The macroeconomic factors and economic growth in Bangladesh

Bangladesh, which was upgraded to lower middle-income status in 2015, is

showing a discernible improvement in macroeconomic indicators and sectoral
growth. The GDP growth rate for FY2018–19 was 8.13 percent, according to the
Bangladesh Bureau of Statistics (BBS), which is much higher than the growth rate
of 7.86 percent for the previous fiscal year. In FY2018–19, the per capita national
income increased to USD 1,909 from USD 1,751 the previous year. The services
sector, which contributed roughly 52.1% of the GDP in FY 2017–18, was followed
by industry (33.67%), of which the manufacturing sector made about 22.85%.
Together, forestry, fishery, and agriculture increased GDP by 14.23%. The export
sector picked up steam and increased by 10.5 percent, or USD 40.5 billion, from
2017–18 to 2018–19. Knitwear and ready-to-wear clothing make up a sizeable
portion of the nation's total export revenue. On the other hand, Bangladesh's total
import payments for FY2018–19 (July–February) were USD 40.9 billion. On April
30, 2019, the foreign exchange reserve was USD 32.12 billion. According to the
Medium-Term Macroeconomic Framework (MTMF), the GDP is forecast to
increase by 8.2 percent in FY2019–20, which will be accomplished by
implementing prudent fiscal management, an effective and efficient monetary
policy, and continuous government reform initiatives.

Why macroeconomics is important in Bangladesh?

1. It helps to understand the functioning of a complicated modern economic

system. It describes how the economy as a whole functions and how the level of
national income and employment is determined on the basis of aggregate demand
and aggregate supply.
2. It helps to achieve the goal of economic growth, higher level of GDP and higher
level of employment. It analyses the forces which determine economic growth of a
country and explains how to reach the highest state of economic growth and
sustain it.
3. It helps to bring stability in price level and analyses fluctuations in business
activities. It suggests policy measures to control Inflation and deflation.
4. It explains factors which determine balance of payment. At the same time, it
identifies causes of deficit in balance of payment and suggests remedial measures.
5. It helps to solve economic problems like poverty, unemployment, business
cycles, etc., whose solution is possible at macro level only, i.e., at the level of
whole economy.
6. With detailed knowledge of functioning of an economy at macro level, it has
been possible to formulate correct economic policies and also coordinate
international economic policies.
7. Last but not the least, is that macroeconomic theory has saved us from the
dangers of application of microeconomic theory to the problems of the economy as
a whole.

What are the major objectives of macroeconomic policy?

Macroeconomics is concerned with issues, objectives and policies that affect the
whole economy. All economic analysis that refers to aggregates is macro. The BD
unemployment rate, the BD inflation rate, the rate of economic growth in the BD;
these are all BD aggregates and therefore macro issues.

The four major objectives are:

1. Full employment
2. Price stability
3. A high, but sustainable, rate of economic growth
4. Keeping the balance of payments in equilibrium.

In this Learn-It, we will look at the way in which these objectives are measured. In
the next, we shall look at why these objectives are important, their relative
importance and how successful recent governments have been in achieving these
goals. Finally we will look at the difficulties that governments have in trying to
achieve all the objectives at once.

How are these objectives measured?

1. Full employment, or low unemployment.

The claimant count is the older, more out-of-date, measure of unemployment used
in the BD. Those counted must be out of work, physically able to work and looking
for it, and actually claiming benefit.

For a more realistic count, and for international comparisons, the ILO
(International Labour Organisation) measure is used. This includes the young
unemployed who are not always eligible to claim, married women who can't claim
if their husband is earning enough, and those who claim sickness and invalidity
benefits. Many only slightly inconvenienced unemployed workers are paid these
benefits rather than swell the claimant count of unemployment.

Note the issue of active and inactive members of the population of working age.
Only those who are active are included in the working population (or labour force),
which is defined as all those who are employed or registered unemployed. But
some of the inactive are in this category by choice, for instance, students and those
who retire early.

At the moment in the BD, the level of employment is the highest ever (nearly 28
million workers). But one should note the significant difference in the numbers
employed in manufacturing compared with the services (approximately 4 million
against nearly 18 million).

2. Price stability

Inflation is usually defined as a sustained rise in the general level of prices.

Technically, it is measured as the annual rate of change of the Retail Price
Index (RPI), often referred to as the headline rate of inflation. For prices to be
stable, therefore, the inflation rate should be zero. Generally, governments are
happy if they can keep the inflation rate down to a low percentage. For an
explanation of how the RPI is formulated, see the topic called 'Unemployment and
inflation'. The BD government prefers to target the underlying rate of inflation, or
the annual percentage change in the RPIX. This is the same as the RPI except
housing costs are removed in the shape of mortgage interest payments. It makes
sense for the government to use this measure because the weapon they use to
control inflation, interest rates, directly affects the RPI itself.

Other less popular measures include the RPIY, which takes RPIX a stage further
by also taking out the effects of indirect taxation (e.g. VAT), and the consumer
price index, which is often used when making international comparisons.
3. High (but sustainable) economic growth

Economic growth tends to be measured in terms of the rate of change of real GDP
(Gross Domestic Product). When the word real accompanies any statistic, it means
that the effects of inflation have been removed. GDP is a measure of the annual
output (or income, or expenditure) of an economy. Sometimes GNP (Gross
National Product) is used, which is very similar to GDP. The only difference is that
income earned from assets held abroad is added and the income earned by
foreigners who have assets in the BD is taken away (officially called net property
income from abroad). Growth figures are published quarterly, both in terms of the
change quarter on quarter and as annual percentage changes.

