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Issue 12

May 2021

Economic systems have been matters of longstanding debates and reflections. Despite being more efficient and practical than alternatives, the currently predominant system, mixed-economy capitalism, is confronted with profound challenges, amongst others, associated with sustaining economic growth while reducing poverty and tackling inequality, and dealing with the existential threat that the mankind faces from global warming-induced climate change. COVID-19 has also highlighted myriad socio-economic vulnerabilities that require prompt actions and fixing within the existing system.  The cover article in this issue of Policy Insights takes a critical look on the positive and negative sides of capitalism, the challenges faced globally and the conditions under which the economic system must be rightly steered. As pointed out in the article, meeting these challenges will require significant collaboration on global and regional levels, with significant institutional rearrangements, primarily to strengthen the incentives to cooperate and coordinate. 

Prior to the ongoing second wave of COVID-19, Bangladesh did manage to cushion the blow of the pandemic and performed better than previously anticipated. However, as an article in this issue points out, it is still far from securing the pre-pandemic level of dynamism in domestic demand, consumption, and investment. A particular concern is the vicious cycle of job loss and consequent depressed demand in the economy, which is deterring firms from investing while opting for further employee retrenchments. The situation calls for prudent policy measures as it is crucial to stimulate domestic demand and facilitate investment for job creation and shaping an inclusive recovery. 

Another article in this issue discusses Bangladesh’s recent most export performance. The COVID-19 pandemic has dealt a colossal blow to the sector which has been slowing down since FY 2014. The export environment has been marred by several constraints, owing particularly to complex and unpredictable supplementary and regulatory duties on imports and sharp rise in real effective exchange rate. Prudent macroeconomic policies are required to effectively support the export sector through such interventions as improving export incentives through tariff rationalization, boosting labor productivity through investment in skills and technology, penetrating in new markets by participating in global value chains, facilitating FDI for exports, tackling infrastructural bottlenecks, and reducing trade logistic costs. 

The immediate need of a coherent National Tariff Policy is highlighted in another article of this issue. There has been progress in making the tariff structure more transparent and uniform to eliminate scope for malfeasance or unnecessary confusion in classification of imports. But much work remains. In the absence of a coherent strategy, a tendency for ad hoc imposition of tariffs has persisted. Output tariffs tend to remain high while input tariffs have recorded a declining trend with effective protection on the rise. The structure of tariffs and trends seem to advocate protection over promoting competitiveness or efficiency over time. Furthermore, the dependence on import revenue means it has been very difficult to undertake an effective tariff rationalization policy.

Finally, there is another article in this issue of Policy Insights providing an overview of the digital economic response in Bangladesh for mitigating the COVID-19 consequences. The government-to-person (G2P) payments, making use of the mobile financial system (MFS), has so far played an important role in providing payments to many beneficiaries under various social security programmes. In the wake of the first wave of coronavirus in April – May 2020, close to two million garment workers were also brought under the digital payment mechanism for paying their salaries. However, infrastructure and information deficits, combined with the difficulties associated with identifying the eligible beneficiaries have remained critical constraints in deriving most out of the digital payment system. Bangladesh must utilize the potential of the digital financial system for a greater financial inclusion.