SUBMITTED BY-

NUSRAT JAHAN DIPA

ID: 08305003
ESS DEPARTMENT, BRAC UNIVERSITY
Introduction:
Over the past few decades Bangladesh performed well on many macroeconomic indicators,
became more incorporated with the world economy and achieved impressive social gains.
Bangladeshi residents are energetic, flexible and industrious. In spite of having sharp external
shocks and grave governance flaws in its political and public administration system, the country
has continued macroeconomic stability. To illustrate GDP growth rate of our country steadily
climbed to over 6% a year in the preceding 5 years, up from 4.8% in the 1990s and 3.5% in the
1980s. GDP growth is estimated at 6% in fiscal year (FY) 2008 with fiscal and current account
imbalances contained at manageable levels, a notable performance considering the impact of the
twin floods and a devastating cyclone in 2007.With higher GDP growth rates of 8-9% a year,
Bangladesh may become a middle income county earlier than 2020 and for implementing this
aspect the investment climate of Bangladesh should be highly flexible and convenient for
potential investors. In recent years policymakers have increasingly emphasized the significance
of a sound investment climate for promoting economic growth and good governance can be the
key for opening the door of feasible investment climate in Bangladesh. Good governance has
become a certified issue for its profound rapport with economic development. The issue of
investment climate is indivisible from good governance.

Though GDP growth rate of our country has been satisfactory, but Bangladesh performs less
well in other areas such as it is less integrated with the global economy than other Asian
countries, with low trade and foreign direct investment and high formal and informal barriers to
investment climate. It has poor-quality physical infrastructure, especially in the power sector. It
does poorly on some measures of governance, with high corruption, a weak rule of law, and a
large administrative burden for starting a business. And it performs poorly on technology- related
issues, with relatively low spending on research and development and weak basic research.
So this paper will try to elucidate all these problems as well as the aftermath of these problems
upon our investment climate. Moreover, this paper will try to establish a link between good
governance and investment climate. Moreover, this paper will point out all those flaws of our
governance system which is hindering the smooth investment climate in Bangladesh. Finally this
paper will suggest some policy implications for erecting robust investment climate in
Bangladesh.
An assessment of investment climate and good governance in Bangladesh:

Investment climate and good governance are entangled with each other. Good governance is
positively linked with feasible investment climate. A productive investment climate can be
broadly thought of as an environment in which governance and institutions support
entrepreneurship and well-functioning markets in order to help generate growth and
development. Investment climate is the “policy, institutional, and behavioral environment,
present and expected, that influences the returns, and risks, associated with investment” On the
other hand, the commitment of good governance lies on economic welfare, resisting political
unrest and ensuring the basic needs for the nation through effective administration. Most of the
donors and international financial institutions are increasingly basing their aid and loans on the
condition of ensuring “good governance” such as The World Bank uses the Country Policy and
International governance assessments for investment.

There are many challenges in the path of investment in Bangladesh. Potential investors, both
domestic and foreign investors face various problems in case of investing. They are:

a) Cost of doing business:

Investment climate crucially depends on competitiveness of the local industry and the economy
as a whole. Bangladesh is presumed to possess comparative advantage due to lower labor costs.
However, the advantage of low labor costs is offset by high ‘cost of doing business’ emanating
due to unfavorable “investment environment”. Particularly, there is a huge transaction cost
arising from bureaucratic inefficiency, corruption, poor governance, inefficient port service, etc.
To illustrate, we should know how costly and how difficult is it for an entrepreneur to start a new
firm in Bangladesh? Data from the World Bank’s “Doing Business” project suggest that startup
is relatively costly. An entrepreneur in Bangladesh must complete seven procedures to start a
firm and the cost of these procedures amounts to 77.6 percent of per capita income. Another
measure suggests that starting a business is relatively difficult in Bangladesh compared with
other Asian countries.”Global Competitiveness Report 2001/02” ranked Bangladesh 60th out of
the 75 countries on the basis of difficulty of starting a new business. On the other hand, in
Bangladesh firms have to wait very long for utilities and other services needed to run a business.
In Bangladesh firms reported waiting nearly 70 days on average for an electricity connection,
more than 90 days for a gas connection, and nearly 260 days on average for construction permits
and so on. These waiting times along with unofficial payments like bribes, as well as legitimate
connection fees, gives a sense of the difficulties entrepreneurs face in starting viable businesses
in Bangladesh.

