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p. 2 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government’s Development Strategy III. ADB’s Development Experience IV. ADB’s Strategy V. ADB’s Assistance Program VI. Risks and Results-Based Monitoring and Evaluation

Country Strategy and Program Update 2006-2010: Bangladesh

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I. Current Development Trends and Issues

A. Development Context

1. Despite poor conditions at the time of independence and its extremely high vulnerability to natural disasters, Bangladesh's achievements in macroeconomic management and social development have been impressive compared with many Asian countries (Table 1). The country has achieved steady annual economic growth of 4-5% since the 1990s, with fiscal and current account imbalances contained at manageable levels, low inflation rates, moderate public debt, and stable interest and exchange rates. During the 1990s, national poverty fell from 59% to 50%, one of the fastest rates of decline recorded worldwide. Infant mortality was halved and life expectancy increased from 56 to 65 years. Over the past 5 years, average economic growth exceeded 5% and poverty incidence continued to decline. The vast majority of children now attend primary school, and gender parity has been achieved in primary and secondary education with a committed Government policy for girls' education.

2. Although the overall governance setting is marked by poor law and order, systemic corruption, and a decline in civil service quality, several positive aspects of governance explain Bangladesh's success in accelerating growth and reducing poverty over the past decade. Since the 1990s, the Government has increasingly supported private sector development through sound macroeconomic management and measures to open up the economy. The sustained use of public resources to support technological progress in agriculture, rural infrastructure, health, and education, combined with progressive policies to ensure community participation and strong partnerships with nongovernment organizations (NGOs) to deliver grassroots public services, have helped Bangladesh make a strong start in meeting the Millennium Development Goals (MDGs). As a result of open labor market policies, income from remittances and peacekeeping is now equivalent to 50% of export earnings, much of which directly benefits the rural poor.

3. Still, national income remains extremely low, with national gross domestic product (GDP) at about $56.5 billion and per capita GDP at $418 in fiscal year (FY) 2004. As a result, nearly half of the population remains poor, maternal and child mortality rates are extremely high, education quality is poor, gender discrimination continues, and efforts to overcome poverty face numerous constraints. The population growth rate fell from 3% in the 1970s to 1.3% in 2004. With about 140 million occupying 147,570 square kilometers of land (population density nearly 1,000 people per square kilometer), Bangladesh is one of the most densely populated countries. Two thirds of the rural population are landless or near landless, and the productive agricultural land is often inundated by regular floods. The population of Dhaka, one of Asia's megacities, has expanded to 12 million, straining urban services, threatening public health and adversely affecting the environment. Providing the necessary infrastructure while generating productive employment, safe habitats, and responsive public services for the poor and for new entrants to the labor force are tremendous challenges.

4. A dynamic private sector, a growing skilled labor force, a capable network of NGOs, and dedicated elements of the public service are drawing on their respective resources, talents, and capacities to address the tremendous array of constraints that are keeping the country from realizing its full economic and social potential. But Bangladesh faces even formidable challenges: the urgent need for improved law and order, better infrastructure, sound financial markets, quality social services that are accessible and affordable, clean urban habitats, and an enabling environment for private sector development.

B. Economic Growth

5. Rapid economic growth has underpinned poverty reduction efforts. Real annual GDP growth averaged 5.3% during 2000-2004 up from 4.8% in the 1990s, and 3.5% in the 1980s. The GDP growth rate reached a record level of 6.3% in FY2004. Although income inequality increased over the past decades, the poor benefited from the growth process with a decline in rural and urban poverty. The stable macroeconomic environment and measures to open up the economy resulted in annual export growth of 11% in the 1990s with substantial employment generation, especially in the ready-made garment (RMG) sector. Macroeconomic stability, strengthened banking operations, and open labor markets contributed to a significant rise in remittances, at approximately 6% of GDP by FY2004. Remittances have reached the rural poor, helped to finance the purchase of land and agriculture inputs, and contributed to improved human resources. Furthermore, investment in irrigation, research and extension, together with more liberal agriculture input and output markets, triggered a rise in productivity, especially in rice cultivation and fisheries. Pro-poor public expenditures directed at rural infrastructure also contributed to a significant increase in nonfarm activity, employment, and income.

