Bangladesh faces the challenge of achieving accelerated economic growth and alleviating the massive poverty that afflicts nearly two-fifths of its 135 million population. Strategies for meeting this challenge have included a shift away from state-bureaucratic controls and industrial autarky towards economic liberalization and integration with the global economy. These policy reforms were initiated in the mid-1980s against the backdrop of serious macroeconomic imbalances, caused in part by the declining level of foreign aid and in part by a preceding episode of severe deterioration in the country’s terms of trade. The policy reforms in the 1980s included the withdrawal of ...view middle of the document...
21 percent annually during the second half of the 1990s). During this time, the progress in the human development indicators has been even much more impressive. Bangladesh is in fact among the top performing countries in the 1990s in terms of the extent of improvement in the Human Development Index as estimated by the UNDP. However, there are signs that continued progress in this respect may prove increasingly difficult, particularly in the absence of strong international support and further consolidation of the economy's growth performance.
The relatively strong growth of the Bangladesh economy in the 1990s was underpinned by even much stronger export growth. That performance has now been put to test by the global economic recession and the threat of post-MFA competition in the export of readymade garment - the country's flagship in the global market. Given the increased reliance on trade, the country's overall economic performance has come to depend to a large extent on how well it can cope with the risks and opportunities in the global market. Undoubtedly, the country will have to deal with a whole range of internal policy issues, from public finance and the financial system to governance and investment climate. But, much will also depend on the changes in the global economic scenario and the way domestic policies respond to such changes. This paper is aimed at particularly highlighting this later aspect in the wider context of Bangladesh's development options and challenges.
2. Trends in Macroeconomic Indicators
The stabilization program was primarily aimed at reducing the fiscal and external deficits to a sustainable level, consistent with the reduced and declining level of aid availability. By the end of the 1980s, the external current account deficit had been already reduced to about 5 percent of GDP from between 8 to 10 percent in the beginning of the decade, and there was a similar decline in the overall budgetary deficit. However, this was achieved by cutting back on investment, both public and private, rather than by mobilizing larger domestic savings. The ratio of investment to GDP steadily declined, and the government's development budget became almost entirely dependent on foreign financing. Throughout the 1980s, the contribution of the government’s fiscal operations to domestic savings, in the form of public savings, continuously declined because of the rapid growth in current expenditures along with a stagnant and low revenue-GDP ratio. As a result, macroeconomic strains started to reappear towards the end of the decade (Mahmud 1995).
Against this backdrop, the macroeconomic indicators showed a marked improvement in the 1990s. Although the net flow of foreign capital further declined to less than 2 percent of GDP, indicating a further decline in foreign aid, the investment GDP ratio steadily increased from about 17 percent in 1990/91 to 23 percent in 2000/01. Furthermore, this increase was almost entirely due...