Chapter

6 Bangladesh: Economic Reform Measures and the Poor

Editor(s):
Ke-young Chu, and Sanjeev Gupta
Published Date:
April 1998
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Author(s)
Padma Gotur

With a per capita income of about $200 in 1991, Bangladesh is one of the poorest countries in the world. More than half of its population—50 million people—live in poverty. The most vulnerable groups include small farmers, landless rural laborers, and workers in the urban informal sector. Health care, nutrition, and education standards are low, especially among women and children. The earning potential of most poor people is limited by their lack of skills, assets, and access to credit. Given its limited natural resources, high population density, and frequent natural disasters, Bangladesh faces an enormous challenge in its efforts to reduce poverty.

The only lasting way to reduce poverty is to ensure sustainable economic growth, by implementing policies to promote financial stability and the efficient use of resources. With this strategy in mind, the government launched a medium-term structural adjustment program in the mid-1980s, supported by the IMF under the Structural Adjustment Facility (SAF) and the Enhanced Structural Adjustment Facility (ESAF). The government’s efforts have also been supported by the World Bank, other donors, and nongovernmental organizations (NGOs).

Adjustment efforts are likely, however, to have some adverse effects on the poor in the short run, arising primarily from increases in public pricing, lower subsidies, public enterprise reform, and deregulation of private sector activity. The government has put in place compensatory and targeted programs to mitigate these negative effects, although the massive numbers of poor people, on the one hand, and the shortage of budgetary resources, on the other, constrain the scope of these efforts. Although improved food availability remains the focus of targeted action under the SAF and ESAF programs, efforts are being made to reduce the constraints that impeded the development of a comprehensive social safety net in the past.

This paper evaluates the impact of the adjustment programs on the poor. It sets out the objectives of the government’s economic reforms and the main elements of the SAF and ESAF programs. It then analyzes the impact on the poor of program-induced changes in relative prices as well as induced changes in production, employment, and income.

Economic Reforms and Structural Adjustment Programs

The programs under the SAF (1986/87, 1988/89) and ESAF (1990/91, 1992/93) reflect the government’s emphasis on addressing poverty reduction mainly by promoting sustained economic growth. The government has adopted a policy program to (1) spur private investment through financial reform, exchange and trade liberalization, and industrial deregulation; (2) facilitate public investment by raising domestic revenues, curtailing government consumption, and improving project implementation; (3) protect the purchasing power of the poor by reducing inflation; and (4) improve human resource development by strengthening social programs and reorienting public expenditures. These policies aim at promoting labor-intensive agricultural, industrial, and export production, and economic diversification. At the same time, since the benefits of growth may not reach the poor in the short run, this policy framework has been supplemented by targeted programs that provide special assistance to the poor. The details of each policy measure are discussed in the next two sections.

During the SAF arrangement, growth and investment objectives were not realized because of the disruptions caused by severe floods, as well as slippages in the implementation of structural reform. Real GDP growth averaged only 3 percent, inflation remained at 10 percent, and per capita income did not increase in real terms. The SAF program, however, was successful in expanding the tradable goods sector, which created employment, and in reforming the agriculture sector, which laid the basis for the subsequent recovery of production and the improved availability of food. The ESAF program maintains the objectives of raising investment and reducing inflation with a view to achieving 5 percent real GDP growth. Higher incomes and profits resulting from higher investment are expected to improve per capita consumption while generating increased private savings. A more open and competitive economy, resulting from agricultural, financial, and exchange and trade liberalization, is expected to strengthen production incentives and create employment opportunities.

Program-Induced Changes in Relative Prices and Their Impact on the Poor

Although it is generally observed that the poor are hardest hit by changes in relative prices during adjustment, this is not so in Bangladesh because price distortions have not been severe. As a result, not only was the need for sizable adjustment reduced, but it was possible for the pace of adjustment to be gradual. The government recognizes, however, that, as adjustment efforts are intensified, there could be more pronounced short-term adverse effects on the poor, which would require compensatory measures.

