Bangladesh's GDP per capita outshines India's: Can Bangladesh sustain this?

Updated on 15/12/2021 - By InM - No Comments

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According to the latest (October 2021) forecast by the IMF, Bangladesh's GDP at current prices is likely to rise to $565 billion in 2026 from $355 billion in 2021 (59 per cent increase) while, over the same period, India's GDP is expected to increase from $2,946 billion to $4,393 billion (49 per cent rise). Accordingly, the GDP per capita of the two countries are forecasted to rise over the next five years (Table 1). The forecasts show that Bangladesh's GDP per capita has surpassed India's GDP per capita in 2020 and this is expected to remain so over the next five years along with increasing gaps between the two. This indicates that the income per capita (in current dollar terms) of an average Bangladeshi citizen at present has exceeded the income per capita of an average Indian citizen and this will remain so in the near future. This further shows that, in terms of growth, Bangladesh has been catching up rapidly in recent years among the developing nations despite the Covid-19 pandemic. 

One must, however, recognise that the GDP per capita of Bangladesh based on PPP terms is $5,733 in 2021 which is nearly 22 per cent lower than India's $7,319. Further, India's GDP per capita in PPP dollars is projected to rise to $10,866 and Bangladesh's to $ 8,859 by 2026 so that Bangladesh's GDP per capita in PPP terms would remain more than 18 per cent lower than India's in 2026.

In practice and as a matter of convenience, a country's economic strength is typically measured on the basis of GDP growth and the absolute size of GDP. If one looks at the history, it is seen that India's economy has performed better than Bangladesh's in terms of both the above indicators during most of the period since 1971. However, when one computes the GDP per capita, this also involves the total size of the population since GDP per capita is arrived at by dividing total GDP by the total population. This shows that there could be three underlying factors that have contributed towards changing the scenario in which Bangladesh's GDP per capita has surpassed that of India in 2020. The first and the most important factor is that the Bangladesh economy has been growing at sustained and rising rates (with very short and minor downturns) since the early 2000s which is continuing at present with some short term recession during the Covid-19 pandemic period. On the other hand, in the case of India, the average economic growth since the early 2000s until 2016 has been higher than the growth rate achieved by Bangladesh. But India's GDP growth rate has decelerated rather sharply since 2017 while Bangladesh's GDP has grown even faster.

Secondly, India's population grew from a total of 1.057 billion in 2000 to 1.38 billion in 2020 indicating an increase of nearly 31 per cent over the 20 year period. Over the same period, Bangladesh's population increased by only 16 per cent  from 142.3 million in 2000 to 164.7 million in 2020. As a result of the above two factors, Bangladesh could acquire a rapid catching up speed to close the GDP per capita gap with India. The GDP per capita of Bangladesh was around half of India's GDP per capita in 2007, which narrowed down to about 70 per cent in 2014; and the gap closed rapidly by 2020.  

A third factor may also be noticed after the outbreak of the Covid-19 pandemic. The relative impact of Covid-19 pandemic differed significantly between the two economies. While India's GDP growth suffered significant setback, the Bangladesh economy suffered significantly less in terms of growth decline. This has also contributed towards Bangladesh's success in surpassing India's GDP per capita in 2020. As the projections in Table 1 shows, Bangladesh is likely to remain slightly ahead of India in this GDP per capita race till 2026. And if Bangladesh can remain on track in its journey towards an upper middle income country by 2031 and a high income country by 2041, Bangladesh will be able to take a convincing lead over India in GDP per capita as well as a lead in South Asia as well!  

In the above context, one key question is: How has Bangladesh been able to achieve sustained high GDP growth as well as social development as reflected in rapidly declining population growth?

After independence in 1971, despite the dire predictions and pessimistic prophecies of the initial years, Bangladesh was able to achieve an inflection point within a short time; and subsequently the country has emerged as one of Asia's most amazing and unexpected success stories of recent times. Bangladesh's transformation from a 'basket case' in the 1970s into one of the most startling development successes of the 21st century within a span of fifty years provides a rare example of a neo-liberal development model in which social progress has far outstripped economic growth. In the process, the role of the state has been critical in the pursuit of sound macroeconomic policies, disaster management, investments in public health and education, partnership with non-government organisations (NGOs) and civil society organisations (CSOs), reducing population growth rate, and encouraging overseas labour migration.

