Institutional Deadlock May Halt Long-Term Growth | 2017-08-18 |

Institutional Deadlock May Halt Long-Term Growth

Mohammed Dulal Miah     18th August, 2017 08:59:32 printer

Institutional Deadlock May Halt Long-Term Growth

Peruvian Economist Hernando De-Soto has identified some critical constraints that restrict economic growth of some developing countries including his own.


In his investigation as to why capitalism triumphs in the West and fails everywhere else, De-Soto finds that legal structures of property right give west the tools to save and invest surplus in a productive way. Property rights in particular or institutions in general have been practically emphasised much less in the development agenda of many developing economies.

De-Soto’s exploratory study shows that a taxi driver who wants to obtain official recognition of his route faces twenty-six months of red tape in Peru.

To obtain legal title for a small piece of land requires 728 steps which need eleven months to six years to complete in Peru, thirteen to twenty five years in Philippines, five to fifteen years in Egypt, and nineteen years in Haiti. These examples are rather the tips of large icebergs.



Institutions are simply ‘the rules of the game’ comprising of both formal and informal rules. Formal rules comprise of a country’s constitution and other basic regulations governing contractual relations as well as property rights whereas informal institutions are the tradition, culture, norms, and other social practices.


Although it is difficult to quantify informal institutions, formal institutions can be measured through different yardsticks including the level of democratic practice, political openness, individual rights, rule of law, contract enforceability, expropriation risk etc. These institutions and their enforcement characteristics define and specify the ways by which people in a society will behave. Institutions that do not guarantee actors about the fruits of their hard work tend to encourage them to devote time and resources in seeking unproductive rent through illegal and other unethical means.


Looking at Bangladesh through the lens of institutions reveals a gloomy picture. Institutional quality in the last couple of years deteriorated in most instances. World Bank ranks countries for various measures of institutional quality. In the category of ‘ease of doing business’ countries are ranked by sorting the aggregate distance to frontier scores. An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represent the best performance (frontier). In 2016, Bangladesh ranked 176th of the 190 countries considered in the study and 7th among the eight South Asian countries (only Afghanistan is behind Bangladesh). Distance to frontier in 2010 was 45.52 which has been declining over the years reaching its lowest in 2015 (40.67). In the subsequent period, the score remained unchanged.


World Bank also provides data on ‘Country Policy and Institutional Assessment’ in which it rates a country against a set of 16 criteria grouped into four clusters: economic management, structural policies, policies for social inclusion and equity, and public sector management and institutions. None of these criteria shows any improvement of institutional quality. Bangladesh scored 3.5 on a scale of 1 (low) to 6 (high) in ‘business regulatory environment’ in 2014. In 2015 and 2016 the score declined to 3.0. Among various subcategories the ‘financial sector rating’ remained at an absolutely disappointing level. The score was 3.5 in 2009 and 2010 which declined to 3 in 2011 and 2012 and finally tumbled down to 2.5 in the subsequent period (2013 to 2016).


Recent scandals in the financial sector bear the manifestation of the above data. The cases of Hallmark and Bismillah Groups are well known. Bismillah Groups alone plundered about Tk.1,100 crore from five local banks. Similarly, Hallmark borrowed Tk.2,600 crore from Sonali Bank with the help of some bank officials. Not a single penny of that amount has been recovered so far. Default culture in Bangladesh is institutionalised due to lack of proper rule of law.


According to the statistics of Bangladesh Bank, default loans amounted to Tk.62,172 crore against the banking sector’s total capital of Tk.83,758 crore as of December 2016 (i.e. default loan accounts for 74% of the capital). The amount of default loan increased to Tk.73,400 crore as of March 2017 which is about 80 per cent of the total capital. The government usually covers up these losses by injecting taxpayer’s money. Since 2009, the government injected an estimated Tk.14,505 crore in the guise of recapitalising banks.  


Intuitional quality of other segments is also depressing. Protection of property rights is the most pragmatic element of institutions. Property Rights Alliance provides rating and ranking of countries across the world. The overall grading scale of property rights index ranges from 0 (lowest) to 10 (highest). As per the latest data (2017), Bangladesh ranks 125th in the world, the lowest among the countries belonging to Asia and Oceania. India ranks 54th and Sri Lanka 59th.


Even Nepal ranks much ahead of Bangladesh (76th) while Pakistan finishes being closely ahead of Bangladesh (121). Well, it can be argued that despite these institutional setbacks, the GDP of Bangladesh has been progressing at a moderate rate. While this claim remains valid, the explanation lies elsewhere. In many instances measuring economic progress through the lens of nominal GDP is a false dictum. Centre for Policy Dialogue (CPD) in its post budget analysis argued that the recent GDP growth of Bangladesh is a sort of ‘economic illusion’ in the sense that the growth has failed to create employment opportunity for its mass population.


The growing economy has benefited only a certain quarter of the total population particularly the elites. This group has materialised benefits from the growing share of the economy either through some unethical or illegal ways or through using the loopholes of the existing legal system. As a result, a large part of their wealth remains undisclosed and turns black, which has been transferred and deposited to banks in foreign countries. It has been reported that deposits from Bangladesh in Swiss banks have increased on average 20 per cent every year since 2013. Over the years, Bangladesh has lost between 6 and 9 billion USD to illegal money outflow. The drain of local fund to foreign countries surely reduces local investment and hence the opportunity for employment. Despite nominal GDP growth at a moderate rate, the benefits of the growth remain out of the reach to its teeming millions.


Institutions are either the prerequisite of growth or the growth itself leads to better set of institutions. If the first proposition remains valid, Bangladesh is surely growing at a pace much less than its real potential which can be attributed to institutional failure. In the absence of quality institutions the on-going growth momentum is likely to halt in the future once the marginal efficiency of current growth drivers diminishes. If the second axiom is considered more rational, the country has failed to upheave the accompanying and supporting intuitions parallel to growth. In either case, the long-term GDP growth rate will suffer if these anomalies are not addressed on a priority basis.


The writer is an Assistant Professor and Head, Department of Economics and
Finance, University of Nizwa, Oman