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Deals and DevelopmentThe Political Dynamics of Growth Episodes$

Lant Pritchett, Kunal Sen, and Eric Werker

Print publication date: 2017

Print ISBN-13: 9780198801641

Published to Oxford Scholarship Online: December 2017

DOI: 10.1093/oso/9780198801641.001.0001

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Navigating the Deals World

Navigating the Deals World

The Politics of Economic Growth in Bangladesh

(p.96) 4 Navigating the Deals World
Deals and Development

Mirza Hassan

Selim Raihan

Oxford University Press

Abstract and Keywords

This chapter shows how elite political settlements over time have influenced economic growth in Bangladesh. More concretely, the chapter focuses on the analysis of economic, institutional, and political economy conditions behind structural breaks in economic growth, phases of growth acceleration, and transitions in growth regimes in Bangladesh. This involves analysis of the pattern of structural change in the economy, mapping of the rent generation and rent allocations process in different sectors, discussions on the institutional space (i.e. delineation of the nature of formal and informal institutions that tend to affect a firm’s behaviour), and analysis of the deals environment of the business. The chapter also explores the incentives and ideology/vision of the political, state, and economic elites, the nature of state–business relations, and the influence of de facto growth coalitions to explain the dynamics of current trends and future prospects for growth in Bangladesh.

Keywords:   economic growth, political settlements, deals environment, Bangladesh, rent space, limited access order

4.1 Introduction

Over the past forty years since independence, notwithstanding many external and internal shocks, Bangladesh has increased its per capita income fourfold, cut poverty by more than half, and achieved many of the Millennium Development Goals. Bangladesh’s economic growth rates in recent years have been higher than most South Asian countries and many sub-Saharan African countries. These positive development experiences provide the basis for optimism that, despite many policy and institutional constraints, and global uncertainties, Bangladesh will perhaps be able to continue with the current rate of economic growth. Bangladesh’s reasonably high and steady growth performance (and also remarkable progress in some social development indicators) has been perceived as a ‘paradox’ or ‘development surprise’ by the World Bank (on both growth- and social development-related achievements) as well as by other observers of Bangladesh’s development (World Bank, 2007a; World Bank 2007b; World Bank 2010; Mahmud et al., 2008; IGS, 2009; Asadullah et al., 2014).

The conventional narrative on economic growth in Bangladesh tends to ignore the role of deep determinants of growth—political institutions and processes, rent management strategies, and the deals environment—and mainly emphasizes the proximate determinants, such as appropriate industrial policy, trade policy, and savings. The conventional narrative sees Bangladesh as a paradox, since a steady and reasonably high rate of growth took place in the context of ‘bad’ or ‘weak’ governance. The fundamental assumption here is that standard ‘good governance’ institutions (as unequivocally advocated by Islam (p.97) (2016), and in a more nuanced way argued by Khan (2015)) or ‘market enhancing governance institutions’ (Khan, 2008) are preconditions for a high and sustained growth rate in the economy.

In contrast, this chapter provides an alternative explanation of the ‘Bangladesh paradox’. It argues that strong economic growth has been possible in Bangladesh (despite a lack of, or weaknesses in, many of the market-enhancing institutions) because a reasonably robust form of ‘growth-enhancing governance’ exists in the country. Such growth-enhancing governance is characterized by de facto rent-sharing (across political divides), the political elites’ ability to separate economic and political rents (based on contingent needs), and, more critically, a largely ordered deals environment (irrespective of being open, closed, or semi-closed in various sectors of the economy). This has created enabling conditions—de facto credible commitment of the state and transactional certainty—which are critically important to the private sector for economic growth to take place. The support of political elites for such growth-enhancing governance has been a defining feature of the political settlement in Bangladesh for the past few decades, and is the key explanatory factor for the maintenance of strong growth in the country.

The rest of the chapter is organized as follows: Section 4.2 describes the growth episodes and patterns of structural change, noting that there have been three growth episodes in the post-independence period. Section 4.3 discusses the political context of each of the three growth episodes. Section 4.4 describes the deals environment in Bangladesh’s key growth sector, the ready-made garments (RMG) sector. Section 4.5 discusses the future trajectory of Bangladesh’s economy, in light of current developments in its political economy. Section 4.6 concludes.

4.2 Growth Episodes and Structural Change

4.2.1 Growth Episodes

We use the methodology outlined in Chapter 1 for identifying the growth breaks in Bangladesh between 1972 and 2010. There are two growth breaks in Bangladesh: one occurred in 1982, and another in 1996. These two growth breaks make three growth episodes: (i) between 1972 and 1982; (ii) between 1983 and 1996; and (iii) between 1997 and 2010. Figure 4.1 plots the trend in per capita GDP, the trend in growth rate of the per capita GDP, and the growth episodes.

Navigating the Deals WorldThe Politics of Economic Growth in Bangladesh

Figure 4.1. Growth episodes in Bangladesh

Source: Kar et al. (2013).

The first growth episode had a negative average growth rate, which turned into a small positive number (1.6 per cent) during the second episode. However, during the third episode the average increased to a considerably higher number, around 4 per cent. This suggests that during the second growth (p.98) episode in Bangladesh, the economy was transformed from a negative growth phase into a positive growth phase, and the major acceleration in economic growth took place during the third episode.

4.2.2 Pattern of Structural Change

The overall structure of the Bangladesh economy has undergone a significant transformation over the past four decades, whereby the share of agriculture in GDP has declined, and the shares of the industrial and services sectors have risen gradually (Figure 4.2). During the first growth episode, the average share of agriculture in GDP was as high as 46.5 per cent, which came down to 36.5 per cent during the second growth episode, and further to 23.2 per cent during the third growth episode. The share of industry increased from only 10.7 per cent in the first episode to 11.7 per cent in the second, and further to 27.6 per cent in the third. Finally, the share of services increased to 59.2 per cent in the third episode from around 43 per cent in the first episode.

Navigating the Deals WorldThe Politics of Economic Growth in Bangladesh

Figure 4.2. Composition of GDP (% share in GDP) in Bangladesh

Source: Authors’ calculation from Statistical Yearbook of Bangladesh (various sources).

Liberalization of trade during the 1980s and 1990s, and associated economic reforms, led to large growth in import penetration and export orientation in Bangladesh. The import penetration ratio (the ratio of import to GDP) was only about 12 per cent during the early 1970s, and has increased to more than 30 per cent in recent years. Extensive export promotion measures and favourable market access in the European Union and USA have helped Bangladesh’s (p.99) exports rise remarkably during the past forty years. The export orientation ratio (the ratio of exports to GDP) rose significantly, from only 6.5 per cent in the early 1970s to more than 23 per cent in recent years.

Figure 4.3 shows the movement of the composition of exports across the growth episodes. During the first growth episode, export composition was heavily dominated by raw jute and jute goods. During the second growth episode, the RMG emerged as the leading export sector, and during the third growth episode, more than three-quarters of total export earnings were due to RMG products, with the relative significance of all other sectors declining. The growth of Bangladesh’s RMG exports had largely been attributable to the international trade regime in textiles and clothing, which, until 2004, was governed by the Multi-Fibre Arrangement (MFA) quotas. The duty-free access for Bangladesh’s RMG products in the European Union has also greatly supported the growth of the sector. However, apart from RMG, export performances of all other major commodities, such as raw jute, jute goods, tea, leather and leather products, and frozen food and shrimps, have been rather weak.

