Preliminary Draft: Not for citation or circulation Sources of Growth and Productivity in Bangladesh

GDP growth in independent Bangladesh has been on an increasing path and has been its main instrument for poverty reduction. The pace of poverty reduction was most pronounced during the 1990s—with the poverty rate falling from 59 percent to 50 percent—when per-capita GDP growth accelerated to an annual average of 3 percent per annum, the highest post-independence level. Growth has benefited from remarkable macroeconomic stability, sharp declines in the population growth rate, reasonable levels of savings and investment rates, and the low initial income level. Growth has been remarkably stable and Bangladesh is among a handful of countries to have avoided even a single year of negative per-capita growth since the early 1990s—remarkable feat for an economy persistently hit hard by weather related shocks. Even so, Bangladesh’s growth performance falls well short of that of China, the East Asian tigers, and the neighboring India and Sri Lanka. Understanding why, as this paper attempts to, helps identify policy areas with the highest growth potential. The paper shows that productivity growth has been the main driver of growth. It also shows that the most potential for productivity and GDP growth pay-off for Bangladesh lies in policy and institutional improvements that seek to: improve the quality of economic governance; lower regulatory and administrative burdens on businesses; enhance global integration; accelerate human and infrastructure development; improve the quality of financial intermediation; and maintain macroeconomic stability. Even then, financing of the needed increases in the investment levels will be a challenge and will require fiscal prudence and substantial donor support.