A The MFA Regime

The development of Bangladesh’s RMG sector greatly benefited from the international trade regime in textiles and clothing, which, until 2004, was governed by the MFA quotas. In the global market, the quota system restricted competition, led to allocative inefficiency, and slowed the natural shift in comparative advantage from industrial countries to developing countries (Faini et al., Reference Faini, de Melo and Takacs1993). However, it created opportunities for countries like Bangladesh by providing reserved markets, where textiles and clothing items had not been traditional exports. Bangladesh, being an LDC, benefited from the MFA regime in a number of ways. In the EU, there were quotas on non-LDC exporters, but Bangladesh’s RMG items were allowed quota-free access (as well as duty-free treatment under the EU’s GSP scheme). In the US market, Bangladesh was allowed significant annual quota enhancement based on growth performance in the preceding year. This gave Bangladesh’s RMG exporters a secure market in the United States and also allowed them to gain from the quota-rent.Footnote ¹¹

In 1995, the WTO’s Agreement on Textiles and Clothing (ATC) took over from the MFA. By 1 January 2005, the sector was fully integrated into normal GATT rules. In particular, the quotas came to an end, and importing countries were no longer able to discriminate between exporters. The ATC no longer exists: it is the only WTO agreement that had self-destruction built in to it.

B The Genesis of the RMG Industry in Bangladesh

Bangladesh’s RMG industry started its journey in the late 1970s, with the launch of the MFA. A handful of foreign companies, particularly the Korean companies Youngone and Daewoo, invested early in Bangladesh, bringing technical experience, marketing expertise, and a willingness to employ women. This was partly because South Korea had reached the limit of its MFA quota. Bangladesh’s middle managers and workers gained experience at Youngone and then, hired by other companies, spread their knowledge of operating an RMG business.

The late Nurool Quader Khan was the pioneer of the RMG industry in Bangladesh. In 1978, he sent 130 trainees to South Korea, where they learned how to produce RMG. With those trainees, he set up the first factory, Desh Garments, to produce garments for export. At the same time, the late Akhter Mohammad Musa of Bond Garments, the late Mohammad Reazuddin of Reaz Garments, Md. Humayun of Paris Garments, the engineer Mohammad Fazlul Azim of Azim Group, Major (Retd) Abdul Mannan of Sunman Group, M. Shamsur Rahman of Stylecraft Limited, and AM Subid Ali of Aristocrat Limited also came forward and established some of the first RMG factories in Bangladesh. Following in their footsteps, other entrepreneurs established RMG factories in the country.Footnote ¹² These people were able to obtain major advantages from the Government, in the form of back to back letters of credit, bonded warehouses, and different forms of subsidies.

As mentioned before, the RMG sector has experienced an exponential growth since the early 1980s. The RMG sector was heavily promoted by all governments because of its remarkable economic performance, which contributed significantly to changing Bangladesh over the past four decades, from being an aid-dependent economy to being a trade-oriented economy.

C The RMG Industry Has Been the Major Beneficiary of Industry and Trade Policies and Export Incentives

After independence in 1971, the Government of Bangladesh nationalised all heavy industries, banks, and insurance companies. As a result of this mass nationalisation programme, by 1972 nationalised units accounted for 92% of the total fixed assets of the manufacturing sector in Bangladesh (Rahman, Reference Rahman and Helliner1994). Private sector participation was severely restricted to medium-sized, small, and cottage industries (Sobhan, Reference Sobhan1990). After the change in political power in 1975, the Government moved away from the nationalisation programme and revised the industrial policy with a view to facilitating a greater role for the private sector (Rahman, Reference Rahman and Helliner1994). Together with the denationalisation and privatisation process, these changing industrial policies led to a situation in which the major thrust was to support the growth of the private sector by amending the exclusive authority of the state in the economy (World Bank, 1989).

During the 1980s, the private sector development agenda became more prominent in industrial policies in Bangladesh. The successful outcome of these policies was the rapid growth of the RMG industry. The New Industrial Policy was put in place in 1982 and was further modified by the Revised Industrial Policy in 1986. These policies also aimed at accelerating the process of privatisation of public enterprises. All these policies involved providing substantial incentives and opportunities for private investment (Rahman, Reference Rahman and Helliner1994). Subsequent industrial policies re-emphasised the leading role of the private sector in the development of industries and clearly stated that the objective was to shift the role of the Government from a ‘regulatory’ authority to a ‘promotional’ entity. The industrial policies also encouraged domestic and foreign investment in the overall industrial development and stressed the importance of developing export-oriented industries.

Raihan and Razzaque (Reference Raihan and Razzaque2007) highlighted that an important element of trade policy reform in Bangladesh has been the use of a set of generous support and promotional measures for exports. These measures have primarily been directed to the RMG sector. While the import liberalisation was meant to correct the domestic incentive structure, in the form of reduced protection for import-substituting sectors, export promotion schemes were undertaken to provide exporters with an environment in which the previous bias against export-oriented investment could be reduced significantly. Important export incentive schemes available in Bangladesh include, among others: subsidised rates of interest on bank loans; duty-free import of machinery and intermediate inputs; cash subsidy; exemption from paying the value-added tax; and rebate on corporate income taxes. Box 4.1 summarises some of the most important incentive schemes that have been put in place in the country since the early 1980s, alongside the expansion of the RMG sector. With the significant reduction in tariff rates in the early 1990s, and the provision of generous support and promotional measures for exports, the anti-export bias declined quite significantly, which helped promote a surge in exports, especially RMG exports, during that period.Footnote ¹³

A close scrutiny of the performance of sectors, apart from RMG, and consultation with the stakeholders of non-RMG sectors, reveal that many of these sectors, though classified as ‘thrust or priority sectors’ in the industrial and export policies, were not able to enjoy the incentives provided in these policies, despite having export potential. Instead, the RMG industry has been the major beneficiary of the incentives and facilities specified in these policies.

D Institutional Space, Political Settlement, and Deals Space Favouring RMG

The RMG sector in Bangladesh grew in an environment of very ‘weak’ institutions (see Chapters 2 and 3). Against the poor quality of institutions, the country became the second largest exporter of RMG in the world. How do we reconcile these two contrasting scenarios? If we look at the well-known institutional indicators (World Governance Indicators (WGI), Doing Business, Transparency International, and Global Competitiveness Index), all refer to the quality of formal institutions. However, in countries like Bangladesh, placed at the lower level of the development spectrum, what governs is a host of informal institutions, and the formal institutions are weak and fragile. Khan’s framework of ‘growth-enhancing institutions’, in contrast to ‘market-enhancing institutions’ (Khan, Reference Khan2012b), elaborates how the role of informal institutions can be critical in developing countries. Some developing countries, especially East and Southeast Asian countries, have been successful in steering unconventional institutions to drive growth. Khan (Reference Khan2012b) further highlights that the success of the RMG industry in Bangladesh was not replicated in any other major sectors, as no rent, such as the RMG industry enjoyed, was available for other sectors. The critical element in the institutional arrangement which allowed the take-off of this industry was the global institutional mechanism with the MFA and favourable domestic factors. The MFA facilitated fortuitous rents on terms that assisted the learning-by-doing that was critical for the RMG sector. With the high quota-rent, the quota utilisation rate for Bangladesh in the US market in 2001–2002 was much higher than the rates of other developing countries (Yang and Mlachila, Reference Yang and Mlachila2007).Footnote ¹⁴

Khan (Reference Khan2012b) further points out that the authoritarian clientelism during the early phases of the sector’s take-off allowed the rapid solution of a number of institutional constraints facing the sector, especially in the form of the poor quality of formal institutions. Many of these solutions were ‘unorthodox’ in nature (e.g. back to back letter of credits), and a ‘political settlement’Footnote ¹⁵ among the elites in Bangladesh on the RMG industry helped the industry to grow. This ‘political settlement’ was initially based on rent-sharing, and later evolved as the economic interest of RMG business owners coincided with the political interest of governments in terms of employment generation (especially female employment) and poverty alleviation.

As discussed in Chapter 1, the deals environment framework, proposed by Pritchett et al. (Reference Pritchett, Sen, Werker, Pritchett, Sen and Werker2018) relates to the idea of ‘deals space’. Informal institutions, which are prevalent in developing economies, may also take the form of ‘deals’ among the political and economic elites, in contrast to the formal rules guiding the relationship between these actors that exist in advanced countries. Deals can be open (access is open to all) or closed (access is restricted), and they can also be ordered (deals are respected) or disordered (deals are not respected). According to this view, countries are likely to exhibit high growth when deals are open and ordered, and thus deals become closer to formal institutions.