Navigating the Deals WorldThe Politics of Economic Growth in Bangladesh

Figure 4.3. Movement of the composition of Bangladeshi exports. (a) Product space during the 1972–82 growth episode: composition of exports in 1978. (b) Product space during the 1973–96 growth episode: composition of exports in 1988. (c) Product space during the 1997–2010 growth episode: composition of exports in 2004

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

The high concentration of the export basket in Bangladesh has been associated with exports of low-level complex products. Figure 4.4 shows the trend in the Economic Complexity Index (ECI) for Bangladesh, which is constructed using export data during the three growth episodes. The ECI for Bangladesh has always been negative, suggesting a very low level of economic complexity. The ECI had a declining trend during the first growth episode, which intensified further during the second growth episode. During the third episode, there was an increasing trend in the early stages, but in later stages the ECI again showed a declining trend.

Navigating the Deals WorldThe Politics of Economic Growth in Bangladesh

Figure 4.4. Economic Complexity Index for Bangladesh

Source: Hidalgo and Hausmann (2009).

(p.100) (p.101) (p.102)

4.3 Political Context of Growth Episodes in Bangladesh

4.3.1 First Growth Episode (1972 to 1982)

Political Settlement

The political economy context of the first growth episode (1972–82) can be broadly divided into two phases: a dominant party regime, characterized by economic populism and illiberal rule that ended up being a one-party state (1972 to late 1975, the first phase of Awami League (AL) rule); and a populist military dictatorship that later transformed into a dominant party regime (late 1975 to early 1982, the first phase of Bangladesh Nationalist Party (BNP) rule). Both phases can be subsumed under the category of basic stage of limited access order (LAO) (see North et al., 2009).1

During the first phase, the AL regime followed a public sector-dominated economic strategy (nationalization, drastically reducing the scope of the market economy) due to economically contingent reasons (dearth of local entrepreneurs) and political economy imperatives (patronage dispensation to the core constituencies of an ‘intermediate regime’2 and the regime’s inability to (p.103) prevent outright plunder by political cadres). Other reasons included the prevailing ideology (preference for adopting ‘socialist’ economic policy by some of the top leaders of the AL, including Sheikh Mujibur Rahman, the first prime minister, then first president, and founding father of Bangladesh) among the militant young leadership of the regime as well as some of the left-leaning economists, who were part of the hugely influential first Planning Commission (Kochanek, 1993; Maniruzzaman, 1980; Maniruzzaman, 1982; Sobhan and Ahmad, 1980; Islam, 1979; Islam, 2013; Karim, 2005; Islam, 2016). Also, since the private business sector was very small and politically weak as a collective force, the decision to nationalize industries could be made without any serious resistance (Islam, 2013; and see Kochanek (1993) for the weakness of the collective forums of business). Globally influential and popular left economic discourses (such as ‘dependency’ theory, and the neo-Marxist critique of capitalism) and practices (social democracy in Europe, actually existing socialisms of Soviet Union, China, and Cuba) also played some role in shaping the Bangladeshi regime’s ‘socialistic’ economic policies.

In 1972, the nationalized units accounted for the overwhelming proportion of the total fixed assets of the manufacturing sector in Bangladesh, and private-sector participation was severely restricted to the medium, small, and cottage industries. During the later phase of the regime, there were some indications of the ruler’s intention to move away from the basic stage of LAO, at least in the economic domain. For instance, in 1974, significant revisions were made to the industrial policy by relaxing the limits on private investment from 2.5 million taka to 30 million taka, and also by providing scope for domestic and foreign private investments. In contrast, politics went in the reverse direction that essentially reinforced the basic form of LAO. By the earlier part of 1975, the regime abandoned a pluralist form of democracy altogether, and became a near totalitarian state.3 This was a short-lived regime, which soon experienced a violent overthrow by a military coup d’état in August 1975.

The second phase (late 1975 to early 1982) of the growth episode was politically governed by General Ziaur Rahman (popularly known as General Zia), a populist military dictator, later the founding father of the BNP. Under him, the country experienced a dramatic shift in economic strategy, by abandoning the public sector-led ‘socialist’ policy and embracing private-sector-led development. Such a reversal in policy and ideology received the enthusiastic backing of conservative politicians, pro-market senior bureaucrats, and most importantly, Western nations, which set the stage for the pro-market economic reforms under the guidance of the World Bank and the IMF. For (p.104) instance, the new Industrial Investment Policy, declared in December 1975, increased the private investment ceiling to 100 million taka, withdrew restrictions on private-sector participation in large-scale manufacturing, allowed direct foreign investment in the private sector, and reactivated the Dhaka stock exchange, among many other policy changes. This radical departure in economic ideology and strategy further eroded the economic basis of the basic stage of LAO, and perhaps planted the seed for the transition of LAO towards its semi-maturity stage in the economic domain. Ironically, military dictator General Zia’s initiation of a constrained form of pluralist politics4 (between 1976 and 1978) replaced the totalitarian mode of rule of the former regime, and the later years of his rule (1979 to early 1982) also saw the evolution of a dominant party state. In this sense, General Zia also presided over the incipient process of the erosion of basic LAO in the political sphere.

In terms of political trajectory, the above discussion indicates that this growth phase experienced a high degree of volatility in political settlements—a dominant party regime morphing into a near totalitarian state that was violently overthrown by a coup d’état resulting in a military dictatorship (vulnerable authoritarian rule), followed by a short-lived dominant party regime.

Rents Space

Figure 4.5 presents the rents space under the first growth episode. This episode did not have any rentiers. The textile sector was given a high degree of protection from foreign competition, thus enjoying high rent, and may be categorized as powerbrokers. Sectors such as electricity generation and distribution; gas, water, and sanitary services; construction; trade services; transport, storage, and communication; real estate, housing, and business and banks; mining and quarrying; and petroleum and petroleum products producers were also powerbrokers during this episode. Sectors in the magicians’ category, such as raw jute, jute textile, and raw leather, were partially export-oriented. Towards the end of this growth episode, the RMG sector started emerging, which also falls into the magicians category. In the workhorses category the sectors were crops and horticulture; livestock; forest and related services; fishing; chemical and rubber; metal and mineral products; machineries; electrical machinery and apparatus; transport equipment; other manufacturing industries; wood and furniture; paper and printing; and other services. Figure 4.6 shows that the workhorses had the largest share (58 per cent), followed by powerbrokers (33 per cent) and magicians (9 per cent).


Navigating the Deals WorldThe Politics of Economic Growth in Bangladesh

Figure 4.5. Rents space in Bangladesh during the 1972–82 growth episode

Source: Authors’ illustration.

Navigating the Deals WorldThe Politics of Economic Growth in Bangladesh

Figure 4.6. Share of actors in GDP in Bangladesh in the first growth episode

Source: Authors’ calculation from the national accounts data.

