive uses such as drinking water, domestic use, and fisheries. Narrow sectoral development approaches exacerbate the conflicts arising out of conjunctive use of this resource, while the absence of a comprehensive water policy only furthers the sub-sectoral orientation to water use policies.

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Water resources, although brought under some form of government control and regulation over the last hundred years or so, has always remained as a common community resource. New laws and institutional barriers have been created by the state to restrict their use by people. Bureaucratic traditions remind us that, once under their control, governments and their line agencies are very reluctant to relinquish authority over any resource. The erosion of common property resources and its impact on the sustenance of poor households is a relatively well recognized phenomenon in Bangladesh. The dwindling forest resources of the Central Highlands are disproportionately affecting the Garo indigenous forest dwellers of Madhupur tract (Khaleque, 1984). Flood control embankments and other infrastructures are seriously affecting the income, nutrition and employment opportunities of poor households and fisher-folk communities in the flood plains (Sadeque, 1992). It is apparent that with increasing demands on ground water use, some regulations are needed to deal with the emerging conflicts. While policies and regulations are developed at the central government level, due considerations from the perspectives of all stakeholder are a critical need in order to formulate principles that are equitable and generally acceptable to all. The lessons from our rapid appraisal suggest that there are points of conflict as well as consensus in sharing the common resource. The future of cooperative use of this common resource hinges upon these points of conflict as well as consensus. Some of the policy options of dealing with seasonal (drinking) water shortage and their mitigation are becoming issues of grave concern for the water-sanitation sector. Essentially, in the absence of large scale replacement of handpumps by improved Tara pumps, cooperation among all users of ground resources must be encouraged. Irrigation sector can share some water with drinking water sector, while newer methods of demand driven Tara pump distribution mechanism need to be developed to ensure greater participation and ownership by all stakeholders.

First, people having no control or legitimate use rights of deeper water table abstracting technologies (DTW and Tara pumps) face real- life constraints in accessing safe water for domestic purposes during the dry months of February-May. Their rights and ability to harness the common resource is constrained by their lack of ownership or control over the required technology. Poor women, children and vulnerable groups outside the allotted group of Tara pumps suffer shortage of domestic water supply most. Due to their limited social network and linkage, they are often not in a position of strength to negotiate water from groups who have access to it during the period of scarcity. This raises the question of unequal access to a common resource, due to access to improved and more expensive technologies. The deprived community here becomes the victim of conventional exploitative development (CED) of natural ecosystems (Berkes 1989). As a common resource, ground water becomes only available to people having the deep extraction technologies, and increased exploitation of this common resource deprives others from harnessing the resource with simple existing technologies. Here, individuals’ welfare is subject to subtractibility by others who have access to technology. This raises the questions of equity and the adverse effects upon users of HTWs arising out of unregulated conjunctive use of water. The mitigation measures of such CED activity must be found in the approach where points of conflicts are resolved equitably, and preferably with the participation of all stakeholder at the local level. Under such an arrangement, resources can be sustainably utilized with due consideration to welfare issues and consensus among all users forged with local level informal rules. New sets of rules may be developed to deal with the use of ground water whose extraction during the dry season becomes dependent upon technologies not at the disposal of all. Such attempts may resemble what is broadly known as Reform Sustainable Redevelopment (RSR), as explained by Berkes (1989). Common and open access resources often come under over exploitation, as rights and allocation

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principles are often not clearly defined and enforced excepting communal properties managed over generations with traditional rules governing its use and methods to deal with abuses. In the case of ground water in Bangladesh, the rights and allocation principles are still not defined. Historically it also never developed because of the abundance of water and unavailability of technologies that can radically alter the water balance, like the new deep tubewells. Although water rights are not yet defined by regulations in Bangladesh, evidence suggests that people are increasingly becoming conscious of its needs. There are numerous examples of self-regulation and cooperation in water use during the lean period, a few of which were reported in this study. As the conflict over water rights is still in an embryonic form, it is perhaps an opportune moment to come up with equitable water rights acceptable to all stakeholders. Second, certain critical resources have multiple uses and the user groups have differential interests. When guidelines and priorities of several different entities govern the resource in question, conflicts are bound to arise. Under such conditions it is ideal to have uniform principles to guide actions. Ground water in rural Bangladesh is such a case. Different institutional control of this resource, along with the private sector as an important actor, use practices are no wonder often conflicting, resulting in different basis for negotiation and rule making. The choices left are several. Self-management for consensus as cited earlier is an option; self regulations as opposed to imposed controls are another option. Finally basin wide management integrating use rights of different groups is another option. However, we know little about these issues that can constitute the core and scope of future research. * The research for this paper was conducted during 1995-96 period, before the Arsenic contamination in ground water was comprehensively detected and publicized. However, despite the changed circumstances,

the main contention of the paper still holds, as ensuring supply of safe drinking water in rural Bangladesh has limited options other than ground water which is free of bacterial contamination, the major cause of infant mortality and morbidity of all age cohorts in Bangladesh. Recent advances in developing simple and cost-effective arsenic filters among all other alternative options holds the major potential for ensuring safe water supply in rural Bangladesh. The author would like to thank Professor Syed S. Andaleeb, the editor of JBS, and the reviewers for their helpful comments. REFERENCES

Ali, Mohammad , George E. Radosevich and Akbar Ali Khan (ed.) 1987 Water Resources Policy in Asia, A.A. Balkema, Rotterdam, Boston. Bangladesh Water Resources and Flood Management Strategy 1995, Government of Bangladesh and The World Bank, Dhaka, Bangladesh. Berkes, Fikret (Ed.) 1989 Common Property Resources, Belhaven Press, London. Department of Public Health Engineering (DPHE) Official Reports, Undated, Dhaka, Bangladesh. Jodha, N.S. 1992 Common Property Resources-A missing Dimension in Development Strategies, World Bank Discussion Paper, Washington Khaleque, Kibriaul 1984 Prospect of Social Forestry in the Garo Villages of Madhupur, Mimeograph, Department of Sociology, University of Dhaka. Khan Amjad Hossain Md. and Akbar Ali Khan 1987 Surface water strategy, policies and laws in Bangladesh, in Mohammad Ali, George E. Radosevich and Akbar Ali Khan (ed.) Water Resources Policy in Asia, A.A.Balkema,

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Rotterdam, Boston. Narayan, Deepa 1995 The contribution of People’s Participation, Evidence from 121 Rural Water Supply Projects, ESD Occasional Paper series No.1, The World Bank, Washington D.C. National Water Plan 1990, 1991, Government of Bangladesh-UNDP-The World Bank, Dhaka, Bangladesh. Ostrom, Elinor 1996 Private and Common Property Rights, Workshop in Political Theory and Policy Analysis, Indiana University, Indiana, USA. Sadeque, Syed Zahir 1992. “Capture Fisheries and other common property Resources in the Flood Plains of Bangladesh” Journal of Social Studies, Vol.55, 1992, Center for Social Studies, University of Dhaka. Sadeque, Syed Zahir and Susan Turnqist 1995 Handpump Financing issues in Bangladesh: An Exploratory Study, Regional Water and Sanitation Group - South Asia, The World Bank, Dhaka.