Bangladesh to graduate from LDC status with flying colours

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Published on February 15, 2021
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Just as it had been for past LDC status graduates, Bangladesh will also not face a lot of challenges afterwards for already having proven its economic resilience and potential for sustainable growth, according to a government study.

It can be confidently stated that Bangladesh is going to graduate from its least developed country (LDC) status with flying colours and will keep progressing, on condition that there are no extremely disruptive events, it said.

Only five countries have managed to graduate from the category since the formation of the LDC group in 1971. However, in terms of economic structure, these five countries are quite different from Bangladesh.

Among these former LDCs, Cape Verde and Samoa fall into the category of small island developing states (SIDS) while Botswana and Equatorial Guinea are countries with abundant natural resources.

Equatorial Guinea is the only country to graduate having completed just the income criterion while the rest fulfilled two -- Gross National Income (GNI) per capita and Human Asset Index (HAI).

However, all of them had weaker than desirable scores in the Economic Vulnerability Index (EVI).

In comparison, Bangladesh has a huge population, is not dependent on natural resources and meets the graduation thresholds for all three criteria, said the report.

General Economics Division (GED), a wing under the Ministry of Planning, prepared the "Impact Assessment and Coping up Strategies of Graduation from LDC Status for Bangladesh".

The experiences of former LDCs are not going to be extremely helpful in predicting outcomes of Bangladesh's post-graduation era. Nonetheless, they can offer several insights about how a country can maintain progress smoothly after graduation.

In the years after their graduation, all five countries have improved on the HAI and EVI.

Except for Equatorial Guinea, all the former LDCs have maintained steady progress in the GNI per capita. Equatorial Guinea's fall in income level can be attributed to price instability of its primary export, crude oil.

The few primary indicators for these countries five years both prior and post the graduation gives a good idea about how LDC graduation shaped their economic performances.

A common theme for Botswana, Cape Verde and the Maldives during their respective transition periods has been a slowdown of economic growth. In the immediate post-graduation era, Botswana saw its growth cut down by half while Cape Verde by more than one-third.

The Maldives also experienced slow growth, particularly due to the slow performance of its main export items (fish fillets and frozen fish) to key export destinations (European Union and Japan). Loss of Duty-Free and Quota Free (DFQF) status in the European market created adverse pressure on the Maldivian economy.

Despite a fall in gross domestic product (GDP) growth rate, Botswana's mining industry experienced a boom and the government maintained a high current account surplus and high tax revenue earning owing to the successful diamond mining industry.

The country is closely integrated with global trade and cyclical factors are determinants of growth. But overall, the economic performance of the country has been good since graduation.

One issue that has remained historically challenging for Bangladesh is the collection of tax and revenue in terms of the GDP.

Evidence suggests, during the preparation period, former LDCs had a high starting tax-GDP ratio. And in the post-graduation transition period, they maintained close to 20 per cent.

Overall, the tax revenue collection efforts of Bangladesh will need to go up significantly over the years.

An interesting issue that can be learned from former LDCs are the shares of official development assistance (ODA) with respect to national income and share of foreign direct investment (FDI) against GDP during the transition period.

The proportion of the ODA against income fell whenever any country developed.

Apart from Cape Verde, all other four countries had a three-year grace period for preferential access, international support measures (ISMs) and other LDC-specific preferences. Cape Verde undertook good planning prior to graduation.

The country successfully negotiated with the EU for an additional two-year grace period for Everything But Arms (EBA), the EU's gracious Generalised System of Preferences (GSP) above the original three-year grace period, and some other transition period deals with prominent trade partners like China.

Malaysia and Botswana also planned about the potential negative impact of graduation.

It is to be noted that only the EU and Turkey have an explicit policy for extending LDC specific trade preferences for a transition period. The same is not necessarily true for other countries offering unilateral trade preferences.

For instance, there are no smooth transition provisions in the case of Japan's or Canada's GSP scheme.

"Therefore, one option for Bangladesh is to start planning for the future ahead and negotiate for transition period preferential access, with options for post-graduation trade deals or free-trade agreements with countries of interest," the GED document also said.

All graduated LDCs have experienced a stronger inflow of FDI in the post-graduation era. This has helped them to recover from the early loss of preferential access. Convinced that FDI is critical for achieving robust export growth, Bangladesh is proactively seeking FDI from all countries in the East and West.

Vietnam has shown the way by becoming a dynamic export economy on the back of heavy FDI integration into the export sector. For example, its garment sector is 60 per cent FDI driven.

Three strategic steps are underway to mobilise more FDIs into the economy to reach a target of $10 billion by FY2024. The steps include setting up 100 special economic zones (SEZs), improve the business and investment climate and remove barriers to entry of FDI in any specific sectors like garments, footwear or ceramics.

From Bangladesh's perspective, remittance earning has always been a matter of key interest. A strong remittance inflow helps develop a good reserve of foreign currencies, which provides significant leverage to central banks in maintaining favourable exchange rates.

Former LDCs also faced other problems like unemployment, underemployment, automation and inadequate working opportunities.

They also faced the problem of the declining significance of remittance earnings (as proportionate to their GDP). Therefore, Bangladesh needs to put emphasis on maximising the remittance earning opportunities to tackle any adverse consequences of LDC graduation.

It is essential to remember that all countries are different and likely to have their distinct versions of post-graduation challenges. But a common theme for any graduating country will be loss of trade preferences.

Bangladesh is much better advanced on the development path. The country has a very diversified economy with huge domestic demands for different products while its export performance and remittance inflows are substantial.

Bangladesh has a buoyant private sector with strong entrepreneurial skills. The social fabric is dynamic and the formation of human capital has taken root.

Therefore, with further policy reforms and investments in human capital, technology and institutions, Bangladesh can smoothly transition from an LDC to the road of upper middle income, said the report.