Deals Environment

Barring a few years (1972–5), the Bangladeshi state has been staunchly pro-business. But it manifested major syndromes of a ‘soft state’, dithering in its implementation of pro-business reforms, especially related to privatization and relaxing bureaucratic control over business through regulatory reforms. Bangladesh was also the first country in South Asia to liberalize its economy. (p.106) A combination of external pressure (by the World Bank and IMF) and domestic politics (marginalization of ‘socialistic’ and left ‘populist’ ideologies with the demise of the first regime of the AL, post-1975 politics being dominated by pro-market elites—both politicians and technocrats (Kochanek, 1993), absence of any effective far left politics, and trade unionism stifled by laws), created an enabling space for the state to formulate and adopt business-friendly regulatory and economic policies during the later phase of the growth episode. Such meta-/macro-level features of the elite political settlement largely shaped the meso-level deals world, and structured state–business relations during this growth episode.

A clearly discernible shift in the deals environment occurred after 1975—from a largely closed and disordered environment (governing the processes of nationalization of industries, allocations of permits and licences, uncertainty with land reform, adjudication of property rights, etc.) to an increasingly open and ordered one. The post-1975 regime, in its drive to create new entrepreneurs and to bolster private-sector-led industrial growth, followed a de facto extremely lax form of regulatory governance in sanctioning industrial loans from specialized publicly owned banks, that led to massive defaulting (see various articles in Sobhan, 1991). This ‘primitive accumulation’ strategy was based on cronyism to a limited extent (for a few politically connected and partisan business actors), but mainly on open deals (for the multitude of business individuals with no political identity). The latter category generated a proactive form of market-led corruption (unsolicited bribing of officials by entrepreneurs), as well as massive rent-seeking, mainly by bank officials (Islam and Siddique, 2010), but also by staff of the relevant ministries, and the process was largely governed by an ordered form of deals (transactional certainty). The Zia regime’s liberal bank loan dispensation policy was also a patronage policy to shore up loyal political constituencies and to develop and consolidate the newly formed political party,5 first Jatiyatabadi Gonotantrik Dal (JAGODOL), which later became BNP (presently one of the two most important political parties in Bangladesh)—perhaps a fitting example of politically productive ‘political rent’ generation and allocations. This means of rent management also proved to be economically productive, as manifested in the emergence of the RMG sector at the end of this growth episode, as well as the creation of indigenous entrepreneurs, especially in the RMG sector (Rashid, 2008)—a critical element that was in acutely short supply during the first decade of independence, as indicated earlier in this section. Such entrepreneurs, in very limited numbers, were also created through the disinvestment of publicly owned industries. Retrospectively, one could argue, (p.107) it would be a stretch of the truth to claim that the regime’s loan disbursement and patronage policies constituted full-blown crony capitalism, since the specific nature of the deals (more open than closed) tends not to indicate so. A form of crony capitalism eventually developed during the regime of General Ershad’s (1982–90) kleptocratic rule. The crony capitalism of this period, however, affected mostly trade and service sectors, rather than manufacturing, which probably enabled the relatively robust nature of industrial development that took place during the later decades.

4.3.2 Second (1983–96) and Third (1997–2010) Growth Episodes

Political Settlement

These growth episodes need to be politically divided into two broader phases: the dictatorial/quasi-dictatorial rule of General Ershad (1983–90); and the vulnerable democratic transition period (1991–2010), characterized by illiberalism and zero-sum elite conflicts, consequently showing little signs of the democratic process being consolidated. The first phase again can be divided into two distinct political stages: military dictatorship/vulnerable authoritarianism (1983–6); and dominant party rule (1986–90). The first stage undid the relative democratic progress that citizens enjoyed under the later stage of the BNP regime, but this form of political governance (constrained pluralism under dominant party rule) was largely restored in the second political stage. This means that similar political dynamics (a limited form of citizen rights regressing and then progressing) were manifested in the basic stage of LAO during the growth phase (1983–90). General Ershad was head of state throughout this period, having taken over power through a bloodless coup in 1982 (from the BNP) after the assassination of General Zia in 1981. He was ousted from power (in 1990) due to a political movement led by both the AL and the BNP and also, at the end of his rule, the military junta declined to back him any further (see Ali (2010) for an empirically rich account of this period).

On the economic front, General Ershad essentially deepened the pro-market economic reform initiated by the previous regime, particularly privatization of large public enterprises and publicly owned banks, which led to serious resistance from the industrial workers and public sector employees trades unions (for a useful account on this, see Monem (2014)). The regime enacted restrictive laws to contain trade union movements that saw a reversal of rights gained by the workers during the last phase of the Zia regime (Faruque, 2009). Strategies to contain union movements were not only limited to denying associational rights and the use of extra-legal coercions—Ershad also utilized his patronage network to co-opt powerful union leaders and influential left leaders with deep connections to the labour movement, by accommodating them in the cabinet, among other strategies.

(p.108) A hallmark of economic governance of this period is the evolution of a full-blown crony capitalism, characterized by General Ershad’s personalistic, kleptocratic, and centralized control over the patronage distribution process. This process has been vividly described by Kochanek (2003: 68–9):

The assassination of Zia and the military coup of General H. M. Ershad in March 1982 took the culture of patronage to new heights. Unable to secure the legitimacy of his regime, Ershad used state power and patronage to retain control. It was Ershad who created the culture of private gain as patronage came to dominate the political and economic system. Under Ershad, state power was used to accumulate private wealth, including his own. Ershad centralized power in his own hands, personally reviewed a large number of files, and Ershad’s Presidential Secretariat in the words of one observer ‘sounded like a brokerage house with calls requesting the status of a contract, an import license, or a bank loan’. Like a traditional patrimonial leader, Ershad attempted to build support by providing important social groups with patronage and benefits. These groups included the military, trade union leaders, business, and other key social groups. Even development projects were affected. The decision on whether or not to proceed with a project was determined by the number and size of contracts and commissions made possible by the project, favouritism, nepotism, personal gain, and rent-seeking took precedence over routine procedures, equitable queuing, or public interest. A complex web of interlocking exchanges between the political elite and civil society, based on personal interests, motivations, and obligations, came to dominate over public responsibility.

The second political phase (1991–2010)6 saw internal progress within the LAO, a ‘paradigmatic’ shift from the previous basic stage to semi-maturity and also the emergence of competitive clientelism (Khan, 2013). We are categorizing the LAO in Bangladesh as semi-mature, due to the low level of political development that occurred during this period. Following Fukuyama (2011), political development is understood here as a process of maintaining a stable balance between state-building,7 rule-of-law consolidation, and democratization. This period also witnessed the rise and consolidation of the politico-institutional form called partyarchy: a democratic political system in which ‘political parties monopolize the formal political process and politicize society along party lines’ (Coppedge,1994: 18). Partyarchy8 took two distinctly (p.109) different forms during this political phase—monopolistic and duopolistic—impacting political and economic domains, respectively. This means, in the political domain, the ruling party tends to monopolize ‘political rents’ (near monopolistic control over power-bestowing institutions), but in the economic domain it follows a duopolistic strategy in sharing economic rents with the opposition political actors, contingent on the nature of economic domains (see later in this section). The effects of the monopolistic partyarchy on the political sphere led to non-consolidation of electoral democracy and recurring political instability, mainly related to regime succession. This implies eventual non-evolution of a self-enforcing and robust elite political settlement, with regard to regime succession, despite numerous attempts by the contending political elites9 to reach such a settlement. The establishment of an interim neutral caretaker government to oversee the elections was the optimum solution that the political elites managed to devise, but this ‘credible commitment’ device later proved useless, due to machinations by successive incumbents to manipulate the system in their own favour.10

More relevant for our current analysis is the examination of the effects of duopolistic partyarchy on the economic domain (especially in relation to the generation and allocation of rents), since it has deeply affected the deals environment. Before we delve into this aspect, it would be helpful to discuss briefly the ‘political’ role of business in the broader polity and economy as it evolved during this competitive clientelistic phase. Such macro-contextual analysis of the role, as well as the political capacity, of business will help us to understand its ability to shape the deals environment and also to navigate within it.

