The International Monetary Fund (IMF) in its latest World Economic Outlook report (October, 2017) has given a more optimistic forecast for global economic growth. This report was released in the context of its annual meeting in Washington last month setting out the IMF's policy agenda. The IMF predicts 3.6 per cent global economic growth this year followed by 3.7 per cent the next year. It is now 10 years since the Global Financial Crisis (GFC), the greatest economic collapse we have ever seen in our life time till now. Within this context this optimistic economic outlook is very encouraging.
While describing the economic growth outlook as good news, the IMF Chief Economist Maurice Obstfeld pointed out this growth was marked by an acceleration from very tepid growth rates of recent years. He noted that the predicted longer-run potential growth rates are lower than they were in the past. He further indicated that the current phase of recovery was incomplete in many important ways and then he went on to say that the window of opportunity provided by the current "cyclical upswing'' would not be open forever. His use of the term "cyclical upswing" is very important; this clearly indicates economic conditions have not yet returned to the conditions as prevailed before the pre-2007-08 period.
According to the report the main area of incompleteness of the recovery was wage growth which remained stagnant to fairly slow relative to income earned by people belonging to the top income bracket (possibly he was referring to the one per cent). The report feared that this phenomenon can fuel social and political discontent. In essence it alludes to economic populism which generally refers to a general opposition to income inequality and globalisation (more precisely free trade) and also opposition to money in politics. But economic populism has hardly any grounding in economics and money in politics is a political issue not an economic issue. Nevertheless, we ought to be careful about it as it is a reality now in many developed and developing countries.
The decline in real wages is not a new phenomenon but part of a longer-term trend. Working poor has been a common feature of most industrialised economies for a considerable period of time predating the GFC. Furthermore, flexible working arrangements such as casual, part-time (many of whom accepted such working arrangements involuntarily), including "zero-hour contracts'', are on the increase. A zero-hour contract (or low-hour contract) is where an employer has the discretion to vary the employee's working hours; usually anywhere from full-time to "zero hours''. These flexible working conditions lie at the root of low productivity now in most developed economies. More alarming is the minimum wage is no longer a guarantee to meet living costs or a way out of poverty. Working people on minimum wages are in most cases practically condemned to poverty. Only a living wage can save them from poverty but with rising unemployment and widespread disguised unemployment as well as falling trade union memberships, trade unions are at a disadvantageous position to strike a stronger bargain for a living wage.
In effect the world is still picking through the wreckage of the economic meltdown of 2007-08 and quite unsure what needs to be done differently to restore economic normalcy and more importantly, to ensure that the world does not face this type of calamity again. Over the longer term the failure to lift potential growth and make growth more inclusive would further fuel protectionism. There is now growing discontent among people as reflected in growing political trends towards "populism''.
Populism is a term that can be applied in numerous contexts and extremely difficult to tie it down to a single descriptive phenomenon. It is a veneer to give expression to popular discontent against the powerful elite and provide policies which look and sound that they will work and make things better. But in reality they would not; because they misunderstand or misinterpret the underlying causes of the problem. No wonder their discontent has been directed against globalisation because they blame globalisation for their job losses in manufacturing, offshoring production facilities and fear of immigrants. It is creating a divide between "us'' and "foreigners''. But those compulsive fears mask the far greater role played by increasing industrial automation and its impact on the job market.
The report focusing on the challenges facing emerging markets and developing economies predicted rather a "sobering outlook''. It indicated that nearly a quarter of these economies would likely to experience negative per capita growth and low-income commodity-exporting countries also would face challenges. However, affecting all countries is the concern surrounding the growth rate of trade flows which just barely was above that of global gross domestic product (GDP). The report further stressed that sustaining the current phase of economic expansion would require policy-makers to avoid protectionist measures and do more to ensure that gains from growth are shared more widely.
This slowdown in trade flows has important implications for Bangladesh. Exports of goods and services accounted for 16.5 per cent of GDP in 2016 while imports accounted for 23.2 per cent of GDP during the same year. While Bangladesh has now positioned itself as a manufacturing-exporting country, the export basket is largely composed of one product - ready-made garment (RMG) accounting for about 80 per cent of exports. The products of the RMG industry are mostly targeted towards low to middle-income consumers in developed countries. These products are highly income elastic. With wage stagnation and rising unemployment (including disguised unemployment), any significant increases in export volumes are unlikely given the nature of the targeted market. The diversification of manufacturing has been advocated by policy planner in Bangladesh, but nothing noteworthy seems to have happened on that front yet.
However, remittances from more than 1.0 million workers overseas are the single largest source of foreign exchange earnings. Workers' remittances also kept the current account in surplus for most of the years over the last decade while the country ran trade deficits during the same period. According to the World Bank, Bangladesh is now one of the largest recipients of remittance with about US$ 15 billion in 2015. Since then remittances to Bangladesh have slowed down negatively impacting on the country's balance of payments. The falling commodity prices (i.e. oil) negatively impacting on economic activity in the major host countries of Bangladeshi immigrant workers in the Middle East. With the continuing sluggish oil prices, it is unlikely to see any major turn-around in remittances to Bangladesh.
The Bangladesh economy is expected to grow between 6.4 per cent to 6.8 per cent in 2017 and 2018. But declining exports, falling remittances and rising food (especially rice) price inflation may result in lower than expected growth. However, there are other risk factors that need to be factored in, such as early floods, the Rohingya refugee influx, the political uncertainties in the run up to elections in 2019, delays in fiscal reforms , very low productivity, industrial unrests and rising energy prices in projecting the future growth rates. But the ongoing infrastructure development may help drive growth rates to a higher level in 2018 and beyond.
The writer is an independent economic and political analyst.
muhammad.mahmood47@gmail.com