Word Bank Report 1

Improving the Investment Climate in Bangladesh
An Investment Climate Assessment Based on an Enterprise Survey Carried Out by the Bangladesh Enterprise Institute and the World Bank
June 2003
Washington, D.C. The World Bank
2003 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, USA The material in this work is copyrighted. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint, please send a request with complete information to the Copyright Clearance Center, Inc, 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978750-8400, fax 978-750-4470, www.copyright.com All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-5222422, e-mail pubrights@worldbank.org Library of Congress Cataloging-in-Publication Data has been applied for.
Contents
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .v Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vii 1. Investment Climate Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Key Features of the Investment Climate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 International Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Linking the Investment Climate with Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 An Overview of the Bangladesh Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 The Surveyand What Its Findings Reveal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 2. Bangladeshs Investment Climate in International Perspective . . . . . . . . . . . . . . . . . .11 A Strong Macroeconomic Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Poor Integration with the Global Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Serious Deficiencies in Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Transport, Ports, and Customs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Governance Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Governance Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Lagging in Human Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 A Weak Record in Technological Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 3. The Effects of Bangladeshs Investment Climate on Firms . . . . . . . . . . . . . . . . . . . . .27 International IntegrationThe Potential of Exports and the Rise of a New Industry . . . . . .27 Governance a Big Burden on Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
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IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 .31 .32 .33 .33 .36 .36 .37 .38 .38
Corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Access to Finance a Growing Concern . . . . . . . . . . . . . . . Flexible Rules for Labor . . . . . . . . . . . . . . . . . . . . . . . . Greater Difficulties for Small- and Medium-Size Enterprises . Comparing the Investment Climates in Chittagong and Dhaka Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulation and Corruption . . . . . . . . . . . . . . . . . . . . . Whats the Bottom Line? . . . . . . . . . . . . . . . . . . . . . . Simulating the Gains from a Better Investment Climate . . .
4. Conclusions and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 Easing Bottlenecks in Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 Transport, Ports, and Customs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 Strengthening Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Improving Access to Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 Appendix 1: Sampling Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 Trade Associations Contacted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 Chambers of Commerce Contacted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 Other Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 Government Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53 Appendix 2: Technical Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 Regression Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 Simulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 Indexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 Appendix 3: Standard Investment Climate Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
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Acknowledgments
THE AUTHORS GRATEFULLY ACKNOWLEDGE financial support from the United Kingdoms Department for International Development (DFID), which supported the implementation of the survey and the collaboration with the Bangladesh Enterprise Institute (BEI) in the survey and analytical work. BEI staff contributing to this report include Farooq Sobhan and M. H. Khaleque. World Bank staff contributing to the report include Khurshid Alam, George R. G. Clarke, David Dollar, Giuseppe Iarossi, Esperanza Lasagabaster, Syed A. Mahmood, Giovanni Tanzillo, and Scott
Wallsten. The study team appreciates the efforts of advisors of the survey team. Members of the advisory panel include Sayed Alamgir, F. Chowdhury, Ambassador Mustafa Faruque Mohammed, Ambassador M. Aminul Islam, Ambassador M. Shafiullah, Zahid Hussain, and M.Shamsur Rahman. The authors thank K. B. Al Masum and Ayesha Novera for excellent research assistance and the Survey and Research System in Bangladesh for collaborating with the BEI in implementing the survey.
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ASYCUDA++ BEI BPDB BSIC BTTB DESA DESCO DFID DIFE GDP NCBs PGCB UNCTAD UNESCO R&D TFP
Acronyms and Abbreviations
Automated System for Customs Data Bangladesh Enterprise Institute Bangladesh Power Development Board Bangladesh Standard Industrial Classification Bangladesh Telegraph and Telephone Board Dhaka Electric Supply Authority Dhaka Electric Supply Company Department for International Development Department of Inspection for Factories and Establishments, Ministry of Labor and Employment, Bangladesh gross domestic product national commercial banks Power Grid Company of Bangladesh United Nations Conference on Trade and Development United Nations Educational, Scientific, and Cultural Organization research and development total factor productivity
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Executive Summary
OVER THE PAST DECADE Bangladesh performed well on many macroeconomic indicators, became more integrated with the world economy, and achieved impressive social gains. This progress in the 1990s is heartening. But the performance of other low-income countries suggests that Bangladesh has fallen short of its growth potential. While Bangladesh has maintained fairly high per capita growth for the past decade, its growth has nonetheless lagged far behind that in some countries. Take China and India. As a result of the more rapid growth in these countries, a big gap has opened up in per capita income, though all three countries started out at similar income levels in the 1980s. Which features of Bangladeshs investment climate pose particular obstacles to economic growth and development? To answer that question, this investment climate assessment uses data from a 2002 survey of a 1001 manufacturing firms in Bangladesh and from myriad publicly available sources. The hope is that its results will help identify the reforms most critical to private sector development and facilitate consensus on a more far-reaching agenda of reform. Some of the main findings: Infrastructure poses some of the most severe obstacles facing firms. Bangladesh fares worse than its neighbors on general measures of infrastructure, and the vast majority of firms
report that problems in infrastructure seriously hamper their growth. Electricity problems plague firms in Bangladesh, which has less generation capacity per capita than its neighbors. Firms report experiencing power outages or surges nearly every day they operate. As a result, more than 70 percent rely on electric generatorsat great expense. On average, these generators cost more than $20,000 to purchase and 50 percent more per kilowatt-hour to operate than the price of power from the public grid. Corruption is pervasive. Bangladesh ranks worse on measures of corruption than its neighborswith more than half the firms reporting it as a major or very severe obstacle. Firms view regulation as a serious problem. Starting a firm in Bangladesh is fairly difficult. And once firms are running, they receive frequent visits from government agencies about 17 a year on average. Finance appears to be a looming problem. While most firms appear to have access to finance, it is mostly short-term and nearly 60 percent of firms with a line of credit report having exhausted that credit. Moreover, the very large share of nonperforming loans portends potential difficulties. Small- and medium-size firms are disproportionately affected by all these problems. The smaller the firm, the more of its resources it
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IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH
devotes to bribes and to dealing with government visits and inspectionsand the less likely it is to have access to formal finance. These problems can pose great barriers to market entry and growth for small firms. Dealing with these problems is no simple matter. But their size and prevalence underscore the urgency of reform. Among the potentially most important reforms are unbundling electricity generation and transmission, encouraging private investment in the power sector, corporatizing the ports, increasing accountability in the civil service, and streamlining regulatory procedures while eliminating unnecessary ones. What would the private sector stand to gain from such reforms? Simulations based on the survey results estimate the potential gains from a 50 percent improvement in critical investment climate measures. While a 50 percent improve-
ment may sound large, such a change would still leave Bangladesh with, for example, less reliable electricity and longer waits in customs than firms in China endure. The simulation results suggest that the improvements could boost sales growth from 7 percent to more than 10 percent, raise the investment rate from about 9.5 percent to 12 percent, and more than double total factor productivity. Carrying out the needed reforms may be difficult, but the costs of avoiding and delaying them are high. And the urgency of reform will only increase as the Multifibre Arrangement is phased out by December 2004, deepening the obstacles posed by a poor investment climate. The survey findings show, in rigorous, quantifiable ways, how much the poor investment climate costs firmsand how the voices of the thousand firms call out for reform.
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Investment Climate Matters
IN RECENT YEARS POLICYMAKERS and multilateral organizations have increasingly emphasized the importance of a sound investment climate for promoting economic growth in developing countries (Stern 2002b). Emphasizing investment used to mean advocating greater quantities of investment, under the assumption that a financing gap was a barrier to development. Today, few accept this simplistic view. Indeed, recent research shows surprisingly little correlation between investment levels and growth rates, at least in the short run (Easterly 1999). Thus while this report is concerned with investment, it does not focus on its quantity. Instead, it focuses on the institutional and policy environment that determines whether investments pay off in greater competitiveness for firms and in sustained growth for the economythat is, the investment climate.1 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.
tional, and behavioral environment, both present and expected, that influences the returns, and risks, associated with investment (Stern 2002b). This environment is generally seen as having three main features: macroeconomic conditions, governance, and infrastructure. Macroeconomic (or country-level) factors include such issues as fiscal, monetary, and exchange rate policies and political stability. Governance relates to government interactions with business, which typically mean regulation and corruption, both of which affect the costs of starting and running a business. 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. Beyond these features of the investment climate, this report also looks at international integration and human resources.
Governance
A countrys 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
Key Features of the Investment Climate

Defining investment climate precisely is difficult. But one useful definition is the policy, institu-
corruption, involving payments to inspectors who visit firms or to officials who grant permits. Corruption can easily deter foreign and domestic investors. Recent empirical research confirms, for example, that measures of corruption are significantly and negatively related to inflows of foreign direct investment (Smarzynska and Wei 2000; Wei 2000). Finding quantitative measures of the quality of government regulation and the cost imposed by corruption is generally difficult. But many researchers and practitioners have tried to produce aggregate statistics that can be used for comparisons across countries. One study looks at the regulatory and administrative issues affecting firms day-to-day operations. Friedman and others (2000) compile indexes of taxation levels and overregulation (essentially, indexes of the business environment) in 69 countries. While they find no evidence that higher tax rates drive firms underground, they do find a significant correlation between measures of overregulation and the size of the unofficial economy: more overregulation is correlated with a larger unofficial economy (Friedman and others 2000). Thus while higher tax rates do not appear to drive away investors, the myriad obstacles to starting and running a business do. This does not mean that all regulations in developing countries are only onerous and unnecessary. On the contrary, regulations and regulatory agencies can play an important role in mitigating market failures (such as environmental pollution), protecting consumers (for example, against firms that can exercise market power), and ensuring safe working conditions. But regulations in developing countries tend to be more complex and bureaucratic than necessary, are associated with corruption, and often are not intended to correct market failures or protect consumers. Indeed, Djankov and others (2002) find that more regulations are generally not associated with better societal outcomes in
developing countries. This report focuses on the costs of regulatory inspections to firms, however; societal outcomes are beyond its scope. A particularly important aspect of governance is the ease with which firms can enter and exit a marketan important determinant of productivity, investment, and entrepreneurship (Lansbury and Mayes 1996). Where entry and exit are relatively easy, poorly performing firms can leave the marketpermitting their assets to be reallocated to more productive usesand new, more productive and innovative firms can emerge. The entrepreneurship that is unleashed accelerates economic growth and welfare improvements in developing and transition economies. New firms have usually been the fastest-growing segment in transition countries (McMillan and Woodruff 2002). But the governments of many developing and transition economies, failing to recognize that births and deaths of firms are an inevitable corollary of entrepreneurial risk taking, have erected a maze of administrative obstacles to starting, operating, and closing firms. Compiling data on entry regulations in 85 countries, Djankov and others (2002) discover enormous variation in the number of procedures required to start firms, ranging from 2 in Canada to 20 in the Dominican Republic (with Bolivia and the Russian Federation also close to 20). The time required to establish a firm ranges from 2 business days to 214 in Mozambique. These procedures can be extremely costly to the economy: in Mozambique the cost of official procedures (that is, excluding bribes) for setting up a new business amounts to 214 percent of per capita income. In Africa, Emery and others (2000) find, this whole maze of often duplicative, complex, and non-transparent procedures can mean delays of up to two years to get investments approved and operational. Moreover, Djankov and others (2002) find that stricter regulation of entry is correlated with more corruption and a larger informal economy.
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Infrastructure
In countries with poor infrastructure, businesses must devote more resources to such tasks as acquiring information, procuring inputs, and getting their products to market. Especially for goods marketed internationally, poor infrastructure can undermine the competitiveness of firmsat best making it more costly for them to operate, and at worst deterring them from entering markets where they would otherwise have been able to operate efficiently. Infrastructure and firm performance interact in several ways. Established firms already connected to utilities are affected by the quality of the service. New firms or firms hoping to expand are concerned with difficulties in connecting to utilities.
Access to Finance
Economic theory holds that businesses will invest in projects where the expected benefits exceed the cost of investment. But this efficient outcome can be achieved only when entrepreneurs face no credit constraints unrelated to their own performance. Credit constraints are less likely in countries with well-developed and well-functioning financial systems. Indeed, a great deal of research has shown the importance of financial sector development for growth (Levine 1997; World Bank 2001b). A healthy financial system, by freeing firms from financial constraints, allows them to expand according to their expected potential rather than their current stock of cash. Thus countries with well-developed financial systems (banks, stock and bond markets) tend to grow faster than countries with less well-developed systems.
Mexico, the Philippines, and Thailand) grew more quickly in the 1990s than those that did not. Indeed, many studies find that openness to trade and foreign direct investment accelerates growth (for example, Dollar and Kraay 2001; and Frankel and Romer 1999). Studies using different measures of openness to tradeincluding the relative size of trade (as measured by imports and exports as a share of GDP) and the degree of trade distortion (as measured by average tariff rates and dispersion)strongly suggest that greater openness is associated with faster growth in both industrial and developing countries. Sachs and Warner (1995) find that openness is a highly significant determinant of growth and, when combined with property rights, might even represent a sufficient condition for growth in poor economies. Kang and Sawada (2000) find a similar effect of openness on growth, arguing that openness, combined with financial development, increases growth in developing countries by reducing the cost of investing in human capital.
Human Resources
The availability of inputs is a crucial element of the investment climate. For human resources, this implies more than just an abundant supply of workers. It also implies workers with sufficient education and technological know-how.
Linking the Investment Climate with Growth