One of the major features of this political phase is that it witnessed the growing influences of business actors in the political and economic governance of the country (Kochanek, 1993; Kochanek, 2000; Hassan, 2001; CGS and BRAC RED, 2006; Majumdar, 2012; Jahan and Amundsen, 2012; Rashid, 2008; Taslim, 2008; Hassan and Pritchard, 2013; Hassan and Pritchard, 2016). Such influences were manifested in the domination (increasing presence of business actors and control through resources) over formal political institutions (parliament, political parties), electoral politics (money politics), and the (p.110) political process in general—at both national and sub-national levels. Such domination ensured that business had disproportionate influence in the relevant institutions and policy processes, which effectively shaped policy outcomes since these actors were increasingly present (in some cases substituted by loyal surrogates to work on their behest) in relevant parliamentary committees, governing boards of public banks, and other regulatory bodies. Informal influences were also at work and these were manifested in the increasing level of policy capture by market actors in relation to tax, regulations, and loan rescheduling. The sectors that particularly benefited were garments, real estate, banks, and transport. Although state power tends to be heavily concentrated in the hands of the prime minister (both in a de jure and de facto sense), and a culture of personalized rule essentially characterizes political governance of the country (CGS and BRAC RED, 2006; BIGD, 2014; Blair, 2010), even then elite business groups/individuals have been able to exert de facto veto power over the prime minister or finance minister’s policy decisions. Three recent examples in this regard are: reversing the commitment to implement value-added tax laws, notwithstanding huge pressures from the IMF; allowing more private-sector banks, despite the central bank’s objection on the grounds of demand saturation; and compromising the Dhaka urban plan (due to lobbying by the powerful real estate companies), which was prepared (laying out environmental safeguards) to maintain the liveability of the capital city.

The prominent status of the business actors, which further increased over this political phase, can also be gauged from the fact that it was even possible for them to alter, albeit only to a certain extent, the prevailing de facto rules of the game defining competitive politics and the nature of politicized law enforcement. Two illustrations will suffice.

First, as discussed earlier in this section, a durable elite consensus on regime succession failed to emerge during this political phase, which led to political instability (mainly hartals or shutdowns), following each electoral cycle that affected large and medium-sized businesses in the short term (mainly transporting goods on time). This generated uncertainties related to business transactions and investments. As a result of hard bargaining, owners of manufacturing firms, by early 2000, began to enjoy de facto exemption from hartals and there was hardly any evidence of factories being targeted by the opposition political activists during such protests.11

(p.111) Second, responding to business demands, political elites took initiatives (in the early 2000s) to contain the powerful criminal gangs, politically linked or otherwise, involved in extortions (which were chaotic and unpredictable, besetting the business community for the most part of the 1990s), by conducting special law and order drives.12 A special security force (Rapid Action Battalion) was also created to address the extortion-related crisis, among other remits. As a consequence, over time extortions became routine and predictable in nature, mainly conducted by local-level political leaders of the ruling party (‘stationary bandits’). Such local party leaders were also able to protect businesses from harassment by myriad forms of ‘roving bandits’13 (for instance, non-local thugs with no partisan identity, and also politically affiliated but non-local extortionists). The state/party thus ensured a modicum of ‘rule of law’ (the term ‘rule by law’ would be more appropriate here), thereby reducing any transactional/investment uncertainty emanating from the prevailing de facto political property rights governing state–business relations and also from increasingly criminalized politics. These two illustrations also indicate positive movements within LAO, implying some degree of consolidation of its semi-mature state, at least in the economic domain, during the relevant political phase.

The above analysis should not give the impression that the business elites lacked constraints. Reasonably free and highly aggressive media and citizen activism have managed to ensure a certain degree of business accountability. Bangladesh’s existing democracy, which evolved over this political phase, provided space to societal actors to exert some degree of institutional constraint on the behaviour of business. Such actors included civil society watchdogs, chiefly environmental, human rights, and pro-labour groups, and, more critically, the media—the latter mainly used investigative reports to expose financial scandals and illegal practices of businesses (plunder of financial institutions, land grabbing by real estate firms, and non-payment of workers’ wages and the deplorable state of safety conditions in the RMG sector are a few of the relevant examples of media exposés observed during this period and beyond14).

As noted earlier in this section, partyarchy operated in a duopolistic manner in the economic domain, particularly in relation to the generation and allocation of economic rents. This observation needs further elaboration.15

(p.112) Although the economic domain is subject to duopolistic partyarchy, a certain degree of monopolistic control still exists in this domain: for instance, when the ruling party politicizes the key decision-making positions in the institutions which deal with economic policies and rents/resource allocations (nationalized banks, National Board of Revenue, procurement agencies, regulatory bodies, etc.). Economic actors with the ‘wrong’ political identity still tend to get access to these institutions and a share in the rents and patronages, albeit asymmetrically.

The specific modalities of rent-sharing across the political divide vary. One of the most important determinants of such variations is the significance to national development16 of any particular economic domain. The ruling party tends to monopolize the distribution of rents and patronage in relatively non-critical domains, such as small-/medium-scale government procurements, granting of trade/import licences, medium- and small-scale construction contracts, leases of water bodies, government-owned lands, or ferry stations. Notwithstanding this monopolization, ruling political elites also share these rents with rival political elites and business actors with no political identity. But businesses not affiliated with the ruling party can only access such rents by paying informal commissions to the relevant authorities. In contrast, in the domain of critical economic activities, such as large-scale infrastructure building or power generation, efficiency criteria tend to prevail, to a reasonable extent, over patronage distribution that is largely based on narrow political considerations.

Long-term contracts and licences for banks, telecommunications, or financial institutions (leasing companies, merchant banks) are much less vulnerable to monopoly partyarchal control. A prominent reason for this is that relevant market actors adopt politically strategic measures to circumvent such partisan control. Businesses owned by opposition politicians typically co-opt ruling political elites as shareholders and front persons to secure contracts or licences; in such cases, ruling party individuals act as ‘front persons’ for the contract-/licence-seeking business groups. Firms owned by non-partisan individuals, which are critically dependent on state contracts, similarly co-opt politically connected businesspersons or prominent political actors from both the AL and the BNP as major shareholders/directors (particularly in privately owned banks).

