Hasinomics
The Hasina regime's approach to economic policy
In a classic 1990 paper, Rudiger Dornbusch and Sebastian Edwards defined macroeconomic populism as an approach to economic policy that emphasizes economic growth and income redistribution while disregarding inflation, public finances, external imbalances, or unintended consequences of market interventions. They identified five phases of a populist macroeconomy:
The populist government comes to power, often with strong public mandate, against a background of economic termoil, stagnation, or outright depression.
Initially, production, employment and real wages grow strongly in response to fiscal and monetary expansions; price controls keep inflation in check; and shortages are alleviated through inflation.
In the next phase, the economy starts hitting supply constraints and bottlenecks. Relative price adjustments, exchange rate depreciation or control, or protectionism becomes necessary as external imbalances exacerbates. Wage-price inflation accelerates. Budget deficit widens as subsidies balloon. An underground economy emerges.
Eventually, worsening budget deficit leads to hyperinflation, capital flight and demonetization. Shortages become pervasive. With the failure of populist policies evident, political instability ensues.
Orthodox stabilization policies, often under an IMF program, are finally implemented after a regime change, with living standards likely worse before the whole populist experience started.
Chile under Salvador Allende is the archetypical case of populist macroeconomics, and is an example analysed in detail by the authors. Closer to our time, Sri Lanka, Pakistan, Turkey, Argentina fit the pattern to different extent.
I mentioned this paper during the sideline adda on a conference on Bangladesh back in 2009 when a distinguished political science professor asked me what worried me about the newly elected Awami League government’s approach to the economy.
All these years later, it is perhaps reasonable to say that the Hasina Wajed regime has not exactly pursued populist macroconomics. But it hasn’t exactly been Washington Consensus orthodoxy either.
Hasinomics does indeed deserve to be examined in depth. I would propose the following key features, conjectures, and questions for further analysis.
Infrastructure investment and the oligarchy
Well, some of them atleast. By the mid-2000s, the economy was hitting supply constraints — infrastructure bottlenecks, skills shortages, and poor investment climate. The BNP government and the 1/11 regime failed to address these.
The Hasina regime has addressed the first one with a massive infrastructure boom. The problem was not funding as such, but one of political economy. The regime offered the country’s emerging oligarchs a deal they couldn’t refuse: support the government in its political games, and you would have access to the infrastructure mega projects and other business opportunities without oversight.
Lack of structural transformation
Some results of these megaprojects are visible, literally. Others less so. Has there been a pick up in the underlying TFP growth? What should be a reasonable return on these investments anyway?
Coming at it from a slightly different perspective, Bangladesh is still a relatively close economy with imports or foreign investment remaining much smaller relative to the economy compared with Southeast Asia. Why has the country not moved beyond garments? One answer to this might be that there is still a large pool of untapped labour. If so, is there a role for activist industry policy? And does the oligarchy-regime bargain prevent such a policy? Is Bangladesh in an RMG trap?
Public finances and external imbalances
Unlike the classical macroeconomic populists, the Hasina regime has adhered to some macroeconomic orthodoxy, and not completely ignored the fiscal, external, and monetary sectors.
Except the spending splurge on the civil-military administration to rig the 2014 and 2018 elections, public expenditures have been kept in check reflecting weak domestic revenue mobilisation. Budget deficit has been financed by borrowing from the domestic households through the National Savings Certificate, and not by the central bank, loans from China, or selling eurobonds. For much of the period the exchange rates were stable, and while inflation was high compared with others in Monsoon Asia, it didn’t spiral out.
That said, cracks were beginning to appear even before the pandemic, with the current accound in deficit reflecting domestic savings falling behind investment. Of course, the external shocks of 2022 aggravated the situation. However, unlike typical macroeconomic populists, the regime approached the IMF for assistance and has received a generous stabilisation package.
Informality is a feature of Hasinomics
Weak revenue mobilisation, fiscal risks from the power purchase agreements, and woes in the banking sector are usually cited as the biggest economic problems facing the country. However, along with the informal hundi network of external transactions, these point to the presence of large informal sector that is a structural feature of the regime’s economic management.
Start with the taxes. The regime cannot tax the rich given the political bargain. It cannot tax the non-rich much more either without generating a political backlash that can be costly to repress. Therefore, taxes will remain low. Meanwhile, a weakly regulated and poorly managed banking sector is needed for the regime’s bargain with the oligarchy (on the PPAs for example, but also more generally) to work.
