PENNSILVANIA STATE UNIVERSITY. How the IMF and the World Bank Dealt with the Issue of Poverty in Bangladesh from 2000 to 2010?

Poverty in Bangladesh i PENNSILVANIA STATE UNIVERSITY How the IMF and the World Bank Dealt with the Issue of Poverty in Bangladesh from 2000 to 2010? Sarp Yanki Kalfa PLSC 440 Doctor Blackmon April 25, 2014

Poverty in Bangladesh ii Abstract This paper will cover how the World Bank (IDA) and the IMF dealt with poverty in Bangladesh from 2000 until 2010. This paper will mainly focus on the PRSPs from Bangladesh. It will cover the publications from the IMF and the World Bank, and also some journal articles. The paper will show, how those institutions tried to alleviate the problem of poverty in Bangladesh and try to see which one of those big international organization (IMF, World Bank) has done a better job alleviating poverty in Bangladesh.

Poverty in Bangladesh 1 How the IMF and the World Bank Dealt with the Issue of Poverty in Bangladesh from 2000 to 2010? Introduction Bangladesh is one of the most densely populated countries in the world with 150 million inhabitants on 147,570 km square. Bangladesh has decreased its poverty in the last 15 years but it still has a significant amount of citizens living under the international poverty line; which is $1.25 per day. Bangladesh s biggest challenge is development, its geographical position makes the country vulnerable to natural disasters, such as cyclones, and to climate change. The growth has increased the demands for energy, infrastructure, and telecommunication, but Bangladesh suffers from insufficient and inefficient planning (World Bank, 2014). The International Development Association (IDA) is a result of the changes made in the World Bank, it was established in 1960 and its purpose is to make loans to the poorest countries to increase growth and decrease poverty (World Bank, 2014). The IDA has been a support for Bangladesh since its independence in 1972. The IDA provided Bangladesh with $16 billion, to support governmental policies and investment projects since 1972. The IDA helped Bangladesh not only in economic areas but also in health, education, and infrastructure (Joliffe, Gimenez, Ahmed, Shariff, 2013). With the start of a new millennium, the poverty headcount rate in Bangladesh has decreased by 17.4 percentage points from 2000 to 2010 (Bangladesh Poverty Assessment 2000-2010, World Bank, 2013). The economic growth has reached above 4 percent per year during 2002-2008 (Inchauste, Olivieri, Saavedra, Winkler, 2012).

Poverty in Bangladesh 2 This paper will try to answer the question, how did the World Bank and the IMF dealt with poverty in Bangladesh and how the institutions tried to alleviate poverty? The paper s main focus will be the PRSPs and publications from the international organizations (World Bank & IMF). Overall Look at What Caused the Poverty Decline in Bangladesh Despite strong poverty reduction and strong growth, Bangladesh is still a low-income country. Inchauste et al. (2012) argued that largest contributions to poverty reduction in that period were labor market-related factors, and these factors consist 61 percent of the poverty reduction in Bangladesh (Inchauste et al., 2012). Other most important factors in poverty reduction in Bangladesh are the returns to endowments and increases in farm income (Inchauste, et al., 2012). This also indicates that there was an increase in real wages and higher productivity (Inchauste et al. 2012). Labor income might explain the observed poverty reduction but there is a need to take demographics into account, because it shows that population growth has slowed down and the youth has reached a working age (Inchauste et al. 2012). The decrease in the average household size and the increase in the number of adults living in the households may also explain the higher consumption rate, which impacts positively the economic growth of a country. Another factor in reduction in poverty is the growth in non-labor income, public and private transfers have increased in Bangladesh, and international remittances have tripled since 2000 (Inchauste et al., 2012). This reflects 5 percent of Bangladesh s GDP. These were the results found by using Datt-Ravallion (1992) estimate, which uses the relationship between economic growth, inequality and poverty (Inchauste et al, 2012).