In the post-1980s decades, Bangladesh's economic and social development can be termed as nothing short of a 'miracle' since the country's remarkable progress has been achieved under several unfavourable conditions e.g., weak governance and political instabilities, economic and social inequalities, risks emanating from rapid and unplanned urbanisation, and frequent exposure to severe disaster risks. Since the 1990s, the country's successful development transformation has been led by three country-specific characteristics: (i) penetration of microfinance institutions (NGO-MFIs) and the government agencies (including banks and financial institutions) into the rural communities that led to relaxed credit and other binding constraints of the rural poor households and spearheaded the women empowerment revolution; (ii)  development of the RMGs industry resulting in the rapid transformation of the economy from an agriculture-based to an industry-oriented one; and (iii) significant investments in infrastructure--particularly in roads and bridges--which helped to connect the formerly fragmented spatial economy and support the emergence of functioning value chains. As a result, tremendous success has been achieved in several key social indicators which have created supportive micro-foundations of rapid growth and development. The success of Bangladesh's development model can be seen in sharp contrast with India in terms of several key indicators (Table 2).

Bangladesh's development story over the past fifty years suggests that the successes achieved by Bangladesh are among the fastest improvements in basic living conditions in modern history; and many development observers are surprised because Bangladesh's achievements do not fit the traditional pathways of human and social development. In this context, Professor Amartya Sen distinguishes between 'income-mediated' and 'support-led' pathways to human development. The first refers to improvements in social indicators brought about by rapid and broad-based economic growth (e.g. as happened in South Korea), while the second is based on high public spending on social development programmes (for example, the case of Sri Lanka). However, Bangladesh does not clearly fit into either of the pathways.

The key to success of Bangladesh lies in the fact that, alongside the progress in social sectors including education, health, and gender equity, Bangladesh successfully achieved a growth takeoff which accelerated rapidly in the 2000s that reduced poverty and increased per capita income at rapid rates. Bangladesh also progressively ensured the essential preconditions that allowed private sector dynamism to fuel economic growth during the last two decades.

Structural reforms in the 1980s and 1990s led to broad macroeconomic stability and low fiscal deficits. This allowed the banking system to cater to private investment needs and caused a significant rise in the investment-GDP ratio (currently at around 35 per cent of GDP). Successive governments also had considerable success in keeping inflation at a moderate level. Although FDI inflow has been relatively modest, strong performance of remittance inflows succeeded in bolstering the foreign exchange reserves and smoothing out fluctuations in GDP due to varying domestic economic conditions.

One notable feature of the past fifty years is that Bangladesh's structural transformation process since independence has been very distinct on several counts. As traditionally happens, labour at the aggregate level did not move from agriculture into manufacturing and services sectors in the ?rst phase followed by labour movement from agriculture and manufacturing into services. In Bangladesh, the share of the services sector in output has turned high at relatively low income per capita. With its relatively limited size, manufacturing has emerged as the growth-driver of the Bangladesh economy while services activities, nontradable services in particular, has become the major source of employment of the bourgeoning labour force.   

At the sectoral level, Bangladesh's agricultural modernisation trajectory since its independence has been relatively fast, enabling Bangladesh to shift from an agriculture-based to a transition country in only 15 years (from the mid-1990s to 2010). This shift resembles the one that China experienced ten years earlier, from the mid-1980s to 2000. In fact, Bangladesh's agricultural modernisation model characterises the sequencing of chemicalisation and mechanisation. The policymakers in Bangladesh initiated the process of agricultural transformation to increase food production and reduce poverty since the 1970s. Mechanisation has come with higher capital intensity later on, as chemicalisation has enabled the small farmers to adopt practices that increased both the application and efficiency in the use of chemical fertilisers and other modern inputs required to produce higher levels of output per unit of land.

The pattern of industrialisation, on the other hand, has been closely linked with urbanisation resulting from a host of factors covering, for example, external market demand (e.g. export-oriented RMGs and other manufacturing products), internal supply of production inputs (cheaper skilled labour and infrastructure services), policy bias towards primate city favouritism, and migration of labour from rural areas and peripheries into urban and peri-urban areas for better opportunities. The services sector, on the other hand, has been highly heterogeneous with both tradable and nontradable segments.  The comparison of the sectoral total factor productivities shows that agriculture has been the least productive, followed by services and manufacturing.