The dynamics of rent generation and sharing in other large economic sectors, like power generation and infrastructure, are more complex, and aspects of predation and productive rent allocations are both manifested in these sectors. (p.113)

Rents Space

Figure 4.7 presents the rents space during the second growth episode. A significant change in the rents space during this episode was that the RMG sector eventually became the leading export sector. As mentioned earlier in this section, this sector grew in an international environment of a protected market through the quota system. This sector also received support from the government in the form of subsidies, tax exemption, and other incentives.

Navigating the Deals WorldThe Politics of Economic Growth in Bangladesh

Figure 4.7. Rents space during the 1983–96 growth episode in Bangladesh

Source: Authors’ illustration.

According to Figure 4.8, the share of rentiers in GDP during the second growth episode remained at 0 per cent. The workhorses continue to have the largest share (54 per cent), although reduced by four percentage points compared with the first growth episode, followed by powerbrokers (38 per cent) and magicians (8 per cent).

Navigating the Deals WorldThe Politics of Economic Growth in Bangladesh

Figure 4.8. Share of actors in GDP in the second growth episode in Bangladesh

Source: Authors’ calculation from the national accounts data.

During the third growth episode (Figure 4.9), the RMG sector became the dominant export sector. After 2004, with the phasing out of the MFA, the rent in the international market for the RMG shrunk. During this growth episode, export-oriented sectors, such as footwear, pharmaceuticals, and frozen fish and shrimp, experienced expansion.

Navigating the Deals WorldThe Politics of Economic Growth in Bangladesh

Figure 4.9. Rents space during the post-1996 growth episode in Bangladesh

Source: Authors’ illustration.

During the third growth episode, the share of rentiers in GDP also remained at zero (Figure 4.10). The share of powerbrokers increased further to 44 per cent. The share of magicians also increased to 12 per cent, while the share of workhorses reduced to 44 per cent.

Navigating the Deals WorldThe Politics of Economic Growth in Bangladesh

Figure 4.10. Share of actors in GDP in the third growth episode (1997–2010) in Bangladesh

(p.114) Deals Environment

During the regime of Ershad, which largely overlapped with the second growth phase (1983–96), closed but ordered deals can be observed to cover a diverse set of economic activities—granting of licences and permits for export and import, and large construction projects, but not necessarily setting up of (p.115) industries.17 A milestone initiative in the modernization of the economy—the establishment of the first telecommunications (mobile phone) business in the private sector—was done through a closed deal, owned by a senior member of Ershad’s cabinet, which continued to function as a monopolist under his rule. Similar to the previous BNP regime, the governance of industrial loan sanctioning and the privatization of nationalized industries continued to be largely characterized by a mix of cronyism (in greater form) and open ordered deals. Such a mode of state–business relations resulted in the creation of significant numbers of local entrepreneurs (with especially rapid increases in the number of RMG factory owners)18 and capital formation in the private sector, which perhaps, to some extent, explains the growth acceleration, albeit weak in nature, noticeable during Ershad’s rule.

The competitive clientelistic phase saw the complex evolution of the deals environment, possibly due to the relatively newer forms of rent management in the economy—a complex mix of monopolistic but predominantly duopolistic rent allocations (sharing rents across the political divide)—as discussed earlier in this section. Following such de facto rent management practice, direct access to state resources/privileges (permits, licences, leases, etc.) tended to be closed and ordered in nature, and an individual’s political identity mattered critically here. But even in these closed domains of businesses, (p.116) market actors with the wrong political identity (or no political affiliation, as in the case of the majority of businesses) were also able to partner with political insiders to access state resources. Such strategic practices of the firms, in effect, transformed closed deals into an open deal. Syndication of business firms (alliance of firms owned by ruling and opposition party actors along with non-partisan businesses) was another popular strategy used by business, particularly at the sub-national level (district and small towns), to access state resources (construction of public buildings, roads, etc.). This considerably opened up an otherwise politically important19 closed deal space.

Domains of the economy considered critical (such as large power projects and large infrastructure projects) were mainly subject to open deals (which usually went to technically competent firms, both domestic and foreign), although individuals connected to the highest level of political authority were usually needed as interlocutors/agents to negotiate and seal the deals. Investors, both domestic and foreign, were able to navigate the labyrinth of closed and open deals with the help of readily available and easily identified influential agents (a few well-known political leaders close to the Prime Minister’s Office or to the influential ministers in charge of the relevant ministries, as well as well-connected lobbyists).

The business environment, during the relevant phase, was also predominantly characterized by de facto ordered deals, irrespective of being closed or open. The case of the development of the privately owned Korean Export Processing Zone was a major exception to the rule, where for decades deal-making was subject to the capricious behaviour of the political elites, across regimes. This created serious uncertainty for a high-profile Korean investor and sent the wrong signal to global investors in general. But such incidents are very rare in Bangladesh. Also rent allocations, during the competitive clientelistic phase, became more centralized (primarily within the Prime Minister’s Office), particularly in relation to the critical domains of the economy (the power sector mainly, but also large infrastructure, to some extent). Such movement towards centralization was observed less during the BNP regime and more during the AL regime. Centralization of rent allocations, in the Bangladesh case, implied closed, but not necessarily disordered, deals. Decentralized rent allocations, hardly seen in the critical domains of the economy, tended to be largely governed by a stable and predictable network of actors, and consequently ordered. It should be noted that an ordered deals environment provides predictability and reduces uncertainty only for players who are (p.117) willing to play by the rules of game. Foreign investors who cannot make recourse to informalities (due to legal restrictions imposed by the countries of origin), or domestic businesses who would like to play only by the formal rules, might not be able to navigate through the system or might find it largely closed and disordered. As observed by our business informants, there were a few instances of business firms quitting certain sectors as they found themselves becoming less competitive by following formal and transparent procedures.

4.4 Deals Environment in the RMG Sector

The RMG sector, as we have already noted, has contributed substantially to the growth of the economy, and is Bangladesh’s key magician sector. In this section, we briefly discuss the deals environment in the RMG sector. As we will see, the nature of the deals environment is atypical of what one might expect in a magician sector, and might be related to the specific character of state–business relations in Bangladesh.

In the export-oriented RMG sector, individual firms experienced open deals, at least in the initial stage of the development of the industry. Gradually the nature of the deals environment, as experienced by the individual firms in recent decades, seems to have changed towards being closed. Such evolution in the deals environment has been noted by the New York Times (Yardley, 2013):

Even after the quota system expired in 2005, the trade group [Bangladesh Garments Manufacturing and Exporters’ Association, or BGMEA] steadily expanded its regulatory responsibilities. Today, it enjoys a near stranglehold on exports: only factories that are among its members are allowed to export woven garments, with some exceptions. The group regulates the importation of fabric and issues certificates of origin, the required proof that a garment is made in Bangladesh. It has arbitration committees to settle disputes and administers the often-complex practice of subcontracting.

From the perspective of an individual RMG entrepreneur, subsuming oneself in the BGMEA-led closed deal-based structure, is a rational strategy, since operating in an open deal environment,20 i.e. through bypassing BGMEA and maintaining bilateral interfaces with the state’s regulatory authority, in relation to duty-free import processes, would be prohibitively costly, in terms of the informal transaction costs it would incur and an excessive amount of (p.118) time. Therefore the evolution of earlier open deals towards closed deals has been based on the voluntary compliance of individual firms.