Poverty in Bangladesh 3 Inchauste et al. (2012) argued that these results could be more deeply analyzed and used another method, in which they looked at the changes in earnings due to changes in ( Inchauste et al, 2012) education, age, gender, occupation, sector, the distribution of the labor force. After using the new method, they came to an agreement that previous findings were true but Inchauste et al. (2012) also found that different categories such as occupation, education, sector of work, regional structure, rural assets have an important impact on poverty reduction and economic growth. Progress made in poverty alleviation Changes in occupation were an important factor for poverty alleviation for Bangladeshis who do not work in farms (Inchauste et al., 2012). This change shows that there is an alteration in jobs and that employees wanted to profit from these better employment opportunities. Inchauste et al. (2012) argued that 9 percent of the poverty reduction in Bangladesh is because of the shift from daily and self-employment to salaried jobs in the non-farm sector. In the farming sector, self-employed farmers had a negative impact on poverty; there has been an increase of 3 percent in poverty because of the lack of skills of farmers to have a secondary occupation (Inchauste et al., 2012). Education, and therefore a more educated population helped poverty reduction in the non-farm sector in Bangladesh, but unfortunately studies show that there has been a decrease in educational premium because the demand of more educated workers did not keep up with the supply. This demonstrates that there is not a demand in skilled workers in Bangladesh yet, and that the incomes of the unskilled workers have increased and helped poverty reduction in the country. While there has been an increased in incomes of the unskilled workers, jobs did not

Poverty in Bangladesh 4 require experienced workers, therefore there has been an increase in the income of the inexperienced and also an increase in young workers (Inchauste et al., 2012). To summarize, in Bangladesh there was an increase in incomes for workers with less education and experience. The changes in the sector of work also helped decrease poverty in Bangladesh, there was shift from agriculture into service. In the non-farm sector, the move to the service sector accounted 3 percent of the poverty reduction in Bangladesh (Inchauste et al., 2012). The region dummy which is the penalty in income for not living in the capital city has fallen; therefore there has been an increase in real wages and higher productivity outside of the capital city, thus the reduction in poverty. Inchauste et al. (2012) reports that, this increase in income and wages in other areas than the capital city is responsible for a decrease of 15 percent in Bangladesh. According to Inchauste et al. (2012) report that there was an increased return to agriculture among farm households, this increase is responsible for 42 percent of the poverty reduction, said Inchauste et al. (2012). The reason behind the increase is that the land is becoming infrequent in Bangladesh and the average size of land per capita has decreased from 0.8 acres to 0.6 acres between 2000-2010 (Inchauste et al, 2012). Despite access to irrigation and number of agricultural workers has increased over the course of the decade, unfortunately none of these two factors helped reducing poverty in Bangladesh because the return to irrigation and additional household members have decreased (Inchauste et al., 2012).

Poverty in Bangladesh 5 The change in non-labor income had a small impact on poverty reduction in Bangladesh. The better contributor to poverty alleviation was international remittances, which was the change in non-labor income had a small impact on poverty reduction in Bangladesh. The change in non-labor income had a small impact on poverty reduction in Bangladesh. The better contributor to poverty alleviation was international remittances, which was responsible for 11 percent points in the decline of poverty. These factors were encountered by a decrease in domestic transfers, which means a little bit higher poverty rate compared to the initial rate of domestic transfer rates (Inchauste et al., 2012). The increase of public transfers in Bangladesh (0.9% to 1.9 % of the GDP) between 2000 and 2010 had unfortunately no impact on poverty reduction. But the biggest issue is that only 34 percent of the poor receive a transfer and the amounts transferred are too small to have an impact on poverty (Inchauste et al., 2012). An in Depth Look at Poverty Reduction in Bangladesh with the PRSPs from 2000 to 2010. Interim-Poverty Reduction Strategy Paper 2003 Despite the economic growth in Bangladesh, it still below 7 percent growth rate that was envisioned by the I-PRSP, it is caused by constraint on structural reforms (IMF, 2003). The I- PRSP also emphasizes on human development such as access to education, health, and social protection to improve the access of the poor to the benefits of the growth. The acceleration of poverty reduction since 2000 has been related to accelerated growth of Bangladeshis consumption rate per capita. But an in depth analysis proves that the inequality

