Neoliberalism and Economic Freedom in Bangladesh

Daphne Chen on "Neoliberalism and Economic Freedom in Bangladesh"

Daphne graduated out of Princeton in 2010 after which she completed IBM’s prestigious 2 year strategy consulting rotation program. Following that she decided to work with developing countries and luckily for us she chose to come to Bangladesh on a Fulbright Fellowship where she studied the socioeconomic consequences of violence against women and worked for an impact investment firm in Dhaka.

She has recently been accepted to many top MBA programs for the class of 2016 (including Yale and Oxford) and she is looking for a summer internship at IFC (Any IFC people reading this should not miss this opportunity to hire her) before she matriculates in the fall.

Whenever I hear someone use the word economic freedom, my brain shuts down for a second and I lose track of the conversation. I hear the term so often these days, in so many unrelated contexts and applications, that it has become all but meaningless. “Economic freedom” has become a baffling concept, at once intuitive and slippery; instinctively, I want to accept the broadest definition possible, that of an individual’s freedom to take part in the economy without undue external restrictions and with control over his or her labor and property. But then, Neoliberals like David Harvey have co-opted the term as a means of rhetorical association so that every time I hear Economic Freedom I think “free market economy.” Harvey and his cohort tell us that

“human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade. The role of the state is to create and keep an appropriate framework to such practices.”

The role of government, then, is to create a healthy environment for entrepreneurialism than to withdraw managing it, allowing labor, capital, and goods to move freely.

The argument for “smaller government” always makes me somewhat suspicious, particularly when I think about how to preserve and promote economic freedom in Bangladesh. Despite Bangladesh’s adherence since the 1980s to a mostly neoliberal economic ideal, I don’t think its future will be about less government at all; if anything, I think it should be more better government. I agree with what neoliberalism says about private markets maximizing the collective wealth of a society, but who will ensure that wealth will be fairly distributed, or that corruption will minimized? Furthermore, are free market economies really better at increasing quality of life for its people? From where Bangladesh stands today, in the midst of political and social instability, it’s hard to ignore how such thinking has been responsible for major missteps in its social progress.

To understand how economic freedom is defined and practiced by countries all over the world, I looked to the 2014 Index of Economic Freedom (IEF) put out by the Heritage Foundation / Wall Street Journal. The Index measures economic freedom based on 10 factors grouped into 4 categories:

  • Rule of Law (property rights, freedom from corruption)
  • Limited Government (fiscal freedom, government spending)
  • Regulatory Efficiency (business freedom, labor freedom, monetary freedom)
  • Open Markets (trade freedom, investment freedom, financial freedom)

Each of these subcategories is graded on a scale of 0-100 and the overall score averages these subcategory scores giving equal weight to each.

The 2014 IEF report shows that Bangladesh increased its overall freedom score by 1.5 points to a total score of 54.1, placing it at 131 out of 178 nations. For context, Hong Kong ranks number 1, but other countries that we don’t often consider libertarian, like Singapore, also rank very high (#2). Once the poster child of free market economies, the US ranks 12th, behind Estonia (#11) and Mauritius (#8). This is kind of strange as Singapore is, after all, the land where there is a federal ban on chewing gum and the government has a monopoly on land sales that heavily distorts the property market, and former Soviet-controlled Estonia’s per capita GDP is less than half of what it is in the US. Other strange rankings include Colombia (#34) above France (#70) and Italy (#86).

The IEF rankings start to make even less sense once you go deeper into their methodology (e.g. how it applies a negative rating to increased government spending, regardless of context), and examining the component categories actually confounds the Heritage Foundation’s thesis that “free (market) economies” do a better job of increasing well being for their citizens. For instance, if we look at the IEF’s data on corruption, we see that welfare-state countries like Denmark, Sweden, Norway, and Finland exhibit the highest correlation with low corruption. The same holds true when we consider the IEF’s ratings with respect to protection of property rights across the world; countries with more government oversight like Ireland outrank free market economies like the USA. Even weirder, looking closely at the criteria for Limited Government reveals that minimum-wage laws, environmental regulations, and requirements for transparency in corporate accounting cause a country to be categorized as “less free”, whereas little or no regulation of occupational health and safety make a country “more free.”

Despite its shortcomings, the IEF did give me an overall economic picture of Bangladesh and correctly diagnosed its major weaknesses. It shows a track record of economic growth (GDP shows consistent increases about 6% year over year) but describes Bangladesh as “mostly unfree” due to persistent lack of progress in promoting effective rule of law, minimizing corruption, closing a porous border between politics and the judicial system, and improving weak property rights protection. The reform regime remains unbalanced and ineffective.  These are all obvious areas for improvement, but would further pushes toward a free-market economy solve these weaknesses? I’m not so sure.

In many key ways, Bangladesh has adhered to its path of neoliberal economic development. In the 1980s, it pushed a focus on exports, increasing foreign investment exposure, and using its abundance of cheap labor and advantageous demographic dividend to enter the global marketplace. The promised prosperity of economic freedom has come in some forms, but has utterly failed in others, and it is hard to know if this growth would have been better or worse if Bangladesh had adopted a different economic policy. It is true that there have been some measurable social improvements over the last 10 years, including life expectancy has increased by 10 years, infant mortality rates have dropped by nearly 67%, and female literacy has doubled.

