EXTERNALITIES AND
BANGLADESH ECONOMY
Group : Athena
4th Batch
3rd semester
Name
ID number
1304001
Afroza Sultana
Md. Neyamath Ullah Sikdar
1304015
1304020
Shazzad Hossain
1304028
Zabal-Al-Noor Himel
1304048
Gania Mafruha
APRIL 12, 2015
CENTER FOR BUSINESS STUDIES
University of Chittagong
E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | I-1
Contents
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-2
I.
Abstract
II.
Introduction
III.
Objectives
IV. Methodology
V.
Findings & Analysis
VI. Conclusion & Recommendations
VII. References
Abstract
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F
rom this study based on primary and secondary research where the
participants are political parties, merchants, and public (Buyers and
Sellers), we are going to know and understand the impact of
Externalities in Bangladesh Economy of which the most adverse impact is that
though the GDP growth is increasing each year, we are not getting the maximum
social benefit which is resulted in that the economy of Bangladesh has more
negative externalities than the positive one.
Introduction
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Externalities and Bangladesh Economy
What is Externalities?
A
ccording to David N Hyman; as he stated in his book Public
Finance: A Contemporary Application of Theory to Policy;
Externalities are costs or benefits of market transactions not
reflected in prices. A third party is affected by externalities. For example, the price
hike of necessary things happens due to externalities like “Information gap in
market” or “monopoly market”. Another example of externalities can be “Black
money” during the election.
Here in our discussion we are going to talk about the impact of externalities
on Bangladesh economy. Our discussion will cover how externalities affect our
budget, election, export-import, remittance, oil price, price hike, subsidies and also
how corruption and environment pollution can work as externalities.
Externalities also identified as a spillover and it has two types which are
positive and negative. The one which benefits a project is a positive externality and
vice versa; the one that causes cost is a negative externality.
Negative externalities may include as we already mentioned environment
pollution, corruption, black money, bribery; along with these traffic congestion,
noise, lack of trust in financial market, information gap between different
competitors, and last but not the least, political influence is also included in the list.
Now turning to Positive externalities, the list may include technological or
medical advances, new constructed roads or well-maintained buildings nearby,
subsidies (for instance, subsidies on oil price and fertilizer is working as positive
externalities as it cause to reduce price hike in other sectors but contradictory
argument may also be place for the same issue), or even a group of skilled people.
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-5
Objectives
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-6
O
ur objective is to show what are externalities and their impact on our
economy in brief. We have pointed out different sectors and
discussed about the externalities and also recommended some
solution for removing or at least check those externalities.
Methodology
O
ur methodology is based on Primary Research and Secondary
Research.
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-7
Primary Research is the text book: Public Finance: A Contemporary
Application of Theory to Policy by David N Hyman.
Secondary Research is based on different research papers by various
researches on the same subject. We had provided the references in the end.
Findings & Analysis
E
LECTION:
During election in Bangladesh a flood of black money occurs in the
economic system which is of course works as externalities. Black money
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-8
works as externalities as it has the immense power to change even the result of the
election for which we the people of Bangladesh suffer.
A report by the Independent Review of Bangladesh’s Development (IRBD)
reveals the fact that like a large number of countries in the world who face a real
fall in GDP due to political reason, Bangladesh also faces the fall at the time of
election. Political violence is one of the primary reasons for the fall in GDP.
According to the data given by the same report it is stated that real GDP
growth had fallen down again and again from the period FY1991 to FY 2013 for
each election years. The report also provided a Figure that shows the decline of
real GDP in 1991, 1996, 2002 and 2009 (see Figure 1).
Another fact is that tax revenue also turned down during the election years.
It is said in the report that except FY2002, during each election year, tax revenue
has fallen down as the present government did not want to impose taxes to the
voters just prior to election which may cause for their unpopularity. As the report
indicates that “low off take of taxes” might be a reason of the slowdown in
economic activities which results in taking a rain check in economic growth.
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-9
S
UBSIDIES:
Bangladesh government announces subsidies on different products
each Fiscal Year and oil & fertilizer are the most significant as for the first
one, people gets the price benefits as it affects other product prices as a result the
cost of doing business and inflation reduce; and for the later as Bangladesh is an
agricultural county and 80% of its people depend on agriculture one way or
another, it has its importance.
In recent years, as it is reported in a prominent newspaper, “The Government
of Bangladesh uses a major share of its budget providing direct subsidies for fossil
fuels and electricity. In FY2012, the government reports it spent BDT 81.4 billion
(US$ 944 million) in direct expenditure on energy subsidies.
The government has to subsidize petroleum imports to mitigate consumers against
price shocks. It spent Tk. 7,350 crore on petroleum subsidies in 2013-14, down
from Tk. 13,558 crore in the previous year, according to the finance ministry.”
It is presumed that the economy is getting the benefits of the falling prices of
oil , but the ugly truth is that only a few groups of people who has the blessing of
the current government is getting the benefit due to information gap. The exact
time of subsidy application is only known to the certain marketers who get the
maximum benefits.