Poverty in Bangladesh 6 in Bangladesh has grown, and this impacts poverty reduction negatively. I-PRSP (IMF, 2003) proposes to focus on education, public spending on social services to improve poverty reduction and reach the goal of increasing the GDP per capita and the MDG. To reach this goal Bangladesh should improve governance, accelerate pro-poor growth, increase the investment in human development and in women s advancement and ensure social protection for the poor. To support this strategy, Bangladesh should create an investment friendly environment; raise productivity in agriculture, rural nonfarm enterprises and manufacturing. Bangladesh also needs to improve infrastructure and private investment to reach its goals (IMF, 2003). The challenges Bangladesh is facing are rule of governance, corruption and weak rule across the country, which slows down growth and poverty reduction (IMF, 2003). Preparation of PRSP: A Status Report 2004 One year after the I-PRSP, the government of Bangladesh published the Preparation of PRSP: A Status Report, in this publication Bangladeshi government focuses on alleviating poverty and has established twelve thematic groups. These twelve groups have a different area of focus (IMF, 2004). The first draft of the groups consist of 9 messages (IMF, 2004), to summarize the messages the problems consists of perseverance of vulnerabilities of the poor, the poorest have to be included in poverty reduction strategies, inequality is another factor that slows down poverty reduction, as well as gender inequality (IMF, 2004). The most important part of this status report is the Appendix E, which focuses on good governance and poverty alleviation. The Bangladeshi government was criticized in the Appendix E because of its weak governance, its lack of transparency and accountability. The government was seen to interfere

Poverty in Bangladesh 7 politically, and was accused to be corrupt (IMF, 2004). The most corrupt offices in the government are the police stations, administrative offices, courts, tax and customs, and the hospitals. This is the outcome of a government that lacks accountability, transparency. This may also be caused by low salary structures, lack of training and political interference (IMF, 2004). For the government to have a pro-poor service delivery, there is a need to enhance transparency, to have a simple bureaucratic behavior. The political interference should stop, and the judicial system has to be changed (IMF, 2004). The Bangladeshi government needs to be decentralized to be able to collect the revenue more efficiently, and transparently. The judicial system has to be separated from the executive power to be more transparent and free of corruption (IMF, 2004). The gender gap plays an important role in poverty alleviation; the problem of gender inequality can be solved by improving law and order, and expanding the access to education and health for women, and empowering women (IMF, 2004). Law and order are extremely related with poverty reduction. They are the biggest obstacles to reach poverty reduction and social development (IMF, 2004), mainly because of corruption, bribery, political interference and lack of knowledge of citizens about their rights. But implementing certain reforms such as reducing political intervention, ensuring accountability, and training law enforcement agencies on human rights could solve it. Poverty Reduction Strategy Paper: Joint Staff Advisory Note 2010 The paper looks at the Joint Staff Advisory Note (JSAN), to analysis precisely what were the suggestions of the IDA and the IMF for the fiscal years 2009-2011, the analysis of the JSAN is important to see the changes implemented since the status report in 2004.

Poverty in Bangladesh 8 The NSAPR II (National Strategy for Accelerated Poverty Reduction) which is the successor of NSAPR I (established in the PRSP 2005) (IMF, 2005), is established to alleviate poverty in Bangladesh, and has five strategic priorities. The JSAN offers advice on how to support the strategies and its implementations (IMF, 2010). An important change in preparing the NSAPR II was the consultation of all levels of society and the NGOs (IMF, 2010). There was an average of 6.2 percent growth in the real GDP during the fiscal year 05-09 and 4.9 percent rise in the per capita income (IMF, 2010). Progress made by the Bangladeshi government since 2005 In the human development area, gender parity was reached in primary and secondary school enrolment. The infant mortality has decreased by 20 percent and children mortality by 25 percent since 2003 (IMF, 2010). Doing Business indicators have shown an improvement since 2005. The 2008 election after a political unrest in the country has lead to peaceful power transfer. The key reforms during the 05-09 fiscal year include: corporatizations of state-owned banks (which was strongly advised in the previous papers), Right to Information Act (establishing a more accountable and transparent government), adaption of medium-term budget which led to an improvement in public management system, reinforcement of local government capacity which led to an improvement of local accountability. Bangladesh is facing three main challenges in reducing poverty; poverty of women, regional inequality, and extreme and chronic poverty. These are good description of challenges but the NSAPR II should also focus on the growth in the past and the distributional impacts of