As implied above, the sector as a whole enjoys closed deals. Parts of the closed deals actually have legal and quasi-legal bases (bonded warehouse schemes, cash incentives, statutory regulatory ordinances, etc.), but these tend to be highly exclusive in nature. At the same time, the sector enjoys privileges that are quite extraordinary. For instance, the state has delegated authority for rule enactments, and enforcement of these, to its collective forum, BGMEA, as well as to BKMEA (Bangladesh Knitwear Manufacturing and Exporters Associations). The most prominent of these is the power to issue customs certificates—utilization declarations and utilization permits governing duty-free importing process. Such an act of the state tends to blur the distinctions between legality and illegality.21 In this sense, one can legitimately categorize such privileges as deals-based, rather than strictly rule-based, since these were exclusive to this sector and indicate the RMG sector’s ability to generate and preserve a closed deal environment that allowed it to accrue substantial rent for decades and also achieve spectacular economic performance.

The individual firms also saw quite a rapid shift from a relatively disordered (during the late 1970s and early 1980s)22 to an ordered deals environment in the subsequent decades. The transition occurred, not because of government prodding (through statist policy inducement or coercive rule enforcement by a strong state),23 but largely due to market actors’ strong incentive to ensure its survival and expand in a globally competitive market. This is not to ignore the Bangladeshi state’s ‘developmental vision’ (across regimes, authoritarian or democratic, since 1975), one of the core components of which has been facilitating high export growth for macroeconomic stability and employment generation in a country lacking natural resources. We only want to emphasize the fact that the enactment of various beneficial rules, and myriad forms of deals that the RMG sector has enjoyed, was mainly the outcome of effective demands and skilful negotiations by a sector characterized by strong collective action capability, thanks to the economic and political clout it gradually acquired.

Retrospectively, one could argue that the existing deals environment, which this sector enjoyed, was essentially incentive-compatible with the (p.119) participating actors and thus remained a self-enforcing equilibrium.24 That the ordered deals environment could evolve and be maintained was mainly due to three factors: (a) de facto policy capture (regulatory agencies, Prime Minister’s Office, parliamentary committees),25 due to its enhanced political power over time; (b) the creation of BGMEA (1985) and later BKMEA (1996), which efficiently solved the myriad forms of collective action problems experienced by the sectors, particularly during the earlier phase; and (c) the development of an optimal degree of integration of BGMEA and BKMEA with the most relevant agencies of the state, the National Board of Revenue and the Ministry of Commerce.

Over the decades, RMG owners became one of the most powerful and best organized business groups in Bangladesh. Their political power derived from the sector’s significant contribution to economic growth, its close political integration with the state, including parliamentary representation (Rashid, 2008), and the class of the owners—former military personnel, bureaucratic officials, and members of the white collar managerial class were pioneers of the RMG sector (Rashid, 2008; Kabeer and Mahmud, 2004). The political power of this sector is manifested in the extraordinary tax privileges and subsidies that it has been enjoying for the last three decades. Pointing to the tax privileges of the RMG sector, the finance minister observed: ‘In recent years we have seen the birth of a new rich class, but government cannot collect adequate tax from this class’ (Ahmed and Shah, 2013). Since the minister’s observation, the sector’s tax deduction at source went down from 1.2 per cent to 0.8 per cent (in 2013), from 0.8 per cent to 0.4 per cent (in 2014), and from 0.4 per cent to 0.3 per cent (in 2015). Similarly, the cash incentive it receives, on export value, increased from 0.25 per cent (in 2014) to 1 per cent (in 2015) (Transparency International Bangladesh, 2015). According to the New York Times (Yardley, 2013), the subsidies and tax breaks that this sector received exceeded tax revenues from the industry by roughly US$17 million. Such exemptions and financial incentives have not changed over the decades, although the profitability of the sector has been rising and the sector has witnessed substantive expansion over time.

The embeddedness of the RMG sector with the state enabled the former to ring-fence the potential deleterious effects of the state’s weak capacity and bureaucratic malfeasance.26 The success of such embedded policymaking also (p.120) indicated that the RMG sector had been able to capture, to a large degree, the relevant policy process of the state.27 Such embedded relations between the RMG sector and the state in Bangladesh is in sharp contrast to the reality of ‘embedded autonomy’ as experienced in the fast-growing East Asian countries (in the 1970s and 1980s) documented and theorized by Peter Evans (1995). His idea of ‘embedded autonomy’ depicts state–business relations, which are characterized by the autonomy and capacity of the ‘developmental’ state to discipline business, if required (for suboptimal performance, for instance). In the Bangladesh case, the RMG sector largely dictated policy process, as manifested in the state’s inability to reform the tax and privileges that the sector continues to enjoy and to discipline the industry for its gross violations of rules relating to factory standards and safety compliance.

4.5. Future Trajectory

As we noted in Section 4.3, since 1991 the reasonable level of stability (albeit experiencing a few hiccups, which were non-fatal) of the electoral political governance in Bangladesh was underpinned by a pact among the major political parties that provided legitimacy to regime succession. The agreement enabled a constitutional reform that created a neutral caretaker government (CTG) system to oversee the election. Due to complex political reasons (International Crisis Group, 2015) the CTG system was abolished ‘unilaterally’ by the incumbent AL government in 2011, and the subsequent election in 2014 was held under a partisan government (under the AL). The major opposition parties (the BNP and Jamaat-e-Islami) boycotted the election, as it was not being managed by a neutral CTG. The AL-led alliance came back to power with half of the parliamentary seats uncontested. The integrity, credibility, and legitimacy of the 2014 election were questioned by the major opposition parties, local civil society, media, and the international community.

As a consequence, the competitive clientelistic phase (as embedded in a competitive political settlement) ended in Bangladesh in 2014. What emerged after that, in the political domain, may be called a dominant party settlement.28 Such a political development has been a major setback in the (p.121) movement of LAO towards maturity, especially in the political domain. Although it is too early to comprehend fully the implications of this shift in the political settlement on the nature of rent management and the deals environment, it would be useful to reflect on some of the discernible indications, on a provisional basis, pertinent to state–business relations and their impacts on future economic growth. The first thing to note is that one of the features of rent management, the practice of rent-sharing across the political divide, seems to have altered to a certain extent. Our business informants observed that, in the post-2014 dominant party settlement context, partisan considerations have been increasingly influencing the nature of political elites’ dealings with the market actors. This is especially true for high-value projects. Such changes in political elites’ behaviour will perhaps alter the nature of the rules of the game governing the rent-sharing process as observed before 2014. This means that certain changes in the dynamics of the deals environment will perhaps occur.