Informal institutions can have two distinct roles with respect to the stages of development. At an early stage of development, if countries can steer informal institutions so that they are ‘growth-enhancing’, as well as ensuring that the ‘deals space’ is more ordered (either open or closed), countries can achieve strong economic growth and also some improvements in the social sector. However, for the transition from a lower to a higher stage of development, whether the country can maintain a high growth rate and achieve further development goals depends on the dynamics of how informal institutions evolve, and whether formal institutions become stronger and functional. Not many developing countries have been able to do this. Certainly, the East Asian and most of the Southeast Asian countries are success stories in using informal institutions efficiently at the early stage of development, as well as achieving some notable successes in the transition to functional formal institutions.Footnote ¹⁶

In contrast to many other comparable countries in Asia and Africa at a similar stage of development, and especially in comparison to the LDCs, the country group to which Bangladesh belongs, Bangladesh has been successful in creating some efficient pockets of ‘growth-enhancing’ informal institutions, against an overall distressing picture as regards its formal institutions. The examples of ‘pockets of efficient informal institutions’ in Bangladesh include the well-functioning privileges and special arrangements for the RMG sector.Footnote ¹⁷

However, the next question is how did Bangladesh create such ‘pockets of efficient informal institutions’ and make the ‘best’ use of them? The explanations include both historical and political economy perspectives. The 1971 liberation war led to the emergence of an independent Bangladeshi state which for the first time gave unprecedented and enormous independent power to the burgeoning political and economic elites of the Bengali nation. Also, the people, in general, enjoyed some benefits of this power. To a great degree, the entrepreneurial nature of the people of this country is deeply rooted in this feeling of power.Footnote ¹⁸ Successful entrepreneurship is seen in the case of the RMG sector. As Bangladesh is not rich in natural resources, elites saw in the RMG sector the basis of the generation of substantial rents (the sources of rents in the RMG sector were discussed earlier in this chapter).

While Khan (Reference Khan2012b) rightly mentions the institutional perspectives behind the growth of the RMG sector, his narrative of the ‘political settlement’ is rather narrow and elite-centric. Khan’s ‘political settlement’ is primarily an ‘elite agreement’, and it overlooks the critical nexus between elites and non-elites within the society. Through large-scale employment generation in the RMG sector and its induced effects of poverty alleviation and female empowerment, the business elites were also able to draw support from both the political elites and non-elites in the society.

Using the lens of the ‘deals space’ of Pritchett et al. (Reference Pritchett, Sen, Werker, Pritchett, Sen and Werker2018), Hassan and Raihan (Reference Hassan, Raihan, Pritchett, Sen and Werker2018) argue that the RMG sector as a whole has enjoyed closed deals, and 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. The ‘state capture’ by the RMG lobbies is manifested in the form of ensuring special privileges for them, and a high presence of RMG businesses among members of parliament. From the perspective of an individual RMG entrepreneur, bypassing the Bangladesh Garments Manufacturing and Exporters Associations (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 that would be incurred and the excessive amount of time the process would entail. Therefore, the ‘deals environment’ became more ‘closed’ and the system became more ‘formal’, through voluntary compliance of individual firms with the BGMEA. Also, the individual firms also saw quite a rapid shift from a relatively disordered deal environment (during the late 1970s and early 1980s)Footnote ¹⁹ to an ordered deals environment in the subsequent decades. The transition occurred not only because of government prodding in relation to private sector development (through statist policy inducement) but also largely due to market actors’ strong incentive to ensure their survival and expand in a globally competitive market. The enactment of various beneficial rules and myriad forms of deals benefitting the RMG sector was mainly the outcome of effective demands and skilful negotiations by a sector that is characterised by strong collective action capability, thanks to the economic and political clout it gradually came to possess.

As was pointed out earlier, the RMG sector as a whole enjoys privileges that are quite extraordinary. For instance, the state has delegated the authority over rule enactments and enforcement of these rules to its collective forum BGMEA, as well as to Bangladesh Knitwear Manufacturing Associations (BKMEA). The most prominent power held by these organisations is the power to issue customs certificates – utilisation declarations (UDs) and utilisation permits (UPs)Footnote ²⁰ governing the duty-free importing process. This act by the state tends to blur the distinction between legality and illegality.Footnote ²¹ In this sense, one can legitimately categorise such privileges as de facto deals, since they are exclusive to this sector and indicate the RMG sector’s ability to generate and preserve a de facto closed deal environment that has allowed it to accrue substantial rent for decades, and also to achieve spectacular economic performance.Footnote ²²

Over the decades, RMG owners came to be the most powerful and the best organised business group in Bangladesh. The political power of this group derives from its high contribution to economic growth, close political integration with the state (including parliamentary representation) (Rashid Reference Rashid2008), and the class basis of the owners: former military and bureaucratic officials and the white collar managerial class were the pioneers of RMG sector (Rashid, Reference Rashid2008; Kabeer and Mahmud, Reference Kabeer and Mahmud2004). The political power of the RMG sector is manifested in the extraordinary tax privileges and subsidies that it has enjoyed during the last three decades. These exemptions and financial incentives have not changed over the decades, despite the fact that the sector has witnessed substantial expansion over time.

E Subcontracting in the RMG Industry in Bangladesh

As the industry grew, the need for subcontracting increased. A large factory has a maximum production capacity (e.g. number of shirts per month), even taking into account some allowed overtime. When orders are larger than what can be produced by the business receiving the order, work is subcontracted. This is necessary to balance production capacity and order size. As buyers moved towards wanting to deal with only a few factories, subcontracting became even more important (Cookson, Reference Cookson2017). In recent years, subcontracting has received a bad name. Buyers believe, usually correctly, that factory compliance is not met by subcontractors. The compulsion to demand compliance leads to a reluctance to allow subcontracting. Demands for compliance have many impacts on RMG costs, but a hidden, very significant cost is the difficulty experienced in using subcontracting (Cookson, Reference Cookson2017). In particular, after the Rana Plaza accident in 2013, and the stringent scrutiny by the Accord and Alliance, the number of subcontracting firms declined drastically.Footnote ²³

F ‘Political Settlement’ Regarding the Management of the Labour Regime in the RMG Sector

The labour regime in the RMG sector has been managed quite extraordinarily over the past decades. Most workers work in sweatshop conditions. However, the issue only appears in the global media when major fatal accidents occur, like that at the Rana Plaza in 2013. Long working hours, low wages, lack of regular contracts, and systemically hazardous conditions are often reported (Uddin, Reference Uddin2015; Berik and Rodgers, Reference Berik and Rodgers2010). Trade unions, when allowed, are unable to protect their workers. Not all ‘Fundamental’ International Labour Organization (ILO) conventions have been ratified, and their concrete application is far from the norm. The UN Guiding Principles on Business and Human Rights, and the OECD Guidelines for Multinational Enterprises fix good standards of corporate social responsibility for Western brands operating in such countries, but they are not binding and do not provide for sanctions if they are not applied. In practice, they have failed to defend workers’ rights. While there has been growing unrest from workers, which has led to strikes and protests, their main achievement has been some increases in the minimum wage, which remains far below a living wageFootnote ²⁴ (Lu, Reference Lu2016). Also, subcontracting has been used as a way of escaping constraints.

Trade unions are often suppressed, and union organisers intimidated, including physically. Workers claim that some managers mistreat employees involved in setting up unions, or force them to resign (Bhuiyan, Reference Bhuiyan2012; Parry, Reference Parry2016). Some claim they have been beaten up, sometimes by local gangsters who attack workers outside the workplace, and even at their homes. The lack of regular contracts means many workers who are injured in factory fires, and the relatives of those who die, do not receive any compensation because they are not registered as formal employees of the companies and the management therefore does not identify them as their workers. The biggest strength that Bangladesh has over its competitors is its cheap and vast workforce. The minimum wage in Bangladesh in the RMG industry is among the lowest in the top RMG-producing countries (Figure 4.3).

Figure 4.3 Minimum monthly wage for garment workers in 2018 (measured in US$).

Source: https://emergingtextiles.com/?q=idx&s=apparel-manufacturing-labor-costs. The data for Bangladesh take into account the upward minimum wage adjustment that took place in September 2018

After the inception of an export-oriented RMG sector in 1978, the first wage board, formed in 1984, set a minimum wage for the sector’s workers at Bangladeshi Taka (BDT) 560 a month (Figure 4.4). This shows that the country’s first wage board for fixing the salaries of workers in the garment sector was constituted long after Bangladeshi entrepreneurs ventured into the RMG business, which suggests the weak bargaining power of the workers in this sector. This low minimum wage continued for the next 10 years, despite the erosion of purchasing power due to inflation (Figure 4.4).

Figure 4.4 Minimum wage in the RMG sector in Bangladesh (BDT).

