Bangladesh: A Study in Formality

Written By Brian Hicks

Posted January 16, 2007

Just this past year, the Nobel Peace Prize was awarded to Muhammad Yunus, a Bangladeshi businessman whose forays into informal finance have helped thousands get by. But political turmoil marking the turn of 2007 reminds us that Bangladesh cannot subsist without stability.

We are all occasional clients of the informal economy. I’m sure you’ve bought a bottle of water from a kid with a cooler on a hot day, or picked up a rose for a loved one on a whim at a traffic light.

In the developing world, the transactions that take place off the regulatory radar and far from the taxman’s ledger can comprise over half of a country’s economic activity, and employ an even greater chunk of the workforce.

This is not the black market. Most participants in the informal economy are doing nothing more illegal than paying in cash for a transaction that might be conducted by credit card. This is more "under the table" than "underground."

China showed last year that it behooves a nation to take its market stalls and sauntering salesmen into account. That country rocketed past Italy in worldwide GDP rankings after Beijing added $300 billion in off-the-radar trading to its official tally in 2005.

But should the goal of national economists be simply to acknowledge this parallel market? Why does it exist? Bangladesh, through the crucible of its political and economic struggles, can provide some of the answers.

Bordered on almost all sides by India or the Bay of Bengal, Bangladesh is as misunderstood as it is underappreciated. Though it was part of Britain’s colonial territory until 1947, Bangladesh did not gain its independence from Pakistan until 1971.

Since Bengal (Bangladesh means "Bengal country") and what is now Pakistan were predominantly Muslim sections of British India, they were lumped together as Pakistan, like strangers suddenly told that they were twins. Independence in 1971 gave the country the political separation that 1,500 kilometers of geographical distance had not.

Since then, generals have ruled the country for 15 of the past 35 years. The two primary political parties, the Bangladesh National Party and the Awami League, have switched off in a game of political musical chairs marked by immaturity and a notable aversion to power-sharing.

This month’s political transition, marred by chaos, lays bare the reason for such frequent military leadership in Bangladesh.

Elections were to be held on January 22, but amid accusations that the head of the interim government (which takes over between five-year parliamentary terms and is charged with organizing free and fair voting) was leaning in favor of the BNP, Awami League supporters virtually shut down the country.

Rioting and blockades pockmarked the nation’s thoroughfares and ports, costing the textile industry 70 million US dollars a day. Dhaka, the capital and one of the world’s fastest-growing cities, was racked by the protests, and nationwide hundreds were injured and dozens killed.

The international community bristled, and the head of the interim government stepped down, simultaneously declaring a state of emergency that gave the ever-ready military the right to impose order. A new temporary government is now in place, and elections are months off instead of just days.

Multinational Mercenaries?

Besides textile manufacturing and a reputation within the shipping industry as one of the best places to scrap old supertankers, this small country has armed forces that play a significant role on the international scene.

Bangladesh provides the second-most soldiers to UN peacekeeping forces of any country in the world, behind only its former cohort Pakistan. With 10,000 troops in strife-ridden locales far from home, the Bangladeshi army must keep its cool and resist the temptation to overthrow the tenuous democracy it is now expected to bolster at home.

After all, the UN doesn’t want its peacekeepers donning the organization’s blue helmets while their comrades-in-arms prosecute a coup d’état at home. As in any restive land, a political solution must accompany military stabilization for lasting peace to take hold in Bangladesh.

Bangladesh doesn’t just salute the UN out of a spirit of unity. The country pockets some $200 million yearly as reward for its commitment. A military coup would hurt the country’s wallet as well as its reputation.

Perhaps the best way to make a bright spot out of the political blemish on Bangladesh’s body politic is to put an economist in charge. And that is what has happened.

Banking on Bangladesh

Dr. Fakhruddin Ahmed holds a doctorate from Princeton, has worked for the World Bank, was governor of Bangladesh’s central bank, and for the past 18 months managed a top microfinance group, delivering loans within the informal economy without a collateral requirement.

Dr. Fakhruddin (family names are put first in many South Asian cultures) is now the head of the custodial administration that must set up new elections. In this capacity he must save his country from political anarchy while holding on to his economist’s sense of growth.

He should consider the causes of the informal economy in which he and Muhammad Yunus, who won the Nobel Prize with his Grameen Bank microfinance, have so constructively taken part.

Political instability is much of the reason why Bangladeshis must turn to informal economics, as a 2005 World Bank survey found that 80% of the firms in the country lack confidence in the government’s ability and desire to protect their property rights. If entrepreneurs prefer casbahs to office parks, it is no wonder so much is done under the table.

On the same note, there is hope for the formal side of things. The Chittagong "lifeline port" has reopened to the world’s textile industry after weeks of blockades. Sunday, January 14, was the heaviest trading day in a decade on the Dhaka Stock Exchange, with a rebound from the political doldrums spurring many to yell "Buy!" in Bengali.

But it is not enough for an economy simply not to have bad news. There must be some good news on the political scene to encourage growth and institutional confidence in order to help the small businesses that microfinance fosters to coalesce into a modern and mature economy. When formal political will fosters it, a formal economy can flourish.

Sam Hopkins

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