Academic journal article The Journal of Developing Areas

Trade Liberalization and Import-Demand Behavior in Bangladesh, 1974-2008

Academic journal article The Journal of Developing Areas

Trade Liberalization and Import-Demand Behavior in Bangladesh, 1974-2008

Article excerpt

ABSTRACT

From the early 1980s onwards, Bangladesh has undertaken a series of trade-liberalization measures. In combination with the steady rise in real income over the past two-and a half decades, these measures have raised the country's import-orientation and brought structural change in the composition of imports in favor of consumer goods and materials for consumption. This paper investigates import-demand behavior in Bangladesh within the Autoregressive-Distributed-Lag (ARDL) modeling framework using annual data for the period 1974-2008. The empirical results suggest the presence of a well-behaved import-demand function, in the senses that (1) Bangladesh's imports are income-elastic and price-inelastic and (2) there is no evidence of instability in the Bangladesh import-demand relationship.

JEL Classifications: C32, C50, F10

Keywords: Trade Liberalization, Import Trade, Cointegration and Error-Correction, Structural Stability, Bangladesh

(ProQuest: ... denotes formula omitted.)

INTRODUCTION

Bangladesh's import trade has undergone some structural change in an increasingly open-economy environment from the early 1980s. Imports were heavily controlled until the late 1970s as part of an import-substituting strategy of development, aimed at achieving self-sufficiency in manufacturing products; a policy inherited by Bangladesh from its pre-independence Pakistani era. As export earnings were limited, foreign-exchange shortages required import controls through licenses and permits. Until the late 1970s, the only commodity imports permitted were those considered essential to domestic consumption or production. Commodities classified non-essential were banned outright or restricted through prohibitive tariff-and non-tariffbarriers. Consequently, the degree of import-orientation, measured by the imports-to-GDP ratio, was about 7% during 1971-1975. The import restrictions meant that supplies of even basic necessities were low. The effects flowed through to the export trade. As a consequence, the degree of export-orientation, measured by the exports-to-GDP ratio, was only 3.5% during 1971-1975. This autarkic trade regime was associated with a repressed financial system, evidenced by heavily-negative real interest rates and an overvalued currency (the Bangladesh taka). The economic crisis that began building late in 1972 ended with a major balance-of-payments crisis two years later (Hossain, 2000; Islam, 1977), followed inevitably by a political crisis and change of government in 1975.

A paradigmatic shiftin development strategy took place after the political change in August 1975. In the years preceding the crisis, 1972-1975, Sheikh Mujibur Rahman's government had pursued a socialist development model. The new military government of General Ziaur Rahman ("Zia") quickly replaced this with a market-oriented development model (1976-1982). Among the early reforms initiated by the Zia government under this model were some deregulatory measures, including some trade liberalization. The pace of trade liberalization was, however, slow as the government pursued a gradualist implementation program with the aim of minimizing further social turbulence and, in particular, avoiding political backlash (Hossain, 1996). The pace of trade liberalization accelerated in the 1980s, under General H.M. Ershad's government (1982-1990), with the introduction of IMF-supported structural adjustment programs. Further acceleration of trade liberalization was achieved during the early 1990s when Saifur Rahman was Minister of Finance in the Khaleda Zia government (1991-1995). While the impetus created by the previous two decades of liberalization led to the continuation of some limited trade reform during the next few years under the government of Sheikh Hasina (1996-2001), no major trade reform measures have been implemented since the early 2000s. By this time the protectionist lobbies had become politically powerful, diminishing the influence of the IMF and World Bank in Bangladesh's economic affairs. …

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