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Implications of the global economic crisis for the Bangladesh economy

Raihan, Selim (2012): Implications of the global economic crisis for the Bangladesh economy. Forthcoming in:

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Abstract

There is no denying the fact that the recent global economic crisis has profound implications for the developing countries like Bangladesh. This paper has explored the impacts of global economic crisis on the economy of Bangladesh in a general equilibrium framework. The CGE model for Bangladesh economy is developed with a Social Accounting Matrix for the year 2007 as the database. Analysis of the trend and pattern of the global economic crisis suggests that global economic crisis led to some negative impacts on the Bangladesh economy through two major channels: slumps in exports and remittances growths. Three simulations have been conducted considering export and remittance shocks and their short term and long term effects are explored under different factor market closures. The results of the simulations suggest that during the global economic crisis the growth in total exports was much lower than those during pre-crisis periods and the export growth was mainly driven by the growth in non-RMG sectors. Under the export simulation, the woven and knit RMG sectors would experience contraction and there would be some expansions of the non-RMG export oriented sectors. Because of the reduced rates of growth in overall exports as well as much slower growth in knit and woven RMG sectors, there would be some negative impacts on the economy in terms of falls in consumption, exports, imports and households’ consumption and welfare. The poorer households would suffer more as a result of negative export shock during the global economic crisis. Furthermore, the reduced rate of growth in remittances during the global economic crisis would contribute to the fall in household income and real consumption. Demand for goods would decline and, as a result, domestic demand and import would decrease. Due to the fact that reduction in inflow of remittance would contribute to depreciation of the real exchange rate, there would be a positive impact on the growth of exports. All household categories would encounter fall in real consumption and welfare. The households with higher initial endowments of remittance incomes would experience larger fall in real consumption and welfare. The scenario depicting the combined effects of the export and remittance shocks suggests that the negative effects would aggravate under this scenario. In all cases, however, the short term negative effects would be larger than the long term negative effects. The upshots of the above discussion point us to the fact that the economy of Bangladesh was affected during the global economic crisis, when growth in exports and remittances slowed down by great margins and the economy suffered.

Several policy implications may emerge from the aforementioned analysis of the simulation results. It is evident from the aforementioned analysis that there was a very low growth of exports of woven and knit RMG from Bangladesh during the economic crisis. This resulted in low growth in total exports. The effects on consumption and welfare of the households were negative. There is a fear of continuation of this sluggish growth in exports of woven and knit RMG in the future. Therefore, there is a need for the policy makers to take necessary steps to enhance exports from these two sectors. These export oriented sectors suffer from serious supply side bottlenecks, such as lack of backward linkages, weak physical infrastructure, lack of skilled manpower, lack of access to capital, high lead time, high cost of doing business, etc. There is a need to bring down these supply side constraints which can enhance the competitiveness of these sectors. It is also true that the export basket of Bangladesh is highly concentrated in favor of the woven and knit RMG. There is a need to diversify the export basket so that the reliance on only a few sectors is reduced and the economy becomes less vulnerable to any external shock. The simulation results in this paper have convincingly suggested the strong welfare enhancing effects of remittance in Bangladesh. The growth rate of remittance inflow reduced quite drastically during the global economic crisis. Also, looking at the trend of annual migration from Bangladesh it appears that there is a high risk of further reduction in inflow of remittances. Therefore, there is a need to take necessary measures for encouraging larger inflow of remittances and greater outward migration. Measures such as reducing the hassles of sending remittances through formal channels and providing appropriate guidance and support for channeling the remittance money to productive investment could be very useful. Also, government needs to negotiate both multilaterally (at WTO) and bilaterally for the enhancement of export of manpower from Bangladesh.

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