Department of Economics
Assignment on
Economic Development after Trade Liberalization in Bangladesh
Course Code: ECON-224
Course Title: Bangladesh Economy
Date of Submission: 31 July 2022
Group NO: 14
Submitted By-
1. Name: Afshana Akter
Submitted To- ID: 12002055
Dr. Shapan Chandra Majumder 2. Name: Asma Khanam Sayma
Associate Professor ID: 12002060
Department of Economics 3. Name: Abdul Nur
ID: 12002058
Comilla University
4. Name: Sakir Hossian
ID: 12002032
Contents
1.Abstract.
2.Introduction.
3.Literature Review.
4. Nature of Trade Liberalization in Bangladesh.
5. Tariff Structure in Bangladesh.
6. Exports of goods and services (% of GDP).
7. Imports of goods and services (% of GDP).
8.Conclution.
9.References.
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ABSTRACT
This paper examines the process of Bangladesh’s trade liberalization and its impact on the growth
and structure of exports, imports, GDP and other relevant macroeconomic variables with particular
emphasis on exports from 1980 to 2010. This study analyzes the economic achievements of the
country in terms of important variables such as growth, inflation, export and import figures after
trade liberalization The analysis clearly indicates that GDP growth increased as a result of
liberalization. The trade liberalization has not had a significant impact on inflation rates in the
economy. The quantitative analysis also suggests that open economies tend to be more prosperous.
Both real exports and imports have increased with increased openness. Liberalization policy has
certainly helped export growth, which has led to higher economic growth in the 1990s. The results
of this study could be helpful in understanding how to liberalize trade in developing countries.
KEYWORDS:
Trade liberalization, economic growth, Bangladesh economy, export, import, inflation.
INTRODUCTION
The economy of Bangladesh has undergone a number of changes in trade, fiscal, industrial, and
financial policies in the last two decades. The trade liberalization policy of 1990 allowed the
Bangladesh economy to grow and improve overall development. Openness can have a positive
effect on economic growth, exports, imports, FDI and remittance of a country.
The Bangladeshi economy began to grow in the early 1960s, averaging around 4% annually. About
a fifth of the Bangladeshi economy was destroyed during the Liberation War of 1971, which
caused significant dislocations and left the country on a slower economic growth trajectory for the
following two decades. After gaining independence in 1971, Bangladesh followed a restrictive
trade regime strategy. This was characterized by high tariffs, non-tariff barriers to trade, and an
overvalued exchange rate system that was underpinned by the government's import-substitution
industrialization strategy. This policy has been pursued with the objectives of improving the state's
balance of payments and creating a protected domestic market for manufacturing industries
(Bhuyan and Rashid, 1993). The trade regime underwent a major change in the mid-1980s when
a policy of moderation towards liberalization was initiated. From its first year of independence in
1971, Bangladesh followed an import substitution industrialization strategy for a decade. Trade
policies were based on high tariffs and quantitative restrictions on imports, resulting in an anti-
export bias. The trade liberalization process started in the mid-1980s, with the primary objective
to create a neutral trade regime by reducing and ultimately eliminating the anti-export bias.
Liberalization of the import regime was accomplished primarily through the removal of import
bans and quantitative restrictions. To increase the competitiveness of domestic industries, the
customs duty was greatly reduced for raw materials and capital goods used as inputs for
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manufacturing exports, while it was kept high on final goods. The export promotion was also one
of the main objectives of Bangladesh trade policy reform. Several measures were undertaken in
order to encourage export, including new incentives and facilities for the exporters, duty and tax
free imports of inputs for exporters, creation of the Export Processing Zones, and most importantly,
improvement of export policy administration.
Literature Review
Numerous studies make the assumption that proper domestic resource utilization results in a rise
in GDP as a result of trade liberalization.
According to Morgan and 4 (2008) assessment, greater levels of international commerce are
associated with trade liberal7ization and economic growth. Krugman (1990) then highlights the
benefits of trade liberalization for growth in developing countries in a widely read work. First off,
manufacturing, labor-intensive services, and agriculture dominate production patterns in
developing nations. Low per capita incomes and typically tiny markets are characteristics of these
nations. Low-cost producers are able to increase their output considerably beyond what is needed
for the domestic market in a liberalized trade policy.
Second, industrialization focused on safeguarding homegrown industries leads in an even higher
capital intensity Second, open trade regime allows for the enjoyment of constant returns to scale
\1over a much wider range, whereas industrialization based on protecting domestic industries
results in even higher capital intensity of production. \1
resulting in significant efficiency losses. According to 4Kraay and David Dollar (2001), trade
liberalization boosts economic growth and lowers levels of poverty in developing nations. Trade
y7openness is found by Alesina and Wacziarg (1998) to have a significant positive effect on
economic growth.
Using cross-country regressions, Frankel and Romer (1999) came to the conclusion that trade had
a quantitatively large, significant, and robustly beneficial influence on income. In her 2003
research, Georgies looked at 156 countries from the years of 1960 to 1997 and 56 countries from
the years of 1951 to 1998.