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Again each Fiscal Year, the agriculture sector especially fertilizer and diesel
, go on with consuming the bulk of the government's subsidy allocation but it is
one of the major subsidy policy of Bangladesh government to boost up the food
production. According to news, the national budget for the fiscal 2011-12, the
government allocated a sum of Tk. 92.86 billion on account of subsidies and the
agriculture sector alone has consumed more than Tk. 100 billion as against its
subsidy allocation of Tk. 45 billion.
Again same thing is happening with this sector also. The real farmers are not
getting the benefits of subsidies given on agricultural sector; but the middle-party
is taking all the benefits. In this case also, Information gap and lack of proper
management are the reason.
In both cases the common people are being deprived.
B
UDGET:
Our third externality is the Nature of our market which is
Monopolistic Market and is a product of political corruption. During
budget period (June-July) the information passes to “a very special group” of
marketers, who has the blessing of the certain political parties, robs maximum
benefit.
Because of more expenditure in subsidies and transfer than budgeted,
recurrent expenditures are likely to go beyond the original 2012 budget target.
From July to January of the same Fiscal Year, the central government budget
deficit increased by more than 2.5 times which has induced larger domestic bank
financing of the deficit, including monetary financing.
Most of the year while Budgeting, government are being pushed to give
option to make an entry for the black money to enter the economic cycle as an
investment in Real- Estate or other which is of course a negative externally as its
setting a bad example in society. May be the money is increasing the flow of
economic cycle but in the end the people are being affected adversely through
these.
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-11
C
ORRUPTION:
According to Annual Report 2013 of Transparency International
Bangladesh (TIB) it is stated that among 21 countries Bangladesh was
placed at the bottom of the banding showing evidence of very high risk of
corruption. Pakistan, China, Afghanistan, Bahrain, Malaysia, and Singapore
showed signs of the same level of corruption risk as Bangladesh.
The same report states “According to the Corruption Perceptions Index
(CPI) 2013, Bangladesh scored 27, just one point higher than 2012 and the same as
in 2011. However, in terms of ranking Bangladesh was placed 16th from the
bottom in 2013, 3 steps higher than that in 2011 and 2012. Counted from the top,
Bangladesh has ascended by 8 positions to 136th among 177 countries, compared
to 144th in 2012 among 176 countries.”
But Bangladesh’s score remained well below global average of 43, and in
South Asia, was ranked as the second worst performer, better than only
Afghanistan, having scored 8 points together with North Korea and Somalia.
Bangladesh was earlier placed at the last of the list for five successive years from
2001-2005. In 2006, 2007, 2008, 2009 and 2010 Bangladesh was ranked at no 3, 7,
10, 13, and 12 respectively while in 2011 and 2012 it had taken the 13th position.
As we all know corruption consumed all Government and Non-Government
offices. A single file passing may add costs in the form of inducement which might
led the project planner to either overcome the cost in inducing more corruption in
one way or another or to just leave the plan undone.
E
NVIRONMENTAL ISSUES:
Now-a-days the most popular topic of any conversation
might be the climate change and its impact on countries like
Bangladesh. The high rate of discharging greenhouse gases like Carbon
dioxide is increasing the temperature of earth each year (the increase in
temperature is suggested to be 0.76° C).
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-12
As a result of the global warming as the environmentalists are
suggesting is that the low laying countries like Bangladesh, Maldives,
Indonesia, India, Philippines , Netherlands etc. might go under water.
Within 2030 most of the southern part of Bangladesh might be under
water affecting 60 million people and the most frightening prediction is
that within 2050 there might be no country like Bangladesh on world
Map due to the same reason!
Now the term "loss and damage from climate change” is becoming
popular in affected countries; a fight against the rich countries for
causing environmental damage. The most affected countries like
Bangladesh, are asking for compensation but US is strongly opposing.
In 2012 at COP18 Doha climate change conference held in Qatar
among 195 nations, the developing affected countries were arguing hard
for a marathon 36- hours for the compensation at the fortnight-long UN
climate change and won a momentous recognition of the plight.
Developing countries had been fighting hard for the concession at
the fortnight-long UN climate change talks among 195 nations in Qatar,
which finished after a long-drawn-out 36-hour final session.
E
XPORT- IMPORT:
Export and Import always work as externalities in economy. More
than 78% export remittance is coming from ready-made garments RMG
Sector by exporting mainly to the United States of America and the European
Union. In Fiscal Year 2014, 81.2% of total Exports came from garment exports.
Starting in early 90’s the rapid development in readymade garments had a huge
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-13
impact on the economy of Bangladesh. Now More than in RMG sector 3.6 million
workers are working of which approximately 2.8 million are women.
“You buy one get one free - but it's not really free” _says one of the
Bangladeshi union organizer. The Cruel picture behind the successful façade of
Readymade Garments (RMG) is that the poor labors are dying paying the toll. The
Rana Plaza Incident showed the whole world the cruel façade of RMG sector in
Bangladesh.