Studies have found strong correlations between measures of investment climate and economic growth (see, for example, Kaufmann, Kraay, and Zoido-Lobatn 2000; and Knack and Keefer 1995). These studies typically use data generated from surveys of private businesses and reflect the extent to which investors or firms perceive problems with harassment, corruption, and inefficient
International Integration
Research has shown that countries that aggressively pursued integration with the global economy (such as Brazil, China, India, Malaysia,
regulation. But most macro-level indicators of investment climate used in these studies are of little help to countries in identifying exactly what needs to be done to create a better investment climate. That requires delving much more deeply, drawing on micro-level evidence from surveys of large numbers of firms, including small and medium-size enterprises. To begin to get an objective, empirical look at the investment climate at the firm level in Bangladesh, this report uses a new survey of 1,001 firms in Chittagong and Dhaka. Following
a standard approach for investment climate assessments, it compares the investment climate in Bangladesh with that in other countries including its main competitors, China, India, and Pakistanusing similar surveys and publicly available country-level data sets (box 1.1). And it explores the investment climate indicators from Bangladesh in more depth at the firm level, through analyses that include investigations of how the investment climate differs between Chittagong and Dhaka and between small and large firms.
Box 1.1. What Is an Investment Climate Assessment? Investment climate assessments systematically analyze the conditions for private investment and enterprise growth in a country, drawing on the experience of local firms to pinpoint the areas where reform is most needed to improve the private sectors productivity and competitiveness. By providing a practical foundation for policy recommendations and involving local partners throughout the process, the assessments are designed to give greater impetus to policy reforms that can speed the private sectors growth, leading to faster economic growth and poverty reduction. Produced by the World Bank Group in close partnership with a public or private institution in each country, the investment climate assessments are based on a survey of private enterprises designed to find out what difficulties they encounter in starting and running a business and, if the business fails, in exiting. The survey captures firms experience in a range of areas financing, governance, regulation, tax policy, labor relations, conflict resolution, infrastructure services, supplies and marketing, technology and training. All these are areas where difficulties can add substantially to the costs of doing business. The survey attempts to quantify these costs. Using a standard methodology, the assessment then
compares the survey findings with those in similar countries to evaluate how the countrys private sector is faring and how well it can compete. The findings of the survey, combined with relevant information from other sources, provide a practical basis for identifying the most important areas for reform aimed at improving the investment climate. The assessments look in detail at policy, regulatory, and institutional factors that hamper the provision of good-quality infrastructure services and the functioning of product, financial, and other markets, linking the constraints to firms costs and productivity. In each country the investment climate assessments draw on the guidance and expertise of local partners in government and the business community. The findings and policy recommendations emerging from the assessments are discussed extensively with the private sector and other stakeholders in the country. This broad dissemination of the findings is aimed at engaging not only policymakers but also business leaders, investors, nongovernmental organizations, and the donor community in shaping the national private sector development strategy, forging consensus on the priorities for reform of the investment climate, and laying the groundwork for concrete responses to the problems identified. Updates of the assessment can help track progress in improving the investment climate.
girls education, immunization, child nutrition, and fertility reduction. Primary enrollment, for example, rose from 61 percent in 1980 to 72 perIn the 1990s Bangladesh became increasingly cent in 1990 and 97.5 percent in 2000 (table 1.1). integrated with the global economy, with its By contrast, reforms in other areas, particutrade doubling over the decade to reach 31 perlarly in the institutional and regulatory framecent of GDP by 2001. Efforts to increase integrawork, were far less encouraging. Efforts launched tion had started in the 1980s and continued into in the early 1990s to deepen liberalization across the early 1990s. As early as 1982 the countrys economic sectors soon lost momentum. The New Industrial Policy began to lift import conprogram to divest state enterprises in manufactrols and encourage exports. The Revised Industuring quickly stagnated, and state enterprises trial Policy of 1986 furthered these reforms, remained a huge drag on the Bangladesh econloosening more restrictions on imports, reducing omy.2 Consolidated data for such enterprises point to low productivity, worsening financial antiexport bias by rationalizing tariffs, and easing performance in recent years, and, as a result, a the import of inputs for production. By the end growing burden on the public budget. of the 1990s average nominal tariff rates in Nor was much progress achieved in reforming Bangladesh had declined from more than 100 basic infrastructure services. In telecommunicapercent to about 20 percent, and tariff rates for tions Bangladesh became the first South Asian manufactured imports from 52 percent to 16 country to permit the entry of private mobile percent. The fixed exchange rate system was operators, in the early 1990s. But no further libreplaced with a more flexibly administered syseralization occurred until 2001, when the tem, foreign investment was deregulated (with a Telecommunications Act was approved. The act few exceptions), and restrictions on repatriating created a regulatory agency and the legal basis for profit and income from foreign investment were competition in long-distance service, but licenses eliminated. for new long-distance operators have yet to be In parallel, the country undertook substantial issued. The power sector has been plagued by investments in human development, making financial problems, large inefficiencies, and limgreat strides in such areas as primary enrollment, ited coverage. Only in the past two Table 1.1. Progress in Human Development, Bangladesh years has there been some Indicator 1980 1990 2000a progress, with the coming onstream of two new independent Poverty headcount rate (percent)b 58.8 49.8 power plants (privately financed Fertility rate (births per woman) 5.0 4.3 3.0 Infant mortality rate (per 1,000 live births) 101.4 94.0 66.3 and operated), a reduction in sysCrude birth rate (per 1,000 people) 33.4 32.8 19.9 tem losses, and some initial adjustCrude death rate (per 1,000 people) 10.2 11.3 4.8 ments to tariff policies. In Life expectancy (years) 56.9 56.0 60.6 addition, in early 2003 the Energy Gross primary enrollment ratio (percent) 61.0 72.0 97.5 Regulatory Commission Act was Gross secondary enrollment ratio (percent) 18.0 19.0 42.0 approved, defining the legal Adult illiteracy rate (percent) 71.0 65.0 55.0 framework for establishing a regu Not available. lator. Despite these recent changes, a. Some data are for 1999. acute problems persist in the b. Refers to the upper poverty line. Source: World Bank. power sector. In the port sector
An Overview of the Bangladesh Economy
capacity has failed to keep up with Table 1.2. Investment and Savings as Percent of GDP, the rapid growth in trade and pro- Bangladesh (19812002) ductivity has remained low. PoliFY81 FY91 FY99 FY00 FY01 FY02 cies to enhance capacity at 17.6 16.9 22.2 23.0 23.1 23.2 Chittagong, the main port, and to Investment Private 12.4 10.3 15.5 15.6 15.8 16.8 encourage private participation Public 5.2 6.6 6.7 7.4 7.2 6.4 have met significant obstacles. Gross Domestic Saving 12.5 14.6 17.7 17.9 18.0 18.2 In the financial sector progress Gross National Saving 17.8 19.7 22.3 23.1 22.4 23.4 was similarly uneven in the 1990s. Source: World Bank. Private banks gained market share throughout the decade, and their financial situation improved in recent years, source of growth in the late 1980s, becoming though their share of nonperforming loans even more important in the 1990s. The export remained high at around 17 percent in 2001. The stimulus came mainly from woven garments and state banks, which continued to dominate the knitwear, which grew from $32 million in the system, recorded large losses and a rate of nonearly 1980s to nearly $5 billion in early 2000. performing loans more than twice that of the priWoven garments and knitwear now account for 3 vate banks. Poor performance contributed to 75 percent of Bangladeshs total annual exports. interest spreads of 7 percentspreads large The next largest items are frozen food and raw enough to allow the most efficient private banks jute, which respectively account for 5 percent to earn attractive profits but inadequate to cover and 4 percent of total exports. the provisions of state banks. The new growth pattern is reflected in the Meanwhile, the capacity of the state to govern structure of the economy, which underwent sigand to deliver services has weakened. Public nificant changes (table 1.3). The share of agriculinstitutions are not accountable for their perture (including fisheries) declined from about 32 formance. Civil servants face weak incentives and percent of GDP in the early 1980s to slightly over little in the way of checks and balances. And law 24 percent of GDP in fiscal year 2002. The share and order have deteriorated. of manufacturing, on the other hand, increased Despite this mixed picture in reform, from less than 11 percent of GDP in the early Bangladesh achieved positive growth results. In 1980s to 15 percent of GDP in fiscal year 2002. 1991-2000 real GDP growth averaged about 4.8 However, the latter is still small relative to the percent a year (60 percent for the period), and its share of manufacturing in the South East Asian volatility declined. Contributing to this higher economies (around 25-35 percent of GDP). growth trajectory was higher private investment Also manufacturing activity remains heavily conand greater integration with the global economy. centrated in Dhaka and Chittagong. Private investment increased from Table 1.3 GDP Composition of Selected Sectors, Bangladesh a very depressed level of 4 percent (19812002) of GDP in the early 1970s to more FY81 FY91 FY99 FY00 FY01 FY02 than 15 percent of GDP in the late 1990s (table 1.2). Investment Agriculture and fishing 32.3 28.7 24.3 24.3 24.6 24.1 growth has been the most stable Manufacturing 10.8 12.2 15.2 15.0 14.8 15.0 Other 56.8 59.1 60.5 60.7 60.6 60.9 stimulus to GDP growth during 100.0 100.0 100.0 100.0 100.0 100.0 the last two decades. Exports GDP began to emerge as another major Source: Bangladesh Bureau of Statistics
Bangladeshs economic per- Figure 1.1. Average Annual Growth and Poverty Reduction Rates in formance, combined with its Bangladesh, India, and China, 1990s notable success in slowing popu- Percent lation growth over the past two 12 decades, produced real per capita 10 8 GDP growth of 3.1 percent a year 6 (36 percent over the decade). Not 4 surprisingly, survey-based esti2 mates of consumption poverty 0 show that the 1990s were a period Bangladesh India China 19912000 199399 199298 of declining poverty. While 59 percent of the countrys populaGDP per capita growth rate Poverty reduction tion was poor in 1991-92, the Source: World Bank. poverty rate dropped to 50 percent in 2000, reflecting a decline of 1.8 percent a the consistently slower growth in Bangladesh year (see World Bank 2002a for a discussion of means that today the typical Indian citizen the poverty line applied). This trend is encouragreceives nearly 50 percent more income than the ing. In the previous decade, marked by slower typical Bangladeshiand the typical Chinese citGDP growth of about 4.3 percent a year, poverty izen nearly three times as much income. declined by only 0.8 percent a year in 1983-91 Bangladeshs failure to keep up with the (see Interim Poverty Reduction Strategy Paper growth in other low-income countries points to a 2003). critical need to improve its investment climate. Although the progress of the 1990s is heartenSo does one of the success stories in ing, Bangladesh has fallen short of its growth Bangladeshthe development of the export-led potential. Other low-income countries grew at a garment sector. One factor in this success has much faster pace. China did spectacularly well, been the Multifibre Arrangement, which gives enjoying per capita GDP growth and poverty Bangladesh certain advantages in the sector. reduction rates of more than 8 percent a year When the arrangement expires at the end of in the 1990s. India also outperformed Bangla2004, these advantages will endand the factors desh, with GDP per capita growth at 4.4 percent in the Bangladesh investment climate that have and poverty reduction at 5.4 percent a year (figconstrained growth will bite even harder. ure 1.1). These differences are small in a given year. But small differences in growth rates, sustained for a The Surveyand What Its Findings decade or two, lead to huge differences in living Reveal standards and poverty. In 1980 Bangladesh had What factors in the investment climate have prean average income of $550 (in current U.S. dolvented Bangladesh from growing more quickly? lars adjusted for purchasing power parity), To gather the firm-level data imperative for slightly less than Indias $668 and slightly more answering this question, the Bangladesh Enterthan Chinas $464. In 2001 per capita income prise Institute and the World Bank conducted a (again adjusted for purchasing power parity) had survey of manufacturing enterprises in late 2002. risen to $1,644 in Bangladeshbut to $2,464 in The lack of a reliable and recent census of manIndia and $4,329 in China. Thus while the three ufacturers made sample selection especially countries had similar incomes two decades ago,
difficult. The sample ultimately Figure 1.2. Top Constraints to Business Operation and Growth in was drawn from a census of manu- Bangladesh, as Viewed by Firms facturing industries provided Electricity by the Bangladesh Bureau of Statistics, combined with lists of Corruption firms provided by trade associaTax tions and chambers of commerce administration (see appendix 1 for a detailed Cost of financing discussion of the sampling Economic policy methodology). uncertainty Two criteria were used to Customs and trade choose industries for the survey: Access to the industries had to be important financing to the Bangladesh economy, and 0 10 20 30 40 50 60 70 80 there had to be some overlap with Note: Percent of firms rating issues as major or very severe obstacles (percent). industries covered by surveys in Source: Investment climate survey. other countries to facilitate comparisons. The two criteria are complementary in issues is well understood, this report focuses on Bangladesh. For example, the ready-made garmicroeconomic issues. Second, the rankings are ment industry is especially important to subjective and may not indicate actual economic Bangladesh, and firms in this industry compete problems. Most entrepreneurs want cheaper finwith similar manufacturers in such countries as ancing, but that does not necessarily mean that China, India, and Pakistan. the cost of financing is an economic problem. Six industries were included in the survey: Nonetheless, these rankings provide a starting garments, textiles, food and food processing, point for the analysis, and the survey contains a leather and leather products, electronics, and wealth of additional information to investigate chemicals and pharmaceuticals. The survey colthese and other issues more objectively and in lected data from a total of 1,001 firms in Dhaka greater depth. Most important, the analysis (and surrounding areas) and Chittagong (see reveals that the general constraints identified by appendix 1 for a breakdown of the firms by the firms impose serious costs on them. industry, city, and other factors). The survey findings, while recording some To get an initial sense of how firms view the remarkable improvements in Bangladesh in investment climate, the survey asked firms to rate recent years, also underscore many unfavorable the extent to which a large number of factors in features of its investment climate. And they the investment climate constrain their operation measure the serious effort that the country must and growth. By far the most frequent complaint undertake if it is to stimulate growth and catch was the constraint imposed by the poor electricup with faster-growing economies. Among the ity system (figure 1.2). Ranked next highest were aims of this study is to aid Bangladeshs national problems relating to corruption, governance, Poverty Reduction Strategy Program, one of and finance. whose objectives is to accelerate growth to 7 perThe ranking results raise two issues. First, cent a yearup from less than 5 percent in the firms ranked economic policy uncertainty fifth, previous decade. But is this growth target realishighlighting the importance of stable macroecotic for Bangladesh? How will it be attained? The nomic policies. Since the importance of these Interim Poverty Reduction Strategy Paper, rec-
ognizing the private sector as the main engine of economic growth, encourages further opening of the trade regime and removal of the antiexport bias as well as improvements in a host of factors relating to the investment climate. The hope is that this study, by shedding further light on the cost of a poor investment climate, will help inform the national debate on issues relating to private sector development and aid the consensus building necessary to enact productive reforms.
Notes
1. While social infrastructure is recognized as no less important than its physical and financial counterparts, a deliberate choice was made to exclude the provision of education and health services from the
definition of investment climate used in this report. The issues involved in improving social services are quite different from those involved in improving infrastructure and regulation of industry, the focus of the report. 2. In late 2001 state enterprises had physical assets amounting to 35 percent of GDP, employment surpassing 250,000, and investment equal to 9 percent of GDP (World Bank 2001a). 3. The market share of national commercial banks (NCBs) and specialized development banks remained at 58 percent at the end of 2001. 4. The survey and its analysis focus on the investment climate of the urban manufacturing sector and will therefore need to be complemented with analytical pieces on rural development.
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Bangladeshs Investment Climate in International Perspective

omy than other Asian countries, with low trade and foreign direct investment and high formal and informal barriers to trade. 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.
COMPARING THE INVESTMENT CLIMATE in Bangladesh with those in other countries of East and South Asia, as this chapter does, might seem to diminish the progress that Bangladesh has made, since these are countries that have performed relatively well in recent decades. But good performers provide more useful benchmarks than poor performers. If Bangladesh is to meet its Millennium Development Goals, recent estimates suggest, it will need to accelerate GDP growth to about 7 percent a year over the next decade (Bangladesh 2003). So comparing the performance of Bangladesh with that of economies that are doing well provides useful informationboth on areas where it lags behind and on areas where it is doing well. How well does Bangladesh fare in this comparison with other Asian countries? On some measures, quite well, especially given its lower per capita income. Bangladesh has recorded a relatively strong performance in economic growth and inflation. It has greatly increased school enrollment, and in time the improvements in enrollment should boost other measures of human resources (such as literacy) that remain low. Bangladesh also appears to perform better than other low-income countries in some dimensions of governance, that is, regulatory quality and government efficiency. But Bangladesh performs less well in other areas. It is less integrated with the global econ-
A Strong Macroeconomic Performance

Bangladesh has turned in a strong macroeconomic performance in recent years. The countrys per capita GDP growth, negative in the 1970s, rose to 1.7 percent in the 1980s and to 3.1 percent in 1990-2001 (figure 2.1). Its per capita growth in the 1990s compared favorably with that in other low-income countries, where growth averaged 1.2 percent over the decade. But Bangladesh lagged behind many other countries in East and South Asia, where per capita growth in the 1990s averaged 3.5 percent in India, 3.7 percent in Sri Lanka, and 8.2 percent in China. Nonetheless, Bangladesh made strong gains in per capita income. Moreover, the growth was accompanied byand contributed toa host of
11
|
Percent 9 8 7 6 5 4 3 2 1 0 1
Figure 2.1. Average Annual Per Capita GDP Growth in Bangladesh and Comparator Countries, 19902001
and are affected bymacroeconomic performance.
Poor Integration with the Global Economy