6. The positive economic growth momentum continues. Growth is estimated at 5.4% in FY2005, a remarkable achievement considering the severe floods that affected about 38% of the country, extensively damaging standing crops, infrastructure, and livelihoods of 36 million people across 39 of the 64 districts. Private sector-led growth in FY2005 remained buoyant despite shocks resulting from US dollar depreciation, higher oil prices, and increased frequency of hartals (general strikes) and violence.

7. A decade of double-digit growth in exports of goods and services and increased remittances have generated the resources required to boost imports of capital goods and raw materials, and to maintain a comfortable level of external reserves. Inflation has been contained in the single digits for nearly two decades. Since 1995, the total stock of government debt has stabilized at 45-50% of GDP, while external debt service has fallen from 16% of total exports in FY1992 to 6.6% in FY2004, largely due to a sharp increase in exports and the concessionary nature of the external debt. Though fiscal policy remains expansionary, the fiscal deficit was reduced from 6.2% of GDP in FY2000 to 4.5% in FY2005. While fiscal performance has been broadly consistent with the goal of price stability and debt sustainability, it has been less successful in promoting full employment: 40% of the population is estimated to be unemployed or underemployed. With Government revenues at less than 11% of GDP (compared with a regional average of 19%) the growing demand for infrastructure, social services, and other basic public goods cannot be met. For example, the energy sector requires $600 million per annum to meet existing and growing demand for energy, compared with the actual investment of $300 million.

8. Public and private investment has remained stagnant since the mid-1990s, with the former making up 6-7% of GDP, and the latter 15-17%. Although much more public investment in infrastructure and services is badly required, prospects for a significant increase in public investment are limited by the very low government revenue base, and major new quasi-fiscal obligations that will need to be addressed in coming years, including for recapitalizing nationalized commercial banks, and covering retrenchment costs of employees of loss-making state-owned enterprises (SOEs).

9. New sources of growth will need to be nurtured to sustain the country's current achievements, and to move to a higher annual growth path of 7-8% needed to achieve poverty reduction objectives and related MDGs. New sources of growth can be achieved by expanding the nonfarm rural economy, promoting small- and medium-sized enterprises (SMEs), fostering export diversification, tapping information and communication technology (ICT), and enhancing investment opportunities by boosting factor productivity. To accelerate pro-poor growth, private investment will need to increase and become more productive. This is a daunting challenge, given changes in global and domestic markets. The phase-out of the Multi-Fiber Arrangement poses an immediate threat to RMG manufacturing, which has been a major contributor to the economy's growth over the last decade. Availability of cultivable land, which has been an important source of agriculture growth, has been declining, affecting not only agriculture production but also the rural nonfarm sector. Expansion of private investment is constrained by inadequate infrastructure (e.g., power and ports), poor law and order, corruption, and burdensome regulation. Inadequate access to finance is a major constraint to investment, disproportionately affecting SMEs, the largest segment of Bangladesh's enterprise sector.

C. Political Environment

10. Although democracy is firmly entrenched, confrontational politics is a source of potential instability and political uncertainty that adversely affects Bangladesh's international reputation and investment climate. The two major political parties-the Bangladesh Nationalist Party and the opposition Awami League-have yet to reconcile their differences. The frequency of hartals and violence has increased, impeding economic progress as the country enters the fifth year of the Bangladesh Nationalist Party-led alliance Government. The Government has stepped up measures to improve the law and order situation, but progress has been limited. The Awami League has been boycotting parliamentary sessions, making political consensus difficult. However, party manifestos and policy debates suggest that the two major political parties have a near ideological consensus on economic policy matters; all major parties support democratic, market-oriented development.