Second, as many of our business informants have noted, there has been a steep rise in crony capitalistic practices with the advent of the dominant party settlement, although a steady increase of this was also observed during the later years of the competitive period.29 Print media have exposed numerous cases of ‘plunders’ in the banking sector, by politically connected businesses. Licensing of private banks has also been subjected to a blatant form of crony capitalism. Such elite behaviour has, willy-nilly, led to a ‘vision’ of the dominant party state, which is apparently guiding its current developmental strategy. This seems to have two components: political stability, maintained through authoritarian politics; and crony capitalism. A sophisticated ideologue of the current regime (who happens to be a prominent technocratic advisor to the prime minister) candidly observed: ‘If the country has good leadership and peace, economic growth will definitely occur. Democratic deficit is not a major problem. Singapore and South Korea [the latter during the 1960s, 1970s, and part of 1980s] are excellent examples in this regard—countries which have managed to develop’ (Prothom Alo, 2016). Note that the advisor mentioned two countries that are well known for their statist-authoritarian mode of development, but at the same time which managed, successfully, to discipline the business class (Davis (2004), for South Korea; Rodan (2004), for Singapore). The other interpretation of the vision came from an influential cabinet minister, who is also a prominent national leader of the ruling party. He remarked: ‘We believe in democracy, but not over-democracy. Sheikh Hasina [the prime minister] is going on the path that (p.122) Mahathir Mohamad followed in Malaysia. We will follow that model of democracy’ (Prothom Alo, 2015). It is clear that the strategic developmental vision of the political elites30 is a mix of cronyism and fast economic growth of the perceived Malaysian type, rather than the ‘developmental state’ of the Singapore/South Korea variant—the one articulated in the vision of the technocrat advisor. Evidence, so far, tends to indicate that the regime has been very keen to follow the current Malaysian developmental pathway, which has lately shown increasing trends of cronyism (see Rodan (2004); and Sen and Tyce, Chapter 10, this volume).

Third, the mode of rent-seeking has also changed from the previous relatively centralized form to an increasingly decentralized one (again critical domains of the economy—large power plants or infrastructure are still mostly subject to a centralized rent allocation process). This has been an inevitable consequence of increases in the number of rent-seekers. Business now has to engage with rent-seekers with veto powers at various points down the bureaucratic hierarchies. Some of our business informants have observed that this increasing decentralization of the rent-seeking process may weaken the hitherto robust, incentive-compatible and self-enforcing ordered (irrespective of closed or open types) deals environment that they have enjoyed over the last two decades.

Fourth, politico-ideological changes have taken place which appear to have influenced the organizational dynamics of collective action for market actors. The current regime (AL), being sensitive to the reality of the weak electoral legitimacy it enjoys, has further tightened its political and ideological grip over civil society groups, including various business associations. This has somewhat muted the critical voices of business leadership, and the hitherto informal strategy of business forums, to maintain a bipartisan posture in their leadership composition (a hedging strategy to cope with the regime change), seems to have started losing its strategic relevance. The potential impacts of such politico-ideological changes on the business community’s negotiating capacity to survive and prosper in the existing deals world will surely vary, contingent on the political strength of the various business sectors’ collective forums.

Although there is anxiety among business actors regarding the current political settlement and its possible negative implications for ordered deal-making, still this settlement has provided, since 2014, increasing political stability (no country-wide shutdowns or blockades of highways—thanks to the regime’s repressive political management) that has contributed, among other factors, to the reasonably high and stable growth rates in recent years.

(p.123) The future trend in growth performance can be assessed in the light of these positive and mostly negative feedback loops, as discussed earlier in this section. Despite experiencing massive political and reputational crises (e.g. the Rana Plaza disaster), labour movements for higher wages, and intense global pressures for ensuring factory standards and social compliance, and workers’ associational rights, the RMG sector—one of the most important sectors contributing to Bangladesh’s growth performance—has managed to perform reasonably well. During previous decades, its high performance, notwithstanding the many domestic challenges the industry faced, was possible due to the combination of closed/semi-closed/ordered (collectively) and de facto closed/ordered (enjoyed by individual firms embedded in their collective forums) deals that it enjoyed in the economic domain. In the political domain, a robust and resilient anti-labour elite political settlement between RMG owners and political elites—across political divides—has enabled it to cope with the sustained movements and critiques that it faced from the labour, media, and human rights actors, both local and global. Such a settlement has lately become increasingly vulnerable to both domestic and international pressures.

In the economic domain, the decades-long closed and semi-closed deals are now being questioned by the state and local and global stakeholders. BGMEA has vigorously protested against any such policy reform initiatives. Its political capacity to thwart successfully similar policy initiatives many times in the past has proved the robustness of the hitherto elite political settlement. With the crises the sector is now facing, its continuing high performance and its vision to attain an annual export volume of US$50 billion by 2021 will largely depend on the nature of the evolving political settlement and the deals that it will be able to renegotiate with the political elites, and also how and to what extent it will be able to neutralize its national/global reputation as ‘greedy’ entrepreneur, promoter of ‘economic injustice’, and ‘violator of labour/human rights’.

The negative trend in the ECI, as experienced throughout the three growth episodes, indicates the serious challenges that the country faces in effecting structural transformation in the economy. To achieve such transformation, Bangladesh will have to move beyond relying on one or two sectors and must start producing complex products with higher added-value. Some sectors (for instance, transport and power) will also need modernization and governance reform to provide support to the growth of diversified manufacturing sectors. Potential sectors, in the area of manufacturing, are leather and footwear, agro-processing, electronics, pharmaceuticals, information and communications technology (ICT), light engineering, and ship building. Unlike the RMG sector, these sectors tend to have weak collective action capacity, which is a liability (for a sector as a whole) while operating in a predominantly deals-based world. (p.124) Their weakness in collective action capacity is perhaps due to the small numbers of firms involved in these sectors. Unlike the RMG sector, no ‘accidental rent’ (in the form of the MFA) enabled any of these sectors to take off in a robust manner, except for the pharmaceutical sector, which has been enjoying similar rent for the last few decades (e.g. exemption from patent rights, which will continue until 2033). This sector took advantage of the rent, which contributed to a substantive modernization of the industries, remarkable economic performance (the sector managed to produce almost its entire product [97 per cent] as demanded in the domestic market), and also did reasonably well as an exporting sector, compared with other developing countries.

4.6 Conclusion

During the growth episodes considered in this chapter, Bangladesh’s social order has seen shifts back and forth in the political domain—regressing and progressing in the maturation process of an LAO. In contrast, in the economic domain, there has been the survival of an ordered deal environment—reaching a perpetual state of self-enforced equilibrium—underpinned by an elite political settlement, despite the shifts in politics. We have argued in this chapter that such a resilience of the ordered deals environment (irrespective of being open or closed) substantially contributed to the positive trend in growth during the period under study.

Our findings have two implications for the overall framework of this book, as set out in Chapter 1. First, we have shown that the robust and resilient forms of ordered deals evolved in Bangladesh, not in a context of a matured LAO, in which intra-elite relations take place in an impersonal manner, but against the backdrop of a semi-matured LAO, whereby elite interactions continue to be conducted in a personalistic and discretionary mode (i.e. elites have yet to develop the rule of law, even for themselves). This may be in part due to the existence of military dictatorships and dominant party settlements (exhibiting mostly centralized rent management), at various points in Bangladesh’s relevant growth episodes. However, the ordered deals environment continued to exist, even during the competitive clientelistic settlement phase, when one might have expected that the high intensity of competition in Bangladesh’s polity would have led to a shortening of the time horizons of political elites in the deals that they offered to economic actors.