Source: Author’s calculation and www.dhakatribune.com/bangladesh/nation/2019/01/11/a-brief-history-of-the-minimum-wage-in-garment-sector

In the following three and half decades, five more wage boards were constituted, at very irregular intervals. The second (in 1994) and third (in 2006) wage boards were established at 10-year and 12-year intervals, respectively. Periodic labour unrest, with the demand for an increase in the minimum wage, led to relatively more frequent revisions of the minimum wage after 2006, and a political settlement evolved as workers became more important for political elites in the political game than in the past. Nevertheless, during the almost four decades of the RMG industry’s existence, the minimum wage in the industry was kept very low. This was done with the support of the state, whoever was in power. Figure 4.5 also suggests that, in real terms, the value of minimum wages declined over time, even in those years when they were kept fixed in nominal terms. The real increase was 60% between 2010 and 2018. More or less the same evolution is found for 2000–2010, but the increase was only 20% in the decade before. Of course, the loss in real terms is due to the infrequency of the wage adjustments.

Figure 4.5 GVC participation: Bangladesh and comparators.

Notes: GVC measures from the EORA MRIO national and global input–output tables covering the period 1990–2015. GVC participation measures are the sum of the backward and forward participation rates expressed as shares of gross exports (see text), excluding double counting of exports when intermediates cross borders multiple times. Points above the 450 indicate an increase in GVC participation over the period.

Source: Author’s calculation, from Melo and Twun (Reference Melo and Twun2020)

The minimum wage is set in Bangladesh’s RMG sectorFootnote ²⁵ through a process that involves the Government forming a new minimum wage board for the RMG sector, to formulate a new wage structure for RMG workers. The board is usually led by a senior district judge, as chairman. In addition to representatives from the owners and workers, the board also consists of three independent members. The representatives of owners and workers separately propose a minimum wage for the workers and propose this to the board. After discussions with stakeholders, the board recommends a new wage structure based on the inflation rate, living costs, the country’s economic condition, and strength of the sector as regards paying the settled wage. The wage board then publishes a gazette and gives the workers’ and owners’ representatives a 14-day period in which to appeal if there have any objection to the recommendations. The board finalises the new wage structure taking into consideration the objections of workers’ and owners’ representatives, if there are any. The wage board then passes the wage structure to the Ministry of Labour and Employment, which reviews the proposed wage structure and sends it to the Ministry of Law for vetting. After approval is obtained from the Ministry of Law, the Ministry of Labour and Employment publishes a gazette notification and the new wage structure enters the implementation phase. Once the gazette notification is issued, all export-oriented garment manufacturers are bound to implement the new wage structure in their factories. The new wage structure comes into effect from the date set by the Government.Footnote ²⁶ However, there are allegations that workers’ voices are not heard properly in the wage board as the board includes no ‘true’ representatives of workers.Footnote ²⁷

There also exists a gender wage gap in the RMG industry in Bangladesh. Menzel and Woodruff (Reference Menzel and Woodruff2019), using data from 70 large export-oriented garment manufacturers in Bangladesh, showed that among production workers, women’s wages were 8% lower than those of men. A study by ILO-SANEM (2018), using survey data from 111 RMG factories, also found a similar gender wage gap.

G Poor Factory Compliance and a Weak Regulatory and Monitoring Mechanism

The RMG industry started with small factories as it was easy to set up a small garment factory: one could establish a factory by renting space, buying 50–100 sewing machines, wiring up the factory for electricity, hiring and training the workers, getting a contract for a small order of simple garments, and going to work. Sourcing, pricing, and quality control were learned by doing. The profits were high, and therefore small companies could get established. There was no ban on entry (Cookson, Reference Cookson2017).

Systemic hazardous conditions are a common feature of many factories in this sector. The rapid expansion of the industry led to the adaptation of many buildings that were built for other purposes – residential, for instance – into factories, often without the required permits. Other plants have had extra floors added or have increased the workforce and machinery to levels beyond the safe capacity of the building. Lack of appropriate protective equipment, old and outdated wiring that is at risk of short circuiting (a major cause of fires), and non-existent or outdated fire extinguishing facilities are often reported in these overcrowded workplaces. Fire exits are often deliberately blocked by factory owners, and windows even barred, thus increasing the death toll in accidents (D’Ambrogio, Reference D’Ambrogio2014).Footnote ²⁸ Poor factory compliance persisted for a long time due to a weak regulatory and monitoring mechanism. The Department for Factory Inspection (DIFE), under the Ministry of Labour and Employment, established in 1969, is entrusted with the responsibility for monitoring the compliance of factory conditions. However, due to DIFE’s numerous institutional challenges related to weak capacity, corruption, and a lack of interest from the Government in strengthening DIFE, it failed to perform its duties. After the Rana Plaza accident in 2013, there has been an effort to enhance DIFE’s capacity.Footnote ²⁹

H Rent Generation and Management through RMG By-products

The business of rent generation and management through the RMG by-product jhut (the scrap from clothing items) is an important aspect of the RMG industry. Previously, jhut was a waste product produced by RMG factories, but it has now become a by-product of the industry, since it has commercial value. A newspaper report,Footnote ³⁰ citing the Bangladesh Garment and Textile Waste Exporters Association (BGTEA), highlights that the market size of RMG by-products is over BDT 2,000 crore (around US$ 2.4 billion, equivalent to 1% of GDP). RMG factories in Bangladesh produce over 400,000 tonnes of by-products annually.Footnote ³¹ The simple scraps of fabric that are a by-product of making RMG generate new jobs, especially for women in the informal sector. Some 150,000 people are currently employed in the informal, small-scale operations of this potentially lucrative sector.Footnote ³²

The business of re-using wasted cloth is a three-step process. First, a person, usually a locally influential person, collects the cloth forcibly or via negotiations. Second, it is sold to the re-use or recycling business. Third, the final product is then sold to different consumers and exported. After collection, the process of recycling starts with sorting, which is done by the colour, type, and size of the fabric. Larger scraps of cloth are used to make children’s frocks, skirts, shirts, pyjamas, and sometimes pillow covers. Large scraps of fabric are sold to local traders to make garments for children. Most of these children’s clothes are sold in Bangladesh but some are exported to India. Dhaka’s bedding industry is dependent on jhut. Mattresses, pillows, cushions, and seat stuffing and padding in cars, public buses, and rickshaws use recycled cloth and processed cotton.Footnote ³³

Because of the lucrative nature of this business, locally influential people seek to obtain more jhut through influencing either workers or mid-level management of the factories. Many factories have faced unrest resulting from the politics involved in the jhut business.Footnote ³⁴ This high rent from the jhut business, through legal and illegal means, also makes the RMG industry more attractive than any other export-oriented sectors.

A Increased Competition in the Global Market

In recent years, Bangladesh’s share of global RMG exports has increased steadily. In 2012, the share was 4.66%; this had increased to 6.19% by 2017.Footnote ³⁵ The increased share of global RMG exports shows that, despite numerous challenges, Bangladesh’s RMG industry has been able to strengthen its market share at the global level. With the increased share in the world market, in recent years, Bangladesh has become the second largest exporter of RMG in the world. After China, its closest competitors are Vietnam and India. It can be mentioned that, in 2006, Bangladesh ranked sixth on the list of top RMG exporting countries, with a share of only 2.8%.Footnote ³⁶

However, there is also a very high concentration of products in the RMG industry in Bangladesh. An analysis using the Trade MapFootnote ³⁷ data suggests that while, products conforming with the six-digit Harmonised System (HS) code level, the top 10 RMG products account for around 68% of total RMG exports in Bangladesh, for China, India, and Vietnam, the figures are 35.5%, 45.6%, and 42.1%, respectively. Moreover, the top five products account for 53.3% of Bangladesh’s RMG exports, whereas the figures are only 22.7%, 28.7%, and 25% for China, India, and Vietnam, respectively. Another important concern is that Bangladesh’s RMG exports face stiff competition, especially from China and Vietnam. The 16 products conforming with the six-digit HS code level are common among the top 25 RMG products, both in the cases of Bangladesh vs. China and Bangladesh vs. Vietnam. The EU, Bangladesh’s largest export destination, has extended duty-free access to Vietnam, under the EU–Vietnam Free Trade Agreement, which eliminates the competitive edge that Bangladesh had held over Vietnam in RMG exports to the EU market.Footnote ³⁸

B Diversification within RMG and Quality Issues

While Bangladesh’s export basket remains highly concentrated around RMG exports, diversification within the RMG sector remains a big challenge. According to the data from WTO, products conforming with the six-digit HS code level, just 10 RMG products accounted for 70% of the total RMG exports from Bangladesh in 2017/18. Just two products (T-shirts and men’s trousers) accounted for 36% of RMG exports in that year. Most of these are low-value and basic-quality products. According to the Global Sourcing Survey 2018 by AsiaInspection, Bangladesh is still an attractive source of low-cost RMG items.Footnote ³⁹

Attempts within the RMG industry to move up the ladder to high-value and high-quality products have not been very successful. According to IMF (2014), at the four-digit Standard International Trade Classification (SITC) level, only three RMG products have been of higher quality compared to Bangladesh’s major competitors, China, India, and Vietnam, and the advantage Bangladesh has in these three products is marginal.Footnote ⁴⁰ However, it should be mentioned that while Bangladesh no longer has any duty-free market access or GSP facility in the USA,Footnote ⁴¹ presently Bangladesh enjoys a 12% ‘margin of preference’Footnote ⁴² for its RMG industry under the EU’s EBA initiative (United Nations Department for Economic and Social Affairs (UNDESA, 2019).