D. Poverty

11. A few decades ago, poverty in Bangladesh was primarily caused by landlessness, vulnerability to natural disasters, and limited opportunities for employment in subsistence-oriented agriculture. As a result of vastly improved transport and communication networks, rural labor has become more mobile; farming has become more market-oriented; and the poor are now able to draw their livelihoods from a continuum of farm, off-farm, rural, and urban activities. Microfinance initiatives, the RMG sector, and rural education have fueled the increasing participation of women in the labor force and their growing economic empowerment. This has helped spread access to cash income throughout the year. Urbanization and repatriation of out-of-country remittances, while fueling income inequity, have made a positive contribution to poverty reduction. Overall, the rural poor tend to be landless, live in remote areas, and have inadequate access to basic infrastructure and services. Urban poverty is associated with limited employment opportunities, poor health, inadequate water supply and sanitation facilities, and frequent eviction of squatters by the authorities. Human security in both rural and urban areas is particularly inadequate due to crime, violence against women, and uneven law enforcement. But increasing mobility, flexibility, social networks, and human capital influence the livelihoods and prospects for poverty reduction for the majority of the poor.

12. Despite considerable progress, Bangladesh is still one of the world's poorest nations, with average GDP per capita only marginally higher than the dollar-a-day international poverty standard. In 2000, about 50% of the country's population was classified as having incomes below the national poverty line, compared with 59% in 1991/1992. ¹ In the 1990s, the incidence of extreme poverty declined from 43% to 34%. Still, the absolute number classified as poor remained virtually unchanged at around 63 million in 2000 because of population growth. While its methods are not comparable to the 1990 and 2000 surveys, the results of the 2004 poverty monitoring survey suggest that poverty incidence decreased by about 5 percentage points between 1999 and 2004.² This is consistent with the performance recorded in poverty reduction during the 1990s.

13. Over the past two decades, progress in reducing human poverty proceeded even faster than the progress in reducing income poverty, due largely to the positive effects of substantial public investment in rural transport and social services. The human poverty index fell from 61% in 1981/83 to 47% in 1993/94, and to 36% by 2000.³ In 2003, for the first time, the United Nations Development Programme (UNDP) placed Bangladesh in the medium human development category, along with its neighbors-Bhutan, India, and Sri Lanka. Bangladesh has made steady progress toward achieving the MDGs, and is broadly on-track to achieve its 2015 targets. Major achievements include higher rates of primary education enrollment, gender parity in primary and secondary education, higher literacy rates, rapid decline in the population growth rate, and steady reduction in infant mortality. However, overall levels of human development including functional literacy are still low. Child malnutrition rates are among the highest in the world, while maternal mortality rates are among the highest outside sub-Saharan Africa.

14. In the past decade, progress in reducing the poverty head-count was faster in urban than in rural areas, due to expansion of labor-intensive manufacturing and services. In contrast, more progress was made in addressing absolute deprivation in rural areas, as measured by the improving trend in the rural poverty gap, due in large part to microfinance and other NGO-supported initiatives targeted to poor rural women. In the 1990s, inequality increased as economic growth rates accelerated, but income poverty rates decreased more quickly. Real agricultural wages increased from about Tk20/day in 1983/84 to about Tk32/day in 2004, boosting the welfare of the landless and land-poor farm community.

E. Governance

15. Economic growth and poverty reduction continue to be frustrated by a lack of accountability, transparency, and predictability in the way government operates. In addition to corruption and poor law and order, key governance issues include excessive centralization of decision-making authority, lack of judicial autonomy, weak enforcement of contracts and inadequate access to commercial justice, rigid administrative orientation of the public service, scant use of modern governance technology (e.g., e-governance), and dearth of opportunities for ordinary citizens to participate in public decision making.

16. Albeit slow, the Government is making steady progress in addressing some broad governance issues, including improving fiscal management, financial management, project documentation and processing, public sector management efficiency, and corporate governance in key sectors. Recent measures by the Government to address core governance issues include the creation of the Anti-Corruption Commission (ACC), strengthening of law enforcement agencies, establishment of regular courts in the hill districts where the majority of the country's indigenous peoples reside, initial steps to separate the judiciary from the executive, and various civil and criminal justice reforms. The Government has initiated a national integrity strategy aimed at combating corruption in the Government. A broad consultation process has commenced for this purpose with the support of Bangladesh's development partners (DPs).

17. The results of sector reform programs are encouraging, particularly in terms of reconstitution of regulatory bodies (e.g., the Energy Regulatory Commission, now functional), corporatization⁴, tariff setting and the separation of policy making from management functions in the power sector, enhancement of stakeholder participation in urban sector planning and management, improvement of capital market regulation and supervision, and adoption and enforcement of regulatory standards in the transport sector.

