2.8 Market failure - externalities, common pool resources, public goods, asymmetric information Questionbank

ECONOMIC REALITIES AND POLICIES IN BANGLADESH

Bangladesh is a rapidly developing country in South Asia, recognized for its thriving ready-made garment (RMG) industry, which accounts for over 80% of export earnings. Government reforms since the early 2000s, aimed at boosting export competitiveness, have led to steady gains in real GDP. For instance, between 2019 and 2022, Bangladesh’s real GDP growth averaged 5.2% annually. However, persistent challenges such as high rural poverty rates (officially at 20.1%, with extreme poverty at 10.5%) and vulnerability to climate risks continue to threaten inclusive growth.

Remittances form a major pillar of the economy, totaling over US$24 billion in 2021. Inflows from the Bangladeshi diaspora support household consumption and reduce external vulnerabilities, contributing to the country’s foreign currency reserves. Even so, the government has been concerned about maintaining exchange rate stability, especially in light of global inflationary pressures and supply chain disruptions, which have driven up the cost of essential imports like fuel and machinery. To cope with rising expenditures on food and energy, the government raised tariffs on luxury goods while restricting administrative barriers for essential commodity imports.

On the microeconomic front, the government recently introduced a consumption tax on sweetened beverages to curb rapidly rising obesity rates. Local bottlers initially protested the policy, arguing it would reduce their profits and force layoffs in urban factories. Yet public health advocates insist that the potential long-term social benefits reduced health-care costs and a healthier workforce outweigh the short-term economic costs. Meanwhile, targeted subsidies on fertilizers aim to support agricultural productivity; farmers in the northern regions have long claimed that lack of affordable inputs restricts their ability to increase crop yields and incomes.

Bangladesh’s push for infrastructure improvements particularly in roads, ports, and energy has attracted modest but growing foreign direct investment (FDI), totaling around US$2.8 billion in 2022. Corporate tax incentives are given to firms that establish manufacturing plants in special economic zones, spurring output in electronics and pharmaceuticals. Yet the domestic labor force often lacks specialized skills, leading to high underemployment. The government’s Skills for Employment Initiative, launched in 2020, aims to address these gaps by providing technical training and apprenticeships to youths aged 18–30.

Concurrently, there are ongoing debates on reducing import tariffs further to encourage greater participation in regional trade blocs. Economists highlight that a more liberalized trade environment can improve access to cheaper raw materials for local industries. Critics, however, worry that swiftly removing tariffs might destabilize nascent domestic firms already grappling with competition from established foreign producers.

Bangladesh faces significant environmental and developmental hurdles. Climate change-related floods frequently destroy crops, thereby exacerbating rural poverty. Government officials have begun working with international donors to finance climate-resilient infrastructure elevated roads and flood barriers while also supporting microfinance programs targeted at poor households. These policies seek to break the vicious cycle of poverty, whereby low incomes lead to low investments in education and productivity, perpetuating underdevelopment. Early signs suggest that expanded access to small loans, particularly for female entrepreneurs, is reducing extreme poverty in several flood-prone districts.

Despite these efforts, inequalities persist. In urban areas, the Gini coefficient remains relatively high, reflecting income gaps within the service sector. Doctors and engineers earn significantly above the national average, boosting demand for private education that many poor households cannot afford. The government has tried to bridge this inequality by directing additional funds to public schools, focusing on science and technology curricula.

The prospects for Bangladesh hinge on effective policy coordination. Balancing short-term macroeconomic stability such as keeping inflation below 8% with long-term structural reforms in education, infrastructure, and trade policy remains a central challenge. The government’s ability to manage environmental risks, attract investment, and provide social protection will greatly influence whether Bangladesh can transition from a lower-middle-income to a higher-income country in the coming decades.

Table 1: Selected Macroeconomic Indicators for Bangladesh (2019–2022)

Table 2: Development and Social Indicators for Bangladesh

Liberia’s Growth and Sustainability

Liberia is a low-income country in West Africa, historically relying on primary commodities such as rubber, iron ore, and timber for export earnings. Despite a significant decline in real GDP growth during the global economic downturn from 2020 to 2021, Liberia has gradually rebounded, registering an estimated 3.5% real GDP growth in 2022. Yet, inflation remains high at about 11% in the same year, pushing up the cost of living and exposing vulnerabilities in Liberia’s reliance on imported goods.

To boost economic activity, the Liberian government provides subsidies on fertilizers and basic food items. These subsidies aim to reduce production costs for smallholders and stabilize household spending. However, the fiscal burden of these expenditures has raised concerns about the sustainability of government finances, especially as external debt reached 54% of GDP in 2021. Moreover, subsidies have sometimes been criticized for benefiting larger commercial farms more than subsistence farmers.

In an effort to expand local manufacturing, Liberia maintains moderate tariffs on selected imported consumer goods, especially processed foods. Officials argue that these tariffs protect emerging local industries from external competition. However, critics claim they also raise prices for consumers. Meanwhile, trade relations within the Economic Community of West African States (ECOWAS) have led to discussions on gradually lowering tariffs to promote regional trade.

Foreign direct investment (FDI) has been a significant driver of Liberia’s economic recovery. In mining and forestry, multinational firms have partnered with local businesses to upgrade infrastructure and technology. Despite a growing presence of investors in rubber processing, some local entrepreneurs struggle to gain access to financing. Government policymakers have also begun to explore new sectors, such as light manufacturing and tourism, to diversify the economy.