The main changes in relative prices resulting from the adjustment programs are those stemming from increases in ration prices for food-grains, prices of administered goods and services (e.g., energy and transportation), and excise taxes. The direct impact of these changes on the poor has varied, depending on the relative importance of the affected items in their consumption and the magnitude of the changes. The poor spend a high proportion (about 60 percent) of their income on food compared with the rest of the population, with more than half of such expenditure devoted to foodgrains. Given this consumption pattern, the changes in relative prices resulting from the program are estimated to have reduced the incomes of the poor by not more than 3–6 percent during 1986–91 (see Table 6.1).1

Table 6.1.Bangladesh: Impact of Program-Induced Changes on the Poor(Annual average percentage change)
Price ChangeIncome Loss
Weight in Consumption (In percent)1983/84 1985/861986/87 1988/89 SAF program1989/901990/91 First-year ESAF1986/87 1989–901990/91
Ration foodgrain prices53.02.22.3
Rice7.25.98.67.0
Wheat6.95.78.77.0
Petroleum products14.09.80.2−0.985.00.22.52
Kerosene−2.35.891.8
Gasoline−2.4−38.070.7
Diesel oil−0.15.891.8
Liquefied petroleum gas13.19.252.7
Railway passenger fare3.07.26.73.815.00.20.4
Electricity2.09.06.67.56.5–16.70.10.3
Natural gas1.0
Household15.311.516.015.00.10.1
Power and fertilizer14.322.315.615.0
Industry12.011.916.715.0
Commercial20.521.97.515.0
Total income loss2.85.72
Sources: Bangladesh authorities; and IMF staff estimates.

Weighted average.

In response to the 92 percent increase in kerosene prices, the poor are expected to substitute less expensive firewood for kerosene, as a result of which the net income loss would be 1.5 percent and the corresponding total income loss would be 47 percent.

Sources: Bangladesh authorities; and IMF staff estimates.

Weighted average.

In response to the 92 percent increase in kerosene prices, the poor are expected to substitute less expensive firewood for kerosene, as a result of which the net income loss would be 1.5 percent and the corresponding total income loss would be 47 percent.

Increases in Foodgrain Prices

An important objective of the government’s food policy under the structural adjustment programs has been to reduce food subsidies and the budgetary cost of food management operations, partly through an increase in ration food prices. Although the availability and cost of food have a major influence on the standard of living of the poor, the impact of change in ration food prices alone on their income has been limited and is likely to remain so in the future. This limited impact is explained by the fact that the poor receive only 20 percent of their foodgrain consumption from the public food distribution system. Out of the 8 million tons of foodgrains consumed by the poor, only 1.5 million tons are obtained through the public system. The major share, 4.5 million tons, of their consumption is obtained from their own farm production, while the remaining 2 million tons are purchased from the private market. The urban poor receive a larger share of the food distributed by the public system and also depend more on the private market than the rural poor.

Within the poor groups, the ultrapoor receive the bulk of the 1.5 million tons distributed by the public system, which represents about half of their total consumption of foodgrains. About 60 percent of the 1.5 million tons is made available to them under the nonmonetized channels of the system as food wages paid for work rendered under the Food for Work and Vulnerable Group Development programs. Thus, the increase in ration prices undertaken in the adjustment programs applies to only 0.6 million tons or 20 percent of the food consumed by the ultrapoor.

Average ration prices for rice and wheat were both raised by only 6 percent annually during the SAF program, well below the rate of inflation. Assuming that these increases affect a third of the total income of the poor, their impact on the income of poor households would be to reduce it by about 2 percent annually. Under the first-year ESAF program, ration prices were raised by an average of 7 percent in July 1990. To improve the targeting of subsidies, prices were increased by 5 percent for distribution channels available to poorer groups and by 16 percent for channels available to the relatively well-off groups. The 5 percent increase in ration prices would reduce the income of poor households by less than 2 percent.

Although the ration price increases of recent years sought to reduce budgetary food subsidies, the latter increased considerably in 1988/89 and 1989/90 as higher international prices were not passed through to consumers. While the poor benefited to this extent, they would have been better off had the ration prices on those channels available to the nonpoor been raised in step with world price increases and the resulting budgetary savings applied toward programs for the poor. The differentiated ration price increase in 1990/91, coupled with a cutback in commercial food imports, will permit a substantial reduction in budgetary food subsidies, from 0.8 percent of GDP in 1989/90 to 0.6 percent in 1990/91.