18. The needs of the poor are well met in areas that have a diversity of service providers, more local decision-making, and active efforts to empower the weak and excluded segments of society. Creating space for private sector and NGO service provision, commercializing public sector activities, fostering public-private partnerships, and gradually decentralizing responsibilities to local governments have helped transform many poorly performing and unresponsive central government services into competitive, accountable, and demand-driven services that reach the poor and provide good value for money.

F. Flooding and Disaster Management

19. Every year, large parts of Bangladesh are flooded, but severe floods inflict the most damage. In 2004, severe flooding caused an estimated $2.3 billion in damage and income loss. In total, 39 of 64 districts and 36 million people (27% of the total population) were affected. The Government is adopting a holistic response that integrates disaster prevention; development of early warning and monitoring systems; awareness building, education, and training (of both experts and citizens); and relief and reconstruction. In the medium to longer term, however, more emphasis is needed on mitigating and managing future floods rather than attempting to prevent them completely. A culture of disaster prevention and resilience must be fostered at all levels.

20. A combination of international, regional, and national interventions will be needed to reduce disaster risks and improve mitigation capacity. A high regional priority is to improve management of the Ganges, Brahmaputra, and Meghna rivers, including regular exchange of key data and information on flood and water levels. The Government has proposed establishing a multilateral river commission, with representation of the governments of Bangladesh, Bhutan, People's Republic of China, India, and Nepal to improve transboundary river management.

G. Country Capacity

21. The civil service comprises over 1 million staff in 37 ministries, 11 divisions, 254 departments and 173 statutory bodies. While the size of the civil service has doubled over the past three decades, the quality of public administration has declined, as has the real purchasing power of salaries paid to civil servants. Weaknesses in public sector capacity stem from politicization of the civil service, poor quality of intakes, a generalist approach to administration, bureaucratic centralization, a culture of secrecy resulting in low accountability, lack of results orientation with an emphasis on process over efficiency, inadequate training and capacity-building efforts, limited performance incentives, and weak performance monitoring. Technical and administrative constraints, combined with inadequate resources and limited authority, hamper efforts to build local capacity. To improve public administration, the Government is reorganizing the ministries along functional lines and providing a 40% civil service pay increase over 18 months beginning January 2005.

22. Forging robust public-private-NGO partnerships is essential to ensure that capacities to serve the poor are in place. Bangladesh has a flourishing civil society, including some of the world's most innovative NGOs and community-based organizations, and a diverse free press. The private sector is growing rapidly, and foreign investors, while a small force in the total institutional landscape, are growing in number and influence, particularly in the labor-intensive manufacturing, energy, and telecommunications sectors.

H. Gender Assessment

23. Women in Bangladesh remain particularly vulnerable to poverty. Historically, socially prescribed roles have limited women's access to economic resources, political participation, and other forms of decision making. Women's earnings are almost 50% less than men's, and women's employment is concentrated in sectors characterized by low returns and temporary employment terms. About 30% of adult women are able to read and write compared with 50% of men. Human trafficking, particularly of women and children, continues as an extreme manifestation of both deprivation and gender violence. Although attention to gender concerns is increasing, women continue to have a limited political and economic voice.

24. The role of women in economic and social development has improved over time, making a major contribution to poverty reduction. Participation of women in the wage labor force has increased, particularly with the 2 million jobs in the RMG sector. In rural areas, women regularly provide cash contribution to household income because of their widespread access to microfinance schemes. With higher cash incomes, more women are able to access health services; this has contributed to a decline in infant mortality rates and an increase in female life expectancy. Women's social mobilization has contributed to reduced fertility rates and improved health of family members. Girls are now enrolling in primary school on an equal basis with boys, indicating a significant change in family attitudes to the value of girls, not only economically, but also as individuals with a right to learn.