The findings indicate a favorable relationship between trade openness and economic growth. There
are some research looking into the connection between economic progress and liberation in
Bangladesh. Greater trade liberalization, according to Manni and Afzal (2012), has benefited
Bangladesh's economic growth. Greater openness has resulted in a rise in both real export and
import. Resource allocation away from the manufacture of commodities with an export focus will
be encouraged by trade liberalization.
In order to determine how trade liberalization policy affects Bangladesh's overall poverty in the
short term, Nahar and Siriwardana (2009) undertook a study.
On the other hand, Siddiki (2002) uses annual data from 1975 to 1995 to assess the combined
impact of trade and financial liberalization on Bangladesh's total economic growth. Both forms of
liberalization have favorable consequences, according to Siddiki.
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Nature of Trade Liberalization in Bangladesh
The trade liberalization policy pursued by Bangladesh has gone through three stages. The first
phase (1982-86) was implemented when Bangladesh came under the purview of the World Bank's
policy-based lending; the second phase (1987-91) began with the initiation in 1986 of the three-
year IMF Structural Adjustment Facility (SAF); and finally, since 1992, the third phase was
preceded by the IMF-sponsored Extended Structural Adjustment Facility (ESAF) (BEBOTE,
2003). These reforms led to a significant decline in trade restrictions, the opening up of trade in
many restricted items, rationalization and diminution of import tariffs, and liberalization of the
foreign exchange regime.
Table 1: Changes in Economic Indicators for Liberalization
Economic Indicators Pre-Liberalization Period Post-Liberalization Period
(In Million US$) 1976-80 1981-85 1986-90 1991-95 1996-00 2001-05 2006-10
GDP per capita 154.2 196.8 230 271.8 324 354.6 504
GDP at constant 19,164 22,789 27,321 33,472 42,515 55,054 71,837
price
GDP Growth Rate 4.4 4 4 4.4 5.2 5.2 6.2
(%)
Total population 85.6 97.8 110.8 123.2 135.8 148.2 160
Investment 1,747 3,040 4,264 5,686 9,155 13,615 20,089
Inflation (% change in ---- 11.57 7.84 5.6 5 5.4 7.7
CPI)
Trade % of GDP 18.4 16.4 18.4 22.6 31.4 36 45.2
Total Export 941.4 1,381 1,721 2,914 5,460 8,410 15,018
Total Import 2,191 3,321 3,845 4,783 8,166 10,383 17,435
Remittances 144.6 510 725 1,008 1,645 3,199 8,481
Current Account -411.8 -499 -526.6 -3.8 -396.4 -23.8 1319
Balance
FDI inflow 4.2 1 2.5 6 161 332 623
Real Exchange Rate ---- 45 48 53 54 63 63
Real Interest Rate 6.4 1 7 10.4 10 11 8.2
Source: World Development Indicators,2010.
The economic indicator in table 1 clearly shows that GDP per capita has been increasing since the
pre-liberalization period and is continuing to move at a faster rate up to now. The growth of FDI
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and remittances in the post-liberalization period is significant. Both exports and imports increased
markedly after liberalization, with imports growing faster than exports in the period immediately
after liberalization. However, inflation has declined with liberalization, perhaps due to the
availability of cheaper imports and demand-side conditions from international financial
institutions. Nevertheless, by the period of 2006-2010, the inflation rate returned to the pre-
liberalization level. The GDP growth rate in the post-liberalization period was significantly higher.
The availability of imported goods was a factor in the growth of the economy. After liberalization,
there was a huge increase in foreign direct investment (FDI). Contributing factors included
stronger economic growth, which in turn led to a higher GDP trajectory.
Tariff Structure in Bangladesh
Bangladesh not only dramatically lowered its tariff rates during the 1990s, but also streamlined
the tariff system. The nation made headway in achieving the objective of straightforward and
transparent customs tariffs. From 350 percent in FY 1992, the peak custom duty rate decreased to
32.5 percent in FY 2003. Customs duty (CD) declined from 57 percent in FY 1992 to 16.5 percent
in FY 2003 on an average (unweighted) basis. Additionally, the average protective tax decreased
from 61 percent in FY 1992 to 22 percent in FY 2003. Bangladesh made significant strides toward
achieving some uniformity and eliminating several anomalies in its tariff structure that resulted
from higher taxes on intermediate goods than on final goods (Ahmed and Sattar 2004).