C The Segmented RMG Value Chain in Bangladesh

Mercer-Blackman (Reference Mercer-Blackman2016) argues that, ideally, successful structural transformation in Bangladesh should consist of two types of processes at this juncture: (i) diversification away from garments into other manufactures by producing goods that entail increasingly more complex manufacturing processes compared to garments, but that are still similar enough that it is easy for workers and managers to master these processes; or (ii) linking to the fashion industry global production chain and providing increasingly more complex and valuable parts of garments: for example, through increasing involvement in the design process of the garment. If the country chose avenue ‘ii’ – that is, moving up the fashion industry value chain – increasing overall productivity will be very difficult because of the segmented nature of the value chain. It will thus be much easier for Bangladesh to make products that are similar to garments, such as footwear or small appliances, than to begin to understand and master the various aspects of designing and retailing clothes.

Mercer-Blackman (Reference Mercer-Blackman2016) further argues that there are two main reasons why the fashion industry value chain is segmented for Bangladesh. First, the value buyers attribute to clothes – reflected in the price they are actually willing to pay – is the result of a process occurring in a place that is geographically and information-wise very far from Bangladesh, at the retail end, where fashion fads and volatile markets operate in a complicated way. Second, there is a broken link of accountability once the garment is shipped abroad. The sector’s production process is completely decoupled informally from the fast-fashion production process. This segmentation also exacerbates the dissociation between the unit cost of production in Bangladesh and its retail price: factories sometimes send the clothes with the price tag – even the sales price – so they are floor-ready. It is possible to send one box to New York with shirts price-tagged at US$ 50 each and the identical box to rural New Jersey with shirts price-tagged at US$ 5 each. The price is completely independent of the actual cost. As long as the big buyers maintain price-setting power, garment makers have no incentive to upgrade facilities or enhance workers’ skills because race-to-the-bottom, cost-cutting measures will always take precedence, to guarantee a firm’s survival. Moreover, because of the focus on meeting orders on time, firms have little leeway to become more proactive in anticipating buyers’ needs.

Bangladesh’s place at the lower end of the value chain is also related to the fact that RMG factories are predominantly locally owned in Bangladesh. By contrast, in Cambodia, also a large exporter of basic garments, factories are owned mostly by foreign investors. In the case of Bangladesh, local factory owners are economically powerful business persons who have managed to find ways to bypass the institutional weaknesses and inadequate infrastructure, which is difficult for foreign investors. There are also limits on the input side as the industry is dependent on the large-scale import of machinery and raw materials. There is also a lack of sufficient supply of skilled domestic workers to operate sophisticated machinery, let alone maintain it (ADB-ILO, 2016).

D Increased Pressure on Workplace Safety and Compliance

There are concerns with regard to compliance issues and workplace safety in the RMG industry in Bangladesh, and in the last few years, especially after the infamous Rana Plaza accident in 2013, these issues have become critical for the future of this industry (Box 4.2). There is strong international pressure, in the form of the threat of cancelling large preferential treatment in the markets of Western countries, if labour conditions are not improved.Footnote ⁴³ Quality competitiveness is being increasingly prioritised over price competitiveness, and, of course, the quality of a product tends to increase the standard of living of labour being used in the production process. These concerns should be addressed in a positive way, by seeing them as an opportunity to build the industry’s reputation in the global market. This calls for, among many other things, a more careful engagement with labour issues in the RMG industry. In this context, issues like wages, workplace security, fringe benefits, workplace environment, etc. need to be resolved on a priority basis. Current labour practices prevalent in the RMG industry need to be improved in order to make the sector sustainable. The improvement of labour conditions is closely linked to the enhancement of labour productivity. There is equally a need to invest in training workers to move to high-value garment products (i.e. men’s suits, baby garments, lingerie, and sportswear).

A study by ILO-SANEM (2018) suggests that, despite some improvements after the Rana Plaza accident in 2013, there are still unresolved issues related to occupational safety, hours of work and leave, fixing and execution of minimum wage provisions, workplace training, workplace harassment, and gender equality.

E The Evolving Political Settlement on the Labour Regime

After multiple incidents, including the Tazreen fire and the Rana Plaza collapse, Bangladesh came under international scrutiny for its labour practices and safety standards. However, RMG workers in the country are still being paid one of the world’s lowest minimum wages. The success of the fashion industry in the West is built on the ‘exploitation’ of workers from countries like Bangladesh, who struggle every day to survive above the poverty line. The sector’s vision of achieving US$ 50 billion worth of RMG exports by 2021 shows little concern for the well-being of its workers. Oxfam (2017) highlights that for every garment sold in Australia, only 4% of its price goes to the factory workers who made it. Cheap labour is the main factor on which Bangladesh’s RMG industry capitalises when it comes to attracting big retail brands. The RMG sector faced severe labour unrest demanding a wage increase in 2006. Since then, labour unrest has taken place in the sector almost every year. This is threatening the political settlement between the political elite and RMG owners, or at least modifying its conditions.

F Crisis in the Deals Environment of the RMG Sector

Hassan and Raihan (Reference Hassan, Raihan, Pritchett, Sen and Werker2018) argue that despite experiencing massive political and reputational crises (e.g. the Rana Plaza disaster), labour movements for higher wages, intense global pressures for ensuring factory standards, and social compliance and labour’s associational rights, the RMG sector has managed to perform reasonably well. During the previous decades, its high performance, notwithstanding the many domestic challenges the industry faced, was possible due to the combination of close and ordered 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 labour, media, and human rights actors, both local and global. This settlement has recently become increasingly vulnerable to both domestic and international pressures as the Government might side with labour if pressures do increase.

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 any such policy reform initiatives. Its political capacity to successfully thwart 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 ambition to grow further will largely depend on the nature of the evolving political settlement and the deals that it will be able to renegotiate with political elites, and also on how and to what extent it will be able to neutralise the de facto national/global reputation of its actors as greedy entrepreneurs, promoters of economic injustice, and violators of labour/human rights.

G Automation in the RMG Sector and Implications for Job Creation

Technological advances associated with automation raises the concern that new technologies will lead to widespread job losses in manufacturing industries in countries like Bangladesh. What is perhaps different now is that new, interconnected digital technologies will likely have a broader and more far-reaching array of abilities, and so the prospect of new kinds of jobs appearing may well be diminished or limited to increasingly sophisticated domains. In addition, new technologies are now not just replacing jobs, they are also enabling the disruption and restructuring of entire industries (Hamann, Reference Hamann2018).

Between 2013 and 2016/2017, manufacturing jobs in Bangladesh declined by 0.8 million. A major part of this was in the RMG industry (Bangladesh Bureau of Statistics, 2018). Increased use of automation also changed the composition of the labour in the RMG sector. Raihan and Bidisha (Reference Raihan and Bidisha2018) show that the RMG factories that were closed down after the Rana Plaza event in 2013 were mostly the ones that were comparatively female labour-intensive. Furthermore, the introduction of labour-saving machinery was speeded up after the Rana Plaza event for the kind of jobs which were previously done mostly by low-skilled female workers, which caused employment loss in respect of female labour. Also, there is a perceived threat of automation to employment, and this affects women disproportionately. Already there is evidence of RMG workers being displaced by automation in Bangladesh.Footnote ⁴⁴ There are a few applications of automation in important manufacturing industries related to RMG, a few companies have taken steps to implement automation in their operations, and this automation is increasing.Footnote ⁴⁵

H The Challenges of LDC Graduation

Bangladesh successfully met all three criteria for graduating out of LDC status in the first review in 2018 and in the second review in 2021 and will finally graduate out of LDC status in 2026. Such a graduation carries with it a risk of preferences for Bangladesh being eroded.

