Bangladesh’s potential is being undermined by political instability, writes Asad Ali, analyst at IHS Country Risk.
With the eighth-largest population in the world, low labour costs and an average GDP growth rate of 6% over the past decade, Bangladesh has been building a strong case for its emerging status as a frontier market. The Awami League (AL) government, which has been in power since 2009, has a pro- investment outlook, while – unlike in neighbouring India – domestic businesses and society as a whole is broadly open to foreign investment. Importantly, Bangladesh’s security situation has also improved. The capability of extremist militant groups has been reduced through a comprehensive and relatively robust counterterrorism policy under the AL. Attacks that do occur are infrequent and low-level, mostly against secular sections of society.
However, despite all this progress, challenges to development and investment remain. Moreover, persistent political instability threatens to undermine the government’s ability to face these problems, and as a result, the country’s full potential. Born out of a civil war in 1971, and marred by high-profile assassinations and military coups, Bangladesh’s political history has been turbulent. Since 2014, this instability has deepened even further, as the decades-old rivalry between the leaders of the country’s two principal political parties has intensified.
Challenges to the ready-made garment sector
The ready-made garment (RMG) sector has arguably been the driving force behind Bangladesh’s growing positive investment reputation. Cheap labour cost is the primary reason for Bangladesh’s competitive edge, supported by acceptable quality standards for mid to entry-level retailers. Roughly 80% of the country’s exports are RMGs and nearly 3.6 million workers are employed at over 5,000 factories across the country. The sector is well set to develop even further with rising costs and decreasing availability of labour in China – by far the current world leader of garment manufacturing.
However, the Rana Plaza accident in April 2013, when more than 1,100 garment factory workers died in a factory collapse in a Dhaka suburb, has placed the international spotlight on the Bangladeshi RMG sector’s poor safety record. The US excluded Bangladesh from its Generalised System of Preferences (GSP) programme the following June to press for stronger regulations and the Bangladeshi government has responded by entering into two separate safety accords with western retailers. The government also entered into the Trade and Investment Co-operation Framework Agreement (TICFA) with the US to improve factory standards. The sector has been beset by concerns about growing industrial unrest over wages too. Until 2010, the minimum wage in Bangladesh had been unchanged since 2006. Concern over safety standards also brought attention to this and working conditions and the government agreed to raise the minimum wage by more than 70% in December 2013. The US government has also worked the treatment of unions and working conditions into its review process for rewarding Bangladesh with the GSP status.
Rising wage costs are not surprising. Most European and US retailers have factored in a 30% increase in costs by 2020. However the continued financial viability of Bangladeshi RMG exports is contingent upon a simultaneous and gradual improvement in efficiency and quality. But this process has been complicated because of the somewhat unexpected dual pressure of improving safety standards. Government management of this transition will be vital going forward if Bangladesh is not to lose market share to other emerging manufacturing hubs such as Myanmar and Cambodia, as retailers look to find alternatives to China.
What is certain though, is that the Bangladeshi government is set to focus on the sector that has become the backbone of the economy, not least because a third of parliamentarians have financial interests in RMG manufacturing. This in turn has created a host of unique tax and policy incentives. The concern here is that in focusing on RMG exports, the government will hedge the country’s economic future on a troubled sector that is dictated by volatile external demand. Government attempts to diversify to other sectors, such as IT and pharma, have been half-hearted. The need for diversification will present investment opportunities, but the Bangladeshi leadership has to recognise this first and create the suitable regulatory and tax environment for this.
A Chinese boost to infrastructure?
Poor infrastructure is probably the foremost challenge to improving Bangladesh’s investment profile. In the World Economic Forum’s Global Competitiveness Report 2014-2015, the infrastructure deficit ranked as the top concern for businesses in the country, ahead of corruption and inefficient government bureaucracy. Transportation time from the capital Dhaka to the main port in Chittagong around 240-odd kilometres away can take longer than a day, often longer during periods of political instability. Moreover, the port itself is operating at peak capacity, handling 80% of the country’s marine cargo. An upgrade or a new port altogether is therefore needed to maintain export growth. A World Bank report in April 2014 suggested that Bangladesh needs at least US$74bn of investment in its infrastructure to completely overhaul the deficit by 2020. The target is admittedly overly ambitious, but the money involved gives an indication of the scale of the task facing the government. The seemingly perennially stalled Padma bridge project sums up the difficulty of tackling the lack of infrastructure without first reducing rampant graft. In June 2012, the World Bank withdrew its US$1.2bn financing for the project, saying that it had evidence of high-level government corruption. Despite the scale of the challenge, the upshot is that the government will have to keep the private sector involved to maintain financing and development, therefore creating a steady stream of high-risk opportunities for investors.