Increases in Administered Prices

The rationalization of public enterprises under the adjustment programs has led to increases in prices of several public goods and services, some of which imply higher consumption costs for the poor. This impact was limited during the SAF program because some planned price increases had not been implemented, and those that had been carried out accounted for only a small share of the consumption of the poor. During the SAF program, administered prices were increased for electricity (20 percent), natural gas (35 percent for household consumers), and transportation (10 percent). Gas and electricity prices were further increased by 16 percent and 8 percent, respectively, in 1989/90. The impact of the changes in transport fares and energy prices on the income of the poor during this four-year period, however, is estimated at only 0.4 percent annually.

The government is raising prices more aggressively during the ESAF period to strengthen public enterprise finances. Increases that have already been implemented include prices of natural gas (15 percent), electricity (6–17 percent), railway fares (15 percent), and petroleum products (85 percent). However, even price increases of this magnitude for energy products, except for kerosene, have limited impact on the rural poor, although the urban poor are somewhat more affected by increases in transportation costs. In the case of kerosene, prices have been raised by 92 percent, largely reversing its previous cross-subsidization against other petroleum products, which the authorities believed had encouraged smuggling across land borders. This price increase will cause a reduction of 2½ percent in the real income of the poor. However, this effect is likely to be smaller to the extent that the poor would substitute less expensive firewood for kerosene.

Increases in Excise Taxes

The SAF and ESAF programs include, as part of the revenue mobilization effort, increases in excise taxes for sugar, tobacco, natural gas, and certain services, which result in higher prices. Such effects are not substantial for the poor since these goods together account for less than 10 percent of their consumption. During the SAF program, price increases on these items are estimated to have reduced the income of the poor by less than 1 percent annually. Further, the government usually attempts to levy excises mainly on goods and services largely consumed by the better-off groups, including bank transactions, telephone services, and luxury consumer goods. To assist the poor, proposals in the original 1990/91 budget for higher excise duties on kerosene, which represent an estimated 4 percent of the total consumption expenditure of the poor, were subsequently withdrawn.

Program-Induced Changes in Production, Income, Employment and Their Impact on the Poor

The reform measures that induce changes in production, employment, and income consist of (1) agricultural policies; (2) tax reform; (3) public expenditure policies; (4) financial reform, exchange rate, and trade liberalization policies; and (5) public enterprise reform. In contrast to the limited adverse effects of relative price changes, program-induced changes in production, income, and employment are substantially benefiting the poor. Under the SAF program, such positive or beneficial effects were most evident in the impetus given to agricultural output and the diversification of export production. The implementation of measures under the ESAF program is expected to increase income and employment opportunities in both agriculture and industry.

Agricultural Policies

Agricultural policies have sought to raise foodgrain output. The government has taken measures to increase the role of the private sector in the distribution of inputs, including the liberalization of the fertilizer market and irrigation equipment imports, to strengthen research and extension services, and to extend the provision of rural credit. The crop replanting and intensification program launched in the aftermath of the floods included free distribution of fertilizer and seeds to small farmers, and assistance with procurement and repair of minor irrigation equipment. These policies benefit the poor by increasing food security, strengthening incomes, and generating employment opportunities. The productivity of small farmers is enhanced by their improved access to irrigation equipment and support services. As a result of the higher level of activity, additional jobs become available for farm laborers and sharecroppers. Moreover, landless rural workers and the urban poor gain from the resulting moderation of retail food-grain prices.

Improvements in the public food distribution system have had a beneficial impact on farmers’ incentives, production decisions, and poverty alleviation. A key objective has been to achieve greater stability of market prices; this has been realized partly through foodgrain imports and greater recourse to open market operations in foodgrains. The system has provided improved incentives for domestic producers through average increases in foodgrain prices of about 7 percent during the Last four years. These policies have helped maintain prices paid to farmers by private traders. Beneficiaries have included the small farmers who market about 2 million tons of food-grain annually.