Environmental challenges, especially deforestation and soil erosion, have intensified. Liberia’s vast forests are at risk due to logging and surge in farmland expansion. Many small-scale gold mining operators also create negative externalities through water pollution. International organizations have urged stronger environmental regulations, but enforcement remains weak. Policymakers debate whether stricter rules might discourage inflows of FDI, a key pillar of the national development strategy.

Amid these challenges, the government launched the National Agriculture Development Initiative (NADI) in 2019. The program includes farm modernization projects, education in sustainable farming practices, and credit facilities for small and medium-sized enterprises. By 2021, agricultural productivity grew by 6%, according to official estimates. The authorities aim to increase Liberia’s self-sufficiency in staple crops, lessening dependency on volatile global commodity prices.

Liberia’s social indicators reflect both progress and persistent inequality. Official data suggest unemployment reached 14% in 2020, disproportionately affecting young people in urban centers. Although per capita income remains low, the Gini coefficient dropped slightly from 0.37 in 2018 to 0.35 in 2021, indicating mild improvements in income distribution. Critics note that many residents still work in informal sectors, lacking social protections.

Looking forward, the government plans to strengthen institutions, reduce tariff barriers within ECOWAS, and encourage private investment in infrastructure. Supporters of these initiatives see potential for enhanced export competitiveness and job creation. On the other hand, some analysts worry that overreliance on foreign borrowing and a narrow export base could expose the country to external shocks. As Liberia transitions from post-conflict recovery to a more stable growth path, balancing fiscal sustainability, social welfare, and environmental integrity remains a central policy challenge.

Table 1: Liberia’s Selected Macroeconomic Indicators (2018–2021)

Table 2: Data on the National Agriculture Development Initiative (NADI)

Pakistan’s Economic Recovery Challenges

Pakistan faces persistent economic challenges as a developing nation with a rapidly growing, youthful population. The country’s fiscal position remains precarious, characterized by a large budget deficit fueled by rising defense spending and debt servicing costs, with interest payments consuming approximately 40% of total government revenue. This fiscal strain is further aggravated by persistent current account deficits and a dependence on external financial assistance from international institutions.

In response, the Pakistani government has engaged with the International Monetary Fund (IMF) and other multilateral lenders. Under its latest IMF bailout program, Pakistan has committed to a set of structural reforms, including the privatization of state-owned enterprises to improve efficiency, reforming energy subsidies to lower government expenditure, enhancing tax collection mechanisms to increase revenue, tightening monetary policy to control inflation, and maintaining a market-determined exchange rate to stabilize the external sector.

Government officials stress that international financial support is critical for economic recovery, as it restores investor confidence, attracts Foreign Direct Investment (FDI), and facilitates access to additional funding from institutions like the Asian Development Bank (ADB) and World Bank. However, critics argue that IMF programs often lead to austerity measures that can slow economic growth and disproportionately impact low-income households.

Pakistan has a long history of engagement with the IMF, having participated in more than twenty IMF programs since the 1980s. A recurring pattern has emerged: temporary improvements in external balances followed by economic reversals, raising questions about the effectiveness of IMF-led reforms and Pakistan’s ability to sustain long-term economic stability.

Beyond macroeconomic stabilization, development economists emphasize the need for human capital investment to unlock Pakistan’s demographic dividend. Key policy recommendations include expanding education and vocational training programs to improve workforce productivity, promoting gender equality in labor markets to increase economic participation, and encouraging youth employment initiatives to leverage Pakistan’s young population.

While multilateral development banks support initiatives like green energy projects, infrastructure development, and digital transformation, concerns remain about policy implementation, governance challenges, and environmental sustainability. Some critics argue that economic stabilization efforts often overshadow long-term development goals, leading to an ongoing policy dilemma: how should Pakistan balance short-term fiscal stability with long-term economic development?

Table 1: Pakistan’s Government Expenditure and Debt Servicing

Table 2: Foreign Direct Investment and Current Account Balance in Pakistan

Cuba is an island nation in the Caribbean with a long history of state-led economic policies and a continued trade embargo imposed by the United States since 1960. The Cuban economy is heavily dependent on two key sectors: sugar and tourism. Sugar has traditionally been Cuba’s largest export, accounting for over 70% of export revenues, although inefficiencies and outdated technology have constrained growth in output. Meanwhile, tourism has become an increasingly important source of foreign exchange, representing nearly 24% of the nation’s gross domestic product (GDP). However, environmental concerns have arisen from rapid growth in visitor arrivals, including water pollution and congestion in popular coastal areas.

Cuba’s real GDP grew modestly from 2021 to 2022, although high inflation and global supply chain disruptions presented serious challenges. The government has attempted some economic reforms, including allowing limited private enterprise and trying to attract modest amounts of foreign direct investment (FDI). Nevertheless, significant barriers to trade remain in place due to the decades-long embargo, as do restrictions on access to many imported goods.

The Cuban government operates a progressive tax system to finance public healthcare, education, and subsidized food programmes. Alongside this, it has announced a new subsidy plan to boost sugar production and modernize processing facilities. Policymakers hope that these measures will generate both export revenues and improved economic prospects.

Below are selected data from the Cuban economy:

Table 1: Key Macroeconomic Indicators for Cuba (2021–2022)

Table 2: Demand for Sugar in Cuba

Table 3: Tourism in Cuba

Table 4: Selected Cuban Tax Rates