Evidence suggests that Bangladesh is not well integrated with the global economy, despite significant growth in trade in recent years. The countrys exports rose from only 6 percent of GDP in 1980 to 15 percent in 2001, while its imports increased from 18 percent of GDP to 23 percent. These shares compare favorably with those of India and Pakistan but less so with those of other low- and middle-income countries, especially in East Asia (figure 2.3). Low-income countries as a group also outperform Bangladesh, with exports accounting for 28 percent of GDP on average, and imports for 29 percent. What accounts for the trends in trade for Bangladesh? One likely contributor to the large growth in trade over the past decade is the significant liberalization in tariffs, which fell from more than 100 percent in 1990 to only about 20
Malaysia
Bangladesh - 1990-2001
Bangladesh -1980s
Philippines
Bangladesh -1970s
Low income
Pakistan
Low & middle income
Sri Lanka
Indonesia
Source: World Bank 2002c.
other achievements: a decline in the poverty rate (from 59 percent in 1990-91 to 50 percent in 2000; Stern 2002a), a significant drop in fertility (from 6.3 births per woman in 1975 to 3.3 in 1997-99), a reduction in infant mortality (from 153 deaths per 1,000 live births in 1975 to 66 in 2000), and impressive gains in combating child malnutrition and starvation. All these gains are consistent with recent evidence showing that while GDP growth alone is not sufficient for reducing poverty, it does benefit the poor (Dollar and Kraay 2002), making it significantly easier for countries to achieve their poverty reduction goals. In another positive trend, Bangladesh has kept inflation lower than most other countries in East and South Asia. Its consumer price inflation averaged 5.1 percent in 1990-2001, compared with 7.1 percent in China, 8.6 percent in India, and 9.2 percent in Pakistan (figure 2.2). Moreover, although inflation in Bangladesh remains higher than that in many industrial countries, it appears to be significantly below the level where it has a strong adverse impact on economic growth.1 The reasonably strong macroeconomic record in Bangladesh, however, masks the underlying features of the investment climate that affect
Thailand
Figure 2.2. Average Annual Inflation in Bangladesh and Comparator Countries, 19902001
Percent 16 14 12 10 8 6 4 2 0
ad es Ma h la ys ia Th ai la nd Ch in a Ba ng l
China
India
Source: World Bank 2002c.
12
Ph
ist an Sr iL an ka In do ne sia
In di a
pp i
ili
Pa k
ne s
Figure 2.3. Exports and Imports as a Share of GDP in Bangladesh and Comparator Countries, 2001
Percent 140 120 100 80 60 40 20 0
an ad es h In di a ist ng l Pa k Ch in a
Exports Source: World Bank estimates.
Imports
percent in 2001. This liberalization, primarily in the early 1990s, left average tariffs in Bangladesh in 2001 lower than those in India (29 percent), for example (figure 2.4). Even so, Bangladeshs average tariffs remained higher than those in many other developing countries in Asia, including Pakistan (17 percent), China (14 percent), and Indonesia (7 percent). So formal barriers to trade remain. And informal barriers are also important. One such barrier
Figure 2.4. Average Tariffs in Bangladesh and Comparator Countries, 2001
Percent 35 30 25 20 15 10 5 0
is the relative poor performance of ports and customs in Bangladesh (see the section on infrastructure). Another might be corruption, which imposes indirect costs that might discourage trade. Assessing the importance of corruption relating to imports and exports is difficult. But a survey of business executives carried out in 75 industrial and developing countries for Global Competitiveness Report 2001/02 generated relevant data (World Economic Forum 2002). The survey asked business executives to rate on a seven-point scale how common irregular payments or bribes were for import and export permits in their country (with 1 meaning common and 7 never). Based on the average scores, the 75 countries were then ranked, with the countries with the lowest average scoresthat is, those where bribes were most commonreceiving the lowest rankings.2 Bangladesh ranked lowest75th out of the 75 countries (figure 2.5). By contrast, China ranked 38th, and India 58th. Although these qualitative
Figure 2.5. Rankings of Bangladesh and Comparator Countries by the Extent of Irregular Payments for Import and Export Permits
China Malaysia India Thailand Sri Lanka Philippines Indonesia Bangladesh
Ba
Lo
Lo
in co me an d m in idd co le m Sr e iL an ka In do ne sia Ph ili pp in es Th ai la nd Ma la ys ia
In do ne sia Ph ili pp in e Ma s la ys ia Sr iL an ka Ch in a Th ai la nd Pa ki st an
a gl an
s de
In di a
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75
Strongest Source: World Economic Forum 2002.
Weakest
Note: Figure shows simple averages of tariff rates. Source: International Monetary Fund staff estimates.
13
rankings should be treated with Figure 2.7. Rankings of Bangladesh and Comparator Countries by Overall caution, they do suggest large Quality of Infrastructure informal barriers to trade in Malaysia Bangladesh. Thailand Other evidence of poor integraIndonesia tion with the global economy is the China low level of incoming foreign direct investment in Bangladesh. Sri Lanka India As a share of GDP, foreign direct investment in Bangladesh (0.59 Philippines Vietnam percent) is only slightly lower than the average for low-income coun- Bangladesh tries (0.63 percent), and it is 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 slightly higher than that in India (0.50 percent) and Pakistan (0.51 Strongest Weakest percent). But it is considerably lower than foreign direct invest- Source: World Economic Forum 2002. ment in most East Asian countries (figure 2.6). ness executives surveyed for Global Competitiveness Report 2001/02 Figure 2.6. Net Incoming Foreign Direct Investment as a Share of GDP in Bangladesh and Comparator Countries, 2001 ranked Bangladesh lower on this trait than all other developing Percent Low & middle 4 countries in East and South Asia China income Thailand (World Economic Forum 2002). Philippines 3 The executives were asked to rate Malaysia the infrastructure quality in their 2 Sri Lanka country on a scale of 1 (poorly Low 1 Bangladesh Pakistan India income developed and inefficient) to 7 (among the best in the world). 0 Of the 75 developing and indus1 trial countries in the sample, Bangladesh ranked 74th, higher 2 only than Bolivia (figure 2.7). By 3 contrast, Malaysia ranked 20th, Indonesia Thailand 30th, China 61st, and 4 India 66th. Source: World Bank estimates. Evidence from the firm-level investment climate surveys confirms that the quality of infrastructure services is Serious Deficiencies in a significant problem in Bangladesh, with electricity the biggest concern. Asked to rate the Infrastructure In infrastructure, a critical feature of a countrys extent to which tele-communications, electricity, investment climate, the quality of services and transport hampered enterprise op-erations appears to be relatively poor in Bangladesh. Busiand growth in their country, only 4 percent of
14
Figure 2.8. Share of Firms in Bangladesh and Comparator Countries Reporting That Infrastructure Is No Obstacle to Business Operations
Percent 60 50 40 30 20 10 0 Bangladesh Telecommunications Source: Investment climate surveys. China Transport 19 4 30 47 44 37 21 52 47
several quantitative measures of infrastructure development in addition to the qualitative measures.
Power
enterprises in Bangladesh reported that electricity posed no obstacle (figure 2.8). Electricity was a smaller concern in China, where 37 percent of enterprises reported that it was no obstacle, and in Pakistan, where 21 percent considered it no obstacle. Enterprises in Bangladesh rated services in other infrastructure sectors higher, with transport posing no obstacle for 19 percent and telecommunications no obstacle for 30 percent. Still, these shares were considerably smaller than those in China and Pakistan. Although these responses sug- Figure 2.9. Electricity Generating Capacity in Bangladesh and Comparator gest that the poor quality of infra- Countries structure is a serious problem for Kilowatts per capita enterprises in Bangladesh, the data 0.7 are qualitative, and methodologi0.58 cal issues make it difficult to draw 0.6 strong conclusions. For example, 0.5 technologically advanced enterprises might be more vulnerable to 0.4 infrastructure problems than less 0.29 0.3 advanced ones, making them more 0.21 likely to rate infrastructure as a sig- 0.2 0.16 0.12 0.1 0.1 nificant problem. Thus the average 0.08 0.1 score in a country depends on both 0.03 the quality of infrastructure and 0 the average level of technological advancement, making cross-country comparisons difficult. The following sections therefore explore Source: U.S. Energy Information Agency.
ist an h ka la nd In di a ne s ad es In do ne s Ch in a an pp i Th ai iL Pa k ng l Ba Ph ili Sr Ma l ay sia ia
With generating capacity short of needs, supply notoriously unreliable, and power outages common, access to reliable power is a prime concern for most manufacturing Pakistan firms in Bangladesh. Over the past Electricity two decades the countrys generating capacity increased almost threefold, from 1.0 million kilowatts in 1980 to 3.3 million. Meanwhile, the population grew only from about 85 million to 129 million, resulting in a modest increase in per capita generating capacity. Even so, generating capacity remains low relative to that in other developing countries in East and South Asia (figure 2.9). While Bangladesh had about 0.03 kilowatts of capacity per capita, India had 0.1, Pakistan 0.12, and China 0.21.
15
As noted, results from the firm-level surveys suggest that transport is a bigger problem in Bangladesh than in some comparator countries, with enterprise managers in Bangladesh less likely than those in China and PakFigure 2.10. Performance Measures for the Electricity Sector in Bangladesh istan to say that transport posed no and Comparator Countries obstacle to enterprise operations Percent Percent and growth (see figure 2.8). This is 2.5 80 consistent with evidence from 72 71 70 Global Competitiveness Report 2 2.0 2001/02 (World Economic Forum 60 2002). Based on executives ratings 50 1.5 42 of the quality of infrastructure sec40 tors in their country, Bangladesh 1 1.0 27 30 ranked 70th among the 75 countries for roads and 72nd for ports 20 0.5 (figure 2.11). Although Bangla10 0 desh outperformed Sri Lanka, 0.0 0 India, and the Philippines in the Bangladesh Indiaa Pakistan China rankings for roads, it ranked lowNote: a. No data available for India on lost sales due to power outages. er than any of the comparator Source: Investment climate surveys.
Share of firms with generators Median losses in sales due to power outages
The investment climate survey in Bangladesh confirms the conventional wisdom that electricity supply, transmission, and distribution are serious problems. Firms reported experiencing power outages and surges about 250 days a year on averageand many reported outages and surges every day they operate. These power problems impose real costs on firms, seriously constraining business operations and growth. Regression results show that even when industry fixed effects and firm characteristics are controlled for, sales and investment both suffer as the number of power disruptions increases. (See appendix 2 for the regression results and a discussion of the methodology used). Indeed, firms reported losing more than 3 percent of production on average as a result of problems in the electricity grid. How do other Asian countries compare? While the median estimate of lost sales due to power outages was 1 percent in Bangladesh, it was 0 percent in China (figure 2.10). Although the estimate was higher for Pakistan, at 2 percent of sales, this difference might be explained by the fact that generators are more common in Bangladesh than in Pakistan. While 72 percent of enterprises in Bangladesh reported having a gen-
erator, only 71 percent of firms did in India, 42 percent in Pakistan, and 27 percent in China. The heavy reliance on generators in Bangladesh means that the reported losses seriously understate the true costs of the poorly performing electricity grid. Relying on generators to maintain production is costly. While firms reported paying about 4 taka per kilowatt-hour from the electricity grid, they pay more than 6 taka per kilowatt-hour to use their own generatorsnearly 50 percent more. Moreover, generators are not cheap. Firms tend to pay more than $20,000 for their generators, though some buy very small ones for less than $1,000 and a few reported purchasing extremely powerful generators for more than $500,000. These backup systems impose costs on firms in Bangladesh that those in few other countries must bear, quickly undermining cost advantages that Bangladesh firms might otherwise enjoy.
Transport, Ports, and Customs
16
Figure 2.11. Rankings of Bangladesh and Comparator Countries by Quality of Ports and Roads
Thailand Malaysia China Indonesia Sri Lanka India Philippines Bangladesh 0 Strongest Source: World Economic Forum 2002. 20 40
countries for ports. India ranked 57th on ports, and China 51st. Much of the inefficiency in Bangladesh ports is centered in Chittagong port, which handles nearly 85 percent of the countrys imports and exports. One of the most inefficient and costly ports in Asia, Chittagong is plagued by labor problems, poor management, and lack of equipment. The container terminal in Chittagong hanFigure 2.12. Median Number of Days for Imports and Exports to Clear Ports and Customs in Bangladesh and Comparator Countries
12 10 8
7 5 5
7 5 3 3
Bangladesh
Pakistan Imports
India Exports
China
Source: Investment climate surveys.
dles about 100-05 lifts per berth a day, well below the productivity standard of 230 lifts a day sugRoads gested by the United Nations ConPorts ference on Trade and Development (UNCTAD). Ship turnaround time is five to six days, compared with about one day in more efficient ports, and the port faces serious congestion. These problems hamper export growth and investment. How ports and customs work 60 75 together is critical: firms that import or export rely on wellWeakest functioning ports and efficient customs procedures to bring in needed inputs and send out finished products. Here, Bangladesh again performs relatively poorly compared with other Asian countries. Responses to the investment climate surveys show that the median time required for imports to clear ports and customs in Bangladesh is seven days and for exports, five days (figure 2.12). Although this performance compares well with Pakistans, it falls short of that in India and China. Average waits are longer, of course, because of the small number of firms reporting especially onerous waits. The average wait for imports to clear customs in Bangladesh was nearly 12 days, while the average longest wait was 23 days (figure 2.13). For exports the average wait was nearly 9 days, and the average longest wait 14 days.3 These waits can be costly to firms. Regression analysis controlling for industry and firm characteristics suggests that import delays are associated with lower profits, while customs delays for exports are correlated with slower growth in sales and employment and lower investment (Appendix 2). While imports are typically delayed longer than exports, firms tend to be hurt more by export delays. Indeed, each day that exports are delayed in customs is associated with a 0.3
17
Figure 2.13. Delays in Ports and Customs Reported by Firms in Bangladesh in Previous Year
ple in Bangladesh rose significantly in the past two decades despite relDays atively rapid population growth from 0.11 in 1980 to 0.39 in 2001. 25 Export delays Import delays Meanwhile, driven by private investment, growth in the mobile 20 phone market took off dramatically. Introduced only in the 1990s, 15 mean mobile phones had surpassed fixed line phones by 2001 (figure 2.14). median 10 In that year there were 0.4 mobile phones per 100 people, compared 5 with 0.39 fixed line phones. 0 Even so, Bangladesh still lags Typical Longest Typical Longest behind other countries in both wait wait wait wait fixed line and cellular telephony. Source: Investment climate survey. In 2001 it had fewer fixed line and mobile phones than the average percentage point reduction in investment and a for low-income countriesand fewer than any 0.2 percentage point reduction in sales and of the comparator countries in East and South employment growth. Interpreted causally, these Asia (figure 2.15). Pakistan, with the next lowest figures suggest that the average wait of nine days phone penetration, had 2.4 fixed lines and 0.6 for exports reduced the three-year average for mobile phones per 100 people. India had 3.4 sales and employment growth by nearly 2 perfixed lines and 0.6 mobile phones per 100 inhabcentage points and investment by 2.7 percentage itants, while China had 13.8 fixed lines and 11.2 points. Among the firms for which all the relemobile phones. vant data are available, sales growth averaged Although difficult to assess accurately, the around 11 percent, employment growth 9 perquality of service also appears to be a problem in cent, and the investment rate 9 perFigure 2.14. Mobile and Fixed Line Telephones Per 100 People in Bangladesh, cent. Thus the delays for exports 19802001 reduced the sales and employment growth rates and the investment 1.0 rate by nearly a quarter.
0.8
Telecommunications
Enterprises in Bangladesh rated telecommunications a smaller constraint on enterprise operations and growth than other infrastructure sectors. But having a well-developed telecommunications sector is becoming increasingly important. The number of fixed line telephones per 100 peo-
0.6 0.4 0.2 0.0 1980
1982
1984
1986
1988 Fixed lines
1990
1992
1994
1996
1998
2000
Mobile phones
Source: International Telecommunication Union 2002.
18
|
60 50 40 30 20 10 0
Figure 2.15. Mobile and Fixed Line Telephones Per 100 People in Bangladesh and Comparator Countries, 2001
government regulation and the cost imposed by corruption. But analyses based on aggregate statistics suggest a mixed performance in Bangladesh.
Governance Quality
To assess governance in Bangladesh relative to that in comparator countries, six aggregate measures were used that capture different aspects of governance, including regulation and corruption. Developed by Kaufmann, Kraay, and Zoido-Lobatn (1999, 2002), these measures combine information on up to 60 (mostly subjective) indicators from other sources.4 The six indexes measure perceptions about:
Ma la y sia
In di a
an ka
an
ia
in es
la nd Th ai
ng la de s
In do ne s
Pa k
iL
Ba
Fixed lines Source: International Telecommunication Union 2002.
Ph ili
Sr
pp
Mobile phones
Bangladesh. In the most recent year for which data are available, Bangladesh had 208 faults for every 100 mainlines, according to the Interna Voice and accountabilitythe extent to which tional Telecommunication Union. In comparicitizens of the country are able to participate son, there were 203 faults per 100 mainlines in in the selection of government. India, 99 in Pakistan, 38 in Malaysia, 29 in the Philippines, 15 in Sri Lanka, and 13 in Indonesia. Getting a telephone connection also appears to be relatively diffi- Figure 2.16. Median Wait for Fixed Line Telephone Connection in Bangladesh cult in Bangla-desh. In the invest- and Comparator Countries ment climate surveys, enterprises Days obtaining a telephone connection 100 90 within the previous two years 90 reported a median wait of 90 days 80 in Bangladesh, far longer than the 70 18 days in Pakistan and 7 days in 60 China (figure 2.16). 50
40
Governance Problems
How does Bangladesh fare in comparisons of governance across countries? Making such comparisons is not easybecause it is difficult to find quantitative measures of such aspects as the quality of
30 20 10 0 Bangladesh Pakistan China 18 7
Note: Data refer only to firms receiving a fixed line connection within the two years before the survey. Source: Investment climate surveys.
19
Ch in a
ist
Political stabilitythe likeli- Figure 2.17. Governance Hexagon for Bangladesh, 200001 hood that the government will Voice and accountability be destabilized or overthrown by possibly unconstitutional or violent means, including terrorism. Control of Political stability corruption Government effectivenessthe quality of public service provision and the government bureaucracy, the competence and independence of the civil service, and the credibility of the governments commitment to adhering to announced poliGovernment Rule of law effectiveness cies. This measure focuses mainly on inputs that governments need to implement good policies and deliver public Regulatory quality goods. Note: The misshapen thick line in the middle of the outer hexagon is the hexagon Regulatory qualitythe quality for Bangladesh. The outer line represents the best performance possible. of government policies. This The thick line in the middle, which forms an even hexagon, is the median for measure, based on outputs low-income countries. The dotted lines represent the 90 percent confidence intervals for Bangladesh. rather than inputs, focuses on Source: D. Kaufmann and A. Kraay, 2002. the prevalence of marketunfriendly policies (such as price controls or regulatory quality, and government effectiveness, inadequate bank supervision) as well as perexceeding the average for low-income countries ceptions about the burden imposed on busion all three measures. In addition, it performs nesses by regulation. better than China, India, and Pakistan on regula Rule of lawthe extent to which individuals tory qualitybut worse than all three on governhave confidence in and abide by the rules of ment effectiveness. On control of corruption, it society. This includes perceptions about the performs fractionally better than the average for incidence of crime (violent and nonviolent), low-income countries but worse than either the effectiveness and predictability of the judiChina or India. And on both political stability ciary, and the enforceability of contracts. and rule of law, Bangladesh performs worse than Control of corruptionthe extent of corrupthe average for low-income countries and worse tion (that is, the illegal use of public power for than China, India, and Pakistan. private gain). Plotted on a governance hexagon, these measures of governance show a mixed performance for Bangladesh compared with the 175 developing and industrial countries in the sample (figure 2.17). Bangladesh scores relatively well on the indexes for voice and accountability,
Entry
How costlyand how difficultis it for an entrepreneur to start a new firm in Bangladesh? Data from the World Banks Doing Business project suggest that startup is relatively costly. An entrepreneur in Bangladesh must complete seven
20
Figure 2.18. Number of Procedures and Cost to Start a Firm in Bangladesh and Comparator Countries, 2002
firms must wait for utilities and other services needed to run a business. In Bangladesh firms 14 90 77.6 reported waiting nearly 70 days on 12 80 12 average for an electricity connec70 10 10 tion, more than 90 days for a gas 10 60 8 8 connection, and nearly 170 days 51.1 8 7 50 7 for a mainline telephone connec40 6 tion (figure 2.20). Mobile teleph26.6 30 ony has shortened the wait for 4 communications services, with 15.7 20 14.5 13.2 2 firms reporting typical waits of less 6.7 10 than a weekand often no time at 0 0 allfor mobile service. But firms h s de la reported waiting more than 260 ng Ba days on average for construction permits. Combining these waiting Source: World Bank, Doing Business database. times with unofficial payments, as procedures to start a firmthe smallest number well as legitimate connection fees, gives a sense of among a group of comparator countries in Asia the difficulties entrepreneurs face in starting (the number for Malaysia is also seven). But the viable businesses in Bangladesh. cost of these procedures amounts to 77.6 percent Another way to measure the ease of entry is to of per capita incomeby far the highest among assess the availability of subcontractors. Where these countries (figure 2.18). subcontractors are available, entrepreneurs can Another measure suggests that starting a business is relatively dif- Figure 2.19. Rankings of Bangladesh and Comparator Countries by ficult in Bangladesh compared Difficulty of Starting Firms and Hiring and Firing Workers with other Asian countries. ExecuThailand tives surveyed for Global CompetiChina tiveness Report 2001/02, asked to rate the difficulty of starting a new Sri Lanka business in their country, ranked Malaysia Bangladesh 60th out of the 75 India countries, worse than the rankings for all the comparator countries in Indonesia East and South Asia (figure 2.19). Hiring and firing workers in Philippines Bangladesh is generally perceived Bangladesh as easier, however. On this meas0 10 20 30 40 50 60 70 ure executives ranked Bangladesh higher than most other developing Easiest Hardest countries in East and South Asia. Hiring and Firing of workers Administrative burden for startups Not all constraints to entry are regulatory. Consider how long Source: World Economic Forum 2002.
la nd in es ka in a sia Ch iL pp ai Th Sr Ph ili Ma l In di a an ay
Cost as a percentage of gross national income per capita Number of procedures
21
|
Days 180 160 140 120 100 80 60 40 20 0
Figure 2.20. Average Wait for Utility Connections for Firms in Bangladesh
Access to Finance
Bangladesh firms tend to have reasonable access to formal finance compared to other low-income countries. In 2001 credit to the private sector amounted to about 27 percent of GDP in Bangladesh (figure 2.21). Although this ratio was lower than those in some countries in the region, it compares favorably with the average for lowincome countries (24 percent of GDP). And it was only fractionally lower than the ratios in India (29 percent) and Pakistan (28 percent), despite their higher per capita incomes. Other measures confirm this assessment of finance in Bangladesh. For example, nearly 66 percent of enterprises in the investment climate survey reported having an overdraft facility, compared with only 18 percent of enterprises in China and 23 percent in Pakistan (figure 2.22). As discussed in chapter 3, however, this figure obscures serious weaknesses and looming problems in the financial sector that could hurt longterm growth.
Mainline Gas telephone Source: Investment climate survey.
Electricity
Mobile phone
more easily start a business because they can quickly have a variety of services available to them without needing to house them all within their new, very small business. And in some cases it may be easier to start firms as subcontractors, since these are often highly specialized operations. In Bangladesh, however, subcontracting is almost unknown. In the investment climate survey nearly 75 percent of firms reported never using contractors, and another 10 percent only seldom using them.
Figure 2.21. Credit to the Private Sector as a Share of GDP in Bangladesh and Comparator Countries, 2001
Percent 160 140 120 100 80 60 40 20 0
a e n es sh esia me nd sia dl nk sta o de id ome ppin aila lay la don inc ri La aki m P Ma Th ng In & nc ili S w w i Ph Ba Lo Lo
In di a
Lagging in Human Resources

Bangladesh has improved access to education, essential in creating a workforce with the skills
Figure 2.22. Share of Enterprises with an Overdraft Facility in Bangladesh and Comparator Countries
Percent 70 60 50 40 30 20 10 0 Bangladesh China Pakistan Source: Investment climate surveys.
Note: Data are for 2000. Source: World Bank.
22
Figure 2.23. Illiteracy Rate and Gross Secondary and Tertiary Enrollment Ratios in Bangladesh and Comparator Countries
the average in low-income countries. Tertiary enrollment Percent remained low, however, rising to 100 about 5 percent by the end of the decade. 80 Despite these improvements, 60 illiteracy remains relatively high in Bangladesh. At 58 percent, the rate 40 is higher than that in any of the 20 comparator countries in East and South Asia and slightly higher than 0 the average for low-income countries (46 percent). The slower progress in this indicator reflects Secondary Enrollment Tertiary Enrollment Illiteracy the fact that it is easier to raise enrollment than to quickly reduce a. No data available on tertiary enrollment. b. Enrollment data are for 1998/99. illiteracy among adults. Source: World Bank and United Nations Educational, Scientific, and Cultural Moreover, the quality of educaOrganization (UNESCO). tion has not kept pace with enrollment. During grassroots and knowledge needed for a healthy investment consultations for the 2003 Interim Poverty climate. But other elements for a strong human Reduction Strategy Paper, rural participants capital base are missing. Fewer scientists and expressed concerns about teacher absenteeism, engineers are available than in many other develthe poor quality of teachers, and inadequate learnoping countries, including many of the comparaing materials (Bangladesh 2003). tor countries in East and South Asia. Illiteracy Still another concern is the shortage of skilled remains high, possibly reflecting poor education workers. Business executives, asked to rate the results in the 1970s and 1980s. And concerns availability of scientists and engineers in their about the quality of education remain. country in the survey for Global Competitiveness Bangladesh has made much progress in Report 2001/02, ranked Bangladesh 58th among improving enrollment over the past decade. In the 75 countries in the survey, ahead of China 1990 its gross enrollment ratiosonly 72 percent (59th) and Malaysia (60th) but below the other for primary, 19 percent for secondary, and 4 percomparator countries (figure 2.24). The relacent for tertiary educationwere similar to their tively low ranking might reflect in part the relalevels in 1975 and lower than the average ratios in tively low tertiary enrollment ratio in low-income countries (89 percent, 37 percent, Bangladesh. But it might also reflect a brain and 6 percent). Moreover, its ratios were lower drain of skilled workers. When asked whether than those in any of the comparator countries in scientists and engineers normally wished to leave East and South Asia except Pakistan, which had the country to pursue opportunities elsewhere or lower primary and tertiary ratios. would almost always remain in the country, By the late 1990s Bangladesh had increased its executives in Bangladesh were more likely than gross primary enrollment ratio to more than 97 those in all other countries in the survey except percent and its gross secondary enrollment ratio Zimbabwe to report that scientists and engineers to 42 percent (figure 2.23). These ratios exceeded would normally leave the country.
ng la de sh Pa ki st an a Lo w in co me a Lo w In do ne sia a & m in id co dl me e a Ch in a Sr iL an ka a ,b Ph ili pp in es b Th ai la nd Ma la ys ia In di aa
Ba
23
Figure 2.24. Rankings of Bangladesh and Comparator Countries by Availability of Scientists and Engineers
India Sri Lanka Indonesia Philippines Thailand China Malaysia Bangladesh 0 Strongest 10 20 30 40 50 60 70 Weakest Availability of scientists and engineers Likelihood scientists and engineers will leave country
Source: World Economic Forum 2002.
A Weak Record in Technological Innovation