UNDESA (2019) argues that Bangladesh would lose access to DFQF arrangements for LDCs, and to simplified ROO reserved for LDCs, with especially important impacts on the RMG sector. In its main market, the EU, Bangladesh would remain eligible for DFQF market access under the EBA scheme for a period of three years after graduation, given the scheme’s ‘smooth transition’ provision. After that, the terms under which it would have access to the EU market would depend on the new GSP regulation, as the current regulation will expire at the end of 2023 (before Bangladesh’s expected graduation date). Under current rules, Bangladesh would in principle have access to the standard GSP, whereby it would face higher but still preferential tariffs. Most of Bangladesh’s RMG exports would face tariffs of 9.6% in the EU under the GSP, which would result in increased competition from Bangladesh’s competitors. Bangladesh’s exports would also have to comply with more stringent ROO to benefit from the GSP than it is required to comply with, as an LDC, to benefit from the EBA. Bangladeshi RMG exports currently benefit from the single transformation rule for LDCs, whereby products qualify for preferential treatment if only one form of product alteration is undertaken in the country, as opposed to the double-transformation rule for non-LDCs, whereby two stages of conversion are required. Despite Bangladesh having had access to the EBA since 2001, it was only after the simplification of the rules in 2011 that the country was able to fully benefit from the preferences, as the country relies significantly on imported inputs, particularly in the case of woven RMG. Woven RMG would be most affected by application of the double-transformation rule.

UNDESA (2019) further argues that no important impacts are expected in the US market, since Bangladesh’s most important products are not covered by an LDC-specific preference scheme. Bangladesh has been suspended from the GSP scheme (including preferential tariffs for LDCs) since 2013 due to labour safety issues. Among other developed country markets, in Canada, Japan, and Australia, the standard GSP does not cover an important part of Bangladesh’s exports, which will face MFN tariffs. Moreover, in some countries, such as Canada and Australia, Bangladesh would no longer be able to use dedicated ROO for LDCs, making it more difficult to benefit from preferences for the tariff lines covered by the standard GSP than it is to use the GSP for LDCs. Among major developing country markets, Turkey, Bangladesh’s largest importer of jute and jute products, has aligned its GSP scheme to that of the EU. In India and China, still relatively small destinations for Bangladesh’s exports but important due to potential and proximity, Bangladesh would no longer benefit from the DFQF treatment reserved for LDCs and would instead export under the Asia-Pacific Trade Agreement (APTA) (for China and India), the South Asian Free Trade Agreement (SAFTA) (in the case of India), and MFN rates.

Raihan (Reference Raihan2019a), using a global dynamic general equilibrium model, suggests that due to the loss of preferences after graduation from LDC status, in the markets of the EU, Canada, Australia, Japan, India, and China, Bangladesh might see a sizeable drop in exports of RMG compared to the business-as-usual scenario. The scenario in the model considers the imposition of MFN tariff on imports from Bangladesh in the markets of the EU, Canada, Australia, Japan, India, and China. According to the model simulation, the drop in RMG exports would be US$ 5.4 billion in 2024 (13.5% of RMG exports), which could further fall to US$ 5.8 billion by 2030 (10.8% of RMG exports).

A Weak Collective Action of Non-RMG Sectors

Future potential export sectors are leather and footwear, agro-processing, electronics, pharmaceuticals, ICT, light engineering, and ship building.Footnote ⁴⁶ Unlike the RMG sector, these sectors tend to have weak collective action capacity, which is a liability (for a sector as a whole) when operating in a predominantly deals world. This weakness in collective action capacity is perhaps due to the small numbers of firms involved in these sectors. Also, unlike the RMG sector, no ‘accidental rent’ (in the form of the MFA) has enabled any of these sectors to take off in a robust manner, except for the pharmaceutical sector, which has been enjoying such rent for the last few decades (e.g. through the exemption from patent rights under Trade-Related Aspects of Intellectual Property Rights (TRIPS), which will continue until 2033).

B Inadequate Policies and Strategies That Hurt Non-RMG Sectors

Though Bangladesh’s export and import policies are supposed to provide unbiased facilities to all export-oriented sectors, there is an inherent pro-RMG bias in policies and strategies for export diversification in Bangladesh. This is also reflected in a statement by the Md Mosharraf Hossain Bhuiyan, Chairman of the National Board of Revenue, on 3 May 2019: ‘In case of diversification, we will give the same facilities that we are giving to the garment sector this year’. At present, the apparel sector enjoys a host of benefits, including a 4% cash incentive on exports to new destinations, lower corporate tax, and a bonded warehouse facility.Footnote ⁴⁷ However, as Box 4.3 suggests, there are inherent biases towards the RMG sector in the bonded warehouse facility, and many of these biases are deals-based.

The new export policy for fiscal year 2018/2019 to fiscal year 2020/2021, like in the past, also highlights the importance of diversification of the export basket. Leather gets a special focus in the new export policy and the benefits enjoyed by the RMG industry are supposed to be extended to the leather industry. Also, in the new export policy, the number of highest-priority sectors has been raised to 15 from the existing 12, and the number of special development sectors has been raised to 19 from the existing 14. Like in past export policies, the new policy also mentions special benefits, including subsidies and tax benefits, for the priority and special development sectors. This new policy also mentions extending easy term loans and other banking facilities from the Export Development Fund (EDF) of the Bangladesh Bank to export-oriented industries.

However, as already mentioned, though export policies identify ‘thrust’ or ‘priority’ or ‘special development’ sectors with a view to promoting the development of potential export items, many of these sectors are probably not in a position to reap the benefits of the incentives reserved for them. For example, although the Government’s cash incentiveFootnote ⁴⁸ plays a vital positive role in the export of agro-food processing products, exporters complain about difficulties in gaining access to this subsidy as a result of bureaucratic and other procedural obstacles. Many firms have also complained about the duty drawback system, as the process is cumbersome and bureaucratic in nature and takes a long time to finish (Raihan et al., Reference Raihan, Lemma, Khondker and Ferdous2017c). Also, though the Government has set up the EDF to provide pre-shipment financing for imports of raw materials, and support to exporters of new and non-traditional items, many of the non-RMG sectors have been unable to exploit the benefits of the scheme, and so far, the RMG sector has been the prime beneficiary of this facility. Stringent rules and regulations are identified as the major hindrances shutting out many of the non-traditional export-oriented industries from the Government stimulus package meant for export promotion, diversification, and growth (Rahman, Reference Rahman2015). Also, there are allegations that the EDF only benefits big companies.Footnote ⁴⁹ Therefore, it seems that before formulating policies and schemes, it is important to undertake sector-specific diagnostic studies so that structural and policy constraints can be identified, in order to devise the most appropriate incentives.

Sattar and Shareef (Reference Sattar and Shareef2019) argue that a proper management of the exchange rate is a critical part of a trade policy geared to superior export performance and high economic growth. Between fiscal year 2012 and fiscal year 2017, the real effective exchange rate (REER) appreciated by nearly 45%, serving as a significant damper on exports. Policymakers in Bangladesh have avoided letting the exchange rate slide for fear of fuelling inflation. The policy of keeping a stable nominal exchange rate has gained support from the RMG sector as it is a big importer of raw materials. As Hussain (Reference Hussain2020) points out: ‘paradoxically, industry leaders (especially the RMG) in Bangladesh have revealed a preference for selective policies time and again. If correcting the overvaluation of the exchange rate through devaluation can produce the same industry specific result as a direct cash subsidy, should they not opt for the former than latter? Do not expect the industry to say yes, because it is in their self-interest to get both. However, when choosing between the two, they insist more on the latter because they do not have to compete with all others to benefit from the devaluation whereas the targeted subsidy is a lock-in for the insiders.’ However, a highly appreciated local currency affects exports from the non-RMG sectors, which are not greatly import-dependent for sourcing their raw materials. Also, the growth in RMG exports, with a ‘managed overvalued exchange rate regime’ leads to a ‘Dutch disease’ phenomenon which affects non-RMG exports.Footnote ⁵⁰

Sattar (Reference Sattar2019) also shows a systematic anti-export bias in the policy regime affecting export diversification, and which has persisted in recent years. Interestingly, many support measures, such as cash incentives, subsidies on bank interest rates, lower corporate taxes, and bonded warehouse facilities, can offset much of the anti-export bias for the RMG sector. For the non-RMG sectors, such anti-export bias affects their export performance, as these sectors are effectively not the beneficiaries of these support measures, though they should be – as mentioned above.

C An Environment with a High Cost of Doing Business That Disproportionately Affects the Non-RMG Sectors

There are crucial supply-side constraints associated with production and exporting activities faced by business enterprises in Bangladesh. Inefficient ports raise the cost of doing business as ports are plagued by labour problems (such as workers’ strikes), poor management, and lack of equipment. The state of physical infrastructure is weak. Business enterprises are also subject to invisible costs arising from widespread corruption and malpractices. These activities impose direct costs, thus undermining the competitiveness of trading enterprises. Corruption and a conflicting political situation together make the domestic environment business-unfriendly, discouraging new investment in exporting activities, both from local and foreign sources.