4. Balance of payments in equilibrium

This is a very big topic in itself. Look at the topic called 'The balance of payments'
for much more detail. Briefly, this records all flows of money into, and out of, the
BD over a given time period (usually a year). It is split into two: the Current
Account and the Capital and Financial Accounts (formerly the capital account,
although examiners do still accept this name).

Probably the most important is the current account because this records how well
the BD is doing in terms of its exports of goods and services relative to its imports.
If the BD is to 'pay its way' in the world over the long term, then it needs to keep
earning enough foreign currency from its exports to pay for its imports. If this is
not the case, the current account will be in deficit.

Japan has the largest current account surplus in the world. Although a surplus
sounds better then a deficit, both can be bad. Japan's surplus forces other countries
in the world to have deficits. In fact, while Japan's surplus is the biggest in the
world, the USA's deficit is the biggest in the world. This is not a coincidence! The
BD tends to be in deficit, although the current account was in surplus a couple of
years ago, mainly due to our strength in the service sector.

Why are these objectives important?

1. Full employment, or low unemployment

Although this objective was not considered so important in the 80s, when
unemployment rose to over 3 million, it is still considered important by most
economists, and the current Labour government have certainly made the goal of
full employment more prominent.

It is important to keep unemployment levels as low as possible. High

unemployment is expensive for the government and, therefore, for the taxpayer.
For every unemployed person, there are two costs to the government. First, the
unemployed worker will be entitled to benefit, and if he/she is young, or older but
remains unemployed for a long period of time, he/she will be offered training
under the 'New Deal'. Secondly, there is the less obvious cost of the loss of income
tax revenues the worker would have paid in work. These workers would have been
paying VAT as well through their purchases. Put together, some economists have
estimated that the cost to taxpayers of each unemployed person is up to £9,000 a
year.

Finally, there is the personal human cost to each worker. In the short term the
unemployed worker has to put up with the loss of earnings, although this may be
balanced by redundancy payments. But in the long run, the long term unemployed
will find it harder and harder to find a job, as they find that the skills they have
become less relevant and they have had no new training.

2. Price stability

Some would say that the main reason why the control of inflation is so important is
that if inflation gets out of control, the economy stops growing. If inflation rises,
the Monetary Policy Committee (MPC) is forced to raise interest rates. Consumers
will stop borrowing to spend and firms will stop borrowing to invest. The housing
market will slump, and along with it all the home improvement consumption that
goes with it. Manufacturer’s exports will become less competitive. The economy
may well drop into a recession.

Many economists worry about the redistribution effects of inflation. Periods of

high inflation cause redistribution from savers to borrowers. Inflation erodes the
real value of all money. Hence, if you are a net saver, the real value of your
savings will fall, which is bad for the saver, but if you are a net debtor, the real
value of what you owe will fall, which is good for the borrower.

The interest rate that is earned on one's saving will usually be higher than the
inflation rate, but there have been times when the rate of interest does not keep up
with the inflation rate, and so savers are paid a negative real interest rate. The best
example of debtors gaining from inflation is the housing market.
Economists do not like this redistribution from savers to borrowers. It
penalizes thrift, which is a bad thing for the economy because, over the long term,
the amount of investment in an economy is closely related to the amount of saving.

There are two minor costs of inflation. 'Shoe leather' costs refer to the time wasted
(and worn shoe leather!) searching the market place for the lowest price. This is
much harder when inflation is high. High inflation tends to coincide with variable
inflation and, therefore, very unstable prices.

'Menu costs' refer to the costs of inflation to businesses in terms of continually

having to change their menus, price tags, vending machines, etc. due to the
continually changing price.

3. High (but sustainable) economic growth

Some would say this is the most important of all the objectives. Why? Since
economic growth leads to improved living standards. Obviously this is good for the
inhabitants of an economy.

Unfortunately, there always seems to be a trade-off between efficiency and equity

in an economy. The most efficient economies in the world have grown the most
and their inhabitants have experienced the best standards of living. But these
economies tend to have the most unequal distributions of income. The competitive
world of the free market creates winners and losers. The winners are exceptionally
rich, but the losers can be worse off in absolute terms as well as relative terms
unless the government's welfare state is generous.

To be fair, though, successful economies tend to grow so much that the standard of
living of the poorest households in the economy still tends to rise. This was known
as the 'trickle down' effect.

As the national cake gets bigger, the poor may well be getting a smaller slice
(worsening distribution of income), but that slice will still constitute more cake as
time goes by.

4. Balance of payments in equilibrium

For developed economies with mature and free capital markets, balance of
payments disequilibria are not so important nowadays. If a developed country has,
for example, a current account deficit, it can usually attract enough foreign
investment on the capital account to balance their books. In other words, they
can finance the deficit.

Some economists argue that it is a bad thing, but more in the sense that it is a sign
of the uncompetitive-ness of the economy's industries. Economies with continual
current account deficits are not 'paying their way' in the world.

The problem lies with developing countries that experience large current account
deficits over a long period of time. They may simply not be able to finance this
deficit. They need to pay for the imports in the currency of the country from whom
the goods are bought. The US dollar is usually accepted worldwide. If they can't
earn enough US dollars to pay for their imports, can't attract the foreign investment
and can't convince other countries to lend them money, then they will be in trouble.
Countries in this much trouble can knock on the door of the International Monetary
Fund (IMF) looking for funds. These will only be lent under quite severe economic
conditions, like keeping government spending down to a prohibitively low level.