Agricultural reform will continue to be stressed in the ESAF period. Planned measures aim at an increased share of agriculture in public development spending, flexible pricing, and a greater private sector role in distribution of inputs, improved extension services and research, and financial support for marginal farmers and landless groups. Public sector food procurement and distribution operations will be further improved to sustain market prices at economic levels and realistic support prices will be introduced for farmers. However, no political consensus has emerged for the implementation of land reform that could have potentially far-reaching implications for poverty alleviation.

Tax Reform

Extensive tax reform measures planned under the SAF and ESAF programs, including the introduction of the value-added tax, aim to improve the structure and elasticity of the tax system. These measures will strengthen economic efficiency and provide the additional resources needed to use available project aid, with potentially favorable consequences for output and employment. A major objective of the reforms is to remove impediments to higher private sector output, such as the current bias against export production. It is expected that, with the proposed changes, fiscal incentives for private investors, including tax holidays, could be reduced. These reforms would benefit the poor by promoting employment opportunities in more labor-intensive forms of production.

The poor are not likely to suffer much from an adverse effect of tax reform. The total tax burden of the poor is estimated at only 4 percent of their household income. Indirect taxes are levied mainly on commodities that have a substantial import content, and, in most cases, are not consumed by the poor. The introduction of the value-added tax in 1991, to replace a number of sales and excise taxes in a revenue-neutral manner, will broaden the tax base, but any additional costs to the poor in the short term will likely be more than offset in the long run by additional employment opportunities expected to result from the removal of distortions associated with existing consumption taxes.

Public Expenditure Policies

Public expenditure policies support poverty alleviation efforts by raising the allocations for human resource development, welfare, and agriculture and water resource management. Poorer groups will also benefit from the flood control program, which will promote better early warning systems, medical services, and food security in the event of disasters. However, expenditure on social programs remained limited during the SAF period (Tables 6.2 and 6.3). Current and development spending was limited to 2 percent of GDP for education, 1 percent of GDP for health and population control, and 0.5 percent of GDP for relief and welfare. Moreover, the effectiveness of the already underfunded social programs was further constrained by poor targeting and other infrastructural deficiencies.

Table 6.2.Bangladesh: Poverty Focus of Government Current Expenditure
1983/84–1985/86 Average1986/87–1988/89 Average1989/90 Estimate1990/91 Budget
(In percent of total current expenditure)
Human resource development21.522.621.621.6
Education15.816.916.216.2
Health and population5.75.75.45.4
Subsidies6.64.814.013.5
Food6.23.79.48.0
Vulnerable group development and relief4.26.04.52.5
Agriculture and water development3.91.83.83.7
Total36.237.243.941.3
Excluding agriculture and water development32.333.040.137.6
(In percent of GDP)
Human resource development1.61.92.01.9
Education1.21.41.51.4
Health and population0.40.50.50.5
Subsidies1.10.41.31.2
Food0.60.30.80.7
Vulnerable group development and relief0.10.50.40.2
Agriculture and water development0.30.30.30.3
Total3.13.14.03.6
Excluding agriculture and water development2.82.83.73.3
Sources: World Bank, Bangladesh: Managing the Adjustment Process—An Appraisal, World Bank Economic Report No. 8344 (Washington, March 1990); Bangladesh authorities; and IMF staff estimates.
Sources: World Bank, Bangladesh: Managing the Adjustment Process—An Appraisal, World Bank Economic Report No. 8344 (Washington, March 1990); Bangladesh authorities; and IMF staff estimates.
Table 6.3.Bangladesh: Poverty Focus of Government Development Expenditure
1983/84–1985/86 Average1986/87–1988/89 Average1989/90 Estimate1990/91 Budget
(In percent of total development expenditure)
Human resource development9.410.514.619.2
Education4.15.06.110.1
Health and population5.35.58.59.1
Social welfare0.50.60.50.8
Agriculture, water resources, and rural development26.920.526.324.1
Total36.831.641.144.1
Excluding agriculture and water resources9.911.114.820.0
(In percent of GDP)
Human resource development0.70.80.91.3
Education0.30.40.40.7
Health and population0.40.40.50.6
Social welfare0.11.00.1
Agriculture, water resources and rural development1.21.41.61.6
Total2.82.22.53.0
Excluding agriculture and water resources0.80.80.91.4
Sources: Bangladesh authorities; and IMF staff estimates.
Sources: Bangladesh authorities; and IMF staff estimates.