I. Private Sector

25. The private sector accounts for close to 70% of total investment, 80% of GDP, and 90% of total employment. Successive governments have recognized the need to foster development of the private sector as the main engine of growth. Maintaining a stable macroeconomic framework, opening up the economy including privatization of a number of nationalized industries, allowing private investment in many previously restricted sectors (including finance, energy, and telecommunications), and removing government involvement in trade and distribution of agricultural inputs (seeds, fertilizers) have boosted investor confidence and contributed to private sector-led growth. Attracting private investment in large infrastructure projects, particularly in energy and telecommunications, has substantially reduced the Governments budgetary burden.⁵ Nonetheless, Bangladesh continues to be an underperformer in terms of attracting foreign direct investment (FDI), averaging about $430 million annually in recent years.

26. Although the investment climate compares favorably with most South Asian countries, particularly in terms of its competitive labor costs and flexible labor laws, the cost of doing business in Bangladesh is perceived to be high. High costs are a reflection of corruption; weak law and order; inadequate infrastructure and services, particularly in the power and port sectors; gaps in the skills base; and distressed financial markets. While policies relating to private sector development are generally favorable, an effective regulatory framework to ensure that such enabling policies are actually enforced has yet to develop. Public procurement procedures remain vulnerable to political interference, while excessive bureaucracy imposes additional costs and reduces transparency and efficiency.

27. SMEs, which contribute 40% of manufacturing output and about 80% of the industrial work force, are hampered by limited access to medium- to long-term credit, markets, technology, and information. Banks and other financial institutions generally prefer large enterprise clients because of the lower transaction costs, and greater availability of collateral. SMEs also fall outside the reach of microfinance schemes, and are thus compelled to depend more on informal sources of funds at much higher interest rates.

J. Environment

28. Water and air pollution have emerged as serious problems in most urban areas, particularly in Dhaka, due to unplanned urban development, unchecked vehicle and industrial pollution, and inadequate urban sewerage and sanitation services. The arsenic contamination of groundwater is a major environmental concern-contaminated wells exceeding the Ministry of Health standard of 0.05 milligram (mg) arsenic per 1 liter of water have been identified in 61 districts and in about 30% of the nation's total tube wells. In addition, immense risks to the natural ecology could result from global climate change, including more intense natural disasters in the form of recurrent floods, cyclones, storms, and drought. Some progress in environmental management has been made: in Dhaka, recent efforts to introduce compressed natural gas and to substitute unleaded for leaded fuels, while yet to be fully enforced, are showing encouraging results; and the ban on plastic bag use for packaging has helped reduce long-life urban waste.

K. Regional Cooperation

29. Bangladesh has the potential to become a transport and transhipment center for the subregion. Bangladesh borders India and Myanmar and is in close proximity to the landlocked countries of Bhutan and Nepal. With the opening of the Jamuna Bridge and development of the Padma Bridge, the Dhaka-Chittagong transport corridor and other strategic transport corridors can serve to link the northeastern states of India to Bhutan, Nepal, and West Bengal. Bangladesh is a key member of several regional cooperation initiatives including South Asian Association for Regional Cooperation (SAARC); South Asia Free Trade Area (SAFTA); and Bay of Bengal Initiative for Multi-Sector Technical and Economic Cooperation (BIMSTEC).⁶ Bangladesh's economic ties to East and Southeast Asia have increased as a result of FDI associated particularly with the RMG sector. Deepening economic ties with East and Southeast Asia, by easing barriers to trade and investment, is central to Bangladesh's regional cooperation vision.

30. Deficiencies in key infrastructure and a lack of transit rights frustrate opportunities for economic integration with Bangladesh's near neighbors. Improvements in regional initiatives under the SAARC and, particularly, bilateral agreements between Bangladesh and India are required to facilitate trade in energy, to enhance cross-border transit trade, to effectively promote environmental cooperation including cross-border watershed management and disaster management, and to combat trafficking of women and children.

31. ADB's regional cooperation strategy and program (RCSP) for South Asia (2005-2008)⁷ focuses attention on the need to accelerate economic cooperation between Bangladesh, Bhutan, India, and Nepal. Subregional projects being formulated include improving road networks connecting the participating countries, and developing regional railway and power projects. The ADB-supported South Asia Subregional Economic Cooperation (SASEC) program identifies several multiregional projects and initiatives. Other subregional groupings, such as BIMSTEC, are advancing rapidly and will serve to broaden the regional cooperation focus from South Asia to parts of East and Southeast Asia.

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