In terms of the components of the Global Competitiveness Index of World Economic Forum and Logistic Performance Index of the World Bank, Bangladesh is seriously lagging behind its major competitors, India, China, and Vietnam. It is important to note that though all business enterprises face the aforementioned challenges, special privileges for the RMG sector and different support measures can compensate for many of the costs arising from the poor business environment. The non-RMG sectors are unable to enjoy these compensations.

A Structure of the Banking Sector

After its independence in 1971, Bangladesh, as part of its socialist economic strategy, nationalised all banks except a few foreign-owned ones. Following this step, the banking sector did not experience any significant changes until the beginning of the 1980s, when, under the Structural Adjustment Program, the Government liberalised the banking sector and allowed the operation of private banks. Although the speed of privatisation of the banking sector was quite slow during the 1980s and 1990s, there was indeed significant expansion of the branches of NCBs. Privatisation of a few NCBs, and later sanctioning of privately owned commercial banks, which has accelerated over the most recent decades, have resulted in the current operation of 42 domestic private commercial banks (PCBs) in Bangladesh.

Although the number of banks did not change drastically until 2013, the percentage share of PCBs in total industry assets increased quite remarkably. While in 2001, the share of PCBs in total industry assets was around 35%, by 2017 it had increased to 67%.Footnote ⁹ Such an increase in the share of industry assets is not a conundrum as PCBs’ share of deposits in the industry also increased over the same period of time. Therefore, in terms of the structure of banks, PCBs can be considered the dominant type of banks, in terms of the aforementioned important indicators.

B Performance of the Banking Sector

This sub-section provides an overview of the performance of the banking sector of Bangladesh in terms of access, stability, efficiency, and depth. An analysis over time, and comparisons with a few comparable countries, is carried out based on the available data.

Table 5.1 summarises the performance of the banking sector of Bangladesh when all types of banks – that is NCBs, DFIs, PCBs, and FCBs – are taken together, according to some standard ratios describing various aspects of banking activity. Ratios are reported for a few points of time over the last 20 years or so, or when they were available. For the most recent year, they are compared to their value in other Asian countries or to averages over groups of countries at the same level of income (least developed countries) or at a higher level (upper middle-income countries (UMICs)).

Looking first at these indicators over time, two opposite evolutions can be observed. On the one hand, accessibility of the banking system to the public has very much increased over the last 15 years, whether in terms of account holders or bank branches. On the other hand, stability and efficiency indicators overall suggest a deterioration over time, except the NPL ratio between 1996 and 2010, an evolution that is discussed in more detail in the next section. On stability, if the liquidity ratio has not changed much, the recent drop in the capital adequacy ratio is worrying as it suggests that the Bangladeshi banking sector would have more difficulty confronting an economic or financial crisis today than was the case in 2010. However, the evolution of the z-score suggests that the probability of the whole banking system defaulting remains low and is even decreasing. On the side of efficiency, however, all indicators show a worsening of the overall performance of Bangladesh’s banking system. Over the recent past, it is possible that this deterioration may be due to a drop in the interest rate, as has been observed in most countries in the world.

A final indicator, which is more macroeconomic in nature, appears in Table 5.1. It is the depth of the financial system, as measured by the ratio of total bank credit to GDP. It is generally the case that economic development goes hand in hand with financial development. This is clearly confirmed in the case of Bangladesh.

Comparing Bangladesh to other countries is made difficult because indicators are not always available for countries at levels of development similar to or just above Bangladesh. Three countries appear in Table 5.1: India and Sri Lanka in South Asia, and Thailand in Southeast Asia. For liquidity, the comparison is also made for the average LDC or UMIC.

If the comparison is unfavourable to Bangladesh for access – when the benchmark is Thailand – and for the liquidity of banks, the results are more ambiguous for the other indicators. The performance of the Indian banking sector in particular does not look better than Bangladesh’s, even with respect to the NPL ratio. It should be emphasised, however, that the inter-comparability of some of these indicators is not granted. For instance, it is well known that the definition of NPL may vary across countries. More important, standard banking indicators are essentially business oriented and may not be good descriptors of the actual economic performance of the banking sector: that is, its contribution to the good functioning of the economy.

The preceding remark applies particularly to the depth indicator in Table 5.1. Bank credit is of a comparable size in Bangladesh as in India or Sri Lanka, but much less than half of what it is in Thailand, which, admittedly, is at a more advanced level of development. Yet, it must be kept in mind that even if two economies extend the same relative volume of bank credit, the overall economic impact of bank lending may be quite different. The quality of loans and their allocation within the economy are of utmost importance. As a matter of fact, it will be seen below that, despite average indicators that are not unduly unfavourable, some aspects of the banking system in Bangladesh are deeply dysfunctional.

A word must be said about the fact that the preceding indicators correspond to very different situations depending on the type of bank that is being considered. Without getting into details, the major difference appears between PCBs and FCBs, with the latter generally performing better than their domestic counterpart, and between private and public commercial banks (and DFIs), with the latter showing a much higher volume of NPLs and a lower capital adequacy ratio than the former.

C Trend in NPLs

NPLs are loans that do not earn any interest income for a certain period of time, and, more importantly, for which there is a lower likelihood of recovery. NPLs are considered to be one of the critical indicators for banks’ financial stability, as well as profitability, and high NPLs can seriously affect banks’ ability to sustain their operation, including the expansion of credit.

High NPLs are historically considered to be a matter of concern for many Bangladeshi banks and, as shown in Figure 5.1, till the late 1990s the proportion of NPLs was alarmingly high, due mainly to high NPLs of NCBs. Since the late 1990s, with a number of regulatory measures in operation, for the NCBs as well as for many of the PCBs, we observe an immediate decline of NPLs to total loan portfolio. However, that trend has been reversed in recent years as the percentage of NPLs to total loans rose to almost 11% by the end of 2019. Whether considering provisions or not, for all four types of banks, sizeable NPLs are observed. In the case of PCBs, although net NPLs on average are quite low, while analysing the loan profile of PCBs we should keep in mind that most of the NPLs in PCBs are held by a few banks, therefore, the average NPLs of PCBs may fail to capture the depth of the issue.

Figure 5.1 Trend of NPLs as percentage of total loans.

Source: Annual Report, Bangladesh Bank

International Monetary Fund (IMF) data show that in September 2019, NPLs as a percentage of the total loans of the banking sector was as high as 12%: the ratios for NCBs and PCBs were around 31.5% and 7.4%, respectively (IMF, 2020). It is therefore evident that, despite the success in reducing the NPLs of NCBs during the 1990s, the problem has returned in recent years. Unlike the 1980s and 1990s, NPLs have turned out to be a problem of PCBs as well, which necessitates further analysis of the issue from a political economy point of view.

A close examination of sector-wise distribution of NPLs reflects that trade and commercial sectors constitute more than 28% of total NPLs in 2018.Footnote ¹⁰ The RMG sector alone is found to account for more than 12% of the NPLs (and, in fact, around 27% of the NPLs in the manufacturing sector), followed by other large-scale industries (7.63%). This distributional pattern of NPLs is, however, consistent with the distributional pattern of sector-wise shares of loans. This highlights that important sectors of the economy constitute a significant proportion of NPLs and that weak institutional discipline of the banking sector has also ‘helped’ these sectors to grow.

D Trend in Interest Rates

Figure 5.2 presents the trend in the lending interest rateFootnote ¹¹ and real interest rateFootnote ¹² in Bangladesh between 1980 and 2018. In 2018, the interest rate spread in Bangladesh, Sri Lanka, Malaysia, and Thailand was 3%, 2.7%, 1.8%, and 2.9%, respectively. This suggests that the interest rate spread in Bangladesh is not very different from that of other developing countries.

Figure 5.2 Trend in the lending interest rate, interest rate spread, and real interest rate.

Source: World Bank, World Development Indicators and www.theglobaleconomy.com/rankings/Lending_interest_rate/

The real interest rate affects financial sector development through its influence on the volume of financial savings and on the cost of capital (McKinnon, Reference McKinnon1973; Shaw, Reference Shaw1973; Fry, Reference Fry1988; Leite and Sundararajan, Reference Leite and Sundararajan1990). As depicted in Figure 5.2, negative or very low interest rates in Bangladesh in the 1980s corresponded typically to a repressed financial system where credit is rationed and allocated in some authoritarian way, or as the result of ‘deals’ among sectors or firms – which is discussed later in this chapter. The two troughs, in 1985 and 1996, were due to inflation surges. After liberalisation of the financial market and a surge in the real rate, due to decelerating inflation with a lending rate still under control, the real rate followed the same declining trend as the nominal rate, because inflation was stabilised – after the accident of 1996. The declining trend of the lending rate also followed an international trend that started in the early 2000s but accelerated after 2008 – for example the declining trend in the yield on US 10-year bonds or on the German Bund.

