The Growth-Equity Nexus in Bangladesh: An Analysis of Recent Experience

Bangladesh’s transition to a higher growth trajectory since the early 1990s has been accompanied by increasing inequality of income. In particular, the gap between the richest ten per cent and the poorest forty per cent of the population has steadily widened. The present paper argues that growth acceleration and rising inequality are essentially two sides of the same coin - in the sense that the forces that have contributed to growth acceleration are also the ones that have engendered rising inequality. An important causal mechanism underlying both sides of the coin is the fact that growth of real wages has lagged behind growth in labour productivity. This has, on the one hand, reduced the real cost of labour which has contributed to growth acceleration by improving Bangladesh’s competitiveness in the world market and thereby spurring an export-oriented growth process. On the other hand, it has reduced the share of labour and raised the share of non-labour factors of production in national output, resulting in a shift in the functional distribution of income against labour. Since the poorer segment of the society depends more on labour income (wage- or self-employed) and the richer segment depends more on the returns from non-labour factors such as land and capital, the anti-labour shift in the functional distribution of income has resulted in rising inequality in personal income distribution as well. Yet another mechanism underlying the two sides of the coin is the phenomenal growth in foreign remittance which has spurred economic growth on the one hand and contributed to rising inequality on the other. Although inequality is rising because of the growth process itself, the solution does not lie in reversing the growth process or in abandoning the current sources of growth. Rather the solution lies in ensuring broad-based access to the opportunities being opened up by the growth process. One of the implications of this analysis is that a necessary precondition for linking growth with equity in Bangladesh is to ensure greater social protection and greater equality in human capital. The evidence presented in this paper show, however, that this precondition is far from being fulfilled. On the contrary, there is clear evidence that inequality in the distribution of human capital is not only high but also increasing over time, which does not portend well for the prospects of achieving equitable growth in the future.