Bangladesh spends less on research and development (R&D) as a share of GDP than do most other developing countries in East and South Asia for which data are available (figure 2.25). While R&D spending totaled about 0.03 percent of GDP in Bangladesh, it amounted to about 0.2
Figure 2.25. Research and Development Spending as a Share of GDP in Bangladesh and Comparator Countries, Latest Year Available
Percent 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00
nd h in es Ma la ys ia na ad es In do ne s Ba ng l ili pp Th ai Ch i In di a ia la
percent of GDP in the Philippines and Malaysia and about 0.7 percent in China and India. Since R&D spending as a share of GDP is highly correlated with income, the low spending in Bangladesh might reflect its low per capita income relative to that in most comparator countries. But it might also reflect problems in the institutional environment: recent work has shown that R&D spending tends to be lower in countries where intellectual property rights are less well protected and the rule of law is weak (Clarke 2001). The low level of R&D spending in Bangladesh is reflected in relatively low levels for other measures of innovation. For example, companies and individuals in Bangladesh were granted fewer U.S. patents per capita than were those in other developing countries in East and South Asia. Similarly, basic research appears to be weaker in Bangladesh than in other countries in the region: authors from Bangladesh published fewer scientific articles per capita than did those from any of the comparator countries in East and South Asia except Indonesia (figure 2.26).
Figure 2.26. Scientific Articles Published and U.S. Patents Received Per Million People in Bangladesh and Comparator Countries
20
16.7
16 12 8 4
1.0 3.5 0.0 0.6 0.2 1.9 0.1 1.9 1.6 0.5 7.2 4.0 1.5 8.2 9.0
15.2
1.8
Bangladesh
Pakistan
Philippines
Sri Lanka
Thailand
China
Indonesia
Scientific articles
Utility patents (X 10)
Source: United Nations Educational, Scientific, and Cultural Organization (UNESCO).
Note: Patent data refer to patents for inventions filed with the U.S. Patent and Trademark Office. Source: National Science Foundation and U.S. Patent and Trademark Office.
Ph
24
Malaysia
India
|
Notes
1. Bruno and Easterly (1998) find little evidence to support the assertion that inflation affects growth, however, even when it reaches levels between 20 and 40 percent. 2. As discussed in detail in Recanatini, Wallsten, and Xu (2000), averaging responses on qualitative surveys can be problematic for several reasons. Lall (2001) discusses other problems with the Global Competitiveness Report. 3. The ranking was on a five-point scale, with 0 implying that infrastructure services posed no obstacle and 5 implying that they posed a very severe obstacle. To avoid problems associated with averaging subjective answers, the number of enterprises reporting that infrastructure was no obstacle is presented. 4. The survey asked firms about ports and customs simultaneously, so it is impossible to determine whether the delays are caused primarily by the port or by customs. But this approach is necessary because entrepreneurs typically know only the total delay, not who is responsible for the delay. Future surveys should experiment with ways of eliciting information on ports and customs separately.
5. Some qualifications should be noted when using subjective indicators to compare competitive environments. One issue is the yardstick that respondents (usually enterprise managers or outside experts) use when assessing the quality of the business environment. One problem is the point of reference: if respondents use different yardsticks across countries, their answers may not be comparable. In one study , for example, entrepreneurs in the Republic of Korea rated problems consistently worse than entrepreneurs in Indonesia. Few would believe the business environment in Indonesia to be superior to that in Korea. A more plausible explanation is that Korean entrepreneurs had higher expectations about service delivery. Another problem is that these measures generally change only very slowly over time and therefore might not fully reflect recent improvements. Finally, respondents might lack in-depth knowledge of the business environment in other countries, making it difficult to assess the relative quality of the business environment in their own country, even using a specific benchmark. Because of these concerns, these indicators are often thought to be more useful for comparing problems within a country than between countries.
25
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The Effects of Bangladeshs Investment Climate on Firms

Figure 3.1. Three-Year Average Performance Measures for Firms in Bangladesh by Export Status
Percent 14 12 10 8 6 4 2 0 Sales growth Employment growth Investment rate Exporters Nonexporters
COMPARING BANGLADESH with other countries provides important insights, pointing to areas where Bangladesh has made greater strides than its neighbors as well as to areas where it has lagged behind. But understanding why these differences have emerged requires more detailed information. Using the survey of firms in Bangladesh, this chapter explores the investment climate at the firm level, looking for the biggest problems in the investment climate and quantifying their effects on firm growth. Along with deficiencies in infrastructure, corruption appears to be the dominant problem facing firms, occurring at nearly every point of contact between firms and the government (customs, inspectors, state-owned utilities). These issues pose special challenges to small and medium-size firms, which devote more of their resources to informal payments and dealing with government inspections than do large firms.
Source: Investment climate survey.
International IntegrationThe Potential of Exports and the Rise of a New Industry

The potential benefits of international integration can be clearly seen at the firm level in Bangladesh: firms that export tend to enjoy faster sales and employment growth and higher investment than firms that do not (figure 3.1).
Yet this raises an important question about the direction of causality: exporting may help improve firms performance, but it may also be true that better firms choose to export. The Bangladesh data make it possible to begin to address this question. To do so requires first selecting firms in the sample that had never exported five years previously (477 of the 1,001 firms).1 These firms are then divided into two groups: firms that began to export sometime in the previous five years (71 firms) and those that did not (406). The second step allows a compar-
27
ison of the performance of firms that began to export with the performance of nonexporters. The analysis shows that firms that began exporting for the first time within the previous five years had faster sales and employment growthand higher investmentthan the firms that did not begin to export (figure 3.2; see appendix 2 for the regression results and a discussion of the methodology used). But these results still do not answer the question of whether the better firms chose (or were able) to export. While there is little information on the firms in years before the survey, the survey did request data on firms sales in 1996/97the last year in which all the firms in this subsample had not yet exported.2 These early sales figures can thus be compared to get an idea of which firms began to export. The data suggest that bigger firms (in terms of sales) tended to remain nonexporters while the smaller firms turned to exports. Firms that began exporting within the previous five years were smaller in 1996/97 on average than those that remained oriented purely toward the domestic market (figure 3.3). But by the year of the survey
Figure 3.3. Sales by New Exporters and Nonexporters in Bangladesh

Thousands of taka 250 New exporters Nonexporters
200
150
100
50
0 199697 Source: Investment climate survey. 200102
Figure 3.2. Three-Year Average Performance Measures for New Exporters and Nonexporters in Bangladesh
Percent 17.0 New exporters 12.75 Nonexporters
8.50
4.25
the new exporters had overtaken the nonexporters in sales. These results show the potential benefits from exporting. But they also hide an important development in the Bangladesh economy. While the regressions control for industry fixed effects, the analysis also picks up the growth of the readymade garment industrya new success story in Bangladesh (the empirical results are robust even when the garment industry is excluded, however). The firms that never exported are primarily in the textiles, food and food processing, and electronics industries. By contrast, the new exporters are mainly in the ready-made garment industry. Indeed, firms in this industry tend to be the youngest in the sample and by far the most likely to export. Thus the results reflect the development of a new industry that has used an export-led growth strategy to become an important force in the Bangladesh economy (box 3.1).
0 Sales growth Employment growth Investment
Governance a Big Burden on Firms

Governance has direct effects on firms through the regulatory and administrative procedures
28
Box 3.1 The Bangladesh Ready-Made Garment IndustryGreat Success and Great Challenges The ready-made garment industry accounts for the largest number of firms in the Bangladesh investment climate survey. This sector has achieved much success in the past decade, with especially rapid export growth in the first half of the 1990s. Both the sectors success and the challenges ahead make it an interesting and important case for Bangladesh. The sectors success in the 1990s can be traced in part to the Multifibre Arrangement, which has regulated international trade in garments with a system of quotas for several decades. In the early 1990s successful garment manufacturers from such countries as the RepubAverage Productivity, Capital Intensity, and Wages in Garment Factories in Bangladesh and China
Thousands of US$ China 6
4 Bangladesh 2
0 Annual value added per worker Capital per worker Annual wages
Source: Investment climate surveys
lic of Korea were looking for countries with unused quotas that could be used for exports to the United States and Europe. Bangladesh was one such country. It has other advantages as well. It has a high-quality, low-cost labor force. And it has shown itself willing to make changes to meet compliance norms and standards set by buyers in the United States and Europe Bangladesh was the first developing country to sign an agreement to eliminate child labor from its garment factories. Despite these advantages, the Bangladesh garment sector has been losing out in competition with China in recent years. And the end of the Multifibre Arrangement by December 2004 will bring even greater competition in the global garment market. Data from the investment climate surveys help explain why Chinas share of this market is growing. The typical Chinese garment factory uses much more capital per worker and pays higher wages than its Bangladesh counterpart (see figure). It also has far higher labor productivity. So even after the higher wages and greater capital use are taken into account, the typical Chinese factory is much more profitable. Some of these differences between Bangladesh and Chinese garment factories relate to differences in the investment climate: Chinese factories can count on more reliable power, easier access to phone lines and other infrastructure, and more efficient ports and customs. So the looming end of the Multifibre Arrangement makes it even more imperative for Bangladesh to address deficiencies in its investment climate.
affecting day-to-day operationsand, often, through the corruption that can accompany these procedures. The survey made several attempts to uncover information about administrative hassles and corruption in Bangladesh. As might be expected, questions on these topics are the ones that firms are least likely to answer and least likely to respond to truthfully when they do answer (see Recanatini, Wallsten, and Xu 2000 for a survey of the survey literature). Nonetheless, the survey collected information on
several issues relating to firms interactions with the government. The data provide a sense of the burden that governance problems impose on firms.
Regulation
How large is the regulatory burden faced by Bangladesh firms? One way to find out is to ask firms how many visits they receive from inspectors from government agencies. The answer:
29
about 17 visits a year from all government agencies (figure 3.4). The most frequent visits came from the customs agency (7.5 a year) and the tax agency (2.7).3 Dealing with these visits can be costlynot only in fees and payments but also in the resources firms must expend to satisfy inspections. Managers reported spending nearly 5 percent of their time on average dealing with regulatory matters. With a reported average compensation for managers of around 1 million taka, that means that the management cost alone amounts to close to 50,000 taka annually. And more than a third of firms reported using facilitators to help with regulatory issues, at an average annual cost of more than 600,000 taka. The excessive bureaucracy dampens firms performance. To explore the effect of government visits, the number of inspections were estimated per firm employee to normalize inspections by firm size, since more inspections are both to be expected and easier to handle for larger firms. Regression analysis was then carried out, controlling for industry fixed effects and firm characteristics. The results show that the number of inspections per employee has a signifFigure 3.4. Average Annual Visits by Government Agencies to Firms in Bangladesh
20 18 16 14 12 10 8 6 4 2 0 Customs Tax Inspectorate Labor & Social Security Fire & Building Safety Total, all agencies
icant negative correlation with investment and productivity.4
Corruption
A large regulatory burden often means corruptionwith inspectors and other officials demanding paymentsand indeed, more than half of all firms in the sample reported that corruption was either a major or very severe obstacle to their growth. So while gathering reliable information on corruption is difficultunderstandably, since firms may be reluctant to provide itfirms in Bangladesh clearly view corruption as a significant problem. Firms reported making unofficial payments totaling an average of more than 70,000 taka in the previous year (figure 3.5). But given firms reluctance to answer detailed questions on payments and their qualitative responses about the severity of corruption, this number and others on unofficial payments probably understate the problem. Moreover, the totals disguise much variation among agencies.
Figure 3.5. Average Unofficial Payments in Previous Year by Firms in Bangladesh
Thousands of taka 80 70 60 50 40 30 20 10 0 To government inspectors For utility connections In ports & customs Total, all unofficial payments
Note: Total does not equal sum of the categories because not all firms paid all types of bribes. Source: Investment climate survey.
30
A breakdown by government agency of the average unofficial payments, and the number of firms reporting making payments, gives a sense of how common it is for firms to be required to make unofficial payments to agenciesand how large those payments are (figure 3.6). The customs and tax agencies top the list, both in the frequency with which firms reported making payments to them and in the payments required. Some 424 firms reported making unofficial payments to the customs agency in the previous yearpayments averaging more than 55,000 taka. And 517 firms reported paying the tax authorities close to 20,000 taka on average.5 By contrast, only 154 firms claimed payments to environmental agencies, averaging 4,800 taka, while 331 firms reported payments to the labor and social security agencies, for about 4,500 taka. The average payments for infrastructure connections also disguise variation. While a relatively small number of firms (54) reported
Figure 3.6. Average Unofficial Payments to Government Agencies in Previous Year by Firms in Bangladesh
Thousands of taka 60 50 40 30 20 10 0
ms ro nm r & ent S Fir Sec oci a e & urit l y bl dg sa wo Foo rk d h fety pl y ac gi e en sa e fe & Sa ty ni ta tio Co n ns tru ct io n st o to ra te
making unofficial payments to the gas company for connections, the payments were very large averaging close to 100,000 taka for a connection (figure 3.7). Next largest were unofficial payments for electricity connections, at nearly 30,000 takareported by 103 firms. Some 241 firms reported paying an average of 11,000 taka for a mainline telephone connection. Of course, obtaining a connection to a service is a rare event. Thus the small share of firms reporting payments for connections probably reflects the fact that most firms in the sample already have connections, not that unofficial payments for connections are rare. For new entrepreneurs problems in obtaining new connections may hamper not only their growth but also their entry into the market.
Legal System
Entrepreneurs and other investors want assurances that contracts will be honored, that disputes will be handled fairly and quickly by the legal system, and that its decisions will be
Figure 3.7. Average Unofficial Payments for Utility Connections by Firms in Bangladesh
Thousands of taka 100 (54)
(424)
80 (517) 60 (154) (331) 40 (47) 20 0 Gas Electricity Mainline telephone
(295)
(85)
(116)
(103) (241)
Cu
In sp
ec
En
vi
Ta x
La
bo
Note: Figures in parentheses are the number of firms reporting making payments. Source: Investment climate survey.
Note: Figures in parentheses are the number of firms reporting making payments. Source: Investment climate survey.
31
came from retained earnings, while about 30 percent of working and investment capital came from banks. Just over 65 percent of firms have an overdraft facility or line of credit. A line of credit can be useful, allowing firms to borrow funds relatively quickly and easily, without excessive bureaucracy. Firms that have lines of credit appear to use them extensively: the median share of lines of credit remaining unused was only 10 percent. How does access to formal finance affect firms performance? To investigate the effects, an index was constructed based on the share of a firms working capital that comes from banks (domestic and foreign), the share of a firms new investment capital from banks, and whether the firm has access to an overdraft facility or line of credit. The index thus increases with a firms access to formal finance and decreases with reliance on retained earnings. Regressions show that the index is positively and significantly corAccess to Finance a Growing related with growth in employments, suggesting Concern that firms with better access to credit grow more Firms in Bangladesh reported that around 55 quickly than firms that rely more on retained percent of their working capital and nearly 60 earnings, even controlling for firm and industry percent of their investment capital, on average, characteristics. That firms with better access to finance perform better is perhaps Figure 3.8. Share of Firms in Bangladesh Believing That Court System Never axiomatic. But there is cause for or Seldom... concern in Bangladesh. While 66 Percent percent of firms reported having 60 an overdraft facility or line of 50 credit, a large share of these firmsnearly 60 percenthad 40 exhausted that credit (figure 3.9). 30 Moreover, the survey data focus 20 on short-term lending, and other evidence suggests problems with 10 term lending. 0 Consider national-level data on nonperforming loans. Some estimates put the share of nonperforming industrial loans at around 40 percent (Centre for Policy Source: Investment climate survey.
r Is qu ick le nt isi on s Is fa i Is a Is c En fo rc e sd ec Is ho ne s rd ab on sis ffo te t
enforced. Thus a countrys legal system can support investmentor seriously undermine it. Firms in Bangladesh generally have a poor view of the court system. Asked for their perceptions on whether the court system is fair, honest, quick, affordable, and consistent and whether it enforces its decisions, firms scored it best on fairness and honestythough even here nearly a third reported that it was never or seldom fair or honest (figure 3.8). The worst score goes to efficiency, with more than 60 percent of firms reporting that courts are never or seldom quick. Even worse, nearly 70 percent of firms involved in a court fight in the previous three years reported that the courts were never or seldom quick, suggesting that the efficiency of the court system may be even worse than it is perceived to be.6
32
|
Share of firms 0.60
Figure 3.9. Firms in Bangladesh by Share of Credit Line Used
Share of credit line used
Dialogue 2001).7 Since banks will have to provision for nonperforming loans, the large share of such loans could ultimately increase the cost of capital to entrepreneurs. While the government has taken measures to improve the banking sector, including strengthening debt recovery and enhancing monitoring capacity, dealing with the high level of nonperforming loans remains difficult.
Flexible Rules for Labor

Few firms in Bangladesh believe that labor issues impede their growth. Indeed, asked what ideal staffing levels would be if hiring and firing were costless, the median firm reported that its current staffing level was ideal. Including extreme values makes little difference: on average firms reported that their ideal staffing level was less than 2 percent smaller than its current level. Nonetheless, two issues relating to labor are worth emphasizing. The first has to do with labor flexibility. To operate efficiently, firms need a labor force that can quickly adjust to production needs. Regressions controlling for industry and firm characteristics show that the share of a companys labor
that is temporary (rather than permanent) is positively correlated with sales and employment growth. That is, firms that can adjust their staffing levels more quickly seem to grow more quickly. But assigning causality here is difficult: it may be that firms hire temporary labor because they are growing so quickly, not that firms grow more quickly because they use temporary labor. This discussion leads to the second issue: the benefits of tempo100 rary labor should not be interpreted to mean that investments in workers are not useful. Regressions similar to those for labor flexibility show that firms that ran training programs or sent employees to outside training programs saw higher sales growth, profitability, and investment.8 Together, the two analyses suggest that flexible rules on hiring and firing benefit firms, but so too do investments in workers. Just as firms with a flexible labor force tend to grow faster, so do firms that invest in their labor force through training.
Greater Difficulties for Small- and Medium-Size Enterprises

Small- and medium-size enterprises often face greater difficulties than large firms. If these difficultiesor market failuresprevent them from growing, the consequences can prove damaging to the economy: dynamic new firms will never emerge to challenge less efficient, but perhaps much larger, incumbents. But identifying problems facing small firms is not easy. The difficulty arises because in a healthy economy very few new firms will succeed in the long run. So, on average, small firms often
33
Figure 3.10. Share of New Investments Funded by Bank Loans in Bangladesh, by Firm Size
Percent 35 30.5% 30 25 20 15 10 5 0 < 50 50150 Firms by number of employees Source: Investment climate survey. > 150 18.4% 34.0%
appear to perform worse and to face greater difficulties than large firms, but that does not necessarily mean that small firms face special market failures. Consider access to finance. Small firms across the world often report difficulty obtaining finance. In some cases this difficulty reflects market failures that create credit constraints for small firms even when their future would otherwise be promising. In other cases new firms have trouble obtaining financing because they are not viable. Sorting out which explanation applies is extremely difficult. Nonetheless, looking at differences in investment climate measures between smaller and larger firms provides insight into the difficulties entrepreneurs face, both in building a firm that they have already started and in deciding whether to start a new firm. To investigate these differences, the sample of firms was divided into three groups by size of employment. With nea rly all firms (988) reporting employment for 2002, this division resulted in the following groups: 218 firms with up to 50 employees, 215 with 51-150
employees, and 554 with more than 150. Now lets look at the differences among these groups in their experience with finance, regulation, and corruption. First consider how firms fund new investments. According to the survey data, larger firms are much more likely to use bank loans to finance new investments such as land, buildings, machinery, and equipment (figure 3.10). But formal finance goes beyond bank loans. To capture more broadly the extent to which a firm has access to formal finance, an index was constructed based on the share of a firms working capital and investment that comes from bank loans and whether the firm has an overdraft facility (see appendix 2 for details). The results show that small firms generally have much worse access to formal finance than do larger firms (figure 3.11). As noted, however, it is difficult to determine the extent to which this difference reflects market failures. That larger firms have better access to formal finance could simply mean that better firms have better access to finance and thus become larger. Whichever effect
Figure 3.11. Access to Formal Finance by Firm Size, Bangladesh

Finance index Worse ..........................................Better
50150
> 150
< 50 Firms by number of employees Source: Authors' calculations based on investment climate survey data.
34
dominates, the results provide compelling evidence that smaller firms face more difficulties in gaining access to formal finance. Indicators that are more exogenous to the firm are easier to interpret. Two such indicators relate to regulation and corruption. Comparing government inspections per employee across the three size categories reveals that smaller firms face a larger burden of inspections. Indeed, the smallest firms face nearly 10 times the inspection intensity that large firms do (figure 3.12). Inspections per employee may overstate the problem facing small firms: when a firm is very small, even one inspection can make this measure seem large. Nonetheless, the indicator shows the bureaucratic obstacles entrepreneurs facea very small firm has fewer employees to deal with inspectors and must divert scarce resources to meet bureaucratic requirements. Corruption, though ubiquitous in Bangladesh, can also disproportionately affect small
firms. When bribes are measured as a share of costs by firm size, the results show that the smallest firms tend to make unofficial payments at nearly five times the level of payments by large firms (figure 3.13). Since these younger, smaller firms are also more likely to face financial constraints, these unofficial payments make growth even more difficult. The bottom line: life is more difficult for small firms. Some of these difficulties arise simply because not all firms are viableas noted, in a healthy economy most new, small firms will fail. But a healthy economy should encourage entrepreneurial risk taking and attempt to minimize market failures facing small enterprises. The evidence here suggests instead that small enterprises in Bangladesh face greater obstacles than other firms doobstacles that cannot be explained as markets working efficiently. These obstacles ultimately prevent dynamic new firms from entering the market and putting competitive pressure on existing enterprises.
Figure 3.12. Annual Government Visits per Employee by Firm Size in Bangladesh
Visits 0.25
Figure 3.13. Bribes as a Share of Total Costs by Firm Size in Bangladesh