Poverty in Bangladesh 9 policies and their implementations. By focusing in these, the NSAPR II could sharpen the focus on the oncoming five years plan (IMF, 2010). Macroeconomic framework and factors helping economic growth The macroeconomic framework is in line with the reform scenario outlined by the IMF; this will put the economy on a path to attain a growth rate of 8 percent (IMF, 2010). Private sector credit (19.3%) and broad money growth (21.3%) are in excess of targets set in NSAPR II macroeconomic framework. These factors may cause inflationary expectations to rise and make harder to bring inflation under control. Therefore putting NSAPR II poverty reduction objectives in risk (IMF, 2010). Private sector should form the basis for growth and employment. Bangladesh needs to improve the investment climate and businesses but access to finance is a problematic issue. Therefore there is a need to reform state owned banks to increase the access to long-term finances (IMF, 2010). Agriculture and rural development are important factors in poverty reduction, employment and growth, but also Bangladesh has to pay attention to the non-farm rural sectors. The biggest issue is the capacity to supply water; therefore there is a need to establish a water institution (IMF, 2010). The gap between the supply and demand in energy in Bangladesh creates an obstruction for development. The private sector could play a bigger role in the energy sector. Better governance is needed to achieve universal electrification by 2020 (IMF, 2010). There is a need to create a renewable energy sector, this market could attract the private sector and lead to higher growth.

Poverty in Bangladesh 10 A metropolitan government could help organize the budget and monitor issues (IMF, 2010). Bangladesh achieved gender parity and high enrolment rates in primary and secondary education but high dropout rates are still a problem (IMF, 2010). The government can focus on higher and vocational education, a demand driven, efficient and cost effective system is needed. Increased technical and institutional capacity is needed (IMF, 2010). Bangladesh has reduced child and infant mortality, but now the government has to focus on reducing maternal, neonatal mortality, and on malnutrition rates (IMF, 2010). Focus on the rural and urban poor is needed; the local governments can play a bigger role on reducing natural disasters impact on the poor. Disaster risk management is important for protection of citizens (IMF, 2010). Governance plays a key role in achieving poverty reduction. The establishment of Anti- Corruption Clause (ACC) was important for the government of Bangladesh to be more transparent and less corrupt. For the ACC to work it is advised for it to be an independent body. The PRSP process is important to understand how the Bangladeshi government tried to alleviate poverty and also to see the recommendations of the IMF and the World Bank to try to help Bangladesh in their pursuit of economic growth. Another approach to poverty alleviation: Microcredit program Microcredit is the provision of financial services to low-income poor and very poor selfemployed (Mazumder, Wencong, 2013).

Poverty in Bangladesh 11 In 2007, according to HDI Bangladesh ranked 140 th in the world out of 177 countries, in 2006, the average per capita income was $520 (Mazumder, Wencong, 2013). The microcredit program was innovative in Bangladesh, first it focused on women but now it is common program that is open to everyone (Mazumder, Wencong, 2013). Mazumder and Wencong (2013) have conducted a field survey on the effectiveness of the microcredit program in Bangladesh. This part of the paper will analyze their findings and conclusions on the effectiveness of the microcredit program in Bangladesh. The main sources of income of the respondents were; raising crops, animals, and fishery. Before taking loans, the majority if the respondents were in the low-income group (63.3%), 26.7 percent were in the middle-income group. After joining the microcredit program, the middleincome group has increased by 18.9percent points (45.6%). The low-income group has decreased by 23.3 percent points (40%) and the high-income group has increased by 4.4 percent points (14.4%). There is an important relationship between the microcredit program and increase of income of respondents (Mazumder, Wencong, 2013). High involvement rates in microcredit shows an increase in household assets, after joining the microcredit program, such as furniture, livestock, and electrical goods (Mazumder, Wencong, 2013). Respondents have invested their moneys in many different income generating activities. Mazumder and Wencong (2013) argue that microcredit is an important tool in poverty reduction. After joining the program, 100 percent of the respondents indicate that they use tube-well water (safer water in Bangladesh) for daily water requirements, before the loans this number

