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Economic Liberalization Reforms May Explain the Impressive Gdp Growth in Bangladesh

Mohammad Imran Hossain
Graduate School of Asia Pacific Studies, Ritsumeikan Asia Pacific University, Beppu city, Oita, Japan

Abstract/ Executive Summary:

This paper seeks to untangle the link between economic liberalization reforms and GDP growth in Bangladesh. To do so, a time series analysis is done on a data set ranging from 1980 to 2009 using the Cointegration and Ordinary Least Square (OLS) methods. After a review of recent growth and development data in the Bangladesh economy, three reform variables as proxies for trade liberalization, financial reform, and capital market liberalization are analyzed against the level of per capita GDP. Empirical findings of this study support a positive relationship between long-run economic growth and the proxies picked to represent liberalization reforms in Bangladesh. A granger causality Wald test indicates a strong unidirectional long-term causal flow stemming from the reform indicators to per capita GDP. The results carry the implication that Bangladesh must get rid of major economic and political impediments in order to fully reap the benefits of various reform programs.

Keywords: Bangladesh, Economic development, Economic growth, Economic reforms, Gross domestic product (GDP).

Location: In Bangladesh

Start Date:

End Date:

Program Area: Comparative study

Commodity: Income generation, Market analysis, Management

Objectives:

The main purpose of the current paper is to untangle the relationship between liberalization reforms and economic growth in Bangladesh, by empirically testing to see whether the marginal impacts of reform variables are positive or negative and if they are statistically significant or not.

Methodology:

The level of per capita real GDP is taken as an indicator of economic growth while three reform variables are assumed to represent liberalization reforms. The empirical model for this study is as follows: LnPCY_t = β₀ + β₁TEXIM_t + β₂R_t + β₃CAPFLOWY_t+ U_t. PCY_t represents per capita GDP in year t; the variable TEXIMt represents trade openness through the total volume of export and import as a share of GDP. According to international trade theories and the Bangladesh Government, expansion of trade is an important objective of economic reforms in the country (MOF, 2010). Hence following Dowling & Hiemenz (1982) and Adhikary (2011), total exports and imports as a share of GDP were assumed to represent ‘trade openness’. Rt stands for ‘real interest rate’ which is assumed to represent the financial openness indicator; real interest rate as an indicator of financial liberalization was included in the model following Habib (2002). Bangladesh has a factor-driven economy where the capital market is yet to be expanded and flourished. Like other developing countries banks and other financial institutions act as key intermediaries to provide necessary funds for businesses. The contribution of financial liberalization reform to the productivity of domestic capital (growth) in Bangladesh is thus a crucial factor (King & Levine, 1993; Hallwood & MacDonald, 1994). CAPFLOWYt represents the net foreign capital inflow as a share of GDP; the net amount of foreign capital inflow in Bangladesh is thus taken as an indicator of capital account openness, and as a proxy for capital market liberalization reforms. The logic is that reform activities in the capital market influence foreign capital inflow, as indicated in Ahmed and Fahian Tanin (2010). These funds stimulate productivity by supplementing the scarce domestic resources, easing foreign exchange constraints, inviting modern technologies and managerial skills, and facilitating easy access to foreign markets. Therefore, they are a crucial factor in the discussion of economic reforms and per capita GDP growth in developing countries like Bangladesh (Quazi, 2000; Adhikary, 2011) Ut is for error terms. For this study all the variables are in real terms and the errors are assumed to be independently and identically distributed. The priorie expected signs of the coefficients are hypothesized as follows: β1>0; β2>0 or <0; β3>0 The amounts of FDI for various years are taken as a proxy for capital market liberalization reforms in the economy. According to neo-classical growth advocates, in a capital shortage economy like Bangladesh, the marginal productivity of investment is increased if additional capital is injected in the form of long-run investments like FDI (Adhikary, 2011). Some economists postulate that more foreign capital investment increases the efficiency of investment as it provides a comparative advantage to a developing economy like Bangladesh (Romer, 1986). FDI and foreign capital in low-income countries are a source of fund that fills up the gap between existing resources and the amount needed for development. Such funds may stimulate productivity through complementing scarce domestic resources, by easing foreign exchange constraints, through inviting modern technologies and managerial skills, and also by facilitating easy access to foreign markets. Therefore, in the discussion of economic reforms and per capita GDP relationship in developing countries like Bangladesh, it is also a crucial factor (Quazi, 2000; Adhikary, 2011).

Source of Information: Ritsumeikan Journal of Asia Pacific Studies, Volume 32, September 2013

Article Link (Online Journal):

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

The variables were found normally distributed in the normality test according to the Karnel Density Estimation Technique. The standardized normal probability plot confirmed normality in the middle range of residuals. Similarly, the Quintile-normal plot ensured normality in the extreme of the data. A non-graphical test for normality is the Shapiro-Wilk test which checks the hypothesis that the distribution is normal. In this model, the p-value of 0.07715 indicated that the null hypothesis that the distribution of the residuals is normal cannot be rejected (at 90%). The white noise Q test, as well as the Breush-Goodfrey and Durbin-Watson test for serial correlation, detected serial correlation in the data at 5% significance level. To correct it, we utilized Cochrane-Orchutt regression. The result shows that the Durbin-Watson original static was 1.07025 while the transformed value for the statistic was 1.699318. Both the graphical and the Breusch-Pagan test suggested no possible presence of heteroskedasticity in the model (prob>chi2 =0.4340). As the residuals were homogeneous, we would not expect that the model might have wrong estimates of the standard errors for the coefficients and therefore their t-values. Even so, we followed Stock and Watson (2003) and assumed heteroskedasticity in our model. From the two ways to deal with this problem, using heteroskedasticity robust standard errors and using weighted least squares (WLS), we followed the former (Stock and Watson, 2003).

Knowledge Management: Report/Proceedings