By Zafar Sobhan
A year ago as the world financial system teetered on the edge of collapse after many Wall Street giants failed, there was widespread concern about the impact of its tsunami effect on the world's developing countries so dependent on the US market.
But not only have China, India and other major developing countries survived and prospered, even poorer countries like Bangladesh have come out virtually unscathed. How did this happen? A combination of prudent economic management and resilience of the low-end export sector in hard times seems to have helped the country to survive the global challenge.
Speaking on the anniversary of the fall of Lehman Brothers on September 15, US Federal Reserve Chairman Ben Bernanke said the US might finally be coming out of the recession, but cautioned that the worst is not over: further job losses are still to come and families could expect to continue to see hardship well into the new year.
Contrast this with Bangladesh, immortalized in the 1970s description of it as a "basket case" - the differences could not be sharper.
It has, against all the odds, confounded skeptics, demonstrating how some developing economies can remain sure-footed as more developed economies fall victim to their fancy financial instruments and derivatives.
The conventional wisdom has long been that in times of global financial turmoil, it is the countries at the bottom of the food-chain - those that have the least flexible economies, the least responsive governments, and the least financial reserves - that are the first ones hit; that it is the developing economies, such as Bangladesh, that would be expected to be the earliest and most serious casualties of the crisis.
However, Bangladesh, while no means immune to the effects of the global down-turn, has weathered the worst of it, and, at what appears to be an impressively low economic cost. GDP growth in 2009 is estimated to be roughly 5 percent for the second year in a row, down only modestly from the 6 percent plus growth rate that the country had been enjoying since the mid-nineties.
One reason Bangladesh has fared so well lies in the minimal exposure of Bangladeshi financial institutions to the toxic assets originating in the US mortgage market due to government restrictions on investing in foreign financial assets. Meanwhile, the central bank's dollar exposure was concentrated in conservative US treasury bonds, which enjoyed a significant rally during the market turmoil.
But if Bangladeshi financial institutions were insulated from the financial crisis, the economy remains closely integrated with the contracting global economy, with exports standing at 17 per cent of GDP. In an $82 billion economy, with $14 billion in exports and $20 billion in imports, the trade-GDP ratio was 42% in 2008.
Surprisingly, Bangladesh officials say that export growth is on target for 12 percent growth despite the 9 percent drop in world trade estimated this year. Last year, exports grew 10 percent with 16 percent growth in its knitwear exports and 14.5 percent growth in exports of woven garments. The composition of such exports is one of the likely clues to Bangladesh's resilience.
Companies such as Wal-Mart and McDonald's serving the low-end of the market have done notably well despite the economic down-turn, outperforming their more up-market competitors as consumers abandon brand names for a bargain and value for money.
Bangladesh's $12 billion garment export trade embodies the same ethos and reaps the same benefit. The Bangladeshi garment industry, catering largely to the low-end market but with a reputation for value for money, has seen its market share in the US grow by 10 per cent this year, even as overall US garment imports declined by 3 percent.
Bangladesh's share in the US apparel market has risen as a result of rising sales of cheaper clothing in the US due to the recession. In fact, the 7 percent growth in retail sales recorded by Wal-Mart in fiscal 2009 (and estimated 5 per cent growth in fiscal 2010) has directly benefited the Bangladeshi garment industry, as Wal-Mart alone imports $500 million worth of apparel from Bangladesh, accounting for 30 percent of Bangladeshi garment production for the US market. Indeed, Wal-Mart's 2008 supplier of the year was a Bangladeshi company.
Like Wal-Mart and McDonald's, a prudent and clear-sighted management together with an eye to providing good value at low cost, have allowed countries such as Bangladesh with a similar and indeed complementary focus to weather the global recession. In other words, what has worked for individual companies works for entire economies as a whole.
The second mainstay of the economy has been the life-raft provided by the estimated ten million plus Bangladeshis working outside the country, from whom remittance earnings are on course to reach $10 billion this year, recording growth of almost 20 percent over last year.
Here, too, the fact that Bangladeshi migrant workers are typically at the bottom of the food chain has, paradoxically, helped them, as employers looking to cut costs increasingly turn to the cheapest source of labor on the market.
As a result, even though the economies from which the bulk of remittances originate have been hurt by the recession to a greater (US and UK) or lesser (Saudi Arabia and UAE) extent, Bangladeshi migrant workers continue to remit funds in record amounts.
Finally, Bangladesh's resilience was aided by the prudent economic stewardship of the outgoing caretaker government of two years and continued through the tenure of the current government that came to power nine months ago.
From the start, the finance ministry and central bank have done the right thing. When global commodity prices were spiking in mid-2008, the government responded by tightening its belt and also slashing fuel subsidies, an unpopular but necessary step.
Throughout the downturn, the government has continued to subsidize the agricultural sector, thus ensuring both food security and a living wage for 60 percent of the population still involved in agriculture, as well as other targeted subsidies aimed at minimizing the worst of the fallout.
The resultant budget deficit of 5 percent of GDP over the past two years is higher than the government's target of 4 percent, but still well within the bounds of prudence given the economic climate and compared to the global situation.
The central bank, meanwhile, has resisted strong pressure to devalue the currency (the taka) to help out the export sector. A strong taka has ensured that commodity prices remained within reach while on the upswing worldwide, and now, with prices far below the peaks of 2008, Bangladesh is reaping the benefit of the terms of trade gains.
Perhaps the ultimate lesson to be learned is that in the rough and tumble of the new global economic order we shouldn't be too quick to jump to conclusions as to who will weather a global downturn better. Globally, as employers and consumers look for a bargain, it is countries that service the bargain basement such as Bangladesh that can benefit if they offer value for money and play their cards right.