Table 2: Tariff Structure in Bangladesh
Fiscal Year Maximum Rate (%) Un-weighted
Tariff Rate (%)
1991-92 350.0 70.0
1992-93 300.0 47.4
1993-94 300.0 300.0
1994-95 60.0 25.9
1995-96 50.0 22.3
1996-97 45.0 21.5
1997-98 42.5 20.7
1998-99 40.0 20.3
1999-00 37.5 19.5
2000-01 37.5 18.6
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2001-02 37.5 17.1
2002-03 32.5 16.5
2003-04 30 15.6
2004-05 25 13.5
2005-06 25 15.5
2011-12 25 14.9
Source: Raihan and Khondker, 2013 and GoB (2014)
The table shows the tariff structure of Bangladesh. The tariff regime has liberalized more and more
since the late 1980s. The unweighted average tariff rate decreased from 70 percent to 14.9 percent
between 1991–1992 and 2011–2012. This decreased protection was mostly made possible by
lowering the maximum rate. According to Table 1, the maximum tariff rate in 1991–1992 was 350
percent and it was just 25 percent in 2011–2012. There are no tariff quotas, seasonal tariffs, or
variable import levies in Bangladesh (WTO, 2000).
Exports of goods and services (% of GDP)
Years Exports of goods and services (% of GDP)
1991 6.662611969
1992 7.58667691
1993 9.017269036
1994 9.001543646
1995 10.86463
1996 9.706508
1997 10.52037
1998 11.75733
1999 11.75864
2000 12.3442
2001 13.38656
2002 12.40997
2003 11.43115
2004 11.14651
2005 14.39284
2006 16.35346
2007 16.99533
2008 17.65886
2009 16.94013
2010 16.02411
2011 19.92207
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2012 20.16159
2013 19.53787
2014 18.98966
2015 17.33667
2016 13.9212
2017 12.81975
2018 12.67479
2019 13.09476
2020 10.44279
2021 10.66278
Source: World Development Indicators.
Exports of goods and services (% of GDP)
25
20
15
10
0
1985 1990 1995 2000 2005 2010 2015 2020 2025
Figure 1: Exports of goods and services (% of GDP).
The graph shows the exports preview of goods and services of GDP from 1991-2021. Here, we
can see that the export rate was increasing from 1991 to 1995 and after that the rate decreased.
The increasing highest rate was in 2020 which was 20.16159. In 2020, the rate decreased to much
because of covid. The lowest rate was in 1991 at 6.662611969.
Imports of goods and services (% of GDP)
The IPO 2012–15, according to Bangladesh Trade Policy Support Program (2014), seeks to
harmonize the import regime with WTO requirements, streamlines the process for importing
capital equipment and raw materials, offers opportunities for technological innovation, and permits
the import of essential goods on an emergency basis.
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Table 4: Imports of goods and services (% of GDP)
Imports of goods and services (% of
Year
GDP)
1989 [YR1989] 12.78503
1990 [YR1990] 13.05819
1991 [YR1991] 12.22721
1992 [YR1992] 12.34733
1993 [YR1993] 14.10431
1994 [YR1994] 13.86432
1995 [YR1995] 17.34486
1996 [YR1996] 16.36958
1997 [YR1997] 15.80514
1998 [YR1998] 16.12273
1999 [YR1999] 16.6293
2000 [YR2000] 16.97751
2001 [YR2001] 18.71146
2002 [YR2002] 16.55741
2003 [YR2003] 16.22674
2004 [YR2004] 15.71173
2005 [YR2005] 20.00409
2006 [YR2006] 21.75846
2007 [YR2007] 22.94705
2008 [YR2008] 24.96206
2009 [YR2009] 23.15266
2010 [YR2010] 21.77873
2011 [YR2011] 27.49877
2012 [YR2012] 27.94933
2013 [YR2013] 26.75853
2014 [YR2014] 25.52442
2015 [YR2015] 24.74932
2016 [YR2016] 17.41295
2017 [YR2017] 17.17998
2018 [YR2018] 19.83984
2019 [YR2019] 18.4833
2020 [YR2020] 15.82866
2021 [YR2021] 17.06123
Source: World Development Indicators.
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Figure 2: Imports of goods and services (% of GDP).
Here the graph shows that the imports rates of GDP of Bangladesh from 1989 to 2021.The graph
shows that the rate is fluctuating. The rates sometimes increasing and sometimes decreasing. The
highest rate is 27.94933 in 2012.On the other hand the lowest rate is 12.22721 in 1991. In 2021,
after covid the rate increased from previous year which was 17.06123.
Conclusion
Finally, we draw the following conclusions: export-oriented policies boost export growth, which
helps to restore the balance of payments; import substitution industries also help to reduce imports,
which contribute to the creation of the balance of payments.
According to the empirical analysis conducted for this paper, Bangladesh's economic growth is
positively impacted by increasing liberalization. With more deregulation, real exports and imports
have both increased.
As for the genuine accomplishments, over the post-liberalization period, overall exports, headed
by industrial exports, particularly textiles and readymade garments, constantly increased. Exports
are still, however, heavily concentrated in a small number of commodities, namely in the
commodity textiles and ready-made clothing. Therefore, the study attempts to shed light on the
overall impact of trade liberalization on Bangladesh's economic growth using empirical evidence
and policy recommendations.
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References
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(2000). Trade Policy Review: Bangladesh. Report by the WTO Secretariat, World Trade Organization,
Geneva. WTO (2012). Trade Policy Review for Bangladesh, mid-October.
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