Poverty in Bangladesh 12 would be 93.4 percent (Mazumder, Wencong, 2013). This increase in use of tube-well water influences the populations around and makes it available to use by others. After joining the program there was an increase of 11.1 percent points in medical treatment of respondents by trained doctors (77.8%, before involvement it was 66.7%) (Mazumder, Wencong, 2013). These facts prove that the microcredit program has a positive influence on citizens standard of living (Mazumder, Wencong, 2013). After involvement in the microcredit program households below the poverty line has decreased from 85 percent to 40 percent, and the number of households has increased from 13.3 percent to 60 percent (Mazumder, Wencong, 2013). This is a clear example of poverty reduction through access to credit. To summarize, the microcredit program helps the women in Bangladesh. The majority of respondents seem to end up better after joining the microcredit program, there is also a clear positive relationship between microcredit and poverty reduction (Mazumder, Wencong, 2013). After involvement in microcredit, the poverty levels of participants have decreased significantly (Mazumder, Wencong, 2013). This study suggests that microcredit is a helpful and powerful tool in poverty reduction. A different approach to policy reforms of Bangladesh Sobhan (2005) argues that unless aid flows follow a locally designed and owned policy, the impact of a policy on poverty reduction is ineffective. Externally driven reforms will be unsustainable because they ignore the local socio-political context (Sobhan, 2005). International organizations use the PRSPs as an indicator for aid strategies and use it as a tool to achieve the Millennium Development Goals (MDG). Bangladesh is now a trade dependent country instead

Poverty in Bangladesh 13 of being an aid dependent country and the studies prove that; the aid-gdp ratio has fallen to below 2 percent from 10 percent in the 1980s and the trade-gdp ratio has increased to 40 percent from 21 percent in 1986 (Sobhan, 2005). The PRSPs have become an alternate to medium-term plan instead of being a program that focuses on poverty reduction outcomes. Countries are forced to follow the macroeconomic model created from the Bretton Woods Institute, which aims to accelerate growth rate and achieve poverty reduction (Sobhan, 2005). PRSPs include reforms originated in the Country Assistance Strategy (CAS) of the IMF and the World Bank (Sobhan, 2005). According to Sobhan (2005) these strategies want to achieve poverty reduction but none of the reforms have originated in Bangladesh, and this poses the question of ownership of reforms. Bangladesh relies less on aid and more on the commitment to reforms and better governance to reach MDG (Sobhan, 2005). So, Bangladesh does not only face the problem of attracting aid but also to use the aid effectively. To attract more aid Bangladesh has to come up with credible reforms and programs (Sobhan, 2005). Bangladesh s Finance Minister proposed that aid flows should follow the results and not conditions (Sobhan, 2005). Because the MDG look at human development and poverty reduction, and increased growth demands macro-economic sustainability and privatization of export and import (also the conditions of the IMF and World Bank), there is an inconsistency in the conditions for aid flow (Sobhan, 2005). The important question is should donors put conditions such as better governance or should they focus on aid absorption (Sobhan, 2005) before donating. Putting conditionality in aid