Of course, the oligarchs and the regime’s cronies want to siphon at least part of their money overseas. The hundi network that is outside the formal balance of payments is vital for this capital outflow, with informal remittances being the other side of the transaction. That informal remittance, of course, provides for the domestic private consumption in both formal and informal sectors.
A crisis is not inevitable
Populist macreconomics always end in crisis — runaway inflation, currency collapse, forced demonetisation and so on. Given the limited adherence to macroeconomic orthodoxy, however, an economic crisis is not at all inevitable under Hasinomics. In fact, as long as the remittances keep flowing — formally or through hundi — a significant crisis is not even likely.
Instead, a far less dramatic but still insidious denouement awaits Hasinomics. For example, persistent current account deficit would mean domestic savings would need to rise. Power sector bills would need to be paid. Banking woes could aggravate. Inflation could remain sticky. As the budget constraints start binding, social expenditure could fall. Eventually, economic growth coming from capital and labour accumulation could run its course and Bangladesh could end up stagnating at a low middle income trap with a worsened inequality.
In fact, without significant microeconomic reforms to attract foreign investment, rise in taxes to pay for education and health expenditure, and supportive industry policy, stagnation is a quite likely outcome.
While noting these five features of Hasinomics, I was reminded of a 2019 follow up piece by Edwards on Latin America’s experience with populist macroeconomics. The most important lesson from that continent, according to him, is ‘excessive inquality and corruption are fodder for populist politicians’. This echoes a classic Dani Rodrik paper from 1999 which found that countries with divided societies and weak institutions of conflict management suffer from sharper drops in economic growth when hit by external shocks.
That is, macroeconomic populism might not be Hasinomics, but its legacy!
While I generally refrain from writing on the stuff that trends on social media, Zia Hasan prompted me to think about this.
I have also benefitted from many discussions with Shafiqur Rahman over the years.
The 2009 conference: https://bdiusa.org/2009-ideas-and-innovations-for-the-development-of-bangladesh/
Previous pieces on Bangladesh’s economic history
Reference
Dornbusch R and Edwards S, Macroeconomic populism, Journal of Development Economics, 1990.
Macroeconomic populism is an approach to economics that emphasizes growth and income distribution and deemphasizes the risks of inflation and deficit finance, external constraints and the reaction of economic agents to aggressive non-market policies. The purpose of our paper is to show that policy experiences in different countries and periods share common features, from the initial conditions, the motivation for policies, the argument that the country's conditions are different, to the ultimate collapse. Our purpose in setting out these experiences, those of Chile under Allende and of Peru under Garcia, is not a righteous assertion of conservative economics, but rather a warning that populist policies do ultimately fail; and when they fail it is always at a frightening cost to the very groups who were supposed to be favored. Our central thesis is that the macroeconomics of various experiences is very much the same, even if the politics differed greatly.
Rodrik D, Where did all the growth go? External shocks, social conflic, and growth collapses, Journal of Economic Growth, 1999.
This article argues that domestic social conflicts are a key to understanding why growth rates lack persistence and why so many countries have experienced a growth collapse since the mid-1970s. It emphasizes, in particular, the manner in which social conflicts interact with external shock on the one hand, and the domestic institutions of conflict-management on the other. Econometric evidence provides support for this hypothesis. Countries that experienced the sharpest drops in growth after 1975 were those with divided societies (as measured by indicators of inequality, ethnic fragmentation, and the like) and with weak institutions of conflict management (proxied by indicators of the quality of governmental institutions, rule of law, democratic rights, and social safety nets).
Edwards S, On Latin American Populism, and its echoes around the world, Journal of Economic Perspective, 2019.
In this article, I discuss the ways in which populist experiments have evolved historically. Populists are charismatic leaders who use a fiery rhetoric to pitch the interests of "the people" against those of banks, large firms, multinational companies, the International Monetary Fund, and immigrants. Populists implement redistributive policies that violate the basic laws of economics, and in particular budget constraints. Most populist experiments go through five distinct phases that span from euphoria to collapse. Historically, the vast majority of populist episodes end up badly; incomes of the poor and middle class tend to be lower than when the experiment was launched. I argue that many of the characteristics of traditional Latin American populism are present in more recent manifestations from around the globe.
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