Bangladesh Focus on Textiles not Much Help in Economic Distress

Garment exports lifted the country to new heights. But overreliance on that industry also helped bring down Prime Minister Sheikh Hasina.

· Cheaply made garments were attractive to global clothing retailers, especially fast-fashion brands like Zara and H&M.

· For more than a decade under Ms. Hasina, the economy grew at a blistering pace, in some years crossing 7 percent. Garment exports drove more than 80 percent of the country’s earnings.

· The pandemic reduced global demand for textiles and apparel. At the same time, supply chain disruptions and Russia’s war on Ukraine sharply raised prices for imported food and fuel. With so little diversification in its economy, Bangladesh was unable to pull in enough revenue from other industries to help pay the bills.

· Bangladesh spent down its foreign exchange reserves, which dropped so low that it was forced to seek a loan from the International Monetary Fund in 2022.

· Its tax-to-G.D.P. ratio, a measure of a government’s ability to fund its priorities, is one of the lowest in the world.

· Bangladesh still has a high growth rate, but economists and others say that the growth has been uneven, and that income inequality is high.

· Mr. Yunus — a social entrepreneur who married profit with development through the microlending operation he pioneered through Grameen Bank — is expected to institute market-friendly reforms.

[ABS News Service/12.08.2024]

Not long ago, Bangladesh was hailed as an economic miracle. Its singular focus on exporting textiles and apparel delivered rapid growth, lifting millions out of poverty and winning the country’s prime minister, Sheikh Hasina, fame and admiration.

But Ms. Hasina’s abrupt exit from power this week has exposed the limitations of that strategy, as Bangladesh struggles to combat steep inflation and joblessness that economists say are largely the result of poor policy decisions. Her increasingly authoritarian rule and Bangladesh’s widespread corruption only added to the frustration that boiled over and forced her ouster.

Now, Bangladesh must decide its future.

Bangladesh underwent economic reforms starting in the 1970s, and the garment industry has been central to the country’s economy for decades. But Ms. Hasina, who came to power in 2009, narrowed the country’s focus to that single sector and expanded into new global markets, which drove much of Bangladesh’s growth.

Cheaply made garments were attractive to global clothing retailers, especially fast-fashion brands like Zara and H&M. At the same time, that demand created livelihoods for millions of people, especially women, and transformed living standards.

Ms. Hasina spent heavily on infrastructure, reassuring international companies that they could rely on the country to meet their demands.

“What she brought was a level of stability, which was attractive for foreign investors,” said Thomas Kean, a consultant on Bangladesh at the International Crisis Group. Garment buyers were unlikely to send business to Bangladesh if there were worker strikes, power cuts or other factors that made it unreliable, Mr. Kean said.

Ms. Hasina also instilled domestic confidence. Even as she brought the armed forces and judiciary under her control, quashed dissent and turned increasingly authoritarian, there was almost a “compact” between Bangladeshis and her government, Mr. Kean added. “There was a belief that she and the Awami League were the party that would deliver economic growth and development,” he said, referring to the political party Ms. Hasina has led since 1981.

For more than a decade under Ms. Hasina, the economy grew at a blistering pace, in some years crossing 7 percent. Garment exports drove more than 80 percent of the country’s earnings.

But that dependency was also Ms. Hasina’s undoing.

The pandemic reduced global demand for textiles and apparel. At the same time, supply chain disruptions and Russia’s war on Ukraine sharply raised prices for imported food and fuel. With so little diversification in its economy, Bangladesh was unable to pull in enough revenue from other industries to help pay the bills.

As inflation soared, the Hasina government’s efforts to control it backfired. While trying to prop up the value of its weakening currency, Bangladesh spent down its foreign exchange reserves, which dropped so low that it was forced to seek a loan from the International Monetary Fund in 2022.

By the time garment exports bounced back after the pandemic, Bangladesh was mired in its short-term troubles — a situation that also highlighted underlying problems. Bangladesh collects very little in taxes, partly because of a lax bureaucracy and an unwillingness by many citizens to pay their taxes. Its tax-to-G.D.P. ratio, a measure of a government’s ability to fund its priorities, is one of the lowest in the world. That meant it could not count on tax revenue to pay its steep bills.

Bangladesh still has a high growth rate, but economists and others say that the growth has been uneven, and that income inequality is high. The sense that the growth story on paper did not match up with the reality people saw on the ground fed into distrust of the government, said Iftekhar Zaman, the executive director of Transparency International Bangladesh.

Brazen corruption, including loan fraud and reports of money laundering by many in the business community who were seen as close to the prime minister, sowed further disaffection, Mr. Zaman said. “Everybody knew that this was being sustained by the people who were supposed to control corruption,” he said.

Perhaps the biggest long-term problem for Ms. Hasina was her government’s inability to create new jobs because of its narrow focus on the garment business. There aren’t enough new or better-paying jobs for the country’s large working-age population.

Last month, that cumulative frustration found an outlet when students began demanding an end to a preferential quota system for government jobs, which provide stability that Bangladesh’s private sector often does not. Once Ms. Hasina sent the armed forces to quell the protests, the bubbling frustration with a system that had failed to deliver boiled into rage against her.

On Thursday, Bangladesh swore in the new interim government, with Mr. Yunus, 84, as its leader. He called for calm and appealed to the nation to restore order and eschew violence. Although it’s unclear how long he will remain in office, Mr. Yunus — a social entrepreneur who married profit with development through the microlending operation he pioneered through Grameen Bank — is expected to institute market-friendly reforms.