Percent 2
0.20
0.15
0.10
0.5
0 < 50 50150 Firms by number of employees Source: Investment climate survey. > 150
0 < 50 50150 Firms by number of employees Source: Investment climate survey. > 150
35
Comparing the Investment Climates in Chittagong and Dhaka

Comparing the investment climates in Chittagong and Dhaka produces intriguing results: Dhaka has a better investment climate in some respects, while Chittagong comes out on top in others. And while some investment climate measures differ little between the cities, others differ a great deal. What explains these results? Lets look at the evidence. First consider the differences in firms performance between the cities. Firms in Dhaka appear to be growing more quickly, with faster sales and employment growth and a higher investment rate on average (figure 3.14). But firms in Chittagong are more productive and more profitable (figure 3.15).9
Figure 3.15. Profitability and Productivity in Chittagong and Dhaka

Percent 43
Chittagong Dhaka
14
Pretax profitability
Total factor productivity
Infrastructure
Firms in the two cities have similar opinions of the degree to which the electricity sector poses an obstacle to their growth and development, with the problem in Dhaka appearing to be slightly worse (figure 3.16). But firms in Dhaka were far more likely to report that telecommuniFigure 3.14. Firm Growth in Chittagong and Dhaka
Percent 12 Dhaka Chittagong
cations and transport were a major or very severe problem. Objective measures confirm these results. Firms in the two cities reported nearly identical problems with the quality of electricity, for example, with firms in Chittagong experiencing power interruptions 247 days a year and firms in Dhaka reporting interruptions 250 days a year statistically identical responses. Similarly, firms
Figure 3.16. Share of Firms Rating Infrastructure as a Major or Severe Obstacle in Chittagong and Dhaka
Percent 74
Dhaka Chittagong
0 Sales growth Employment growth Investment rate 0 Electricity Transport Telecommunications Source: Investment climate survey.
36
in Dhaka reported losing 3.3 percent of their output to power problems, while firms in Chittagong reported losing 3.0 percent of their output. But the similarities disappear when it comes to waiting times for connections. Firms in Chittagong reported far shorter median waits for both mainline telephone and electricity connections than did firms in Dhaka (figure 3.17).10
Figure 3.17. Median Waits for Electricity and Mainline Telephone Connections Chittagong and Dhaka
Days 100 90 80 70 60 50 40 30 20 10 0 Electricity Source: Investment climate survey. Mainline telephone Chittagong Dhaka
Thus the data suggest that while the quality of infrastructure may be similar in the two cities, firms in Dhaka see infrastructure as a bigger obstacle. This perception is confirmed by the generally much longer waits that firms in Dhaka must endure to obtain utility connections. But not all infrastructure measures are better in Chittagong. While physical infrastructure is extremely important, so too is soft infrastructuresuch as finance, technology, and labor. Here, Dhaka appears to outperform Chittagong. On average, firms in Dhaka have better access to formal finance, use technology more intensively, and provide more training for their workers than do firms in Chittagong (figure 3.18).
Regulation and Corruption

Regulation and corruption, shown by the firmlevel analyses to be a severe obstacle, affect firms in the two cities quite differently. Firms in Dhaka are more likely than those in Chittagong to view tax administration, customs administration, and corruption as major or very severe obstacles to their growth (figure 3.19). Again, objective measures back up firms perceptions. Top managers of firms in Dhaka spend a greater share of their time
Figure 3.19. Share of Firms Reporting Governance and Corruption as a Major or Very Severe Obstacle in Chittagong and Dhaka
Percent 63
Dhaka Chittagong
Figure 3.18. Finance, Technology, and Worker Training by City in Chittagong and Dhaka
Percent
29
Dhaka
Chittagong
Share of firms with worker training
18 Finance index
Technology index
0 Customs administration Tax administration Corruption
Source: Authors' calculations based on investment climate survey data.
37
dealing with government regulations than do those in Chittagong (figure 3.20). And firms in Dhaka tend to pay more bribes per employee. Thus firms in Chittagong appear to face fewer regulatory hassles and less corruption (though they are still certainly problems) than do firms in Dhaka.
Whats the Bottom Line?

The comparison leads to no clear conclusion that one city has a better investment climate than the other. The survey seems to tell us that regulation, corruption, and some aspects of physical infrastructure pose smaller problems in Chittagong, while access to finance and technology appears to be better in Dhaka. And it shows that firms are growing more quickly in Dhaka, but those in Chittagong are more profitable and productive. At least two hypotheses could explain these results. First, suppose that all the survey data accurately reflect reality. In this case the explanation could be this: The greater access to finance, use of
Figure 3.20. Burden of Regulation and Corruption in Chittagong and Dhaka
Percent 5.0
Share of time spent dealing with regulations
Taka Dhaka 900
technology, and worker training in Dhaka are conducive to growth for firms. But this success attracts greater corruption, cutting into firms profits and productivity. In other words, firms may benefit from being in Dhaka because of proximity to other firms (a cluster effect that in turn attracts more firms) and government agencies. These benefits, though, appear to come with a costgreater corruption, more regulatory hassles, and longer waits for utility connections. Second, suppose that some aspects of the data are suspect. Assume that the corruption measures reflect reality and that firms in Dhaka are subject to higher levels of unofficial payments than are firms in Chittagong. While firms are always (and understandably) reluctant to reveal financial information, firms facing greater corruption may be even more reluctant to do so. That is, the greater the corruption, the greater the incentive for firms to hide profits from bribetakers. So, because corruption is a greater problem in Dhaka, firms in that city have an incentive to report lower profits on average. If this incentive spilled over into tax reporting, corruption would in effect cause a drain on the treasury. This hypothesis is consistent with results in Friedman and others (2000) suggesting that overregulation tends to drive economic activity from the formal to the informal sector.
Chittagong
Simulating the Gains from a Better Investment Climate

What kind of gains might firms expect from significant improvements in the investment climate? To investigate this question, simulations were conducted using the results of the empirical analyses discussed in this chapter. Such simulations should be taken with a grain of salt: they have a large margin of error and, more important, provide no guidance on how to achieve the improvements they require. Nonetheless, the simulations shed light on what firmsand thus
0 Time spent dealing with regulations Source: Investment climate survey. Unofficial payments per employee
38
the countrystand to gain if such improvements could be made. The simulations assumed a 50 percent improvement in the investment climate measures that proved to be significant in a regression that estimates many of these measures together (see appendix 2). In other words, they estimated the impact of reducing by half the number of days with power interruptions, delays in ports and customs, bribes as a share of costs, and the number of inspections per employee, and increasing by half the share of firms that export, access to technology, and access to finance. A 50 percent improvement may sound farfetched. But such a change would still leave firms in Bangladesh with less reliable electricity and longer waits in customs than firms in China endure (see chapter 2). What do the simulation results show? The improvements in the investment climate could boost average sales growth from about 7 percent to more than 10 percent, raise the investment rate from about 9.5 percent to 12 percent, and more than double total factor productivity (figure 3.21).
Figure 3.21. Estimated Gains from Improving Selected Investment Climate Measures in Bangladesh
0.12 0.10 0.08 0.06 0.04 0.02 0 Sales growth Investment rate Total factor productivity (x10) Actual Potential
As noted, these estimates should be interpreted with great caution. The estimated productivity improvements, for example, seem quite high. Nonetheless, they suggest how much weaknesses in the investment climate are holding back economic growth in Bangladesh. And they show that strengthening infrastructure, improving regulation, and reducing corruption could dramatically improve growth.
Notes
1. This selection procedure also removes firms established five or fewer years before the survey. 2. The survey also requested sales data for 1991/92, but many firms in the sample had not yet been founded in that year and others could not recall data from a decade earlier. These data therefore are not used in this analysis, as it would severely restrict the sample size. 3. Several agencies do not appear in the figure. The data for the separate agencies do not sum to the total, since the survey could not ask about all agencies that conduct inspections. 4. Inspections per employee are also negatively correlated with sales growth and profitability, but these estimates are not statistically significant. It is important to note that endogeneity is an especially serious problem in regressions involving inspections or bribes as the policy variable of interest. While onerous inspections are likely to dampen firm performance, it is also true that a firm will have more interactions with the government as the firm expands and thus needs permits for its expansion and investment plans. In this scenario the number of inspections and firm performance would be positively correlated, but not because inspections cause firm growth. In another scenario bribes could be correlated with better firm performance if bribe-seekers are attracted to firms that are profitable, as these firms may be more willing and able to provide bribes. Here, a regression would also reveal a positive correlation between bribes and firm performance, but because profits attracted bribe-takers, not because bribes caused growth. The
Note: Estimates calculated assuming a 50 percent improvement in the measures that proved to be statistically significant in regression analysis (see appendix 2). Source: Authors' calculations based on investment climate survey data.
39
implication is that the regressions are likely to be biased toward finding positive correlations between regulatory hassles and firm performance. That the regressions yield negative correlations suggests that the true negative association between inspections and performance is likely to be much greater than estimated here. 5. In a separate set of questions 533 firms reported making unofficial payments averaging more than 29,000 taka between the arrival of their goods at the port and the goods clearance by customs. But the nature of the question makes it impossible to determine whether these payments are in addition to those that firms reported making directly to the customs agency or whether the payments overlap.
6. Other scores for the courts remained essentially the same for firms that had been involved in a court fight. 7. State enterprises held 49 percent, and private borrowers 51 percent, of total outstanding loans in June 2000. 8. Employment growth was positive as well, but it was not statistically significant. 9. This result is not due to outliers: removing outliers and using medians yields the same result. 10. Firms in Dhaka also reported longer waits for gas connections, but the number of firms in the sample that requested connections in Chittagong in the previous two years was too small to allow significant comparisons.
40
4|
Conclusions and Policy Recommendations
THIS REPORT POINTS TO several features of the investment climate in Bangladesh that require urgent attention if the country is to grow more quickly: physical infrastructure, governance, and the financial system (ordered loosely by importance). Small- and medium-size enterprises have suffered more from the deficiencies in these areas than large companies. At the same time, companies able to export have performed better than companies that do not export. Yet without meaningful reforms in infrastructure, governance, and finance, entering the export market will be difficult for small- and medium-size enterprises. Moreover, the situation will worsen as the Multifibre Arrangement is phased out by December 2004 and Bangladesh loses advantages that have helped ease the pressure imposed on firms by the poor investment climate. The Interim Poverty Reduction Strategy Paper has already identified infrastructure, governance and corruption, and finance as issues requiring attention. Yet the acuteness of the problems affecting the private sectors performance and competitiveness suggests that in many areas the government may need to consider a more profound agenda of reform.
transport, and ports and customs will also be critical to ease the bottlenecks hampering private enterprise in Bangladesh.
Power
The power sector has seen some improvements in the past two years: Two new independent power plants, with a capacity of 810 megawatts, have come onstream, expanding generation capacity by about 20 percent and improving the reliability of supply (table 4.1). System losses have fallen from 35 percent to 30 percent, and revenue collection has increased from 91 percent of billed electricity to 98 percent. And two tariff adjustments since early 2002 have increased cost recovery and reduced cross-subsidies from firms to residential consumers. But despite these recent improvements, firms continue to face high costs from power outagesand long waits for new connections continue to delay the entry of new firms. Moreover, the sector is bankrupt, imposing a big drain on scarce fiscal resources (World Bank 2002a). A radical and systematic restructuring to eliminate remaining inefficiencies would allow the sector to fulfill its role in development, with both more confidence and greater sustainability. Indeed, the sector can play an important role: the country has sufficient energy resources (mainly natural gas), and these resources can be converted into electricity more competitively than many of its neighbors and peers can generate
Easing Bottlenecks in Infrastructure

Power tops the list of infrastructure concerns in Bangladesh. But reforms in telecommunications,
41
electricity. Key elements of a sector restructuring plan would include improving sector and enterprise governance, undertaking financial restructuring, introducing independent regulation, and phasing in competition. The current administration has tacitly endorsed the Vision and Policy Statements on Power Sector Reforms (2000), which supports unbundling the sector and encouraging private participation. Transmission and dispatch functions and assets have been transferred to the Power Grid Corporation of Bangladesh, and a few generation and distribution companies are being corporatized. But this process needs to be accelerated, and measures taken to strengthen the governance of these new corporations.1 To promote better governance of state enterprises, measures should be explored for ensuring a clear division of responsibilities between management and the board and regular publication of business plans and performance outcomes. Achieving sound governance in distribution will require ensuring full payment by public sector entities and enforcing antitheft legislation. Corporatization is best seen as an intermediate step, with privatization occurring when country conditions, the regulatory framework, and global conditions become more favorable.2 Developing a more transparent and competitive power sector will entail establishing the longawaited independent regulatory agency to protect the long-term interests of consumers and create predictability for investors. The Energy Regulatory Commission Act, passed by Parliament in March 2003, provides for establishing an independent and empowered Energy Regulatory Commission. But the act leaves to the secondary legislation (rules and regulations) much of the work of guiding the procedures for establishing this independence and for exercising regulatory powers. Because an agency that is weak and nontransparent runs the risk of discouraging investment and being captured by vested interests, the government is encouraged to take special care to
establish the Energy Regulatory Commission as a role model for new institutions that can support a fair, efficient market for infrastructure services.
Telecommunications
The telecommunications sector has seen greater progress. In early 2002 an independent regulatory authority was establishedthe Bangladesh Telecommunications Regulatory Commission replacing the Ministry of Posts and Telecommunications as the regulatory and licensing agent. The new agency should be permitted to function as a truly independent body, vested with the authority to end the monopoly of the Bangladesh Telegraph and Telephone Board (BTTB) in fixed lines and to establish a pro-competitive interconnection regime. The planned corporatization of BTTB into a public limited company, with professional management and a more independent board of directors, will improve its operational flexibility but may not fully isolate it from political influence. That suggests a need to consider privatization for the medium term. International experience over the past two decades has proved the importance of competitive markets and broad private participation for successful expansion of telecommunications services. That lesson has been borne out in Bangladesh, where private investment has driven the rapid expansion of mobile phones.3
Transport, Ports, and Customs

Delays in ports and customs impose big costs on firms. Productivity at the container terminal in Chittagong is very low, and the port is already working beyond its capacity, creating serious congestion. Moving the portsespecially Chittagongto a landlord model separating operations from oversight could do much to improve efficiency. Also important is to proceed quickly with the much-needed expansion of container
42
terminal capacity at Chittagong, involving the private sector.4 The development of the Khanpur Inland Container Terminal as a build-operate-transfer project should also receive support. Preparation for the bidding of the Khanpur terminal is already well advanced, thanks to assistance from the Infrastructure Investment Facilitation Center. Further development of inland waterways will ease the traffic pressure between Dhaka and Chittagong and allow a new channel of communication with Mongla port, opening fresh opportunities for Mongla to become a more important seaport. Other transport modes also need attention. Allocating adequate funding for road maintenance will be critical to prevent further deterioration of the road network. And the railways system, highly deteriorated and inefficient, will need a significant overhaul.5
Strengthening Governance
Governanceespecially regulation and corruptionis an important concern in Bangladesh, viewed by firms as a serious problem. There are no easy solutions. But the Interim Poverty Reduction Strategy Paper recognizes the imperative of strengthening governance and the need to intervene on several fronts: Encouraging a greater flow of information. Establishing and enforcing clear rules and regulations for public sector administration, supported by the separation of power among the three branches of government. Promoting voice and participation of civil society to foster a more transparent government. Initial steps have been taken in some of these areas, though many challenges remain. The government has adopted International Accounting Standards and initiated the separation of accounting and auditing functions. It has created
a new central procurement unit to manage the reform of procurement processes. And, more important, it has reaffirmed its intention (and legislation is being drafted) to form an independent Anticorruption Commission that will replace the Bureau of Anticorruption, an ineffective agency that has suffered from much political interference.6 Complementing these efforts should be new disclosure requirements on assets and liabilities for high public officials and greater accountability for public institutions. Ministries, for example, could be required to publish annual reports with performance outcomes for discussion by relevant parliamentary committees. But broader public administration reform will be required to create a new governance framework. A few steps have been takensuch as stopping automatic recruitment to fill vacant positions and recruiting senior managers on contract from the private sector and abroad to address the severe skill shortage. But more farreaching reforms will be needed, including rationalizing cadres and revising the skill mix while introducing better compensation packages and performance-based salaries. The sharp erosion of financial benefits and the weak performance incentives have contributed much to the poor governance culture of the public administration (see Bangladesh 2000 and World Bank 2002b). Forcefully pursuing the Supreme Courts mandate to ensure separation of powers between the executive and the judiciary, together with other measures, would do much to lessen corruption and delays in the lower courts. So would decentralizing the lower judiciary, simplifying procedures, and introducing effective mechanisms to ensure transparency and accountability. Also important are modernizing the police force and improving the quality of officers and personnel through training programs. Creating an effective Anticorruption Commission (as discussed above) would help improve oversight of the police force.
43
The short term offers opportunities for streamlining regulations and eliminating unnecessary ones, accelerating service delivery, and reducing the scope for informal payments. Procedures for the entry of new firms could be simplified, for example, reducing unnecessary costs and delays and encouraging informal firms to enhance their legal status and thus improve their access to finance. Customs and tax administrationwhere the survey findings point to cumbersome procedures, a high level of informal payments, and a large burden of inspections warrant particular attention. Efforts are under way to improve customs administration proceduresan important bottleneck to trade. The establishment of the Automated System for Customs Data (ASYCUDA++) has already speeded clearance of goods at the internal customs depot and reduced opportunities for informal payments; the completion of the closed loop system within a few months will add to these gains. Deploying these systems at larger customs sitesincluding the Dhaka customs house, Chittagong, and Benapolbefore the end of 2003 will bring even greater benefits. Initial reforms of tax administration are also under way.
Improving Access to Finance

The survey findings portend potential problems in firms access to finance. Many firms appear to have exhausted the bank credit immediately available to them, financing is primarily short term, and its cost is high. Real borrowing rates have sometimes exceeded 10 percent in the past decade. The banking system is dominated by four large national commercial banks (NCBs), which create instability and stifle competition. The Interim Poverty Reduction Strategy Paper lays out some positive initial steps for addressing the distortions in the financial sector. These include increasing the sectors independence, enhancing regulatory authority, and strengthening the human resources of the Bangladesh Bank.
For the NCBs, it proposes establishing more suitable representatives on the boards and new management teams, starting with Agrani Bank. Meanwhile, the government has offered Rupali Bank for sale. Achieving more permanent improvements in the banking systems performance will require deeper reforms for other NCBs. Ultimately, transferring their ownership to the private sector will be critical to isolate the institutions from political influence, introduce modern banking practices, and encourage new investments in information technology systems.7 Privatization will need to be coupled with strong prudential regulation, and for that reason the program of the Bangladesh Bank to strengthen regulatory and supervisory capacity should move forward with full force (World Bank 2003a). Capital markets remain at a nascent stage and enjoy little confidence among the limited number of investors. The development of a secondary market for public debt, essential for improving public debt management, would also facilitate the gradual growth of a broader market in fixed income securities. And strengthening the institutional capacity and authority of the Securities and Exchange Commission would foster greater transparency and improve the governance practices of public companiescritical for boosting investor confidence. * * * * * Over the past decade Bangladesh performed well on many macroeconomic indicators, became more integrated with the world economy, and made impressive social gains. But in many sectors it has lagged behind its neighbors and competitors. The result has been a widening gap in standards of living with such countries as China and India, though all three countries had similar per capita incomes two decades ago. Economic growth has been held back by deficiencies in the investment climatemost notably in infrastructure, governance, and finance. These issues are
44
linked: the infrastructure services that appear to pose the largest obstacles for businesses are staterun operations, and the banking system continues to be dominated by the NCBs. As the country moves forward, the findings of the investment climate survey should help identify the reforms most critical to private sector development and facilitate consensus on a more far-reaching agenda of reform.
Notes
1. Proper unbundling will entail determining how many electricity distribution companies and generation companies would be cost-effective in Bangladesh and developing a path of transition from the single buyer model to direct contracting between generators and eligible customers (such as large industries or bulk consumers).
Table 4.1 Investment Climate Reforms Undertaken in Bangladesh and Additional Measures Recommended
Deficiency by aspect of the investment climate
1. Infrastructure I: Power Highly deficient and unreliable supply Long delays in getting new connections to the public grid Imposition of informal payments on businesses
Government reforms undertaken since 2000 to tackle the problems