Another positive for infrastructure is that Bangladesh features in China’s plan for increased economic connectivity in Asia. The Chinese leadership is very serious about the ambitious project to create a series of economic corridors connecting mainland China to the Indian Ocean, having recently announced US$46bn worth of investments in Pakistan’s infrastructure and energy sectors in April 2015 – the first in its new Silk Road Economic Belt suite of projects. Similar Chinese investment is feasible in Bangladesh, although not on the same scale. Last month, Bangladeshi media reported that China had offered as much as US$20bn in soft loans for a host of railway projects, including the Padma Bridge and the Dhaka-Chittagong track. However, the reports suggested that Dhaka was still negotiating the terms and conditions of the loans. If the funding materialises, the investment will be a huge boost for Bangladesh’s infrastructure, which investors can seek to capitalise and even build upon after its completion.
Election dispute undermining governance
The government’s role in leading development is vital, but its effectiveness has been undermined by the prevailing instability. The root of the ongoing political impasse is the January 2014 parliamentary election, which was one of the most violent in the country’s history. In October 2013, the opposition Bangladesh Nationalist Party (BNP), which previously governed for three terms, began a nationwide protest movement to demand the election be administered a neutral caretaker government – a system that the AL government abolished through a constitutional amendment in 2011 – over concerns about the ruling party manipulating votes.
Despite Molotov cocktail attacks, widespread fighting between protesters and police and hundreds of fatalities, Prime Minister Sheikh Hasina remained entrenched in her government’s position and the BNP eventually decided to follow through with threats to boycott the election. The result was a forgone conclusion: the AL swept the election amid a low turnout (22%) and the BNP was left making demands for a fairer election but without any official political representation.
A lull in violence followed the election, but at the time IHS assessed that street protests would re-emerge given the BNP’s inability to exert its influence politically and the lack of incentives for the AL to meet BNP demands. Soon enough, on the anniversary of the election in January 2015, the BNP called an indefinite nationwide blockade and intermittent general strikes (locally known as ‘hartals’) to press for another election. As many as 130 people were killed before the movement lost momentum in late March.
Underpinning the AL-BNP dispute is the bitter rivalry between Prime Minister Hasina and Khaleda Zia, a two-time prime minister herself. The two have feuded for decades and the prospect for them to actually come to a political compromise, the only long-term solution to the political impasse, is slim. The closest the two came to some dialogue came in October 2013 when they spoke briefly on the phone. But the content of the call, which was leaked to Bangladeshi media and featured the pair trading a flurry of accusations, only demonstrated the depth of their mistrust.
Without political compromise, Bangladesh is likely to continue to experience bouts of violent protests in the coming years, lasting up to a few months at a time. The unrest is likely to exacerbate existing risks of supply chain and cargo disruption, but a prolonged period of unrest will have broader and more long-term implications. While Bangladesh has demonstrated resilience and resourcefulness in achieving what it has in its short history, we feel that a lack of political stability will ultimately have a negative effect for the country’s development.
Under the current status quo, which is likely to continue, the AL government appears to be preoccupied with keeping the BNP at bay, reducing the amount of time and resources it devotes to the economic and operational problems discussed above, such as infrastructure, diversification, corruption and governance.
Moreover, with the BNP severely weakened politically, the lack of an effective opposition allows the ruling party to consolidate its power. One-party rule creates an environment where power can be abused, adding to the already high levels of corruption and nepotism. It also allows the government to pursue a hardline stance against any remaining opposition.
One potential game changer is the military, which over the years has been active in politics having initiated several failed and successful coups since 1971. So far, the military leadership has been content to let the parties compete against one another during the current unrest.
However, a new chief of army staff is due to be selected this summer. A new leadership that is more open to direct political intervention could shake up the status quo. Rising unrest would give indications of the new leadership’s stance, giving the military a satisfactory pretext to remove the government. Expect the BNP to test the waters by starting a fresh movement before the end of the year.