Poverty in Bangladesh 14 flow and focusing in performance indicators may hurt the efficiency of aid absorption (Sobhan, 2005). According to Sobhan (2005), offering aid in the form of budgetary support based on performance is a more effective way to enhance aid absorption. Sobhan (2005) also argues that PRSPs should focus on poverty reduction as an indicator and less on growth. PRSPs should focus on eradication of poverty by looking at the structural dimensions of poverty (Sobhan, 2005). This process can be achieved by empowering the poor and by increasing their capacity to participate in the market economy. The change in the strategy of poverty reduction is a political process that has to happen in Bangladesh, in which donors cannot substitute for it (Sobhan, 2005). According to Sobhan (2005), increasing aid flows to developing countries and expecting an improvement in their capacity for aid absorption still remains as a transitional process (Sobhan, 2005). The use of aid flow must support the poor to overcome social injustices (Sobhan, 2005). Conclusions Bangladesh has seen an increase in growth from the year 2000 to 2010. The growth has lead to an increase in poverty alleviation. Bangladeshis have enjoyed a higher income, the education system has gotten better and they are on good path to achieve MDG goals. This paper analyzed the causes of this increasing growth but Bangladesh is still a developing country under the International Development Association (IDA) and still receives aid from the World Bank and the IMF. The paper has given some examples in increasing the rate of growth with the use

Poverty in Bangladesh 15 microcredit programs which has led to income raise, better knowledge of heath and education and also a change in poverty situation of microcredit users. In the last part of the paper, one can see that the PRSP process is not perfect yet and there is a need to change in the assumption that increased growth leads to poverty reduction. The international organizations should change the conditionality of aid flow and focus more in poverty reduction in looking more in depth to aid absorption instead of using the BWI conditions as an indicator of poverty reduction. The IMF and the World Bank worked together in reducing poverty in Bangladesh and they used the PRSPs to do it, but there is a need to change that and these organizations should be more result oriented to alleviate poverty instead of focusing on growth rates. None of the organizations has done a better job in alleviating poverty in this particular case instead they used Strategy Adjustment Reform and Country Assistance Strategy papers to alleviate poverty.

Poverty in Bangladesh 16 Reference: - International Monetary Fund (2003). Bangladesh: Joint Staff Assessment of the Interim Poverty Reduction Strategy Paper. In IMF elibrary, IMF Staff Country Reports: Bangladesh-: Joint Staff Assessment of the Interim Poverty Reduction Strategy Paper. - International Monetary Fund (2004). Bangladesh: Poverty Reduction Strategy Paper. In IMF elibrary, IMF Staff Country Reports: Bangladesh-Poverty Reduction Strategy Paper. - International Monetary Fund (2005). Bangladesh: Poverty Reduction Strategy Paper. In IMF elibrary, IMF Staff Country Reports: Bangladesh-Poverty Reduction Strategy Paper. - International Monetary Fund (2010). Bangladesh: Joint Staff Advisory Note on the Poverty Reduction Strategy Paper. In IMF elibrary, IMF Staff Country Reports: Bangladesh-: Joint Staff Advisory Note on the Poverty Reduction Strategy Paper. - Inchauste, G.; Olivieri, S.; Saavedra, J; Winkler,H. (2012) What is Behind the Decline in Poverty Since 2000? : Evidence from Bangladesh, Peru and Thailand. Washington, DC: World Bank, Poverty Reduction and Economical Management Network. - Jolliffe, Dean; Sharif, Iffath; Gimenez, Lea; Ahmed, Faizuddin. 2013. Bangladesh - Poverty assessment : assessing a decade of progress in reducing poverty, 2000-2010. Bangladesh development series ; paper no. 31. Washington DC ; World Bank. - Sobhan, R. (2005) Increasing Aid for Poverty Reduction: Rethinking the Policy Agenda. United Kingdom: Institute of Development Studies

Poverty in Bangladesh 17 - World Bank (2007) A Guide to the World Bank second edition. Washington, DC: World Bank - World Bank (2014) Retrieved April 20, 2014, from http://www.worldbank.org/en/country/bangladesh/overview - World Bank (2014) Retrieved April 23, 2014 from http://www.worldbank.org/ida/what-is-ida.html