Commissioned two new independent power plants with a capacity of 810 megawatts at competitive rates Reduced system losses and increased bill collection in selected urban areas Improved the performance of the corporatized Dhaka Electric Supply Company (DESCO) and Power Grid Company of Bangladesh (PGCB) Continued the successful performance of rural electricity cooperatives in tariff levels (relative to urban tariffs), collections, and ability to turn around poorly performing distribution areas transferred from the Bangladesh Power Development Board (BPDB) and Dhaka Electric Supply Authority (DESA) Passed the Energy Regulatory Commission Act Implemented two tariff adjustments to improve cost recovery and reduce crosssubsidies between customer categories Developed a new power pricing framework, expected to be adopted shortly, to smooth the transition to tariffs that fully recover costs Approved a National Telecommunications Policy (1998) Approved the Telecommunications Act establishing an autonomous telecommunications regulatory authority
Recommended additional measures

Establish a professionally staffed reform directorate in the Ministry of Energy and Mineral Resources to strengthen sector reform capacity Accelerate financial restructuring and unbundling of the sector (see note a below) Develop a plan for private participation to improve efficiency, coverage, and financial performance in urban distribution Revise or update the strategy for expanding and financing generation Implement the new pricing framework Establish a new energy regulatory agency with strong enforcement powers and adequate financial and human resources
2. Infrastructure II: Telecoms Lowest teledensity in South Asia Lowest utilization of information technology by firms in South Asia
Implement the plan for strengthening the new Telecommunications Regulatory Commission Establish a pro-competitive interconnection regime Permit the entry of new long-distance operators in competition with the incumbent operator Corporatize BTTB, initiate a restructuring program, and consider privatizing the entity in the medium term to further enhance competition
Note a: The sector cannot assume substantial new liabilities (including power purchase agreements with independent power producers) without major financial restructuring supported by Parliament. (Table continued on next page)
45
Table 4.1 Investment Climate Reforms Undertaken in Bangladesh and Additional Measures Recommended (continued)
3. Infrastructure III: Transport Inefficient and costly services Port inefficiencies that hinder export growth

Developed a National Policy for Ports, Ocean Shipping ,and Inland Water Transport (1998) Developed the draft Private Sector Participation Policy for the Shipping Sector of Bangladesh

Expand the container terminal capacity at Chittagong through private participation Move the ports to a landlord model separating operations and oversight and concessioning services to the private sector Proceed with development of the Khanpur Inland Container Terminal as a build-operatetransfer project Ensure adequate funding for road maintenance Corporatize Bangladesh Railways and establish a performance contract between that entity and the government Encourage the concessioning of specific services of Bangladesh Railways Promote further regional transport integration allowing movement of foreign trucks and railwagons Extend ASYCUDA++ and the closed loop system to key customs houses Further simplify customs procedures, including fully implementing the new duty drawback and bonded warehouse scheme Develop new human resource policies and an ethics code to improve staff compensation and reward good performance Consider establishing an independent revenue authority to support the above measures and foster better institutional performance Launch a national anticorruption plan, including the establishment of an independent commission Accelerate judicial reform Require members of Parliament and key officials to publicly declare assets and liabilities Require all ministries to publish annual reports for submission to the relevant parliamentary committee Develop a plan for improving the compensation and management of civil servants Streamline regulations and eliminate unnecessary ones
4. Governance I: Customs and Tax Administration Harassment of the private sector through frequent audits and informal payments Long delays in customs clearance
Simplified customs procedures Introduced ASYCUDA++ and closed loop system at the internal customs depot
5. Governance II Unnecessary regulations that cause delays and increase firms costs Harassment of the private sector through informal payments Inefficient functioning of courts
Initiated implementation of a Supreme Court decision ensuring separation of powers between the judiciary and the executive Adopted International Accounting Standards in the public sector and initiated work to separate accounting and auditing functions Established the Central Procurement Technical Unit to manage the reform of public sector procurement Recruited from the private sector or from overseas well-qualified Bangladeshis to fill key civil service reform positions
(Table continued on next page)
46
Table 4.1 Investment Climate Reforms Undertaken in Bangladesh and Additional Measures Recommended (continued)
6. Finance: Access to and Cost of Borrowing Poor access to credit (especially long-term credit) and high cost of borrowing, particularly for small- and mediumsize enterprises

Enhanced the legal autonomy and authority of Bangladesh Bank to regulate and supervise banks, including NCBs and specialized development banks Increased capital adequacy requirements from 8 percent to 9 percent on a risk-weighted basis; increased minimum capital requirements from 200 million taka to 1 billion taka; and allowed banks to declare dividends of more than 20 percent only if an equivalent amount is set aside for reserves Closed down 58 loss-making branches of NCBs Announced the sale of Rupali Bank

Implement the plan to strengthen the institutional capacity of Bangladesh Bank, especially in bank supervision Issue bank prudential regulations consistent with international practice Introduce professional management teams at the NCBs and sign performance contracts with their boards Consider transferring the ownership of other NCBs to the private sector, transforming some of them into savings banks in the medium term, or both Develop a secondary market for public debt Enhance the enforcement authority and institutional capacity of the Securities and Exchange Commission
Source: World Bank.
2. See World Bank (2003b) for a more extensive discussion of the power sector structure and critical sector reforms. 3. See World Bank (2003b, 2003c) for in-depth analysis of reform priorities in telecommunications. 4. Sri Lanka and India have allowed the construction of private container terminals next to the old public ports. The new private ports have instituted some competition, forcing some improvements in the public ports.
5. See World Bank (2003b) for further analysis of ports, railways, and roads and key priorities for reform. 6. The report of the Bangladesh Public Administration Reform Commission (2000), which provides a more detailed analysis of the situation, recommends forming an independent Anticorruption Commission vested with strong authority. 7. Privatization might not be a viable option for all NCBs, however, and liquidation (or transformation into a savings bank) might also need to be explored.
47
Appendix 1: Sampling Methodology
Industrial statistics in Bangladesh are inadequate. There is no consolidated institutional effort to generate comprehensive, periodic data on industry. The quality of the statistical data that are available erodes during the long time lag between their collection and their publication. Official information based on the census of manufacturing industries by the Bangladesh Bureau of Statistics is lacking in quality. And the latest Directory of Manufacturing Establishments (covering firms employing 10 or more workers) dates to 1989-90. Lacking a reliable and updated universe, the investment climate survey team therefore had to develop its own sample frame. It adopted the methodology of assembling in one unique frame the establishment lists from different sources. The first step was to identify the strata to include in the sample. It was decided that the strata would be determined on the basis of firms activity, level of employment, and location. The sectors to be included in the survey were selected mainly on the basis of their importance as measured by value added, export potential, and recent growth trends. The sample frame of manufacturing establishments was grouped into six sectors: garments, textiles, leather and leather products, electrical and electronics, pharmaceuticals and chemicals, and food and food processing. It was also agreed that: The sample frame would comprise manufacturing establishments employing 10 or more
workers. These would include both domestically and foreign-owned enterprises. The manufacturing units would be located in and around Dhaka (including Gazipur, Savar, Narsindi, Narayanganj, and Manikganj) and Chittagong (including Hathazari, Fauzdarhat, and Sitakundu), including the export processing zones in these areas. Establishments with head offices in Chittagong and Dhaka would be included in the sample frame. Once the strata were agreed on, the team devoted its efforts to compiling the sample frame. While the most recent Directory of Manufacturing Establishmentswhich publishes results from the last census of nonfarm activities, carried out in 1986was considered too outdated to serve as a basis for the sample frame, the annual census of manufacturing industries, the main source of macro-level estimates for manufacturing, was more useful. The survey team obtained this list, which included firms name, address, sector of activity (classified according to the Bangladesh Standard Industrial Classification [BSIC] at the four-digit level), and size of employment. In a second approach the team canvassed all trade associations and chambers of commerce for their lists of members. The coverage and quality of these lists varied. For some subsectorssuch as textiles, garments, pharmaceuticals, and leatherthe lists were reasonably
49
comprehensive and up to date. But none of the trade associations (except the Bangladesh Garment Manufacturers & Exporters Association) or chambers of commerce were able to provide employment figures. Moreover, small enterprises were underrepresented on the lists, because they have little incentive to join and pay the membership fee. A comprehensive list of trade associations and chambers of commerce was obtained from the Federation of Bangladesh Chambers of Commerce and Industry, the apex body for all national trade associations and chambers of commerce in Bangladesh. A total of 35 trade associations and 9 chambers of commerce were approached (see lists at the end of the appendix). A final effort was made to collect data from other government organizations that maintain some sort of list. Two of these were the Bangladesh Small and Cottage Industries Corporation and the Ministry of Labor and Employments Department of Inspection for Factories and Establishments (DIFE). The DIFE was approached in June 2002, when it was undertaking a nationwide survey of factories and establishments. At that time the DIFE had prepared a list of about 9,000 manufacturing establishments throughout Bangladesh. Of these, about 5,000 were in the investment climate survey area, 3,000 were in the garment sector, and 500 were in textiles or leather. The DIFE survey is still ongoing and could serve as a valuable source of data for future research (although difficult to use, since the DIFE has only one computer, used for typing letters, and all data are filed in hard copies stored in open racks). The team painstakingly assembled all the lists into a single frame, identifying and dropping double entries and establishments classified in the wrong sector. To generate a panel, it included establishments covered in similar surveys. The final framethe sample frame used in the Bangladesh investment climate surveyincludes 9,189 establishments in six sectors and two locations (table A1.1).
As noted, not all lists included information on the size of employment. Moreover, some lists simply indicated the category of employment, such as fewer than 50 employees or more than 50. This ruled out the chances of performing any sampling with a predetermined level of error. Data limitations as well as budget constraints led to a decision to implement a sample of 1,000 establishments drawn through a disproportionate stratified random sampling. The stratification is by sector and, when available, by size. It was also decided to cover two distinct locations, Chittagong and Dhaka. In addition, it was agreed to oversample establishments that applied for the matching grant facility program under the Bangladesh Export Diversification Projecta total of 124 establishmentsso as to be able to perform an analysis of this facility. Finally, based on experience with similar surveys, a 100 percent replacement rate was agreed on. The total sample frame of 9,189 was divided into two groups: a first subframe of 6,023 establishments for which data on employment were available (table A1.2) and a second subset of 3,166 for which no employment data were available (table A1.3). The final sample was then proportionally assigned to the two subsets.
Table A1.1. Sample Frame Distribution by Sector

Share of total (percent) 5.84 6.51 9.90 59.10 4.28 14.37 100.00 Cumulative share (percent) 5.84 12.35 22.25 81.36 85.63 100.00
Sector Chemicals Electronics Food Garments Leather Textiles Total
Frequency 537 598 910 5,431 393 1,320 9,189
Source: World Bank.
50
Table A1.2. Subframe 1 Distribution by Sector and Size

Size of employment Sector Chemicals Electronics Food Garments Leather Textiles Total Small (1050) 141 95 315 53 27 223 854 Medium (51150) 12 15 14 98 3 20 162 Large (151+) 92 45 204 4,320 47 299 5,007 Total 245 155 533 4,471 77 542 6,023
locations in the frame. In fact, the final sample distribution does cover both locations in proportion to their population weights. The complete sample distribution is shown in table A1.4, and the final sample distribution after completion of the survey in table A1.5.
Source: World Bank.
In determining the probability of selection of units across strata, different sampling fractions were used within the strata to oversample small groups that were underrepresented (such as medium-size firms and establishments with matching grant facilities). For the subset of the frame with no information on the size of employment, a proportional simple random sampling was used. The location was not explicitly taken into account in determining the strata, since a proportional random sampling would reflect the proportional distribution of the units across
Table A1.4. Complete Sample Distribution by Sector

Share of total (percent) 10 10 13 30 10 27 100 Cumulative share (percent) 10 20 33 63 73 100
Frequency 100 100 130 300 100 270 1,000
Source: World Bank.
Table A1.3. Subframe 2 Distribution by Sector

Share of total (percent) 9.22 13.99 11.91 30.32 9.98 24.57 100.00 Cumulative share (percent) 9.22 23.22 35.12 65.45 75.43 100.00
Table A1.5. Final Sample Distribution by Sector and Location

Location Sector Chemicals Electronics Food Garments Leather Textiles Other Total Dhaka 68 55 102 271 90 221 5 812 Chittagong 17 36 45 35 9 41 6 189 Total 85 91 147 306 99 262 11 1,001
Frequency 292 443 377 960 316 778 3,166
Source: World Bank.
Source: World Bank.
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Trade Associations Contacted

1. Bangladesh Garment Manufacturers & Exporters Association 2. Bangladesh Knitwear Manufacturers & Exporters Association 3. Bangladesh Textile Mills Association 4. Bangladesh Specialized Textile Mills and Power Loom Industries Association 5. Bangladesh Terry Towel & Linen Manufacturers Association 6. Bangladesh Cosmetics & Toiletries Manufacturers Association 7. Bangladesh Aushad Shilpa Samity 8. Bangladesh Tanners Association 9. Bangladesh Finished Leather, Leather Goods & Footwear Exporters Association 10. Bangladesh Ceramic Wares Manufacturers Association 11. Bangladesh Television Manufacturers Association 12. Bangladesh Rerolling Mills Association 13. Bangladesh GP & CI Sheet Manufacturers Association 14. Bangladesh PVC Compound Manufacturers Association 15. Bangladesh Paint Manufacturers Association 16. Bangladesh Agro Processors Association 17. Bangladesh Frozen Foods Exporters Association 18. Bangladesh Vegetable Oil Refiners and Vanaspati Manufacturers Association 19. Bangladesh Poultry Industries Association 20. Bangladeshiyo Cha Sangsad 21. Bangladesh Association of Publicly Listed Companies 22. Bangladesh Ayurved Parisad 23. Bangladesh Bread, Biscuit-O-Confectionary Prostutkarak Samity 24. Bangladesh Cold Storage Association 25. Bangladesh Electrical Merchandise Manufacturers Association 26. Bangladesh Dughdha and Dughdhajat Shamagri Prostutkarak & Baboshayee Samity
27. Bangladesh Electronic Manufacturers Association 28. Bangladesh Engineering Shilpa Malik Samity 29. Bangladesh Laban Mill Malik Samity 30. Bangladesh Marine Fisheries Association 31. Bangladesh Oil Mills Association 32. Bangladesh Rice Mill Owners Association 33. Bangladesh Salted & Dehydrated Marine Foods Exporters Association 34. Bangladesh Textile Mill Owners Association 35. National Association for Small and Cottage Industries of Bangladesh
Chambers of Commerce Contacted

1. Federation of Bangladesh Chambers of Commerce and Industry 2. Foreign Investors Chamber of Commerce and Industries 3. Dhaka Chamber of Commerce and Industries 4. Chittagong Chamber of Commerce and Industries 5. Narsindi Chamber of Commerce and Industries 6. Metropolitan Chamber of Commerce and Industries 7. Narayanganj Chamber of Commerce and Industries 8. Gazipur Chamber of Commerce and Industries 9. Manikganj Chamber of Commerce and Industries
Other Sources Government Sources

1. Bangladesh Bureau of Statistics 2. Bangladesh Small and Cottage Industries Corporation 3. Bangladesh Export Processing Zone Authority 4. Board of Investment
52
5. Department of Inspection for Factories and Establishments, Ministry of Labor and Employment
Others
1. Micro Industries Development Assistance and Services 2. Bangladesh Yellow Pages
53
Table A1.6 Value Added by Industry Category

Value added in millions of takas
Industry code 1992-93 28,568 442 10,247 32 14,656 4,240 22,472 3,917 1,153 5,092 24,472 4,444 935 5,671 32,601 5,388 1,163 5,558 41,452 6,427 1,383 5,825 50,278 4,939 1,520 6,941 64,430 4,336 1,022 7,806 71,521 6,202 1,600 14,357 12,223 11,869 14,394 14,005 14,558 110,222 44,946 326,419 39,000 9,608 33,040 592 11,396 37 35,703 658 13,133 42 36,763 452 13,353 43 33,860 519 14,311 39 43,293 560 16,223 50 39,354 612 18,639 46 274,634 4,270 106,144 316 20.16 0.31 7.79 0.02 8.09 3.30 23.96 2.86 0.71 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Total 6,678 12 466 11 11,326 882 1,130 347 87 3,813 19,193 3,347 832 14,160 24,053 435 8,842 27
Industry
Establishments in 1991-92 1991-92
Share of value added (%)
Share of Rank by Rank enterprises value by (%) added enterprises 21.56 0.04 1.50 0.04 36.56 2.85 3.65 1.12 0.28 2 25 4 33 3 7 1 9 22 2 33 12 34 1 8 6 14 24
311-312 313 314 315 321
322
323 324 325 326-327
54
203 1,286 697 326 784 177 17 27 28 19 247 30,976 2,381 3,442 1,823 1,056 1,650 3,102 33 51 6 37 112 111,865 2,450 3,291 1,721 1,054 1,638 2,594 38 58 7 42 128 126,167 4,338 3,060 2,444 590 1,801 2,055 41 64 7 46 140 140,840 7,107 4,079 2,062 350 2,083 2,548 46 71 8 52 156 160,339 7,873 4,509 2,116 292 2,064 2,233 50 77 9 56 169 175,740 8,587 5,865 2,763 473 1,882 2,332 54 84 10 61 184 190,316
331 332 341 342 351 352 353 354-355 356 357 361 362 369 371-372
53 1,536 305 91 1,005 377 51 295 13 345 320 670 25 1,140
243 3,779 751 1,926 2,473 3,810 2,463 2,819 238 658 611 1,276 250 2,173
250 3,652 1,029 2,106 3,368 4,932 2,768 3,388 314 732 701 1,708 257 2,214
251 4,401 1,161 2,170 4,232 5,664 3,021 3,735 284 769 1,324 1,768 251 2,860
295 4,513 1,638 2,112 5,412 7,017 2,601 4,553 298 702 1,635 1,557 307 2,555
299 5,037 1,706 2,161 5,987 7,598 2,740 5,182 248 732 1,899 1,653 298 3,448
426 5,441 1,962 1,911 6,429 9,001 2,228 5,557 284 948 1,557 1,785 398 4,409
632 5,630 2,091 2,199 7,130 8,932 3,088 5,181 251 901 1,869 2,084 461 4,495
846 5,445 2,295 2,529 8,126 9,614 2,773 7,018 213 892 1,280 1,896 545 6,246
3,242 37,898 12,633 17,114 43,157 56,568 21,682 37,433 2,130 6,334 10,876 13,727 2,767 28,400
0.24 2.78 0.93 1.26 3.17 4.15 1.59 2.75 0.16 0.46 0.80 1.01 0.20 2.08
0.17 4.96 0.98 0.29 3.24 1.22 0.16 0.95 0.04 1.11 1.03 2.16 0.08 3.68
26 10 20 17 8 5 14 11 28 23 21 19 27 13
25 3 18 23 7 13 26 19 32 15 17 11 29 5
381 382 383 384 385 386 387 391 392 393-394
Food manufacturing Beverage industries Tobacco manufacturing Animal feeds and by-products Textile manufacturing (cotton, jute, silk) Textile manufacturing (carpets, rugs, and so on) Wearing apparel except footwear Leather and its products Footwear except vulcanized or molded Ginning, pressing, and bailing of fiber; embroidery on textile goods Wood and wood cork products Furniture and fixtures manufacturing Manufacturing of paper and its products Printing and publishing Drugs and pharmaceutical products Industrial chemicals Other chemical products Petroleum and petroleum products Manufacturing of rubber products Manufacturing of plastic products Pottery, china, and earthenware Manufacturing of glass and its products Nonmetallic mineral products Iron and steel basic industry; nonferrous metal basic industry Metal products Fabricated metal products Nonelectrical machinery Electrical machinery Manufacturing of transport equipment Scientific and precision instruments Photographic and optical goods Decorative handicrafts Sports and athletic goods Jewelry and other manufacturing Total 10,175 6,471 3,269 753 2,197 2,629 63 97 11 71 214 221,750 8,246 6,672 4,627 558 2,141 2,470 68 105 12 77 232 235,264 51,157 37,389 20,825 5,126 15,456 19,963 393 607 70 442 1,335 1,362,283
3.76 2.74 1.53 0.38 1.13 1.47 0.03 0.04 0.01 0.03 0.10
0.66 4.15 2.25 1.05 2.53 0.57 0.05 0.09 0.09 0.06 0.80
6 12 15 24 18 16 32 30 34 31 29
21 4 10 16 9 22 31 28 27 30 20
Source: Bangladesh Bureau of Statistics.
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Regression Analyses
Appendix 2: Technical Appendix
To analyze the data more rigorously, several equations are estimated using least squares regression analysis. Several versions of the following equation are estimated: yi = 0 + 1*(Investment climate measure)i + 2*Xi + 3Zi + i
The dependent variable, yi, is a measure of firm performance that may be affected by the investment climate. Such measures include sales growth, employment growth, the investment rate, total factor productivity (TFP), and profitability (these measures are defined more precisely below). X is a vector of firm-level control variables and includes firm age, employment in 2002, and sales in 2002. Z is a vector of industry and geographic controlsindustry fixed effects
Firm Performance Variables