Several of the problems encountered in the SAF period are now being addressed. A careful prioritization of development expenditures is being undertaken to ensure that available resources are concentrated on the highest-priority projects, including poverty-oriented programs. In cooperation with the donor community, the government will fully fund programs for the expansion of primary education and health and family planning services. The allocation for human resource development in the 1990/91 budget has been increased to 20 percent of total development spending, almost double its share in the final year of the SAF program, while its share in current expenditure has been maintained. Additional expenditure on agriculture and water resource development should help expand job opportunities for the poor in rural areas.

Financial Reform, Exchange Rate, and Trade Liberalization Policies

These policies are expected to generate additional employment opportunities, especially in export-oriented and import-substitution activities. Indeed, during the SAF period, improved competitiveness, resulting from earlier exchange rate depreciation, promoted rapid growth in the ready-made garments industry. The expansion of this industry is estimated to have created employment for some 500,000 persons, mainly previously unemployed women. The ESAF program continues the emphasis on strengthening the export base in labor-intensive goods, primarily through tight financial policies and structural reforms. Given the potential for exports of electronics, toys, luggage, and leather products, export volume is projected to show strong growth and generate 350,000 additional jobs. These gains can help offset the employment losses resulting from public enterprise, import, and tariff reforms.

Public Enterprise Reform

The SAF and ESAF programs include measures to reduce the financial losses of public enterprises by cutting labor and other costs, tightening financial control, and improving profitability. Only limited progress was made under the SAF program in these areas but efforts will be intensified under the ESAF program. The proposed reforms of jute and industrial enterprises, in particular, emphasize employment rationalization, the closing of uneconomic units, privatization, and increased competition from the private sector. The most important of these actions, which relates to the public sector jute mills, could reduce employment by one-third, or 30,000 people, equivalent to 5 percent of the total public sector workforce. To mitigate such consequences, the government is examining the option of using part of the resulting budgetary savings to provide unemployment compensation and retraining to displaced employees.

Targeted Programs and Nongovernmental Organizations

Targeted programs reflect the priority assigned to ensuring food availability for the poor, while reducing budgetary food subsidies, primarily by withdrawing benefits available to the relatively better-off nonpoor. During the SAF period, two programs—the Food for Work program, which provides wages in the form of food for temporary rural workers, and the Vulnerable Group Development program, targeted at disadvantaged women and children—were expanded to account for 40 percent of the total amount of the food distributed by the Public Food Distribution System. These schemes have reached about three million persons, including 500,000 women, with at least three-fourths of the poor receiving assistance. The budgetary costs of these programs were 35 percent of total rice subsidies and over 80 percent of total wheat subsidies in 1989/90, or two-thirds of total budgetary appropriations. In the event of natural disasters, such as the floods and cyclones of 1987/88 and 1988/89, these programs are temporarily expanded. In addition, this focus of targeted programs has been broadened during the ESAF period to include literacy, health, and skill-acquisition components, which would enhance the income-earning capacity of participants in these programs.

Recognizing the budgetary, technical, and administrative constraints that affect targeted programs, the government has encouraged greater NGO participation in this effort. There are about 400 NGOs operating in Bangladesh—along with 12,000 voluntary social welfare agencies—which assist the poor, especially women, by providing credit, training, primary education, basic health care, nutrition, and family planning facilities. The focus of the activities of many NGOs has been shifting from emergency relief to development-oriented programs, especially those aimed at improving employment and income in rural areas.

Conclusion

The main thrust of the Bangladesh Government’s strategy of poverty reduction has been to strengthen output growth and ensure food security. Increasingly, however, its attention has also turned to improving human resource development and the efficiency of targeted programs, with a greater role provided to NGOs. Nevertheless, poverty will remain a pervasive problem. Any progress achieved should therefore be regarded as only the beginning of a major effort that will need to be expanded in scope, demand greater resources, and continue over many years.

Note: This is an abridged version of IMF Working Paper 91/139 (Washington: International Monetary Fund, 1991).
1Price changes resulting from exchange rate changes are discussed later in the paper.

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