But recent history showcases a 2013 that was messy and violent, with regular riot protests over the war crimes tribunal set up by PM Sheikh Hasina to investigate war crimes committed during the War for Independence in 1971, increasing religious turmoil, and a contentious national election. Not to mention that there are still over 50M Bangladeshis living in poverty, and domestic violence rates are on the rise, as is sexual harassment in the workplace. Furthermore, it would be impossible to talk about the state of economic freedom in 2014 Bangladesh without some discussion of the garment industry and its recent troubles. Last year, Bangladesh experienced some of the worst disasters ever to befall the garment industry, with the Tazreen Fashions fire killing 112 workers and the Rana Plaza building collapse killing over 1000. Many see these events as a direct failure of the neoliberal economic model in Bangladesh and it’s easy to see why. In recent years, the ready-made garment (RMG) industry has grown quickly in the country and accounts for about 75% of the country’s exports; despite this growth, wages remain barely higher than they were in the 1980s. The focus on profit maximization superseded labor regulations, leading eventually to disaster. The fall-out has seen the industry take the enormous burden of a mandatory 77% wage hike, necessitating mass layoffs, factory closures, and ensuring continued disruption for years to come. If there had been better enforcement of labor laws (and better laws), it’s hard to see how things could have escalated to such an extent.

This political volatility and social unrest must be reconciled in the context of undeniable economic and social gains. The economy has grown despite structural and institutional failures, but significant bureaucratic obstacles to entrepreneurial activity and economic advancement persist. The labor market remains woefully undereducated, and labor issues are still a big problem. With such a balance of good and bad effects, it’s really hard to know if economic freedom is even the right word to use to describe the mixed-bag progress of Bangladesh in the last 10 years.

5 thoughts on “Neoliberalism and Economic Freedom in Bangladesh

  1. Great article! To be honest, there aren’t many articles on the internet in this context that makes you so thoughtful. On that note, I’d like to express some humble opinions.

    a. I will not go into the debate on whether the free market is better at improving the living standards of people, but I think it’s definitely better than the system we currently have.

    a. About the point whether a smaller government can minimize corruption, I think it can. From what little knowledge I have, I think government offices in Bangladesh are the most corrupt. It’s the government offices that we fear venturing in to. I remember how tense I was when I went to register for my national ID card. So yes, in that context, I think, limiting the size of the government will likely result in lower levels of corruption.

    b. However, I do agree that there are certain shortcomings of the free market. For example, take the case of the judiciary system. Just downsizing the government will not ensure the independence of the courts.

    c. Would you mind clarifying on what you mean by ‘who will ensure that the wealth is fairly distributed’. Do you mean taking money from the rich and giving it to the poor, because, forgive me if I sound rude, I think that is the last thing a government should be doing.

    d. I don’t think the current problems in the RMG sector is the result of free market. Instead it’s the fault of the owners who failed to recognize the safety rights of workers and the government which failed to implement the existing laws regarding employee safety. I think it’s wrong to blame the entire system for the fault of a selected few corrupt owners. We have to remember that over 4 million workers (most of them were unskilled before they joined the garments factories) are being provided employment by this ‘faulty’ system.

    e. And lastly, I think it’s all a matter of what we choose. It’s unfortunate that corruption is now part of our society. It will be very difficult to improve the situation as long as it’s socially acceptable to be taking ‘bribes’.

    PS. I think there is a factual inaccuracy in the article – Tazreen Fashion Factory fire killed around 120 people, not 300.

    And I would prefer to call the existing system as ‘Corruptocapitalism’ . Sorry, bad joke.

  2. 1. Fair distribution – what is fair ? More for more or equal to all ? Even if we agree that equal to all is fair, in general free market system does lead to long run lower inequality (http://upload.wikimedia.org/wikipedia/commons/c/cf/GINI_Index_SVG.svg)
    2. Political and social instability – Is generally more in countries that had historically more market orientation. In fact, in case of Bangladesh, there is more political and social stability after 80s. Of course it is a continuum, but the co-movement of increasing free market and political stability is clearly there. Moreover, many see the ”psuedo socialism” or in other words the gross rejection of free market in favor of nationalist emotion led development strategy of 70s as the root of BD political and government failure.
    3. I do understand that there is a strong basis for saying that at this particular moment, ”fair, good and efficient” government may be even more effective than free market to promote progress in Bangladesh. But doesnt this achieve only a little more than saying ”free market under perfect competition is would be the best outcome for BD”? – first of all who would ensure good governance? Given the state of politics and corruption, isnt a bigger government tantamount to a bigger monster?
    4. It is great that you have raised the issue of ”welfare states”; wouldn’t you say that they intervene on social mobility issues but rarely on free markets themselves? Like making a more level playing field rather than rigging the outcomes of a game?
    5. About the RMG – the incidents are unfortunate. But can we depend on a government with so blatant regulatory failure to improve their or our lives? Or would a better way for us is to make good practices marketable, such as rating based insurance ? (just as an example)

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