The working condition does not meet the standard set by ILO and labor
rights are continuously being ignored in Bangladesh RMG sector. Unhygienic
working environment, excessive work load, long working hours, discrimination in
payment and over-time payment clauses are not being followed in the approved
manner and adding to these the accidents due to fire, building collapses, are
increasing the death toll every year but it seems nobody cares enough to take
necessary step to avoid the prevailed situation neither government nor BGMEA.
Importers of Readymade garments are greedy for the low labor rate that
Bangladesh is offering and the Owners of the garments of Bangladesh is greedy for
their “Profit” between these the poor labors of Bangladesh are being
“sandwiched”.
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-14
P
RICE HIKE:
There is an information gap between the supply and demand sides
in Bangladesh Economic Market which causes price hike for every type of
product. There is no proper survey for demand or supply of the market. Because of
these the producers face loss and Intermediaries are taking all the benefits and the
consumers are also at loss.
High inflation may result in high pries variability which may result into
different negative externalities. The gap between the growth rate and actual growth
rate is escalating due to inflation.
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-15
Table 1: Summarized Version of Planned Development Effort
Plan
Target of
GDP
growth rate
5
Achieved
GDP
growth rate
4.15
The Fifth Five Year Plan
1997-2002
7
5.21
The Medium Term Monitory Framework
2011-2015
8 (by FY
2015)
---
The Fourth Five Year Plan 1990-95
Average
inflation
5.24
(FY 1991
to FY
1996)
5.19
(FY 1997
to 2002)
6.87 (FY
2003 to FY
2010)
R
APID URBANIZATION:
Rapid Urbanization in Bangladesh for last twenty years or so is
facing diverse negative externalities which include environmental
pollutions, unplanned urban growth, widening the income inequality, urban
congestion etc.
Conclusions & Recommendation
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-16
I
n conclusion we may say that Bangladesh Economy has both the
positive and negative externalities of which the later one is more
prominent.
Now after this brief discussion we may recommend that,
Firstly, we should remove all the ways of entering the black money into the
economic cycle. Our government each Fiscal Year gives chances to invest black
money into some selected sectors by imposing extra charges; but our
recommendation will be to make sure that all the source of income comes under
tax.
Secondly, government should take steps to make people aware of the benefit
of giving taxes properly and should also encourage them. Encouragement can be
promoted through awarding the maximum tax payer.
Thirdly, government should take steps to remove or at least reduce the
information gap between supply and demand sides. And these will reduce price
hike tendency of the market.
Fourthly, the monopoly market or monopolistic market should be changed to
competitive market.
Fifthly, government should ensure that the benefits of the subsidies reach to
the ultimate beneficiary.
Sixthly, the policy of the government should be long term and in a way that
maximum social benefit can be assured.
Seventhly, political discrimination should be eliminated so that the real
consumer gets the ultimate profit.
References
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VII-17
1. “A brief statement for the international seminar on Climate Change and Food
Sovereignty” by Bedroll Alma, President, Bangladesh Krishok Federation.
Available from
http://www.krishok.org/climate-change.html
2. Bangladesh-Economy-in-FY2014. (2013)
Available from
http://cpd.org.bd/wp-content/uploads/2013/10/Bangladesh-Economy-inFY2014.pdf
3. Bangladesh Economic Update. (2012)
Available from
http://siteresources.worldbank.org/BANGLADESHEXTN/Resources/2957591331171967817/BangladeshEconomicBrief2012May31.pdf
4. Energy Subsidies in Bangladesh
Available from
https://www.iisd.org/gsi/supporting-country-reform-efforts/energy-subsidiesbangladesh
5. Externalities: Problems and Solutions
Available from
http://www.macmillanhighered.com/Catalog/WorkArea/DownloadAsset.aspx?id=4
037
6. Kawsar, Mohammad Abu. Urbanization, Economic Development and
Inequality. (2012)
Available from
http://www.bdresearchpublications.com/admin/journal/upload/09297/09297.pdf
7. N. Hyman, David. (2011) Public Finance:- A Contemporary Application of
Theory to Policy.10th Edition. Delhi: Cenagage Learning India Private Limited.
8. Rahman, Mustafizur. (2014) Professor Mustafizur Rahman on oil prices, subsidy
and BoP. The Daily Star. 12th December.
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E x t e r n a l i t i e s & B a n g l a d e s h E c o n o m i c s | VIII-18
Available from
VIII. http://cpd.org.bd/index.php/cpd-mustafizur-rahman-oil-price-subsidy-bop2014/
9. Subsidy to agriculture sector (2012)
Available from
http://www.thefinancialexpressbd.com/old/more.php?news_id=128447&date=2012-05-039.
10. The Guardian. (2012) News on Doha Climate Change deal clears way for
'damage aid' to poor nations .8th December.
Available from
http://www.theguardian.com/environment/2012/dec/08/doha-climate-change-dealnations
11. The Guardian. (2014)Rana Plaza: one year on from the Bangladesh factory
disaster .19th April
Available from
http://www.theguardian.com/world/2014/apr/19/rana-plaza-bangladesh-one-yearon
12. TIB Annual Report 2013
http://www.tibangladesh.org/beta3/index.php/en/communications/publications/annual-report
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