Variable Sales growth Employment growth Investment rate Total factor productivity Definition Average annual growth in sales for the past three years Average annual growth in total employment for the past three years Total new investment divided by the book value of current assets Total factor productivity is estimated using the following production function:
lnVi = 0 + D ij ( jL ln L it + jK ln K it ) + i
j =1
where Vi is value added for firm i; Li is the number of employees; Ki is the capital stock, which is proxied by the original value of fixed assets; and Di is a dummy variable that takes the value 1 if firm i is affiliated with sector j. The analysis includes six industries. So the equation essentially allows sector-specific shares of labor and capital. Total factor productivity is then constructed as the estimate of i , the part of value added not explained by sector, capital, and labor. Profitability Value added divided by sales
55
and a dummy variable indicating whether the firm is in Dhaka. Investment climate measures are the variables discussed in the report, including those representing international integration, infrastructure conditions, governance, corruption, technology, finance, and labor. The basic approach is as follows: The equation is estimated five times for each investment climate measureonce for each firm performance proxy. Moreover, the equation is estimated separately for each measure. The estimation does not at first include all the investment climate measures simultaneously for two reasons. First, not all firms provided answers to all questions, which causes some firms to drop out of the analysis. The more variables included at one time, the smaller the sample becomes. Thus estimating the equation with all variables simultaneously would result in too small a sample. Second, investment climate variables tend to be correlated with one another, causing collinearity problems when all are included simultaneously. Looking at each one separately helps avoid both these problems. The results of these regressions are shown in table A2.1. The table is constructed for viewing convenience. Each investment climate measure is estimated separatelynot with the others along with the firm and industry characteristics, which are not shown in the table. Instead, the table simply shows the coefficient on the investment climate measure, the statistical significance of the estimate, and the number of observations in that particular analysis.
of improving investment climate measures.1 The results of these sets of regressions are shown in table A2.2.
Indexes
A common difficulty arising in investment climate analyses is that any one feature of the investment climate actually consists of several related factors. For example, theory and practice tell us that access to formal finance is important, but how can we measure it? The surveys collect several pieces of relevant information, but selecting a single one that represents finance is difficult. Including multiple finance variables in a regression, however, would lead to serious multicollinearity problems. In two casesfinance and information and communications technologythis problem is solved by constructing principal components indexes. This type of index is intended to extract the maximum possible information from a series of related variables. The index is the linear combination of the variables that captures the most variation possible. The finance index is derived from three variables: the firms share of working capital from bank loans, its share of new investments from bank loans, and whether the firm has an overdraft facility. The information and communications technology index is derived using the share of the firms employees engaged in research and development (R&D) activities, the share of spending on R&D, the share of spending on communications, and whether the firm regularly uses email. The advantage of these indexes is that they capture a large amount of information on particular investment climate variables, where any single variable would provide an incomplete picture. Their main disadvantage is that while they are useful for comparison, their absolute values are not meaningful. That is, an index shows how one firm compares with another in
Simulations
Constructing the simulations requires estimating the investment climate measures simultaneously. To deal with the problem of missing observations, the missing observations are replaced with the sector-city mean for that variable. This approach makes it possible to run regressions with the complete data set to derive the coefficients necessary to estimate the simulated results
56
access to finance or use of information and communications technology, but a score of, say, 0.2 is meaningless by itself. To deal with this problem, the indexes are presented along with some of their components.
Notes
1. As a robustness check, the regressions represented in table A2.2 were run with the imputed variables to see whether the imputations appear to affect the results. The results were qualitatively identical whether actual data were used or missing observations were replaced with city-sector means.
57
Table A2.1. Investment Climate Regression Results (p-values in parentheses) [number observations in brackets]
Investment Climate Topic International integration Export Number of days last year experienced power outages or surges (x 100) Total wait (in days) for mainline telephone connection (x 100) Infrastructure If export, average days from time goods arrived in port until cleared customs If import, average days from time goods arrived in port until cleared customs Enterprise uses email regularly? Investment Climate Variable Sales growth 0.06 (0.000)*** [942] -0.01 (0.064)* [914] 0.00429 (0.54) [247] -0.002 (0.069)* [444] -0.00003 (0.97) [525] 0.04 (0.009)*** [948] 0.04 (0.001)*** [944] 0.01 (0.65) [945] 0.00002 (0.015)** [928] 0.00002 (0.087)* [291] 0.03 (0.010)** [767] 0.0004 (0.27) [947] -0.11 (0.000)*** [960] -0.0002 (0.22) [828] 0.010 (0.14) [853] 0.10 (0.001)*** [931] 0.03 (0.024)** [943] 0.02 (0.17) [925] Employment growth 0.04 (0.008)*** [955] 0.00105 (0.812) [926] 0.00272 (0.65) [259] -0.002 (0.009)*** [454] 0.00021 (0.68) [541] 0.03 (0.006)*** [961] 0.02 (0.018)** [957] 0.00 (0.87) [957] 0.00002 (0.004)*** [942] 0.00000 (0.82) [295] 0.04 (0.000)*** [772] -0.0001 (0.67) [960] -0.02 (0.64) [947] -0.0001 (0.46) [843] 0.01 (0.019)** [864] 0.06 (0.011)** [946] 0.01 (0.26) [956] 0.03 (0.002)*** [937] Investment rate 0.06 (0.040)** [395] -0.03 (0.001)*** [384] -0.00690 (0.62) [108] -0.004 (0.065)* [167] 0.00079 (0.48) [246] 0.05 (0.041)** [398] 0.01 -0.75 [395] 0.00 (0.97) [395] 0.00001 (0.57) [397] 0.00003 (0.024)** [214] 0.02 (0.22) [322] -0.002 (0.055)* [399] 0.12 (0.61) [580] 0.0013 (0.32) [361] 0.005 (0.71) [365] 0.01 (0.84) [393] 0.05 (0.022)** [396] 0.03 (0.24) [391] TFP 0.11 (0.26) [578] 0.01508 (0.678) [559] -0.01240 (0.75) [145] 0.010 (0.078)* [238] -0.00522 (0.25) [324] 0.15 (0.067)* [581] 0.12 -0.12 [578] 0.41 (0.066)* [578] 0.00012 (0.002)*** [577] 0.00012 (0.009)*** [214] 0.21 (0.002)*** [474] 0.007 (0.001)*** [580] -0.17 (0.061)* [399] -0.002 (0.017)** [511] 0.012 (0.79) [519] 0.07 (0.73) [570] 0.16 (0.061)* [578] 0.18 (0.034)** [568] Profitability 0.03 (0.55) [812] -0.01449 -(0.42) [788] -0.00887 (0.25) [213] -0.006 (0.033)** [373] -0.00272 (0.085)* [458] 0.04 -0.31 [816] 0.01 -0.83 [812] 0.18 (0.062)* [812] 0.00002 (0.3) [804] 0.00003 (0.028)** [271] 0.07 (0.098)* [666] 0.0005 (0.66) [815] -0.02 (0.89) [815] 0.0005 (0.24) [715] 0.028 (0.21) [744] -0.01 (0.88) [804] 0.05 0.29 [813] 0.06 (0.17) [795]
Are any transactions facilitated using email or the internet? Have you made financial transactions using the Internet Technology Communication expenses in 2001/02 thousand takas Amount spent on computers
ICT (technology) index
Total visits by all agencies
Government visits per employee Governance/Corruption Total unofficial payments as share of costs
Finance index Finance Share of labor not permanent
Labor
Did your plant run formal in-house training for employees last fiscal year? Does firm employ staff exclusively for R&D/design?
* significant at 10%; ** significant at 5%; *** significant at 1% Note: Each cell represents a separate regression. Each investment climate measure is estimated independent from the other investment climate measures, with firm and industry controls, which are not shown here. Source: Authors' calculations based on survey data.
58
Table A2.2. Regression Results Using All IC Measure Simultaneously

Average sales growth Investment climate measures Does firm export? Number of days firm experienced power outages or surges Total days waiting for goods to clear customs once arrived in port (sum of exports and imports) Visits per employee by government agencies Technology index Finance index Unofficial payments as share of costs Industry fixed effects Garments Textiles Food & food processing Electronics Chemicals & pharmaceuticals Other industries City fixed effect Dahka Firm characteristics Age lnsale lnemp 0.01 (0.692) 0.00 (0.798) 0.06 (0.000)*** -0.04 (0.242) -0.09 (0.118) -0.02 (0.231) 0.00 (0.977) 0.00 (0.885) 0.00 (0.859) 0.05 (0.087)* 0.02 (0.745) 0.04 (0.014)** 0.02 (0.311) 0.01 (0.626) 0.02 (0.275) 0.05 (0.011)** 0.02 (0.693) 0.00 (0.862) 0.03 (0.071)* 0.03 (0.066)* -0.03 (0.148) 0.14 (0.000)*** 0.11 (0.008)*** -0.05 (0.431) -0.01 (0.906) 0.01 (0.933) 0.12 (0.098)* 0.04 (0.563) 0.03 (0.856) -0.01 (0.903) 0.01 (0.923) -0.04 (0.640) 0.05 (0.638) -0.08 (0.426) -0.04 (0.853) 0.06 (0.000)*** -0.00012 (0.021)** -0.0003 (0.406) -0.07 (0.049)** 0.02 (0.035)** 0.011 (0.101) -0.0001 (0.647) 0.03 (0.020)** 0.00000 (0.969) -0.0003 (0.336) -0.11 (0.000)*** 0.03 (0.001)*** 0.010 (0.070)* 0.0000 (0.963) 0.02 (0.048)** -0.00014 (0.001)*** 0.0000 (0.998) -0.05 (0.089)* 0.01 (0.297) 0.004 (0.481) 0.0001 (0.563) 0.02 (0.565) -0.00014 (0.333) 0.06 (0.362) 0.00007 (0.734) Average employment growth Investment rate Pretax profit Total factor productivity
0.0002 -0.0025 (0.020)** (0.880) -0.03 0.22 (0.772) (0.109) 0.05 0.13 (0.111) (0.004)*** 0.022 0.003 (0.232) (0.916) 0.0005 -0.0013 (0.171) (0.022)**
0.00 (0.538) -0.02 (0.000)***
0.00 (0.568)
-0.03 (0.000)*** 0.27 (0.000)*** 1001 0.052 0.19 (0.000)*** 1001 0.068
0.00 (0.281) 0.00 (0.310) 0.00 (0.840) 0.10 (0.013)** 1001 0.150
0.00 (0.290) -0.04 (0.001)*** 0.04 (0.073)* 0.76 (0.000)*** 1001 0.037
0.00 (0.448)
Constant Observations R-squared
0.01 (0.965) 1001 0.023
p values in parentheses * significant at 10%; ** significant at 5%; *** significant at 1% Source: Author's calcualtions based on investment climate survey data.
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Appendix 3: Standard Investment Climate Tables
Table A3.1 Sample Structure for Bangladesh Investment Climate Survey

Sample population Firm size Small Medium-size Large 229 214 539 Sample population Firm activity Garments Textiles Food Leather Electronics Chemicals Other 306 262 147 99 91 85 11
Market orientation Exporter Nonexporter Firm ownership Private, domestic 956 Private, foreign 29 State 3 404 581 Firm location Dhaka Chittagong 812 189
61
Table A3.2. Globalization of Markets and Inputs in Bangladesh, in International Perspective and by Type of Firm (percent)
High-capacity 60.4 36.1 3.5 49.4 43.5 7.1 50 0 8 0 20 0 0 10 0 25 0 High capacity Non-exporter Low-capacity 62.7 31.9 5.4 58.7 34.9 6.3 50 0 6 0 1 0 60 0 10 0 20 0 45 Low capacity Domestic Medium-size Bangladesh
Domestic
Pakistan
Disposition of sales Sold domestically Exported directly Exported indirectly Source of inputs and supplies Domestic sources Imported directly Imported indirectly Not available. Source: Investment climate surveys. 52.5 40.6 6.8 90.0 86.1 92.1 76.2 16.6 7.2 64.4 25.9 9.7 37.8 56.7 5.5 52.7 46.6 0.8 52.5 40.4 7.1 41.8 52.1 6.1 60.1 32.6 7.3 61.2 34.7 4.2 84.9 13.4 1.7 74.1 18.3 7.5 43.1 45.6 8.2 89.2 9.9 0.8 67.7 25.1 7.2 46.7 48.9 4.4 71.4 28.6 0.0 60.5 35.2 4.4 5.5 84.4 10.1 99.9 0.1 0.0
Table A3.3. Firms Competitors, Suppliers, and Customers in Bangladesh, in International Perspective and by Type of Firm
Non- exporter Medium-size
Bangladesh
Pakistan
Exporter 100 0 8 0
Exporter 35 0 0 Foreign
China
Small
India
Foreign 50 0 10 0 30 0 70 0 8 0 5 0 Large
China
Domestic private firms Median number of competitors State-owned firms Foreign-owned firms Domestic private firms Median number of suppliers State-owned firms Foreign-owned firms Domestic private firms Median number of customers State-owned firms Foreign-owned firms Not available. Source: Investment climate surveys.
50 0 10 0 20 0
27 0 0 40 0 0 40 0 0
6 4
40 0 10 0 30 0
Large
Small
India
32 0 10 0 40
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Table A3.4. Share of Firms Assessing Constraints to Operation as Major or Very Severe in Bangladesh, in International Perspective and by Type of Firm (percent)
High capacity 22.5 72.1 23.4 26.1 32.9 47.8 40.0 8.7 16.6 16.1 36.5 45.6 41.3 36.8 55.8 37.7 28.5 Non-exporter Low capacity 28.1 74.9 25.7 30.2 40.1 53.6 45.5 7.5 24.6 17.1 51.2 58.1 50.3 41.9 61.4 41.9 30.8 Medium-size Bangladesh
Domestic
Pakistan
Exporter
Constraint Telecommunications Electricity Transport Access to land Tax rates Tax administration Customs and trade regulations Labor regulations Skills and education of available workers Business licensing and operating permits Access to financing Cost of financing Regulatory policy uncertainty Macroeconomic instability Corruption Crime, theft, and disorder Anticompetitive or informal practices Not available. Source: Investment climate surveys.
24.4 73.2 24.2 27.5 35.4 49.8 41.9 8.3 19.3 16.5 41.5 49.8 44.4 38.6 57.8 39.2 29.3
9.2 39.2 9.9 20.4 45.6 46.0 24.5 15.0 12.7 14.5 37.5 42.6 40.1 34.4 40.3 21.5 21.3
16.5 28.1 19.4 16.3 34.1 23.7 21.1 19.4 26.7 15.9 24.1 21.6 28.0 26.0 22.4 15.7 17.6
19.8 75.8 21.1 25.1 32.6 41.4 27.3 5.3 15.4 11.0 41.4 47.1 35.7 27.8 50.7 36.6 30.4
30.0 75.1 29.6 33.3 40.8 55.9 51.6 10.8 23.5 19.2 53.5 55.4 55.9 45.1 61.0 45.5 33.3
23.0 70.6 22.9 25.7 33.3 49.8 43.1 8.7 18.4 17.5 35.9 47.8 42.0 39.6 58.0 36.8 27.3
20.8 67.8 20.8 26.0 26.7 43.3 35.6 9.2 17.6 17.8 35.9 43.1 37.4 29.2 54.5 34.4 22.3
26.5 76.4 26.2 28.4 40.6 53.4 45.4 7.8 19.8 15.4 44.7 53.7 47.8 44.5 58.8 41.9 34.1
24.3 73.8 23.9 27.3 35.4 49.8 42.1 8.6 19.3 16.7 42.2 50.0 44.1 38.7 57.7 39.3 29.3
31.0 55.2 27.6 34.5 41.4 51.7 34.5 0.0 10.3 10.3 20.7 48.3 51.7 37.9 58.6 31.0 27.6
Table A3.5. Infrastructure Performance Indicators in Bangladesh, in International Perspective and in Selected Cities
Indicator Frequency of power outages (times last year) Production lost due to power outages (percent) Firms with own generator (percent) Firms with own well (percent) Production lost in shipment (percent) Days to obtain a telephone connection Days to obtain an electricity connection Days to obtain a water connection Exports as a share of sales (percent) Not available. Source: Investment climate surveys. Bangladesh 249.0 3.3 71.5 54.5 1.0 150.4 79.6 38.8 Pakistan 14.5 5.4 41.8 43.8 25.3 32.4 15.1 China 1.8 17.0 21.1 1.2 12.5 18.2 25.9 India 68.5 50.1 50.5 Dhaka 249.4 3.4 70.9 53.5 1.0 163.6 92.8 41.2 Chittagong 247.1 3.0 74.1 59.0 1.1 53.4 27.6 28.6
63
Foreign
China
Large
Small
India
|
High capacity 243.9 2.8 72.7 52.7 1.0 135.6 75.7 39.6 50.7 39.9 4.7 0.5 0.4 3.7 58.1 30.3 3.9 0.5 0.5 6.8 54.8 36.3 2.4 0.6 0.2 5.7 62.3 26.5 2.7 0.3 0.4 7.8 High-capacity Low-capacity Low capacity 258.6 4.2 69.0 58.1 1.1 179.9 86.6 37.3 0.1 50.3 43.0 4.0 0.7 0.1 1.9 4.2 0.4 0.5 5.9 62.8 30.7 1.1 0.0 0.0 5.5 2.7 0.3 0.4 7.3 Foreign
Table A3.6. Infrastructure Performance Indicators in Bangladesh, by Type of Firm