Why has an ordered deals environment persisted, even when the political settlement moved decisively to competitive clientelism? There are two reasons. First, there is a strong ideological preference for market-led growth among political elites. Given their fragile democratic legitimacy, political elites felt that they needed to prioritize the simultaneous building of (p.125) developmental legitimacy, hence the incentives to nurture and promote the private sector (by supplying a reasonable degree of predictability and stability in the economic domain), in a country largely deprived of natural resources. Second, the business community has become politically stronger, as manifested in policy/regulatory capture, increasing dominance over party, parliament, and electoral political processes, and leading to the establishment of vertical political integration (VPI): ‘the blurring of the lines between the asset holders and the government’ (Haber et al., 2003: 31),31 which can be observed in a more robust and quasi-institutionalized form in some sectors (as in RMG) and in an ad hoc or fluid forms in others (real estate, pharmaceuticals, textiles). An ordered deals environment has consequently been an outcome of such integration.

A second implication of our findings for the overall framework is the atypical nature of the deals environment in the key magician sector, the RMG sector, which, though ordered, has been closed (when typically magicians prefer open deals to a closed deals environment, as argued in Chapter 1). This sector enjoyed various rents, which are extra-legal in nature, and has shown little interest in open deals. While the ordered nature of the deals has been instrumental in the RMG sector’s growth, both domestic and international stakeholders have increasingly challenged the closed nature of the deal-making between the BGMEA and the state. With the shift of the political settlement to a dominant party settlement since 2013, it is likely that the political equilibrium that underpinned the closed ordered deals environment in Bangladesh’s key magician sector may become unstable over time, possibly calling into question the sustenance of ‘the Bangladesh paradox’.


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(1) For a very useful discussion of this period from a LAO perspective, see Khan (2013).

(2) The term indicates a state controlled by a coalition of the middle class and rich farmers. The term was used by a prominent member of the first Planning Commission to describe the nature of the first AL regime (Sobhan and Ahmed, 1980).

(3) Formation of the one-party state by creating the Bangladesh Krishak Sramik Awami League.

(4) For a detailed empirical account of this phase, see Ali (2010) and Ullah (2016).

(5) Sobhan (1993) and Islam and Siddique (2010).

(6) It would be empirically more appropriate to extend this political phase up to 2013. We are limiting this to 2010 to keep it compatible with the end limit of the period of growth episodes (i.e. 2010) analysed in this volume.

(7) State building indicates the development of impersonal organizations within the state and consolidation of legitimate state violence capability. See Hassan (2013) for a detailed discussion of the low level of political development, covering the three domains of Fukuyama, in Bangladesh during this period.

(8) For empirical discussions on partyarchy, in the context of Bangladesh’s elite political settlement effecting democratization, private sector governance, and social provisioning, see Hassan (2013); in the context of Bangladesh’s local governance and rule of law, see Hassan et al. (2014); and for the concept’s application to analyse donor-supported police sector reform in Bangladesh, see Biswas (2016).

(9) Pressures for a settlement also came from prominent civil society actors, the UN, the USA, and European Union governments, and the elite bargaining process was also mediated by high-profile international dignitaries, such as former US President Carter, among others.

(10) See Hassan (2013) for the analysis (from political settlement and LAO approaches) of the complex processes of elite conflicts surrounding succession (1994–5), evolution of a related elite settlement (1996), breakdown of such a settlement (2006), re-establishment of the settlement by a military-backed technocratic regime (2007–8), and its final breakdown (2012). See also Hassan and Nazneen (2017) for the post-2012 status of elite settlement in politics in Bangladesh.

(11) As a caveat, two other reasons (from the supply side) need to be mentioned. First, political elites have strong incentives to maximize revenue, and therefore readily agreed to ring-fencing business from political instability. Second, by the earlier decade of 2000, a large number of political elites became businesspersons themselves, and thus business-friendly policies became easy to formulate and implement, even in critical and sensitive political domains.

(12) Such interventions saw a manifold increase in extrajudicial killings by the security forces.

(13) The notion of stationary and roving bandits is from Olson (1993).

(14) In the case of RMG, monitoring by myriad forms of transnational actors also became important during the later part of the relevant political phase and beyond. Such global influences will be discussed in Section 4.4.

(15) The section borrows heavily from Hassan (2013).

(16) For the ruling coalition, economic growth/development is crucial for enhancing and preserving developmental legitimacy.

(17) Ershad’s crony capitalism, it appears, marginally affected the manufacturing sector, RMG included.

(18) See Rashid (2008).

(19) We are referring to the political imperatives of national political elites to maintain and nurture political party and associated party fronts by doling out patronage at the sub-national levels. The target beneficiaries here are the ‘core constituencies’ (Geddes, 1994) meaning the rank and file or foot soldiers of the party.

(20) The option, in theory, exists.

(21) As one prominent Bangladeshi lawyer observed: ‘BGMEA has no regulatory authority under the laws of the country. It’s a clubhouse of the garment industry’ (Yardley, 2013).

(22) See Rashid (2008) for the effects of the chaotic policy regime and bureaucratic constraints that RMG firms had to face in the earlier stage of the development of the sector, and how initiatives taken by politically, socially, and administratively well-connected entrepreneurs gradually reduced this chaotic environment that led to a more ordered deals environment.

(23) As Ahmed et al. (2014: 262) correctly pointed out, in the context of RMG: ‘in contrast to other developing countries, [in Bangladesh]…the approach of each party’s [AL, BNP, JP] industrial policies has been relatively hands-off.’

(24) The open deal was particularly needed to ensure a large number of firms to meet the growing global demand and to maintain a reputation as a reliable and timely supplier of garments. Retrospectively, Bangladesh proved to be reasonably successful on both counts over the last four decades.

(25) See Rashid (2008); Hossain (2011).

(26) Such ring-fencing has allowed the RMG sector to reduce transaction costs (thus generating a form of de facto rent), which many other sectors, deprived of such closed deal arrangements, failed to earn.

(27) Saxena observes: ‘The two groups [BGMEA and BKMEA] have been effective advocates of favorable policies and have been criticized for being too close to state officials’ (2014: 106).

(28) Levy (2014: 26) has provided a very useful definition of dominant party settlement from an LAO perspective: ‘A dominant political settlement can be characterized as [a]…combination [whereby]…the disparity between the violence potential of the rulers and the opponents is very large. The rulers’ grasp on power is strong in the sense that it would take an extraordinary level of commitment by the opponents…to mount a credible challenge to the status quo. There is thus an “equilibrium” in which the political leadership can govern as a “principal” and engage others in the country as “agents” (or subjects).’

(29) A prominent national daily observed: ‘Unfortunately, a regime of impunity has hindered effectiveness of the rule of law and corruption has multiplied with crony capitalism’ (Daily Star, 2013).

(30) It is strategic in the sense that the ‘vision’ is also an outcome of domestic political imperatives, as discussed later in this section.

(31) Haber et al. (2003) developed and elaborated the concept of VPI in the empirical context of Mexico.