We enter 2022 with anxiety. The COVID-19 pandemic is experiencing a new surge, thanks to the omicron variant, setting record infection rates. Civil wars and conflicts have erupted in the Horn of Africa, in addition to long-running wars in the Middle East and North Africa. Economies face supply chain bottlenecks, nascent inflation and, in some countries, a slow recovery from the 2020 recession. Despite deals and rhetoric, carbon emissions, which fell for the first time in 2020, are rebounding rapidly.
Amidst all this pessimism, I share two cases of success despite the odds. One happened last year. The other represents a long-term development perspective that demonstrates the triumph of the human spirit over seemingly insurmountable obstacles.
1. South Sudan
In 2021, South Sudan was heading for a perfect storm. The COVID-19 pandemic was spreading through this country with limited resources (as one observer put it, “We have more vice presidents than ventilators”). Climate change induced floods were devastating agricultural regions of the country. While there was a peace agreement to resolve the major conflict between Dinka and Nuer, violence was breaking out between smaller groups across the country. The economy was declining. Foreign currency was scarce but the government kept the exchange rate fixed to avoid an inflationary spiral. Unsurprisingly, a parallel market has emerged. While the official exchange rate was 186 South Sudanese pounds to one US dollar, the parallel market rate was 610. The government insisted that all official development assistance (ODA) be disbursed at official exchange rates , which meant that this aid would soon dry up. at the top.
To shore up foreign aid without immediately devaluing the currency, the government, with the help of the International Monetary Fund (IMF), set up an auction where, each week, a small amount of donor aid would be sold. Banks and other financial institutions would bid on those dollars and the exchange rate would be the one that cleared the market. The experiment worked. In less than four months, the allotment rate converged on the parallel market rate and the two rates have since become unified (graph 1). Lesson? Even in a perfect storm, economic principles apply and actually work.
Due to its high and steady growth (its per capita income is now higher than that of India) in the face of high levels of corruption, Bangladesh is often described as a “paradox”. In fact, there are five paradoxes about Bangladesh. First, growth accompanied by corruption. Second, Bangladesh has a good human development record with relatively little government intervention. Secondary education is provided almost entirely by the non-state sector. BRAC and other NGOs also play an important role in primary education. The health sector has a strong NGO presence.
Third, Bangladesh’s industrial policy has been characterized by the supremacy of ‘deals’ rather than rules and a great deal of elite capture. Yet the country’s ready-to-wear (RMG) industry has grown exponentially, employing millions of women. Fourth, Bangladesh’s tax-to-GDP ratio is at a very low 9%, but the country has maintained macroeconomic stability throughout its history. Fifth, the banking sector shows high levels of non-performing loans and other signs of fragility. But it is the same country that developed a thriving microfinance industry that has spread around the world.
The explanations for these paradoxes lie in geography and history. Bangladesh has a dense and relatively homogeneous population. As a result, ideas and innovations spread like wildfire. A few NGOs introduced contraception in the 1970s and soon the whole country was practicing family planning. When Muhammed Yunus introduced microfinance, it took off across the country, before the government could regulate this instrument, which may explain its success in Bangladesh compared to India, for example. When the war of liberation ended, Bangladesh’s health and education systems were in disarray. International NGOs have begun to provide these essential human services. They were so successful that when the government of the new country began to engage in these sectors, it found that it was best to let the non-state sector continue to provide the services. To circumvent high import tariffs that protected connected people, the government introduced bonded warehouses, where companies could import goods duty-free to produce exports. Before long everyone had access to cheap thread imports and the RMG sector took off. Finally, the government maintains macroeconomic stability despite low tax revenues due to the skepticism of advice from external partners that inevitably accompanies a program with the IMF.
The common feature of these explanations is that the private sector in Bangladesh works relatively well in the face of a dysfunctional government. We call this a paradox because it goes against our usual view that the government supports different aspects of development, such as job creation, credit, health and education. But if the government cannot provide support and, for geographical and historical reasons, the private sector provides these services effectively, then perhaps they should continue to develop in this way. In short, Bangladesh is not a paradox; it is a unique model of development.