Non- exporter 263.0 3.7 66.8 61.6 0.9 186.3 91.5 Non-exporter 56.8 33.5 3.4 0.4 0.6 5.3 55.8 33.2 62.9 27.4 2.4 0.2 0.5 6.7 59.6 29.8 Domestic Medium-size
Domestic
Indicator Frequency of power outages (times last year) Production lost due to power outages (percent) Firms with own generator (percent) Firms with own well (percent) Production lost in shipment (percent) Days to obtain a telephone connection Days to obtain an electricity connection Days to obtain a water connection Exports as a share of sales (percent)
271.3
270.8
231.8
250.4
207.7
230.6
3.7 37.3 46.7 1.0 101.2 62.0 10.8
3.9 68.2 62.6 0.8 196.1 108.8 32.3
2.8 87.5 53.4 1.1 154.2 77.8 53.3
3.3 70.8 53.8 1.0 150.3 80.7 39.5
3.8 86.2 79.3 1.1 95.8 31.0 28.6
79.0 43.6 1.1 110.4 71.7 94.5
Not available. Source: Investment climate survey.
Table A3.7. Sources of Finance for Firms in Bangladesh, in International Perspective and by Type of Firm (percent)
Medium-size
Bangladesh
Pakistan
Sources for working capital Retained earnings Banks and other financial institutions Trade credit Equity Informal sources All others Sources for new investments Retained earnings Banks and other financial institutions Trade credit Equity Informal sources All others - Not available. Source: Investment climate surveys. 59.9 29.7 2.6 0.4 0.3 7.1 55.6 6.2 1.7 14.1 2.6 15.4 68.0 20.0 2.7 0.2 1.1 8.1 61.2 30.1 2.1 0.2 0.2 6.1 55.9 33.6 2.8 0.5 0.1 7.1 55.5 33.0 3.0 0.6 0.2 7.7 55.6 33.5 4.2 0.5 0.5 5.8 65.4 5.1 4.6 12.7 1.3 10.9 63.9 25.8 2.0 0.3 1.1 6.9 55.5 35.5 3.9 0.3 0.2 4.5 52.2 35.7 5.2 0.7 0.3 5.8 53.9 33.3 5.3 0.7 0.3 6.5
64
Exporter
China
Large
Small
India
Exporter 2.5
Foreign
Large
Small
Table A3.8. Firms Credits, Loans, and Liabilities in Bangladesh, in International Perspective and by Type of Firm (percent, except where otherwise specified)
Share of firms with overdraft or line of credit Share of credit currently unused Share of firms with a loan from a bank or other financial institution For the most recent loan or overdraft Share requiring collateral Average value of collateral required, as a share of loan Average interest rate on loan Average duration of loan Share of total borrowing denominated in foreign currency Long-term (one year or more) liabilities as a share of total liabilities Short-term liabilities as a share of total liabilities Equity and retained earnings as a share of total liabilities Not available. Source: Investment climate surveys.
66.2 25.6 58.8
22.8 43.5 19.5
26.6 28.6 57.0
53.1 28.5 48.5
64.8 26.2 61.2
72.3 24.5 63.6
72.4 23.8 72.4
65.8 25.6 58.5
64.1 30.5 52.5
67.8 22.6 64.5
70.8 32.7 62.1
63.8 21.7 57.1
69.9 94.6 12.4 36.5 5.4 34.8 26.4 52.9
70.6 72.9 14.8 8.3 0.5 7.4 14.2 56.4
83.0 88.9 6.6 14.3 8.1
3.2
67.4 83.2 12.4 37.5 8.0 36.0 24.4 64.0
74.1 95.7 12.1 36.0 3.5 38.9 29.3 49.4
68.9 96.8 12.6 36.3 5.1 33.0 25.9 49.7
80.0 125.4 11.3 35.8 12.3 31.6 36.9 41.7
69.3 92.9 12.5 36.6 4.7 35.0 26.0 53.3
62.0 85.7 11.8 37.9 5.7 35.1 25.6 49.9
75.1 99.6 12.8 35.6 5.1 34.6 27.0 54.9
73.5 107.6 12.6 36.5 2.9 38.0 28.8 46.9
67.8 87.1 12.4 36.5 6.9 33.2 25.0 55.8
16.8 27.5 73.6 21.7 42.1 44.3
Table A3.9. Financial Sector and Property Rights Indicators in Bangladesh, in International Perspective and by Type of Firm
High capacity 68.2 2.8 1.9 21.7 65.3 29.1 71.0 60.0 39.6 71.7 Non-exporter Low capacity Medium-size
Bangladesh
Domestic
Pakistan
Exporter
Indicator Financial sector Share of firms with audited financial statements (percent) Clearance time through firms financial institution (days) For check For domestic currency wire For foreign currency wire Property rights Land Share owned (percent) Share leased or rented (percent) Average length of lease or rental (months) Buildings Share owned (percent) Share leased or rented (percent) Average length of lease or rental (months) Not available. Source: Investment climate surveys.
68.7 2.9 1.9 20.6
41.6 1.9 2.4 3.2
74.8 4.7 5.3 3.8
36.0 2.7 1.6
66.3 2.9 2.6 17.8
83.7 2.9 1.6 24.1
77.7 3.0 2.2 29.9
62.5 2.8 1.6 13.8
68.3 2.9 1.9 21.1
87.0 3.0 2.2 14.7
Foreign
China
Large
Small
India
69.7 3.1 1.7 18.4
13.8
67.4 27.2
88.0 11.6
54.0 25.2
70.3 26.6 77.2
81.2 17.0 73.0
60.3 31.9 87.6
54.6 34.8 73.5
75.4 22.6 94.1
66.7 27.8 80.6
78.4 17.9 196.2
71.6 23.5 116.8
83.5 185.4 106.0
62.1 37.7 74.3
90.5 9.0 91.5
64.6 34.3 64.5
66.5 33.1 77.8
74.1 25.5 70.6
54.9 44.9 74.2
47.3 52.4 72.5
72.2 27.4 76.9
61.1 38.6 74.7
80.2 19.8 60.0
66.1 33.9 80.4
65
High capacity
Non-exporter
Low capacity
Medium-size
Bangladesh
Domestic
Pakistan
Exporter
Foreign
China
Large
Small
India
Table A3.10. Regulatory Burden and Administrative Delays in Bangladesh, in International Perspective and by Type of Firm
High capacity 6.1 3.9 2.5 7.5 0.1 0.4 11.9 23.1 9.4 14.4 Non-exporter 7.3 4.0 2.3 10.2 0.0 0.5 12.3 25.9 8.7 14.6 Low capacity 11.1 5.0 2.4 15.1 0.3 0.3 11.2 23.4 7.8 13.4 Medium-size
Bangladesh
Domestic
Pakistan
Firms disagreeing that interpretations of regulations consistent, predictable (percent) Share of senior management's time spent dealing with regulations (percent) Informal payments to officials to "get things done" as a share of revenue (percent) Share of revenue typically reported for tax purposes (percent) Inspections Days spent in inspections or required meetings with officials Share of meetings and inspections by local authorities (percent) Cost of fines or seized goods as a share of sales (percent) Share of interactions in which informal payment requested (percent) Informal payments as a share of sales (percent) Import delays (days) Average wait to clear customs Longest wait to clear customs Export delays (days) Average wait to clear customs Longest wait to clear customs Not available. Source: Investment climate surveys.
7.8 4.2 2.5
50.0 10.1 2.0
14.7 11.5 1.8 54.9
2.6 3.6 2.3
9.0 4.1 2.3
8.1 4.5 2.7
7.3 4.2 2.5
20.7 5.9 1.7
7.0 4.7 2.8
9.9 0.1 0.3
32.8 0.0 0.0
30.9 0.0 0.0
1.9 69.8
5.6 0.1 0.8
12.6 0.0 0.3
11.4 0.2 0.1
9.5 0.1 0.3
2.6 0.1
9.5 0.2 0.1
11.7 23.2
17.9 31.9
7.5 12.2
10.4 21.6
13.4 20.8
10.1 23.2
11.8 23.7
11.7 22.3
10.3 25.6
11.2 20.6
8.8 14.0
9.2 17.7
5.5 8.1
5.1 9.3
9.4 15.8
8.5 14.1
9.0 14.0
9.0 14.2
6.3 11.7
8.9 14.0
66
Exporter
Foreign
China
Large
Small
India
Table A3.11. GovernanceUncertainty and Corruption

High Capacity 6.1 6.5 0.5 11.3 2.5 Non-exporter Low Capacity 11.1 7.9 1.6 13.2 2.4 Bangladesh
Domestic 0.9 2.5
Pakistan
Exporter
Medium
Uncertainty: Interpretations of regulations, consistent, predicatble (% disagree) Share of profits reinvested in the firm Confidence in the judiciary (% disagree) Percent of payment disputes resolved in the courts Planning horizon for investments (months) Corruption: Percent of revenues needed for informal payments Percentage of firms saying gift/payment required for: (a) a mainline telephone connect. (b) an electrical connection (c) a construction permit (d) an import license (e) operating license Revenue reported by typical establishment for tax purposes (%) Source: Investment climate surveys.
7.8
50.0
14.7
2.6 9.0
8.1
7.0
7.3
7.3 20.7
6.9 0.9 11.9
49.0 30.2
7.4 5.4
3.9 6.6 0.5 1.8
7.9 0.7
5.0 0.0
7.8 1.0
6.7 14.3 0.1
11.2 9.9 13.2 10.7
13.0 11.3 28.2
2.5
2.0
1.8
2.3 2.3
2.7
2.8
2.3
1.7
4.7 5.1
7.9 9.1 54.9
67
Foreign
China
Large
Small
India
Table A3.12. Technology Indicators in Bangladesh, in International Perspective and by Type of Firm (percent)
High capacity 60.9 60.1 5.5 4.5 29.6 4.2 86.1 Non-exporter Low capacity 57.3 62.6 8.1 3.4 21.8 5.3 84.7
Medium-size
Bangladesh
Domestic
Pakistan
Indicator Share of firms with ISO certification Share of firms with technology innovations Developed a major new product line Upgraded an existing product line Introduced new technology that has substantially changed the way the main product is produced Discontinued at least one product line Agreed on a new joint venture with a foreign partner Obtained a new licensing agreement Share of firms rating form of technology acquisition as first, second, or third most important Embodied in new machinery or equipment Hiring key personnel Licensing or turnkey operations from international sources Licensing or turnkey operations from domestic sources Developed or adapted within the establishment locally Transferred from parent company All others Not available. Source: Investment climate surveys.
17.0
50.4 44.7
Exporter
Foreign
China
Large
Small
India
39.5 23.7
59.7 60.9 6.4 4.1 27.0 4.5 85.7
11.2 26.6 9.0 14.4 57.2 6.0 93.8
50.9 18.9 23.7
54.2 62.0 3.2 6.9
51.0 62.6 6.3 6.8 30.1 5.3 84.5
65.7 60.3 7.5 2.1 20.5 4.9 85.1
59.8 61.8 6.2 4.2 27.3 4.2 86.0
57.7 50.0 7.7 0.0 23.1 15.4 76.9
64.0 64.3 9.3 2.3 21.0 3.8 85.0
57.4 58.8 4.5 5.6 31.1 5.2 86.0
79.2 19.4 55.9
38.9 3.2 88.4
68
Table A3.13. Labor and Training in Bangladesh, in International Perspective and by Type of Firm (percent, except where otherwise specified)
Non- exporter High capacity 67.0 39.6 8.5 3.8 2.8 1.4 98.7 28.4 4.0 Low capacity 63.2 36.2 10.9 5.7 3.7 1.9 99.6 23.1 4.4 Medium-size Bangladesh
Domestic
Pakistan
Exporter
Labor composition Share of workers who are permanent Share of permanent workers who are female Share of temporary workers who are female Share of permanent skilled workers who are foreign nationals Labor turnover New employees as a share of total Employees who left as a share of total Average time to fill a skilled technical vacancy (weeks) Average time to fill a production or service vacancy (weeks) Desired level of workforce as a percentage of current level Training and education Share of workforce with less than 6 years schooling Share of workforce with more than 12 years schooling Share of skilled workers receiving training Share of firms offering formal training Labor unrest Days lost to labor disputes or civil unrest Not available. Source: Investment climate surveys. 4.1 1.3 0.3 5.4 4.8 3.3 4.1 4.2 4.2 4.8 26.6 34.9 9.5 36.0 11.1 1.7 11.4 45.5 69.6 27.2 14.9 27.7 31.0 30.8 23.8 26.0 34.5 9.3 4.4 3.1 1.6 99.0 8.2 5.3 1.5 1.2 97.0 12.4 2.9 87.4 6.2 0.6 82.8 8.6 4.8 2.1 1.1 98.9 12.7 6.0 3.3 1.8 99.3 8.2 3.6 3.4 1.7 98.8 10.7 5.2 2.9 1.7 98.5 8.3 3.8 3.2 1.5 99.3 9.2 4.2 3.0 1.6 99.0 8.6 9.6 3.9 2.2 98.4 65.3 38.5 86.6 3.0 1.9 85.9 44.5 20.8 59.7 18.3 31.8 50.1 13.9 62.8 20.0 76.2 50.3 67.6 52.7 63.9 24.9 65.8 38.8 71.3 33.7
69
Foreign
China
Large
Small
India
References
Bangladesh, Ministry of Finance, Economic Relations Division. 2002. Bangladesh: A National Strategy for Economic Growth, Poverty Reduction and Social Development. Dhaka. Bangladesh, Ministry of Finance, Economic Relations Division. 2003. Bangladesh: Interim Poverty Reduction Strategy Paper. Dhaka. Bangladesh, Public Administration Reform Commission. 2000. Report of the Public Administration Reform Commission. Dhaka. Bruno, Michael, and William Easterly. 1998. Inflation Crises and Long-Run Growth. Journal of Monetary Economics 41 (1): 3-26. Centre for Policy Dialogue. 2001. Policy Brief on Industry and Trade. CPD Task Force Draft Report. Dhaka. Clarke, George R. G. 2001. How Institutional Quality and Economic Factors Impact Technological Deepening in Developing Countries. Journal of International Development 13 (8): 1097-119. . 2002. Does Internet Connectivity Affect Export Performance? Evidence from Transition Countries. WIDER Discussion Paper 2002/74. United Nations University, World Institute for Development Economics Research, Helsinki.
Djankov, Simeon, Rafael La Porta, Florencio Lpez-de-Silanes, and Andrei Shleifer. 2002. The Regulation of Entry. Quarterly Journal of Economics 117 (1): 1-37. Dollar, David, and Aart Kraay. 2001. Trade, Growth, and Poverty. Finance and Development 38 (3): 16-19. . 2002. Growth Is Good for the Poor. Journal of Economic Growth 7 (3): 195-225. Easterly, William. 1999. The Ghost of Financing Gap: Testing the Growth Model Used in the International Financial Institutions. Journal of Development Economics 60 (2): 42338. Emery, James, Melvin T. Spence, Louis T. Wells, and Timothy Buehrer. 2000. Administrative Barriers to Foreign Investment: Reducing Red Tape in Africa. International Finance Corporation, Washington, D.C. Frankel, Jeffrey, and David Romer. 1999. Does Trade Cause Growth? American Economic Review 89 (3): 379-99. Friedman, Eric, Simon Johnson, Daniel Kaufmann, and Pablo Zoido-Lobatn. 2000. Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries. Journal of Public Economics 76 (3): 459-93. International Monetary Fund. 2002a. Bangladesh: Selected Issues and Statistical Appendix. Washington, D.C.
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. 2002b. Bangladesh: Staff Report for the 2001 Article IV Consultation. Washington, D.C. Kaufmann, Daniel, and Aart Kraay. 2002. Growth without Governance. Economia 3 (1). [http://www.worldbank.org/wbi/governance/pubs/growthgov.htm]. Kaufmann, Daniel, Aart Kraay, and Pablo ZoidoLobatn. 1999. Governance Matters. Policy Research Working Paper 2196. World Bank, Washington, D.C. . 2000. Governance Matters, from Measurement to Action. Finance and Development 37 (2): 10-13. . 2002. Governance Matters II: Updated Indicators for 2000/01. Policy Research Working Paper 2772. World Bank, Washington, D.C. Knack, Stephen, and Philip Keefer. 1995. Institutions and Economic Performance: CrossCountry Tests Using Alternative Institutional Measures. Economics and Politics 7 (3): 207-27. Lall, Sanjaya. 2001. Competitiveness Indices and Developing Countries: An Economic Evaluation of the Global Competitiveness Report. World Development 29 (9): 150125. Lansbury, Melanie, and David Mayes. 1996. Entry, Exit, Ownership and the Growth of Productivity. In David Mayes, ed., Sources of Productivity Growth. Cambridge: Cambridge University Press. Levine, Ross. 1997. Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature 35 (2): 688726. Li, Wei, and Lixin Colin Xu. 2001. Liberalization and Performance in the Telecommunications Sector around the World. World Bank, Washington, D.C. McMillan, John, and Christopher Woodruff. 2002. The Central Role of Entrepreneurs
in Transition Economies. Journal of Economic Perspectives 16 (3): 153-70. Recanatini, Francesca, Scott Wallsten, and Lixin Colin Xu. 2000. Surveying Surveys and Questioning Questions: Learning from World Bank Experience. Policy Research Working Paper 2307. World Bank, Washington, D.C. Sachs, Jeffrey D., and Andrew M. Warner. 1995. Economic Convergence and Economic Policies. NBER Working Paper 5039. Cambridge, Mass.: National Bureau of Economic Research. Smarzynska, Beata, and Shang-Jin Wei. 2000. Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence. Policy Research Working Paper 2360. World Bank, Washington, D.C. Stern, Nicholas. 2002a. The Investment Climate, Governance, and Inclusion in Bangladesh. World Bank, Office of the Senior Vice President, Development Economics, Washington, D.C. . 2002b. A Strategy for Development. Washington, D.C.: World Bank. Tybout, James. 2000. Manufacturing Firms in Developing Countries: How Well Do They Do, and Why? Journal of Economic Literature 38 (1): 11-44. Wallsten, Scott. 2001. An Econometric Analysis of Telecom Competition, Privatization, and Regulation in Africa and Latin America. Journal of Industrial Economics 49 (1): 1-20. Wei, Shang-Jin. 2000. How Taxing Is Corruption on International Investors? Review of Economics and Statistics 82 (1): 1-11. World Bank. 1998. Strategy for Establishing a Sound and Competitive Banking Sector. Vol. 1. Washington, D.C. . 2001a. Bangladesh: A Review of Public Enterprise Performance and Strategy. Washington, D.C.
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Improving the Investment Climate in Bangladesh

Washington, D.C. The World Bank

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Acronyms and Abbreviations

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Investment Climate Matters

Key Features of the Investment Climate

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Investment Climate Matters

Linking the Investment Climate with Growth

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Investment Climate Matters

An Overview of the Bangladesh Economy

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Investment Climate Matters

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Investment Climate Matters

Bangladeshs Investment Climate in International Perspective

A Strong Macroeconomic Performance

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

and are affected bymacroeconomic performance.

Poor Integration with the Global Economy

Low & middle income

Source: World Bank 2002c.

Source: World Bank 2002c.

Bangladeshs Investment Climate in International Perspective

Exports Source: World Bank estimates.

in co me an d m in idd co le m Sr e iL an ka In do ne sia Ph ili pp in es Th ai la nd Ma la ys ia

Strongest Source: World Economic Forum 2002.

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Bangladeshs Investment Climate in International Perspective

several quantitative measures of infrastructure development in addition to the qualitative measures.

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Transport, Ports, and Customs

Bangladeshs Investment Climate in International Perspective

Source: Investment climate surveys.

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

0.6 0.4 0.2 0.0 1980

1988 Fixed lines

Source: International Telecommunication Union 2002.

Bangladeshs Investment Climate in International Perspective

Fixed lines Source: International Telecommunication Union 2002.

30 20 10 0 Bangladesh Pakistan China 18 7

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Bangladeshs Investment Climate in International Perspective

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Mainline Gas telephone Source: Investment climate survey.

Lagging in Human Resources

Note: Data are for 2000. Source: World Bank.

Bangladeshs Investment Climate in International Perspective

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Source: World Economic Forum 2002.

A Weak Record in Technological Innovation

Utility patents (X 10)

Source: United Nations Educational, Scientific, and Cultural Organization (UNESCO).

Bangladeshs Investment Climate in International Perspective

The Effects of Bangladeshs Investment Climate on Firms

Source: Investment climate survey.

International IntegrationThe Potential of Exports and the Rise of a New Industry

IMPROVING THE INVESTMENT CLIMATE IN BANGLADESH

Figure 3.3. Sales by New Exporters and Nonexporters in Bangladesh

0 199697 Source: Investment climate survey. 200102

0 Sales growth Employment growth Investment