There Will be Blood

Shafiqur Rahman

Every country in the world, rich or poor, dreams of striking big reserves of oil. Why shouldn’t they? Striking oil is equivalent to winning the lottery prize. Your country gets an abundant source of liquid cash flow for decades, a cash flow that doesn’t require much hard work or intelligent planning.  But, as many studies have shown that in most of the cases, winning a lottery makes the typical lotto winner more miserable and unhealthy in the long term, striking big oil can also be very detrimental to the health of the nation in the long haul.  In Economics studies, a concept called ‘Resource Curse’ has become very popular in the recent decades.  In general terms, resource curse means that when a country starts utilizing a cheap and abundant natural resource, the strength of its economy become overly reliant on that resource, other sectors of the economies get neglected, government becomes dependent on the revenue from natural resource and the country’s overall development suffers.

Resource Curse does not occur in underdeveloped countries only, it can happen in rich-industrialized nations too. The most famous example is the ‘Dutch Disease’ that happened in Netherlands in the 1960s and 70s. Holland almost overnight became an oil exporting nation when the North Sea oil reserves were discovered in the early ‘60s.  Holland was and still is one of the most advanced industrialized economies of the world. But when it struck oil, its economy became imbalanced.  The overnight riches from oil revenue pushed the general labor wages very high.  The high labor cost made its manufacturing sector uncompetitive compared to close rivals like West Germany, France etc.  Within a few years the famous Dutch Manufacturing sector rapidly shrunk to become a shadow of its previous self.

But it is upon the poorer and more under-developed countries that the ‘Curse of the easy Resources’ wreak the full havoc. To understand the mechanics of the curse, we have to understand some very basics of political economy. All governments, be they autocratic or representative, are somewhat accountable to the people.  At the bare minimum they must feed the people, provide basic amenities and maintain rudimentary structure of the state. If governments fail to do that, the people will rise up and sweep away the regime.  Moreover, even if the government is exploitative and extortionist, it wants to maintain a running economy otherwise there will be no wealth to extract from the people.  A prudent government therefore devotes lot of attention to economic growth because not only economic growth means a satisfied people; it also means more wealth to extract.

But when a country strikes abundant natural resources, the government gets an easy source of wealth without being responsible for a healthy economy.  The cash flow from resources export balances the budget, provides the wealth to maintain a police state, enables government to bribe the community leaders and keep the extortionist machinery going.  The government does not feel the need to develop a robust and diversified indigenous economy.  The government also does not feel pressure to reform representative politics as they can effectively buy people’s silence by bribery or threat.  Moreover, the flow of unaccountable wealth generates lot of venality in the politics and society.  Thus underdeveloped countries that struck oil often become poorly-governed and unrepresentative of the common people.  From Russia, Venezuela, Nigeria to the typical countries in the Middle East, we can see the ‘Resource Curse’ working to the detriment of the people.

Of course Bangladesh has not struck oil and our vaunted Natural Gas reserve is actually rather puny compared to the world (.001%). We also do not have other natural resources for big time export. But the idea that Bangladesh has indeed struck big oil came into my mind a few years ago when I read a column in NY Times by the famous columnist Thomas Friedman.  I am not a big fan of Friedman; I do not think he is a very insightful or original but he has an unsurpassed flair for putting the current conventional wisdom or prevailing zeitgeist into superb word packages.  In that particular column titled, “Israel Discovers Oil (2007)”, Friedman argued that Israel has found inexhaustible source of oil in the form of talent and innovation of its students, technicians, scientists and entrepreneurs.(2)  Due to sensitive reasons I wouldn’t go into an extended paean of Israel’s innovative economy but one doesn’t have to be an ardent Zionist to see that Israel has one of the most advanced economies of the world. This small country of 8 million people exported $ 91 billion in 2012 of which $ 44 billion was industrial goods.(3) According to Wikipedia, Israel ranks fourth in the world in scientific activity as measured by the number of scientific publications per million citizens. Israel boasts the highest number of scientists, technicians, and engineers per capita in the world with 140 scientists, technicians, and engineers per 10,000 employees. (4). Israel also ranks among the world top in high tech patents generated per capita.  Friedman’s main point in that column was that while Israel’s Arab neighbors have neglected developing their people and their economies by depending too much on oil from the ground, Israel has found an inexhaustible source of wealth from the innovation of its people and in the long term the ‘people wealth’ will prove much durable and superior.