At present, in terms of productivity and employment, manufacturing is located between tradable and nontradable services, as it is less productive but employs more workers than tradable services, but is more productive but employs fewer workers than non-tradable services. Thus, future structural transformation towards manufacturing is the major route to industrialisation in Bangladesh. As a matter of fact, the key would be to use industrial policy to push the limits of the country's static comparative advantage and diversify into new and more sophisticated activities based on dynamic comparative advantage. Historical evidence across the countries shows that the employment share of manufacturing increases until it reaches a threshold of about 30% of total employment, and then it flattens out. There also exists a strong positive relationship between the share of employment in services and income per capita. India, on the other hand, has struggled to boost and bring dynamism into its industrial sector and still has far too many people employed in agriculture.

Any keen observer of Bangladesh's development is led to the conclusion that a tremendous turnaround has taken place in Bangladesh's overall growth performance over the last fifteen to twenty years. But, for the present, the key challenge is to identify and employ new and additional growth drivers to transit to a still higher growth trajectory and make the development path less volatile in the face of multiple internal and global destabilising forces. On the social front, the biggest challenge is in education. Most of the education parameters of Bangladesh trail behind India, and this largely explains the lower ranking of Bangladesh than India in UNDP's Human Development Index (HDI).  

Another challenge is to build effective, accountable and inclusive institutions at all levels as part of the means to pursue sustainable development. At the present level of development, the role of good governance and effective institutions is pivotal for Bangladesh for ensuring a  more  adequate  delivery  of  basic  public  services  critical  to  making  progress  towards  achievement  of  the  development goals. Further, effective, responsive and responsible political leadership, with long-term strategic vision for development, is of paramount importance in achieving the development goals. Political commitment and leadership is critical to galvanising political  will,  transforming  vision  into  national  strategies, mobilising  scarce resources and social capital, forming broad  partnerships,  coordinating actions, and motivating and ensuring accountability for results.

For moving forward, corruption poses one of the most important governance challenges in Bangladesh. Transparency International's 2020 Corruption Perceptions Index shows that Bangladesh ranks a low of 146 out of 180 countries while India has a rank of  86. Combating corruption has emerged as an urgent priority as Bangladesh strives to mobilise more public and private resources and ensure their efficient use in pursuing the development goals. There exists compelling evidence that corruption undermines development. On the other hand, underdevelopment also breeds corruption. By increasing the cost of doing business, corruption discourages investment and reduces economic growth.  It also increases inequality and political instability. These developments have the ability to slow down Bangladesh's progressive social reforms that have led to women empowerment and reap economic miracle.

No doubt, Bangladesh provides one of the most striking examples in the study of present day development along with rapid growth and catching up. In this context, one important question is: Why has Bangladesh succeeded in making this quiet transformation? As with all large-scale historical changes, there are many factors and no definite answers are likely to emerge. Still, one might argue that Bangladesh's economic transformation over the last fifty years has largely been driven by social changes, probably initiated by women empowerment. There exists a large number of micro-level success stories of innovative, low-cost solutions, such as social development-intensive microfinance programmes targeted towards women empowerment and social mobilisation both by the government and the NGOs; women labour-intensive, export-based garments industry; and the boost to earnings and human capital provided by labour migration and inward remittances that has made significant strides towards educating girls and giving women a greater voice, both within the households and in the public sphere.

In sharp contrast with India's development pathway, the above transformations have created the essential building blocks for developing critical linkages between micro and macro levels which are the unique features of Bangladesh's development model that have ignited the rapid transformation of the later years. Further, the structural and policy reforms, both economy-wide and sector-specific, carried out since the mid-1980s, had prepared the macro economy to effectively respond to the micro-signals for change and adopt appropriate transformations. In reality, these micro-macro transmissions and their role in overall development are seldom acknowledged in the traditional development literature. But Bangladesh does provide a glaring example of success of the process in reality.   

 Dr. Mustafa K. Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM).

The Institute for Inclusive Finance and Development (InM) is registered as an independent non-profit institution under the Societies Registration Act 1860.
The Institute works for developing the overall capacity of the financial sector and strengthening the links between the financial and real sectors through undertaking research, training, education, knowledge management and other programmes in priority areas including inclusive finance, microfinance, poverty and development.

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