Macroeconomic Management: From Stabilization to Growth

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Macroeconomic Management
From Stabilisation to Growth?
This paper examines Bangladesh's macroeconomic performance in the light of market-oriented liberalising policy reforms. By looking at the trends in fiscal, external and investment-savings balances, it analyses how, despite falling inflows of foreign aid, Bangladesh achieved macroeconomic stabilisation and an acceleration of economic growth in the 1990s. The paper concludes that for consolidating the transition from stabilisation to growth, improvements are needed in many areas such as revenue mobilisation, the efficiency of the financial system and the overall investment environment. WAHIDUDDIN MAHMUD

I Background
The macroeconomic scene in Bangladesh, since the early 1970s, has undergone successive shifts in terms of policy environment, often linked with change in the ruling political regime. In the early years following the War of Liberation in 1971, macroeconomic management was primarily aimed at reviving a war-ravaged economy in an overall framework of extensive state control and with an avowed ideology of socialism. The state became the de facto owner of a large number of enterprises that had been abandoned by their Pakistani owners. After the killing of Sheikh Mujib and the change of government, there was a policy shift towards privatisation and promotion of the public sector. The denationalisation of abandoned enterprises continued with varying speed into the 1980s when a second wave of divestment was initiated under the military government of general Ershad. From the late 1970s to the beginning of the 1980s, there was a short-lived episode of investment boom, with investment in both public and private sectors growing at nearly 15 per cent annually in real terms [Mahmud 1995]. This was made possible by relying on an increasing flow of foreign aid and adopting a privatisation strategy based on lavish dispensation of cheap credit and provision of other incentives such as highly protected markets for domestic industries. To a large extent, latter-day problems regarding so-called 'sick' industries and the large-scale default of bank loans originated from this experiment with aid-dependent state-sponsored private capitalism. 1 There was no mobilisation of domestic savings and the investment boom ended abruptly when the external aid climate severely deteriorated in the early 1980s. A major change of direction occurred in the early 1980s with the adoption of market-oriented liberalising policy reforms undertaken along the guidelines of the World Bank and IMF and implemented under fairly rigid aid conditionality. These reforms were initiated against the backdrop of serious macroeconomic imbalances, which had been caused in part by a decline in foreign aid and, in part, by a preceding episode of severe deterioration in the country's terms of trade. The beginning of the 1990s saw the launching of a more comprehensive programme of macroeconomic reforms, which coincided with a transition to parliamentary democracy from a semi-autocratic rule. While the macroeconomic restructuring has had considerable success in

stabilising the economy, the long-awaited transition from stabilisation to growth has yet to gather pace, although some beginnings appear to have been made during the 1990s.

II Trends in Macroeconomic Indicators
The reforms initiated in the 1980s were aimed at reducing fiscal and external deficits to a sustainable level, consistent with the reduced level of aid availability.2 The trends in various macroeconomic indicators over the last two decades are shown in Table 1. During the 1980s, the fiscal deficit came down from 6.6 per cent of GDP in the first half of the decade to 5.4 per cent in the second half, while the external current account deficit was reduced from 6.7 per cent to 4.7. But this success was achieved at some cost. The macroeconomic balances were improved not so much by raising revenue or exports, but by squeezing expenditure on the fiscal...
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