When I read the column it immediately struck me that like Israel, Bangladesh too has found a huge oil reserve. Like Israel too, this oil wealth is in the people rather than from the ground. I thought that Bangladesh found oil in the form of abundant and inexhaustible source of cheap labor from its people. For more than two decades, Bangladesh economy has been standing on the twin pillars of Garments export and foreign remittances.  In general, a country is deemed resource dependent when 70 to 90% of its foreign exchange income is derived from just one or two natural resources. Let us now dive into some statistics to see how over reliant we have become upon our main natural resource, our abundance of people.

growth over the last two decades. From 2002 to 2007, volume of export nearly doubled. From 2007 to 2012 the volume more than doubled again and in 1012 we exported more than $ 24 billion worth of goods and services.

Now let us view the share of Garments exports as percentage of total merchandising exports over the years.  The first table shows how garments exports have rapidly grown to dominate our total export volume over the last 20 years. (5)

YEAR	FY 1995	FY 2000	FY 2005	FY 2010	FY 2011
% of Total Export	53.00	73.3	74.2	77.1	78.2

Bangladesh’s exports in 2012 were $24.3 billion, of which garments contributed $19 billion.(6) There are now over 5000 Garments factories employing over 4 million people, of which 80% are female. The primary determinant of sourcing for international garments business is still cheap labor.  Labor costs are still major determinant of competitiveness in labor-intensive global Garments production and trade.  Technological innovations have not changed the labor intensive nature of the Garments industry. What is remarkable is that even among other poor and low cost garments exporting countries, Bangladesh boasts a great advantage in labor costs. (7)

The advantage becomes starker when we compare it with other developing economies.

Average Monthly Wage of Operator in Nominal $ (2008) (7)

Bangladesh	China (2006)	Turkey (2006)	El-Salvador
63.00	125.1	459	188.1

Even when we compare with our national bugaboo India, we see a very dramatic contrast.  Labor costs in Bangladesh are almost one-third of those in India. The average monthly labor cost in India is over Rs.7,000 per person, while it is just around Rs.2,700 in Bangladesh.(6) Moreover Indians firms have to pay 9.6 percent export duty to export to European markets while Bangladesh, which is categorized as a least developed country (LDC), enjoys duty-free access.  Contrary to all protestations, cheap labor is indeed the great comparative advantage of Bangladesh Garments sector; the ‘Killer App’ of our exporting prowess.

Now let us look into the other pillar of Bangladesh’s external income, Foreign Remittance.  Our foreign remittance income has really taken off, particularly in the last 10 years. (8) With $ 14 Billion of remittance income, Bangladesh is now the 8th largest recipient of external remittance income.

If we look into the source of remittance income we can see that although United States and Europe have become growing sources of income in the recent years, bulk of out foreign remittance still come from Saudi Arabia, the Gulf Countries and countries in East Asia. (9) Nearly 70% of our remittances come from these countries alone.

Bangladesh’s explosive growth in foreign remittances is mainly comprised of semi-skilled and unskilled workers who accounted for 80.8% of the foreign workforce in 2007. (10) The percentage of professional workers were 0.1 percent while skilled laborers accounted for 19%.  As in the Ready Made Garments sector, the main advantage of our overseas labor force seem to be readiness to work very hard for very little money. Jyoti Rahman pointed out in an early post (Saudi Arabia: Bangladeshi labor becomes less “docile”) that there are 1.5m pakistanis in Saudi Arabia and 2.5m Bangladeshis. But total remittances for both countries was $3.7b. Anecdotal evidences also suggest that our workers get disproportionately less wages in Middle East and East Asian countries.

So how big is the contribution of remittances to the economy of Bangladesh? In 2008 Remittances were 9 % of overall GDP and almost 60% of the total export.(10) We can see that chart that this contribution is has been increasing rapidly over the last decade. For example in 2011 our GDP was $ 111 Billion and remittances were $ 12 Billion, the ration is still above 10% and in 2012 it has only become greater as remittance income touched nearly $ 14 Billion.

 But is this out of place? How do we compare with other remittance earning countries?  If we look at the following chart, we can see that among simillar economies, only Nepal has a larger remittance to GDP ratio. (11) India, Pakistan, Sri Lanka, Cambodia, Indonesia all these rival economies have much less dependency on remittances.

Remittance is the only thing that is standing between sustainability and quick bankruptcy of our economy. Although we have experience impressive export growth, our import growth has been more spectacular.(12) In 2010-11 the gap between Import and Export was nearly $ 8 Billion. If it weren’t for the $ 10+ Billion of remittances, our balance of payment would have a massive and unplug-able hole in the middle.

