NewsWeek Report

Bullish on Bangladesh

The headlines are grim. But they mask what is shaping up to be one of the world's most amazing turnarounds.

These days, it's not easy to be bullish on Bangladesh. Last month militant labor unions declared war on the country's vital textile industry, attacking dozens of mills and torching several in a struggle for wage hikes and new benefits. And just last week opposition parties bent on toppling Prime Minister Khaleda Zia staged a two-day national strike to demand electoral reforms ahead of parliamentary contests slated for early 2007. Their street actions temporarily closed the country's main port, halted public transport and triggered bloody clashes with riot police armed with tear gas, truncheons and rubber bullets. Observers warn that tensions could escalate as election season approaches; Britain's top diplomat in Dhaka, Anwar Choudhury, has voiced "grave concerns about the level of politically motivated violence."

Civil unrest is always worrisome in a densely populated nation that still ranks among the world's 50 poorest, to be sure. Yet what's remarkable about the grim headlines emanating from Dhaka of late is how little they threaten the country's stubbornly robust national economy. In spite of sporadic unrest, rampant corruption and a polarized political system that's all but dysfunctional, Bangladesh finds itself in the midst of a sustained boom. On June 8, Finance Minister Saifur Rahman forecast that the national economy would grow by 6.7 percent in 2006. The main drivers: surging export growth and a robust service sector.

In textiles, the country's mainstay manufacturing industry, export earnings rose by 17 percent last year to $7.5 billion, confounding forecasts that Bangladesh would lose market share to China once World Trade Organization textile quotas expired at the end of 2004. This year Bangladesh's garment makers expect to garner $10 billion abroad. Foreign investment is rising, too. The attraction is an economy that has expanded by 4 percent or more yearly since 1991, cutting the national poverty rate by 15 percent in the process. "Bangladesh is no more a country of despair," declared Rahman during his annual budget address earlier this year. "It is a country of hope and potential."

The Bangladesh boom defies some of development theory's central tenets. For decades, experts have identified political stability and effective governance as critical prerequisites for economic takeoff. But this lowland nation of 145 million is making tangible progress largely without them. Bangladesh now leads South Asia in most social-welfare indicators—including female literacy and poverty reduction. Its fertility rate is near replacement level. And Bangladesh is the only South Asian country on track to meet its United Nations-mandated Millennium Development Goals of reducing poverty by half by 2015. "When I go to India or Pakistan from Bangladesh, people ask, 'What is it you do, cook up all your statistics?' " says Muhammad Yunus, founder of microlender Grameen Bank. "They ask, 'Why are we falling behind when we're doing the right things, while you are doing the wrong things but getting the right answer?' "

There's no pat explanation for Bangladesh's unlikely success. Certainly, experts agree that the country urgently needs better governance to achieve its full potential of double-digit annual growth. Yet the country has disproved one assumption: that Asia's dynamic twin giants—China and India—would grow at the expense of their less efficient, less open neighbors. Instead, Bangladesh looks attractive as a cost-beating sweatshop economy precisely because China and India are thriving. Both have grown more expensive as manufacturing bases relative to Bangladesh, and rising domestic demand within each makes them attractive destinations for Bangladeshi exports.

In textiles, for example, Bangladeshi workers earn less than $1 a day to start, the lowest in the world, according to the International Labor Organization. Exploitation is rife, to be sure, but the mills nonetheless have given more than 2 million people—the vast majority women—nonagricultural wage jobs. In response to last month's factory raids, the government, industry bosses and labor unions cut a deal to raise wages in a pact announced last week, reducing the risk of further unrest. "As wages rise in China, Bangladesh will increasingly fill in the void," says Debapriya Bhattacharya, executive director of the Center for Policy Dialogue (CPD), a private think tank. "Bangladesh will not only successfully compete with Indian products abroad, but has a high potential to expand its market within India itself."

Funds critical to the nation's development often come from an unconventional source—broad-based microcredit schemes targeting the poor. Pioneered by Grameen Bank after Bangladesh's killer famine of the early 1970s, the strategy is to promote grass-roots development with collateral-free loans to poor households for investment in seeds, livestock, irrigation or village-level businesses. Today, an estimated 80 percent of households participate in some form of microcredit from Grameen or nongovernmental organizations.

That makes Bangladesh the test case in a new development-financing model. Experts laud microlending for a string of positive side effects. By targeting women (who have proved more reliable borrowers than men), lending schemes have pushed female participation in the labor force to among the highest in the developing world. As a result, Bangladesh's birthrate has plummeted, poor families have opted to put their girls as well as boys in school and women have taken a large role in local government—all in a predominantly Muslim country. "At the grass roots things have worked quite well," says Ifzal Ali, chief economist for the Asian Development Bank in Manila. "Rural literacy, basic health, provision of water [are] beginning to pay dividends. Compared to 3 to 4 percent growth earlier, there is now 6 to 7 percent. They're doing something right, no doubt about it."

But a concerted clean-hands campaign is needed to kick the economy into high gear. Corruption largely explains the endless red tape, crumbling ports and barriers to foreign investment that keep the country from achieving its full potential. "It's a barrier to every step we need to take," says Yunus, who adds without irony: "If we can bring down our corruption to the prevailing level in South Asia, our growth rate would be 9 to 10 percent."

Should Bangladesh experience destabilizing political turmoil in the coming weeks or months, its economy would certainly suffer. Tension in the garment industry remains high. Abdus Salam Murshedy, vice president of the Garments Manufacturers and Exporters Assocation, warns that the government "must protect our factories [from protesters], or else our achievements will be reduced to zero."

Yet even now, foreign investors have multibillion-dollar projects on the drawing board in Dhaka. The Indian conglomerate Tata has proposed building a steel mill and a power plant worth $2.5 billion in the area. And the government remains upbeat. "We could accelerate the growth momentum remarkably without destabilizing macroeconomic fundamentals," says Rahman, the Finance minister. Then, perhaps, Bangladesh would make headlines for something other than killer cyclones or riots in Dhaka's streets.

>> Source: George Wehrfritz and Hassan Shahriar, Newsweek Int’l, Issue: June 26, 2006