The economic performance of a country is usually measured through changes in its gross domestic product (GDP), a measure of what the country produces. Bangladesh Bureau of Statistics (BBS) has just announced its preliminary national accounts estimates for FY 2017-18. The main purpose of such an early announcement is to provide information to the policymakers with respect to the budget and determination of fiscal policy. These preliminary results reported that the GDP would grow 7.65 per cent this financial year. [This estimate is in constant prices so the effect of rising prices is removed. Using current prices the economy grew at 13.3 per cent.] The implication is that the economy is growing strongly and now has grown at a rate above 7.0 per cent for three years.
One should note that the preparation of the accounts includes data available by March 2018, much of the first half of the financial year. In preparing the early estimate, BBS projects economic change over the course of the year's second half. There is strong momentum in most of the sectors, so sharp changes in output growth are rare. In recent years, there has always been a lot of criticism of the national accounts and claims from many of Bangladesh's leading economists who suggest the accounts are exaggerated and that economic growth has not gone above 7.0 per cent. These criticisms are discussed here.
COMPARISONS: One point often made is that the World Bank (WB) and Asian Development Bank (ADB) have made projections with lower growth rates. ADB and WB do not have all the data available to BBS; these forecast like all macro-economic forecasts are essentially projecting trends of past data with perhaps some attempts to take account of interrelationships. In the past three years, these forecasts have all been wrong. The trouble is that the only test of whether you are right is to compare with what BBS reports.
AGRICULTURE: We note that agriculture is only 14 per cent of GDP, so its performance has little impact on the overall growth rate of the economy. One criticism is that the agriculture sector grew at 3.0 per cent despite the problems with floods, storms and crop diseases. However, crop production grew at slightly less than 1.0 per cent; this is about the same as the previous two years. Paddy production will show zero increase for the year with a reasonable boro crop, responding to high rice prices. For crop production to grow at 1.0 per cent when paddy production does not increase, would require all other crops to grow at 2.5 per cent. With the diversification of crop production and past production, this is a reasonable figure. Agriculture grew largely from increase in fish and livestock productions.
MANUFACTURING: The increase in manufacturing is the key to the question of the validity of growth rate. The manufacturing sector is estimated to increase by 13 per cent and this increased rate is doubted by many observers. The index of large and medium manufacturing has been growing at 11 per cent per annum over the past four years; output of large and medium industries for the first four months of the financial year increased more than 20 per cent over the previous year. The import of capital goods that are linked to 60 per cent of manufacturing have been increasing. Capital goods for manufacturing increased at about 19 per cent per annum from 2012-13 to 2015-16 while the year 2016-17 saw 24 per cent increase over the previous year. Thus there has been a strong growth of capital goods for manufacturing. Availability of electricity for the manufacturing sector has improved considerably over the past two years with special, highly reliable power lines to key industrial areas. These data support an increased growth rate over the past years.
An important criticism is the inconsistency between the growth of employment in manufacturing and the increase in output. A few points in this regard are: the garment sector is moving rapidly towards greater capital intensity and employment per garment is falling. The sector can increase production through overtime by at least 10 per cent without any increase in the number of workers and capital equipment. At the same time, the substantial investments taking place in the knitting industry is undergoing automation - thereby sharply reducing labour requirements. Textiles and pharmaceuticals are two sectors with substantial importance for manufacturing that are capital-intensive. The productivity increases in the garment sector are quite rapid. Finally, most of the manufacturing is produced by the large and medium-sized factories. These provide the formal jobs in manufacturing. This seems to cover less than 20 per cent of total employment in industry. Hence, changes in the total manufacturing labour force are not accurate measures of changes in output.
CONSTRUCTION: Construction sector growth has increased from about 8.0 per cent to 10 per cent. This seems reasonable given the accelerating pace of construction of the mega projects. It was suggested that the liquidity crisis was possibly reducing credit for construction projects. First, although there is a lot of noise about the liquidity crisis, lending to private sector has continued to grow above 18 per cent. The National Accounts try to estimate the actual work of construction, so that it is driven by loans approved earlier. If this is a liquidity crisis, it will affect the construction sector output in FY 2018-19. Second, one only has to look around when one flies out of Dhaka or when one drives around the city to see the extent of new construction. The same is true in Chittagong.
RELATIONSHIP BETWEEN INVESTMENT AND OUTPUT: This is a common argument that there is not enough investment to support a growth rate of 7.0 per cent. The average capital investment is 30 per cent of GDP over the four years ending in 2017-18. Assuming that 5.0 per cent of investment is replacement for machines and buildings that have to be retired, it means that new investment has averaged 25 per cent of the GDP. The average growth rate over the past four years is 7.1 per cent; this implies an incremental capital output ratio (ICOR) of 3.5. That seems to be consistent. Much of the economy operates with a low capital-output ratio. There does not seem to be an imbalance between investment and output.
ECONOMY IS UNSTABLE: It is reported that one of Bangladesh's most knowledgeable and experienced macro-economists made an argument that the economy is in a period of macro-economic instability and either this was inconsistent with rapid GDP growth or that such rapid growth would increase instability. The second argument I set aside, this article is focused on the validity of the estimated GDP and its components - not economic policy. Does macro-economic stability imply that GDP growth is low? Not at all. Perhaps, it is the opposite indeed. If an economy is driven to grow too fast it generates instability and corrections will need to be made. But the growth of GDP is what the numbers say it is.
The newly-published preliminary National Accounts estimates are consistent with available data. The story that they tell is of an economy growing rapidly. The source of that growth is in the manufacturing sector. For what it is worth I have worked in about 15 countries in the developing world and have seen rapid growth and slow growth, Bangladesh today feels like a rapidly growing economy. That is what the data tell us.
Forrest Cookson is an economist.