Thus far we have seen that RMG export and Remittances have affected the country’s finances like an abundant source of natural resource, dwarfing other economic activities and shoring up the finances of the country. But there is a difference between income from natural resources and income from people. Resources income mostly directly goes to the government and then how it is used depends completely upon the system of governance. But our people’s income from RMG and remittances mostly directly goes to people and is therefore changing the economy irrespective of government. The most positive aspect of RMG and remittances is that common poor people have a large share in it. In economics in is well understood that a unit of income at the hand of poor have a much bigger multiplier effect for the economy than the same unit of income at the hand of rich. Poor people spend bulk of their income on basic necessities which tend to recirculate the money in the domestic economy.  Remittance income now accounts for 13% of household income for the poor and lower-income people. (13) There is no doubt contribution of RMG sector will be in the similar level. A study found that  almost a quarter of poverty decline between 2000 and 2005 in Bangladesh can be attributed to the combine impacts of remittances and RMG export.(13) Since income from the two sources only accelerated from 2005 on-wards, it is safe to assume their role in poverty reduction have only grown.

While the torrents of cash flow from RMG exports and foreign remittances were boosting the economy of Bangladesh, they were also creating problems that are very similar to ‘Resource Curse’.  With RMG exports and foreign remittances doing a lot of the heavy lifting for economic growth, wealth dispersion and poverty alleviation, the governments since early 2000s have felt little urgency to reform the economy, implement regulations and develop the human capital of the country.  Actually these engines of economic growth took care of the country’s finances to such extent that it freed the governments from worrying much about economic development at all.  Every year revenue collection kept rising because of increasing consumption of the common people. The governments ceased to worry about governance at all since these two sources went on delivering economic dividends without much tinkering from the top.  The governments have not been using their new freedom and ready cash bonanza wisely.  Nothing makes the sorry performance of governments in the last 12 years starker than the state of infrastructure in Bangladesh. Those of us who have experiences in traveling near abroad know that in the decade of 2000-10, Asia transformed itself from underdeveloped third world to world beating top class infrastructure leader.  Many economists credit Asian infrastructure spending as one of the key driver of Asian economic growth.  Currently India is spending about 4.7% of GDP on infrastructure while China is splurging 8.5% of GDP in annual infrastructure development.(14). Throughout 2000-10 Bangladesh’s infrastructure spending remained below 2%. In fact from 2000 to 2007 there was actually declining trend in allocation for infrastructure. (15). Lack of infrastructure spending and lack of regulation now have made Dhaka the worst city in the world and the whole country is in the way to become world’s largest semi-urban slum.

Government apathy is the least of our problems now.  Unprecedented cash flow from the RMG exports and remittances have helped transform the political organizations of the parties into full-fledged extraction rackets.  From lowly political cadres at the streets to MPs, ministers and head of the government at the top, the extraction pyramid has become so lucrative that holding power of the state has become a higher stake than ever.  We get a picture of the fantastic amount of money sloshing around when a few of the scandals, which are but tip of the iceberg, gets reveals before a dazed public.   It’s no coincidence that unprecedentedly huge recent financial scandals like Hallmark and Bismillah Towel, happened through a nexus of government higher ups, state and private banks and unscrupulous RMG exporters.  Sheer venality of these government-business rackets are very depressing to us but depth of despair for the country came from governments that were not only rapacious but also unaccountable.  Freed from concerns of economic development, the leaders of the governments in the last two elected regimes have devoted most of their time in scheming to do what they always wanted, annihilation of the opposition.  Inherent lack of check and balances in our democratic system and our pervasive lack of democratic ethos meant that we always had governments in our history that ruled like autocracy.  But the two external sources of income have reduced economic accountability in the recent decades thus further exacerbating the problem of governance.  Now our political scene can not much differentiated from a mafia turf battle, with assassinations, kidnapping, disappearances targeting even the top rungs of rival politicians.

Businessmen everywhere hate regulations. They think regulations only make them less profitable and competitive.  They think they can police themselves and government interference is unnecessary. We must understand that in Bangladesh the government itself is incentivized to regulate the golden egg laying RMG and manpower export sector as little as possible. Government is performing the role of patron and protector of the export oligarchy.  Not only the ruling party but even the opposition largely sings from the same hymn sheet.   Even the middle class have become addicted to the easy money from RMG and remittances.  We know that the consumption boom that is fueling the commercial sector, the salary inflation that is making the corporate sector so lucrative, the property bubble that is creating thousands of millionaires, the money transfers that is enabling us to get 2^nd citizenships and 2^nd homes, all these have been made possible to a large extent by the growth in these two sectors.  Now a days Export and remittance growth have become the most eagerly anticipated economic indicators in the country.  Our think tanks and policy makers unabashedly discuss how we can send yet more people abroad to increase the flow of money. We feel pride in the fact that India with a population of 1200 million has only 12 million emigrants abroad while Bangladesh with 150 million has sent nearly 5.5 million of its children abroad.(16).  We feel no shame that we are failing to create opportunities at home and emptying our country of most of the enterprising people.

