'There are reasons to be concerned about the mega projects'

The path to worldwide economic recovery has been uneven. In the year 2021, the world economy saw significant growth of 5.5%. This created hopes for an end to global recession. But the projections for this and next year do not look good.

Two years ago, when the COVID-19 outbreak occurred, there were too many unknowns and too much uncertainty regarding the vaccination, new variants of the virus, the length of economic shutdown and fiscal response by the state. Projections about future recovery involved too many assumptions and a range of possibilities.

As we are in the 2nd anniversary of the pandemic, we have already entered a new global crisis. The Russia-Ukraine conflict has adversely affected energy, commodity and food prices. There is news of another round of COVID infections involving new the omicron variant. All these have contributed to a slowdown in economic growth compared to 2021 - according to one estimate, global output is projected to grow by only 4.0% this year and 3.5% in 2023.

The effect of COVID-19 has been multi-dimensional and multi-sectoral. But if I am to single out the most affected sector, that will be education. We are heading for a demographic disaster following the pandemic. Low spending and pandemic time educational mismanagement have worsened our ongoing education crisis. Bangladesh not only had the longest spell of school closure in the world, it also had the least effective offline and online education system. Add to this the challenge of digital divide and the pre-pandemic burden of learning poverty. According to one estimate, Bangladesh is projected to experience a loss of USD 31,481 million in lifetime earnings.

Much depends on governance. We have to address multiple forms of exclusion and pilferage. At the local level, many eligible recipients allegedly remain excluded because of issues of mis-targeting and corruption in the registration process. Add to this the challenge of the new poor - many lower middle class families temporarily pushed into poverty. Regardless, the introduction of the TCB cards is a useful stop-gap measure to cope with short-term fluctuations in international prices. On the other hand, if prices are rising following a permanent increase in production costs, then the government needs to take measures to assist producers and/or to increase supply.

Short-term fluctuations in foreign earnings at a time of global crisis are not unusual. Declining foreign earnings may not be an immediate concern for countries with a low import-GDP ratio (18% in case of Bangladesh). But we have seen how Sri Lanka with only 22% import share has run into a crisis. Much depends on the adequacy of foreign currency reserves and sources of foreign earnings. Bangladesh may not face an imminent threat given our healthy reserve.

Q: How would you evaluate the economic strategy Bangladesh has been following during Covid and in the present situation?

The government adopted a pro-business strategy prioritising livelihoods, at times removing nationwide lockdown to keep factories open despite surge in Covid-19 infections. The early introduction of the salary stimulus package for the RMG sector was also critical. These steps helped exports recover quickly from the initial shock. That said, Bangladesh lacked a clear vision and strategy in the early months of the pandemic to cope with the health crisis. Coordination failure between different government bodies was poor. Testing was inadequate and infrequent. Public communication was badly managed, including flip-flops over closure and reopening of the economy. All these undermined trust in the government. In the second year, proactive vaccine diplomacy and donor support helped vaccinate nearly 70% with a second dose. The economy also benefited record high remittance along with substantial foreign loans and grants. Even then, serious questions remain about marginalisation of the working class, rising poverty and the new crisis in our education sector.

We need to start fixing existing structural gaps that have been exposed by the pandemic. Let me highlight three of these. First, reorienting the recovery and growth strategy. I recognise the importance of digital technology, mega infrastructure projects and a pro-business approach. But for all these to be sustainable, we need bigger investments to turn the youthful workforce into national assets. This requires increasing social spending in education and health. Mega projects with a universally sub-standard quality, under-funded public education system can’t produce sustained growth.

Second, resilience to future crisis calls for an agile, responsive and truly democratic government. We can’t progress if we continuously deny the ongoing slide in corruption rankings and bureaucratic capacity. Third, effective coordination and implementation of government programmes during crisis times, requires an accountable government. This is not possible unless we return to democratic principles and norms.

A range of explanations have been offered such as cronyism, dictatorial power, family politics, lack of economic diversification, wrong agricultural strategy, excessive foreign borrowing and inward-looking economic strategy. But I want to emphasise the issue of endemic over-optimism. A decade before today's crisis, Sri Lanka’s post-war economy was on a path to prosperity. Income poverty fell to 4.1% by 2016. Between 1992 and 2004, export-GDP ratio was also on the rise. At one point, the GDP was growing at 9%. All these created policy complacency and irrational exuberance about the Sri Lankan economy leading to investments in popular big ticket projects, ignoring the underlying macroeconomic fragilities. Obvious dangers such as falling exports, mounting debts and rising inequality were ignored, much like a “gray rhino” running at you at a high speed.

Mega projects are the cause as well as the consequences of macroeconomic failure. Sri Lanka and Bangladesh both have enjoyed favourable social indicators and a period of steady macroeconomic growth. This created much optimism, leading to lumpy investment in futuristic projects, as a big push to spur the domestic economy. Both countries have simultaneously prioritised numerous infrastructure projects. However, long gestation period, commercial viability and the nature of foreign finance combined with unfavorable external conditions to cause so many mega project disasters in the case of Sri Lanka. The Hambantota International Port was approved on political considerations, despite questionable commercial prospects. So once it opened in 2010, it produced little economic impact. Other completed power plants, airport, and highways are yet to dividends to service Chinese debts. For Bangladesh, there are concerns over underestimated costs and associated environmental impacts as well as overestimated economic benefits.

Again, this is more than a deficit in technical capacity. The issue is politics. Projects are often allocated to party members and cronies for political benefits ignoring financial and social costs. In Malaysia, for example, the fall of 62 years of authoritarian UMNO rule saw in 2018 suspension of the multi-billion dollar East Coast Rail Link (ECRL) project with China owing to concerns over unrealistic and inflated fiscal costs. The project was authorised by former PM Najib Razak whose near-decade-long rule was tainted by massive financial scandals and corruption. More evidence of corruption emerged with projects approved under the BRI scheme of China. In one petroleum and gas pipeline project, 88% of the projects’ value was paid to the contractors even when only 13% of the construction work was completed. In the case of Bangladesh, with rising cronyism, limited public scrutiny and press freedom, similar concerns over financial irregularities ad sustainability are growing.

That is a billion dollar question. Our debt-GDP ratio is still under 40% in contrast to over 100% in Sri Lanka. But because of the huge cost escalation and continuous schedule delay, there's a great deal of uncertainty over future debt liability. In many instances, mega projects have been chosen as populist measures. Whether Bangladesh is able to bear this fiscal burden depends on (1) economic dividends generated by the projects and (ii) the future state of our economy. If both turn negative, we risk heading towards a crisis much like Sri Lanka. In weak democracies, there is an additional accounting related concern as projects costs are often inflated to favor crony contractors and greedy politicians for personal benefits, increasing the risk of what American Michele Wucker author calls “grey rhino” events.

The Ukraine crisis reminds us how a regional crisis can have far reaching consequences while Sri Lanka shows that in countries with fundamental gaps in governance and lopsided economic structure, a major external shock can quickly reverse years of economic progress. Trade and remittance dependent economies are especially vulnerable to such risks. Much like Sri Lanka, both pillars of our economy are labor dependent. Shocks to RMG export or remittance can lead to growth collapse. In a post-COVID world, demands for automation have intensified in many migrant labor dependent countries. Some of our key regional export competitors (e.g. Vietnam) have already diversified their industries, moving away from RMG production, in order to minimize external vulnerabilities. To avoid Sri Lanka’s fate, we must rise above rhetoric and look beyond our current economic success by encouraging frank and critical appraisal of “Grey Rhino” events. Valid criticism of official statistics, concerns over cronyism and corruption must not be dismissed as politically motivated.