It may also be noted in Figure 5.2 that the real deposit rate, which corresponds to the gap between the real rate and the interest spread,Footnote ¹³ has tended towards zero in the recent period. It was high, around 3% on average, throughout the 1990s, shrank in the mid-2000s, and has fluctuated around zero since then.

In 2018, the average real interest rate for Bangladesh, India, Sri Lanka, Malaysia, and Thailand was 3.8%, 5.1%, 6.9%, 4.1%, and 2.7%, respectively. The Bangladesh real interest rate was thus in the lower half of the range defined by these Asian countries.

Despite repeated instructions from the Government (even exhortations by the current, powerful prime minister) to maintain an interest rate spread within 3%, with a 6% deposit rate and 9% lending rate, the banking sector has failed to maintain such a provision.Footnote ¹⁴ However, following the strict instructions of the Finance Minister to reduce the lending rate to 9% from 1 April 2020, bankers decided not to offer a deposit rate over 6%.Footnote ¹⁵ However, this announcement has led to concern as deposit interest rates have dropped close to the inflation rate,Footnote ¹⁶ and also this may decrease banks’ profitability (Hasan, Reference Hasan2020).

E Efficiency of Banks in Bangladesh

The trend and pattern of key economic indicators of the banking sector reveal that the performance of the sector as a whole is not satisfactory, and, except for FCBs, neither NCBs nor PCBs can be considered to have exhibited satisfactory performance in terms of relevant indicators. In this section, we attempt to understand whether the chosen banks (PCBs and FCBs) are performing ‘optimally’ with regard to their assets, income, expenses, and other chosen indicators and to understand the factors behind the ‘sub-optimal’ performance (if any) of certain banks as opposed to others. In this context, from a methodological point of view, we used the DEA,Footnote ¹⁷ a statistical tool that is often used to assess the relative efficiency of firms (see Mercan et al., Reference Mercan, Reisman, Yolalan and Emel2003; Debnath and Shankar, Reference Debnath and Shankar2008). In addition, in order to understand the factors behind the relative efficiency of banks, we estimated a panel logit model where we used the efficiency score with other banking sector indicators: most importantly, the components of the CAMELSFootnote ¹⁸ rating.

In the analysis of the efficiency of the private banking sector of Bangladesh, we have used the input-orientedFootnote ¹⁹ DEA analysis using the CCRFootnote ²⁰ and BCCFootnote ²¹ models to measure overall technical efficiency (OTE) and pure technical efficiency (PTE), respectively. In the context of the banking sector of Bangladesh, we adopted the intermediation approach for selecting input and output variables, which considers banks as financial intermediaries where banks produce services through the collection of deposits and other liabilities and their application in interest-earning. In this analysis, as input variables we have chosen: (i) total assets; (ii) number of employees; and (iii) sum of deposits and borrowings. As output variables we have included: (i) net interest income; (ii) non-interest income; and (iii) NPLs. Apart from the traditional variables used for the intermediation approach, we have the NPLs variable as a (negative) output variable.Footnote ²² In addition, all the input and output variables except labour are measured in Bangladeshi Taka (BDT) in millions, and we have conducted the analysis from 2015 to 2018, on 44 national and foreign PCBs.

Figure 5.3 presents the distribution of the efficiency scores of the banks calculated using the DEA. It is clear that over the years, the percentage share of banks with an efficiency score of 0.9 and above has declined and the percentage shares of very poorly performing banks (efficiency score below 0.25), poorly performing banks (efficiency scores between 0.25 and 0.49), and moderately performing banks (efficiency scores between 0.5 and 0.74) have increased. In 2018, 55% of the banks had efficiency scores below 0.75. In contrast, only 25% of the banks in 2015 had efficiency scores below 0.75. Most of these low-performing banks are PCBs.

Figure 5.3 Distribution of the efficiency score of private banks by year.

Note: Total number of private banks = 44.

Source: Authors’ calculation from the DEA analysis

F Development Implications of the Status of the Banking Sector in Bangladesh

The linkage between economic development and the banking sector can be multi-faced and often the indirect linkage can be quite strong too. One of the most important ways in which the banking sector might have an impact on the growth and economic development of a country is through channelling the savings of depositors for the purposes of investment. Despite a persistent high growth rate in Bangladesh for the last decade or so, there has not been much progress in terms of private investment as the ratio of private investment to GDP has remained almost stagnant in recent years. There are concerns that poor governance in the banking sector, including the high amount of NPLs, has restricted banks’ capacity to maintain a narrow interest rate spread and to reduce the lending rate to borrowers. Such a high cost of borrowing and access to finance is generally considered to be one of the key challenges for entrepreneurs in expanding their businesses (see International Finance Corporation (IFC), 2020).Footnote ²³

One important area of concern is that the Government’s borrowing from the banking sector has been on an increasing trend over the past few years, which has also been accompanied by an accelerated selling of National Savings certificates (i.e. ‘government bonds’). In FY18, the Government’s borrowing from the banking system increased to as high as BDT 1780.9 billion (around US$ 21.34 billion) – equivalent to 8% of GDP. The increase in the Government’s borrowing from the banking sector risks crowding out credit to the private sector (Rana and Wahid, Reference Rana and Wahid2016; see also the discussion in Chapter 2 of this volume).

It is also important to mention that since the 1980s, the Government has been allocating a significant amount in the annual national budget to subsidising the ailing banking sector, to cover the losses of these banks.Footnote ²⁴ After the initiatives to privatise NCBs in the 1990s, a falling trend was observed in the recapitalisation of banks (NCBs) by the Government; this trend has been reversed in recent years. In FY14, there was a massive surge in the recapitalisation process, which, although it has declined in subsequent years, still since FY17 has been annually as high as BDT 10 billion (around US$ 0.12 billion). The national budget for FY20 allocated BDT 15 billion (around US$ 0.18 billion, equivalent to 0.75% of GDP) to the recapitalisation of NCBs. It is not only the direct monetary expense which is at stake here, this recapitalisation expenditure should also be understood from the viewpoint of opportunity costs to the society. With Government education expenditure being around 2% of GDP and health expenditure less than 0.5% of GDP, and also with a very low tax–GDP ratio of around 9%, the consequence of this massive recapitalisation for development cannot be ignored. The ‘costs’ of poor governance in the banking sector is therefore multi-dimensional and can have long-term implications for the Government’s development initiatives.

In addition to the apparently ‘visible’ macro and fiscal indicators, it is often argued that poor governance of the banking sector is having negative consequences through a number of indirect channels. According to a Washington-based think tank, Global Financial Integrity, the total value gap identified in trade between Bangladesh and all of its trading partners in 2015 was US$ 11.5 billion, which was 19.4% of total trade (Global Financial Integrity, 2020). The gap is between the value of exports reported by Bangladesh exporters and the value of imports reported by importers in importing countries. This estimate puts Bangladesh among the top 30 countries of the world in terms of such trade mis-invoicing data, and third among Asian countries, after Malaysia and India. Though not conclusive, this mis-invoicing is argued to be linked to capital flight from the banking system in the form of NPLs (see Ahmed, Reference Ahmed2019; Haider, Reference Haider2019).

A Central Bank

Bangladesh Bank, that is the central bank of Bangladesh, tends to be a very weak institution. Due to various formal and informal controls, it actually enjoys only a marginal degree of policy and operational independence. It is de facto subservient to the MOF even in regard to some of the core functions of the central bank, such as regular banking supervision. However, it is not only the formal power that has reduced the independence of the central bank. Governments also tend to act beyond their legal mandates. For instance, existing rules clearly prohibit appointing the Governor or Deputy Governor of the central bank from the government bureaucracy. But these rules have never deterred successive governments (authoritarian and democratic) from appointing members of the civil service to such positions on an ad hoc basis.Footnote ³⁸ The Government has also effectively marginalised the role of the Bangladesh Bank in the decision-making processes related to operational matters and banking sector governance. Though the BCA 1991 empowered the Bangladesh Bank to regulate the country’s banking sector as an autonomous body, the central bank lost its independence after the MOF established its own banking division. An example of the marginalisation of the Bangladesh Bank can be seen from the following quote of a supernumerary professor at the Bangladesh Institute of Bank Management: ‘A few days ago (in November 2017), the central bank turned down proposals for setting up two new private commercial banks. In response, the ministry instructed them to proceed that would allow parties to get licences to set up private banks. How does such an action leave any room for the bank to operate independently?’Footnote ³⁹