High profit, high risk, lack of regulation and lack of implementing authority always create a mad scramble for profit.  In the United States, from mid-19^th century to early 20^th century, there were several petroleum oil booms. Successively oil was discovered in Pennsylvania, Texas and then in California.  This was the period when petroleum was fast becoming an essential household and industrial commodity. Since petroleum was never extracted before, these new oil wells were easy to extract. If you were lucky, you just dig a few feet and black gold gushed forth.  There were several mad scrambles to make easy money from oil wells. People with little or no experience went on buy extraction rights and operate oil rigs. Prospecting for oil and operating rigs were very risky but at the same time wildly profitable if luck clicked.  At the same time America was still a frontier country, therefore regulations and authority were minimal. There were plenty of intrigue, deceit, murders, and accidents.  The very excellent film “There Will Be Blood (2007)” shows some of the ruthless and gung-ho nature of the oil business in the early days.

High risk, high profit and lack of regulation also characterize our RMG export sector.  We can also see a mad scrambling to make quick money.  Like remittances, the entire money-making edifice of RMG stands on the fact that we have a huge supply of desperate poor workers who are willing to work in the worst environment for the least amount of money.  Therefore there is also no shortage of fly by night entrepreneurs who jump in with a ramshackle setup to make a lot of money in a very little time. The same basic features also ensure that we see a steady stream of deaths from factory fire and collapse, deaths in inhuman working conditions in the Middle East, deaths in desert and sea among people who risk everything to go someplace better. We are building a Shinning Bangladesh on the bones of wretched poor.  Nobody asks unpleasant questions about the actual contribution of the educated middle class in building this new economy.

This is not a path unique to Bangladesh. Lot of countries went on through a similar phase in their economic development.  China’s unprecedented rush to industrial superpower-hood left behind hundreds of thousands of deaths from factory-mining accidents and a ruined environment.  In China too, the government and business operated in tandem just like the fascist fusion of corporate and government.  But the Chinese government and many other newly developed Asian governments were also single-minded about developing the economy and moving up the economic value chain.  They quickly invested most of their gains from cheap labor into developing the human and country capability to prepare for the next economic level.

Many of the developing nations have had rapid income growth on the basis of RMG export but as their economies developed and income reached certain level, their Garments industry became noncompetitive and business moved to a different country.  Bangladesh has still a long way to go before we reach that level of income.(17) So in the near future the RMG export sector has little fear of being priced out of competition.  But we have everything to fear from temporary sanctions from buying countries or companies because of the globally publicized mega-accidents.  Our over reliance on RMG sector have made us very vulnerable even to temporary shocks.

References

(1)    http://opinionator.blogs.nytimes.com/2013/02/13/avoiding-the-curse-of-the-oil-rich-nations/

(2)    http://www.nytimes.com/2007/06/10/opinion/10friedman.html?_r=0

(3)    http://www.slideshare.net/IsraelExport/developments-and-trends-in-israeli-export-2012

(4)    http://en.wikipedia.org/wiki/Science_and_technology_in_Israel

(5)    http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2012/07/04/000333037_20120704022441/Rendered/PDF/708450NWP0BDS20tsinBangladesh0BDS29.pdf

(6)    http://india.nydailynews.com/business/af641dc60c28b80470e71cb3379f52a1/garment-industry-bangladesh-gains-at-india-china-expense#ixzz2RWO0RjvS

(7)    IDE Discussion Paper No 412: Slow and Steady wins the Race, How the Garments Industry Leads Industrialization in Low Income Countries, Fukunishi and Yamagata (April 2013)

(8)    http://blog.payza.com/2013/01/16/how-cost-effective-money-transfers-benefit-bangladesh/

(9)    http://blog.securities.com/2011/09/bangladesh-remittance-income-slows/

(10)http://www.mof.gov.bd/en/budget/rw/external_sector.pdf

(11)http://www.unescap.org/stat/data/syb2011/III-Economy/International-financing.asp

(12) http://www.unnayan.org/reports/meu/June_12/MEU_June_12.pdf

(13) http://www.thefinancialexpress-bd.com/index.php?ref=MjBfMDRfMjRfMTNfMV82XzE2NzM5NA==

(14) http://blogs.wsj.com/indiarealtime/2013/01/18/report-the-social-gains-from-infrastructure/

(15)http://www.isas.nus.edu.sg/Attachments/PublisherAttachment/ISAS_Working_Paper_169_-_Financing_Infrastructure_in_Bangladesh_21032013172631.pdf

(16) http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1199807908806/Top10.pdf

(17) http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1199807908806/Top10.pdf