Structural Adjustment Program:

Bangladesh Perspective

Afif Abdul Fattah Spring 2012

Structural Adjustment Program: Bangladesh Perspective

GEN 214 Development Studies Section -1

Submitted To Touhida Tasnima Assistant Professor Department of Social Sciences East West University

Submitted By Afif Abdul Fattah ID#2009-3-10-069

Submission Date March 11, 2012

In the early 1980s, World Bank (WB) and International Monetary Firm (IMF) recognized that short term stabilization policies prescribed to address economic crisis in developing countries were ineffective because these problems were originated from deep rooted structural weaknesses. Consequently, the Bank and the Fund devised several programs to resolve this crisis through granting concessional but highly conditional loans which were collectively known as Structural Adjustment Program (SAP). Bangladesh was one of the very first countries amongst the 35 to receive structural adjustment assistance. Following is a brief discussion on the impact of SAP in Bangladesh. Internal Policy Reform Privatization of State Firms: After the liberation in 1971, 92% of the manufacturing industries were nationalized. Under the SAP initiative, Government privatized 247 companies during 1975-1981 and 125 companies during 1981-1991 (Bhattacharya and Titumir, 2001). The total aggregated loss of six major state owned corporations was TK. 1044.23 million. The result of privatization was mixed; although some large corporations turned to be profitable, majority of small companies continued to incur losses and finally disappeared. One survey point it out that out of 13 privatized company 2 were profitable and 11 were unprofitable during 1991 (Akash and Sobhan, 1999). The privatization program also had a social cost in the form of disemployement. Removal of State Subsidies: Under SAP, subsidies were reduced or removed in three forms i) export subsidies, ii) public expenditure subsidies, iii) subsidies on agricultural input and iv) cash subsidy to monetized food distribution. However, Bangladesh hasnt reduced the subsidy cumulatively. During 1998, total subsidy was 0.2 % of GDP but in 2008 it has increased to 1.1% of GDP (Ministry of Finance). However, in some sectors the reduction of subsidy troubled the production. For instance, during 1999 Jute subsidy was 22% of total subsidy but in 2008 it was only 3%. Consequently, jutemade-goods production had decreased from 480,925 MT to 295,287 MT during the same period. Improvements in Tax System: In accordance with SAP, GOB has undertaken several tax reforms; such as, introducing VAT in 1991 (Zohir, 1997) and limiting tax holidays. During 1987 to 1999, tax revenue was increased from 7.16% to 11.34% of total GDP (Bhattacharya and Titumir, 2001). Removal of Wage Control: GOB had taken a very liberal approach in Wage Control to advocate competiveness in the labor market. If we compare wage rate indices in urban of FY82-FY86 (prereform) with FY86-FY90 and FY90-FY94, we can see the indices increased in manufacturing sector by 23, 13, 6 and in construction sector 6, 13, -7 during the periods respectively (Bhattacharya and Titumir, 2001). Although a negative growth rate in wage might give the impression of an increased employment but that was not the case for Bangladesh. As a result, urban poverty had further increased in these periods. Reduced Government Workforce: After the mid 80s, Bangladesh reduced government workforce through privatization programs of State Owned Enterprises (SOEs). For instance, during 1996-1997, about eighty nine thousand workers had been retrenched and most of these workers didnt get a job.

However, reduction in government workforce accompanied two benefits; i) it increased growth opportunity for private sectors and ii) it reduced public expenditure.

External Policy Reform Currency Devaluation: Under SAP, the Bank and the Fund advised to devalue Taka to enhance export competitiveness and to contain import growth. Consequently, GOB devalued Taka by 5.6 % between 1990 and 1996. However, Bangladeshs export is heavily dependent on import and due to devaluation of Taka, import became costlier. Thus, the effect was frustrating for export industry. Moreover, devaluation further leads to inflation. A study by Jamsheduzzaman (1998) showed that there was 0.564% rise in inflation for 1% devaluation over a period of two months. Removal or Reduction in Tariffs and Quotas: Trade liberalization through the reduction or elimination of tariffs and quotas is the major goal of SAP. From 1991-2002, the number of Quantitative Restrictions (QRs) was brought down from 239 to 124 items and the number of banned items was reduced from 135 to 5 (Bhattacharya and Titumir, 2001). In the meantime, the maximum tariff rate was also brought down from 350% to 37.5%. Consequently, these initiatives leaded to the rise in the Economic Openness Index form 19% to 35% in the period of 1991-1999. As majority of our manufacturing industry was dependent on the import of capital and intermediate goods, reduction in import tariff accelerated the demand for these goods. Notably, in FY94-FY95 and FY95-FY96, the growth rates for the import of capital goods were 48.9% and 39% respectively and for the import of intermediate goods were 28.8% and 19.3%. A study by Serajul Houqe (2005) reveled that, the reduction in the tariff reduced the Consumer Price Index (CPI) by 3.93%, which was equally reduced nominal wage rate. Accordingly, the demand for labor, hence the aggregate employment, increased by 1.52%. Encouraging Foreign Investment: In general, Bangladesh is one of the most liberal investment regimes in South Asia, placing no limits in foreign equity participation (OECD, 2005). Thus, Bangladesh didnt require to take much separate reforms to encourage foreign investment. Foreign investments were encouraged trough trade and exchange rate liberalization and privatization. From 1998 to 2007, total DFI inflow was $5,510 million and 46% of this investment went to infrastructure sector, 27% to manufacturing industry and 27% to service industry (Hossain, 2007). FDI inflow has affected the balance of payment positively.

In conclusion, we can see that structural adjustment policies have a very mixed effect on the socioeconomic condition of Bangladesh. In general, SAP has not been very successful in removing many of the structural weaknesses, in ensuring sustainable growth and in arresting further marginalization of the poor.

References Bhattacharya, D., & Titumir, R. A. M. (2001). Bangladeshs Experience with Structural Adjustment: Learning from a Participatory Exercise. Second National Forum of SAPRI Bangladesh. Retrieved from http://www.saprin.org/bangladesh/research/BDS.pdf Hoque, S. (2005). The Impact of Tariff Reduction on Bangladesh Economy: a Computable General

Equilibrium Assessment.

Retrieved from http://mpra.ub.uni-muenchen.de/16246/1/MPRA_paper_16246.pdf Hossain, A. M. (2007). Impact of Foreign Direct Investment on Bangladeshs Balance of Payments: Some Policy Implications. Rtrived from http://notunprojonmo.com/wp-content/uploads/2011/07/E18-pn0805.pdf Jamsheduzzaman, (1998). Current Inflation Situation in Bangladesh . Internal unpublished working paper of the Research Department, Bangladesh Bank. Ministry of Finance. Bangladesh Economy: Recent Macroeconomic Trend. (n.d). Retrieved from http://www.mof.gov.bd/en/budget/rw/fiscal_sector.pdf OECD, (2005). Trade and Structural Adjustment: Embracing Globalization. Sobhan, R., & Akash, M. M. (1999). Outcome of Privatisation: The Search for a Policy. CPD. Zohir, C. S. (1997). Macroeconomic Performance During Adjustment: The Case of Bangladesh, The Bangladesh Development Studies. 25. 99-128.