b) Poor infrastructure facilities:

A country’s infrastructure facilities play a major role in promoting successful investment
climate. Infrastructure refers to the quality and quantity of physical infrastructure (such as power,
transport, and telecommunications). More broadly, it can also refer to financial infrastructure
(such as banking)—or access to finance. Efficient infrastructure is essential for a country’s
economic growth. In infrastructure, a critical feature of a country’s investment climate, the
quality of services appears to be relatively poor in Bangladesh. Business executives surveyed for
“Global Competitiveness Report 2001/02” ranked Bangladesh lower on this trait than all other
developing countries in East and South Asia. Of the 75 developing and industrial countries in the
sample, Bangladesh ranked 74th. Evidence from the firm-level investment climate surveys
confirms that the quality of infrastructure services is a significant problem in Bangladesh, with
electricity the biggest concern. Therefore, investments toward improving infrastructure policies,
good governance can play a major role. A study by the ADB-WB-JBIC (2005), for instance,
found that corrupted and poor governance system is the main cause behind the lack of
infrastructure sector reform. Basically, poor governance operates no differently from a tax: it
deters economic activity just as a tax would (Dixit 2009). In order for long –term infrastructure
improvement in Bangladesh, the governance of infrastructure is crucial. Successful regional
infrastructure development needs appropriate institutional arrangements. Institutional and
software components in regional infrastructure are just as important as the hardware components
(Kuroda, Kawai, and Nangia 2007). For any hard infrastructure facility to work, well-designed
institutional and software support is essential. Jansen and Nordas (2006) argued that investment
policies at home and abroad matter most for home imports, together with foreign institutions and
home infrastructure. The importance of institutions to infrastructure performance is also evident
from an analysis of the costs of corruption at the government level in the infrastructure sector.
While corruption is a symptom of failed governance, it can also further weaken the governance
environment. Corrupted government not only raises the price of infrastructure, it can also reduce
the quality of, and economic returns to, infrastructure investment. Corruption can lower the
quality of public infrastructure (Bose, Capasso, and Murshid 2008); some studies (Tanzi and
Davodi 1998; Gulati and Rao 2006; Kenny 2009) also indicate that corruption (petty and grand)
in infrastructure development negatively impacts upon the investment field. To illustrate, with
the growth of foreign trade, Bangladesh’s main seaport, Chittagong Port, should operate almost
at full capacity. However, Chittagong Port is one of the most cost-inefficient seaports in the
world. Low quality service, delay and uncertainty in loading and unloading of goods, frequent
strikes, inadequate facilities for container shipment--- all adds to the cost of transaction.
Inadequate power supply is another major problem. Many industrial units look for alternative
sources of power resulting in higher operational cost. Likewise, the country’s transport and
telecommunication services are severely underdeveloped.

c) Quality of bureaucracy:
We should realize that it is not policy failure but structural weaknesses of the bureaucracy that is
to blame for failure to attract FDIs in Bangladesh. This structural weaknesses work as an extra
tax, and thus discourages investors from coming to Bangladesh. Efficiency of a country’s
bureaucracy has direct and indirect bearings on both domestic and eternal investment flows.
There was a consensus that the quality of the bureaucracy in Bangladesh is not conducive to
generate dynamic investment flows. There is reform inertia, inefficiency in the government. The
prevailing system ultimately frustrates productive investment initiatives. There are some inter-
ministerial conflicts regarding jurisdiction. There is also unnecessary and excessive politicization
in the system. All these problems impart a negative impact on the country’s investment
environment.

d) Political instability and hartal:

Even though Bangladesh has started its journey on the path of democracy, there is a higher
degree of political instability as the democratic values and institutions are severely
undernourished. Political instability hampers profitability of existing production activities and
reduces incentive to invest in this country. Many of the labor organizations are linked with
political parties. Political parties sometimes induce the labor unions to call for strikes.
 e) Corruption:
A country’s general structure of governance and the institutions that govern interactions between
business and government determine the burden that firms face in complying with government
regulations, the quality of government services, and the extent to which corruption is associated
with the procurement of these services. A large regulatory burden is often associated with
corruption, involving payments to inspectors who visit firms or to officials who grant permits.
Corruption can easily deter foreign and domestic investors. Therefore, corruption is negatively
related to inflows of foreign direct investment (FDI). Corruption has entered into every corner of
our society. Overall governance situation is extremely poor in Bangladesh. Corruption and poor
governance increase cost of doing business and create unfair competition within the business.
Corruption not only discourages investment, it also distorts investment priority so as to end up
with sub-optimum allocation of investable fund. The World Bank has cancelled and demanded
refund of Taka 68 million from three projects on the ground of corruption (Ara and Khan, 2006).

Policy implications:
There is no doubt that mass investment—both public and private, both domestic and foreign—
can be tuned to provide the purposes of both economic growth and ensuring benefits of growth to
the poor. This can be achieved through intensive efforts to improve the investment climate,
which in turn can be ensured only through good governance.
In an age of globalization and interdependence of economies, the following issues need upbeat
thinking to encourage higher investment for economic maturity of Bangladesh:

a) Alteration of Bureaucracy:
The quality of public service provision and the government bureaucracy and the credibility of the
government’s commitment to adhering to announced policies should be improved and
monitored. This measure should focus mainly on “inputs” that governments need to implement
good policies and deliver public goods. One major reform that has remained intact is the slow
and complex bureaucratic structure of the Government. The pyramid bureaucratic structure and
its archaic systems and procedures, inherited from the colonial days, are characterized by
incompetence, centralization, lack of entrustment. Too many tiers in the decision making
process, archaic filing and noting system and lack of e-governance and poor pay structure are out
of place in the modern states. That’s why it is incapable of implementing government’s own
development projects, let alone promoting business and investment. So the transformation of
bureaucracy is needed in an efficient way. Under the umbrella of bureaucracy “Public
Administration” should also go through some reforms. Public administration reform is an
important aspect of good governance. The proposed reforms are broad in scope, such as
introducing a merit-based civil service, recruiting skilled private sector personnel in specialized
government positions, ensuring transparency and accountability, improving pay and incentive
system etc. These are general commitments to improve governance scheme which will further
promote investment opportunities.

a) Privatization:
Privatization of state owned enterprises (SOEs) should be geared up to stimulate investment. If
possible, some of the SOEs may be handed over to the foreign investors. The Bangladesh
Telephone and Telegraph Board (BTTB) and some other public utilities may be privatized to
ensure better service. Private sector participation in telecom, port, and railway should be
encouraged. Railway is a potential sector in case of transportation. Improvement and utilization
of railway can lessen the pressure upon out road network. But for various complicated matters in
government level railway has been treated with ignorance. So privatization in this sector will
definitely enable us to conduct full utilization of railway and transportation of goods and raw
materials will become easy at least amount of time which is a positive indicator for investment.

b) Good Governance to minimize the costs of doing business in Bangladesh:

High costs in initiating a business in Bangladesh withheld many potential investors. This
problem should be solved by adopting proper actions such as reorganizing administration
(training, posting, transfer, and promotions), limiting corruption, strengthening and reforming
National Board of Revenue and other related agencies for financial simplicity, intensifying the
areas of comparative advantage by sector including export-oriented FDIs, promoting economic
negotiation, introducing e-governance for improved transparency, improving rapport between
public officials at the grass root level and local business people.
 c) Favorable infrastructure:
Infrastructure is the most important factor for grabbing investment opportunities which can be
achieved by improving service delivery of utilities, including electricity and gas, increasing
effectiveness of ports, developing information technology backbone. Bangladesh can never
attract FDI without adequate infrastructural support. It is however important to note that although
growth of public sector facilities is vital, it is even more essential to ensure quality and quick
service delivery of what we already have.

d) Pooling available funds:

A large number of Bangladeshi live abroad. There is a huge potential for the non-resident
Bangladeshis (NRBs) to invest in Bangladesh. Efforts can also be made to persuade
Bangladeshis who have sizeable personal investments abroad to bring back some of these funds
and invest them locally.

e) Export oriented FDI:

As domestic market in Bangladesh is limited, we have to attract export oriented investment. The
country’s EPZs are established solely for this purpose, where the economy is relatively distortion
free. About 80 % of the investments in EPZs are FDI. In a free market economy, the entire
economy should be distortion free. But our economy is still inflicted with numerous distortions.
A recent study by Bangladesh Tariff Commission shows that there is significant anti-export bias
in the country’s trade regime. Appropriate steps need to be taken to dismantle the prevailing anti-
export bias of the tariff structure so that export oriented FDI is encouraged.

f) Minimizing corruption:
As it has been mentioned earlier that corruption in government level is one of the main hurdles
towards investment climate of Bangladesh, so it’s really important to lay out the whole
governance system in such a way where no scope for corruption will exist. Good economic
governance is needed to secure three essential prerequisites: (i) collective action; (ii)
enforcement of contracts; and (iii) security of property rights. It assures that corruption is
minimized, that the views of minorities are taken into account, and that the voices of the most
vulnerable in society are heard in decision-making. Nonetheless, the following four aspects
should be ensured in case of designing the governance system for minimizing corruption:

 Accountability: Officials should be answerable to the entity from which they derive their
authority; work should be conducted according to agreed rules and standards, and
reported fairly and accurately.
 Participation: Public employees should be given a role in decision making; citizens, and
especially the poor, should be empowered by promoting their rights to access and secure
control over basic entitlements that allow them to earn a living.
 Transparency: Low cost, comprehensible, and relevant information should be made
available to people to promote effective liability, and clarity about laws, regulations, and
policies.
 Regulatory quality: The quality of government policies should be improved and
monitored. The policies should be evaluated based on “outputs” rather than “inputs”.
Government should focus on the prevalence of market unfriendly policies (such as price
controls or inadequate bank supervision).

g) Proper regulation on entry and exit of firms:

Government of Bangladesh fails to recognize that entry and exit of firms are an inevitable
outcome of entrepreneurial risk taking and this failure has erected a maze of administrative
obstacles to starting, operating, and closing firms. Therefore, a particularly key aspect of
governance is to ensure the simplicity with which firms can enter and exit a market—a crucial
determinant of investment and entrepreneurship. Where entry and exit are relatively easy, poorly
performing firms can leave the market—permitting their assets to be reallocated to more
productive uses—and new, more productive and innovative firms can emerge. This emergence
process will accelerate economic growth and welfare improvements in our country as well as
inspire new potential investors to come forward.

Conclusion:

Good governance has become a significant pillar in the consideration of a state’s ability to
confirm realistic investment climate. In Bangladesh the present condition of good governance is
not satisfactory. There are many problems stimulate as barriers for good governance. To tackle
these challenges, the country needs capable and mature political leadership, pro-poor economic
agenda, business friendly policies, efficient but smaller bureaucracy, decentralization, strong
local governments and opportunities for participation of the poorest. I personally believe that
Bangladesh will become an economically viable country and could even emerge as one of the
next eleven fast developing countries as predicted by Goldman Sachs. For unlocking the
abundant potential of Bangladesh, good governance is needed as it is one of the main factors of
promoting robust investment climate.
References:

Bangladesh, Public Administration Reform Commission (2000), “Report of the Public

Administration Reform Commission” Dhaka

Bangladesh Investment Handbook (2008), Board of Investment, Dhaka.

Clarke, George R. G. (2001), “How Institutional Quality and Economic Factors Impact
Technological Deepening in Developing Countries” Journal of International Development

Chowdhury A.K. Mahmud (2003), “Private Sector Development, Investment Climate and
FDI in Bangladesh”, Bangladesh Development Forum, Dhaka.

Khan, Mushtaq H. (2002), “State Failure in Developing Countries and Strategies of Institutional
Reform”

Hall, Robert, and Charles Jones (1999), “Why Do Some Countries Produce So Much More
Output per Worker than Others”, Quarterly Journal of Economics

Investment Facilities in Bangladesh: as available from Bangladesh Bank’s website.

World Bank (2004),”World Development Report: A Better Investment Climate for

Everyone”, The World Bank, Washington D.C.

www.bangladeshbureauofstatistics.com