Academic journal article The Journal of Developing Areas

Growth and Employment Empirics of Bangladesh

Academic journal article The Journal of Developing Areas

Growth and Employment Empirics of Bangladesh

Article excerpt

ABSTRACT

This paper applies multivariate cointegration methodology and vector error-correction models to investigate the factors that are likely to contribute to economic growth and employment in Bangladesh. This paper concludes that exports, FDI and external remittances enhance both economic growth and employment in the short run. But the exchange rate depreciation seems contractionary, although the empirical evidence lacks abundance of clarity and robustness.

JEL Classifications: G100, G120

Keywords: Cointegration, Exports, FDI, Remittances, Growth, Employment.

(ProQuest-CSA LLC: ... denotes formulae omitted.)

INTRODUCTION

The economic problems of Bangladesh include perennially low per capita real GDP growth, exorbitantly high unemployment rate(some 35%) and persistently yawning current account deficit. Since inception, Bangladesh has been continuously struggling to mitigate these problems by pursuing export promotion policies; encouraging emigration of unskilled, semi-skilled and skilled workers; offering various fiscal and monetary incentives to attract foreign direct investment (FDI); and making frequent downward adjustments in the exchange rate in small doses. The policies of export promotion and encouraging emigration of workers of various skill categories are designed to reduce the current-account deficit by enhancing export earnings and increasing the inflows of remittances by the expatriates. Furthermore, by enticing FDI, the country seeks to increase the availability of foreign private capital for long-term productive investment. Downward adjustments in the exchange rates(devalustions) are also designed to improve the competitiveness of exports form Bangladesh and to improve the balance of payments position by attracting larger inflows of external remittances. In brief, the primary objective of the above policies has been to boost real GDP growth and employment in Bangladesh. Despite this evolution in policy, the Bangladesh economy only managed, on average, per capita GDP growth of 1.5 percent in three decades, although the investment to GDP ratio rose from 15 percent in 1981 to about 21 percent by 1995. On the other hand, Indonesia, Malaysia, Thailand and Singapore experienced near-double digit economic growth over 1970s and 1980s into 1990s until the 1997-98 economic meltdown. Recently, China and India have recorded near-double digit -GDP growth.

Growths in real exports, real FDI, concomitant remittances of emigration, and the exchange rate devaluations are expected to make positive contributions to real GDP growth and employment, although in varying magnitudes. The directions of their causal relationships to real GDP growth and employment are subject to academic debate. Prior to the decade of 1980s, most of the less developed countries (LDCs) like Bangladesh used to rely on government-to-government official foreign aid of various types to mitigate the problems of unemployment, poverty, price instability, and foreign exchange crises. The dwindling availability of official foreign aid has induced many LDCs in recent years to embark upon export promotion and foreign private capital attraction efforts. Moreover, foreign aid provided little relationship to human needs in developing and transitional countries (Akram, 2003). Export earnings and FDI are thus gradually replacing the official foreign aid. Manpower exports and the concomitant remittances have proven to be a boon for the Bangladesh economy. The inpourings of FDI into Bangladesh are now more encouraging than before, although very low as compared to those in India, China and a host of Southeast Asian countries. Periodic devaluations of Taka (Bangladesh currency) also appeared to have some unexpected effects on the Bangladesh economy without unleashing undue price instability.

The annual inflow of official development assistance to Bangladesh is highly inadequate. To bridge the expanding gap between domestic savings and investment, inflows of foreign direct investment and portfolio investment are required. …

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