In dealing with critical policy issues, such as monetary policy or lending to the Government, and governance issues – for instance, special monitoring of insolvent banks or problems of NPLs of commercial banks – the tendency of the Government has been to bypass the formal approval process of the central bank.Footnote ⁴⁰ In fact when it comes to governance issues, the Government seems to be more inclined to limit central bank’s authority. An ex-governor of the Bangladesh Bank mentioned: ‘In Bangladesh, there is a “dual” system of control of the banking sector. The state-owned commercial banks and specialised banks, and some statutory banks are controlled by the Bank and Financial Institution Division of the MOF. On the other hand, all private commercial banks, foreign banks, non-bank financial institutions are regulated by the Bangladesh Bank. This “duality” of control has resulted in uncoordinated, often weak, policy measures for the government regulated banks. Bangladesh Bank has serious limitations in enforcing prudential and management norms in these banks, which have made the whole banking sector weak and vulnerable through “domino effect”.’Footnote ⁴¹

B Corporate Governance in the PCBs

Unlike NCBs, PCBs are characterised by reasonably efficient internal management. The bank authorities have successfully avoided the problems that plagued NCBs, since high priority was given to minimising administrative costs. Also, competitive salaries and various other performance-related incentives have contributed to greater management efficiency. However, the central problem with PCBs lies in the area of corporate governance. For a better understanding of the problem, we need to go beyond the conventional perspective of corporate governance, which fails to take into consideration the contingent nature of institutions and the political economy settings. The conventional perspective, developed essentially in the context of the UK and USA (‘Anglo-American model’), assumes the following: the existence of widely held firms (i.e. firms with a fairly large number of dispersed shareholders); firms are subject to effective legal and juridical (civil and criminal) constraints; and firms rely on ‘anonymous finance using primarily arm’s-length contracts and third-party intervention through the market for corporate control’ (Berglof and von Thadden, Reference Berglof, von Thadden, Pleskovic and Stiglitz1999). The defining characteristic of such corporate governance is ‘strong managers, weak owners’ (Roe, Reference Roe1994), and the main governance problem is the conflict between self-interested management and the weak dispersed shareholders.

Such a model of corporate governance cannot explain the realities in the developing world. In the latter context, firms are usually family-owned or closely held (i.e. more or less concentrated ownership), legal and juridical constraints are very weak, and close ties between business interests and government is much more common (‘crony capitalism’), resulting in large-scale corporate fraud and theft. Also, the stock market is less salient as an external source of finance, and firms typically raise funds from sources such as business groups (‘channelling resources between its firms’), family, and friends. In some developing countries like Bangladesh, where the banking sector is characterised by large-scale governance failure, NPLs tend to be another major source for raising funds.Footnote ⁴²

The above features also largely characterise the structure of corporate governance of PCBs in Bangladesh. Concretely, PCBs are closely held firms, that is mainly owned by a few large shareholders,Footnote ⁴³ who have strong control over the managers. In that sense, the defining characteristic of the corporate governance of PCBs is (paraphrasing Roe): strong owners, dependent managers (bank management), and very weak outsiders (i.e. stockholders). Consequently, the main corporate governance problem is that there are hardly any effective self-interested countervailing groups to prevent rampant corporate fraud and theft by the bank owners.

In general, the monitoring and supervision of banks are very complex issues involving serious incentive problems and information asymmetry. For instance, depositors may lack necessary incentives to proactively monitor the performance of banks since they have less costly options of withdrawing their deposits if necessary: that is, depositors may vote with their feet if they find the bank is not viable. The incentive problem also arises due to the presence of deposit insurance. For instance, the Deposit Insurance Fund in Bangladesh has largely contributed to depositors’ complacency (regarding gross inefficiency and insolvency of the banks) and consequently has hindered the free play of market mechanisms in disciplining banks, that is the depositors may have little incentive to vote with their feet. Such complacency seems to be also an outcome of the presence of the Government’s explicit guarantees (bailing out of failing banks) and implicit guarantees (regulatory forbearance).Footnote ⁴⁴ Moreover, depositors tend to lack sufficient information to make a proper evaluation. But even if they have better information, the policy of deposit insurance would reduce the incentive to use that information. There are also collective action problems that severely limit depositors’ activism. In contrast to the small and concentrated groups with high stakes in the system – for instance, the bank owners – numerous depositors, each having a small stake in the banks, tend to be less motivated and consequently less effective in realising collective objectives. The costly process of information collection and the possibility of other depositors free riding on such information are also strong disincentives facing individual depositors in terms of taking individual initiatives to generate information. The point is this: there are important reasons for depositors to delegate the monitoring and supervision role to specialised agencies that will act on their behalf to mitigate collective action problems and reduce information asymmetry and the transaction costs of monitoring. Two forms of agencies are typically available: the formal regulatory institutions (the central bank, for instance) and varieties of countervailing private actors or ‘reputational agents’Footnote ⁴⁵ with strong incentives to monitor corporate firms.

In Bangladesh, reputational agents have largely failed to represent depositors’ interest by playing the role of an effective monitor of commercial banks. To begin with, there are very few such agents or institutions in Bangladesh relevant to banking sector corporate governance. For example, credit rating agencies, investment analyst firms, and depositor or stockholders associations have yet to emerge in any significant sense. Organised legal activism tends to focus more on environmental, civil, and human rights issues, rather than financial sector mal-governance. The role of auditing and accounting firms has been very perverse, which in effect reinforces rather than mitigates the information asymmetry between banks and depositors, as well as corporate fraud and other opportunistic behaviour of bank management and owners.Footnote ⁴⁶ An exception, in this regard, has been the print media. In fact, to the extent that a certain degree of transparency and accountability exists in the system, the credit for this can perhaps largely go to actors like the print media. The print media’s role as monitor has been very critical. Media trial (naming and shaming of defaulters, exposure of banking sector-related corporate fraud, etc.) has probably played a more important role than formal judicial and law enforcement processes in ensuring some degree of discipline in regard to powerful bank owners, defaulters, and cronies.Footnote ⁴⁷

Discussion with bank officials (current and ex) and academics suggest that auditing and accounting firms in Bangladesh have largely failed to play their role of effective monitors of corporate behaviour of commercial banks.Footnote ⁴⁸ The problem is not a lack of technical competence (although this is low) but mainly bad governance. Whatever formal regulations exist, in practice the auditing and accounting firms do not seem to be subject to any form of accountability. For instance, no legal actions have ever been taken against any auditors by depositors or shareholders. The central bank has never disciplined or disqualified any auditing firms for sloppy work or violations of rules. Given such a weak accountability structure and legal enforcement, a large section of the auditing profession has been involved in blatant violation of corporate rules and ethics, auditing fraud, and collusive corruption with bank management. For instance, auditors collude with bank management to hide irregularities in the records, change loan classification entries and provision for loan losses to conceal loan defaults, and exaggerate the performance of banks by concealing expenses and showing income from interest generated from defaulted loans.Footnote ⁴⁹ Another problem is the distorted accountability structure, that is executive authorities’ control over the regulatory agencies. For instance, the central bank does not receive audit reports, instead the MOF does. A collusive nexus is much easier to establish in the executive domain of the state than in the central bank.

The most important public source of external restraint has been the central bank, which has the formal supervisory authority over PCBs.Footnote ⁵⁰ However, experiences in the last two decades (with some variations) suggest that it has largely failed to control such fraudulent practices. The regulatory failure, on the part of the central bank, needs to be explained by relating the corporate governance problem to the larger political–economy settings.

Licences to set up banks in the private sector have mainly been given to politically favoured cronies, most of whom have also been large loan defaulters. The privatisation of Pubali Bank in 1983 is a typical example of this process. The Bank had an estimated value of BDT 3 billion (around US$ 0.12 billion), but during privatisation, it was deliberately undervalued at BDT 160 million (around US$ 6.5 million). The majority of the new owners were already large defaulters (with the same bank), with one of them defaulting in the amount BDT 10 million (around US$ 0.41 million). These bank owners continued to wield political influence over successive democratic regimes. Discussions with senior bankers and recent scanning of print media suggest that the licensing of banks in the private sector (PCBs) over the last decade has also continued to be largely based on corrupt deals and political patronage. For example, several banks that have received licences in past seven to eight years, such as Farmers Bank, NRB Global Bank, and NRB Commercial Bank, suffered a severe liquidity crisis during the 2016/2017 fiscal year. The problem was particularly acute in the case of Farmers Bank, which had to be bailed out by the Government. Prominent economist Wahiduddin Mahmud noted that repeated violations of bank policies led to Farmers Bank’s current dilapidated state. He stated: ‘The influence of politicians has helped them to establish new banks without extensive scrutiny and obtain huge amounts of loans.’Footnote ⁵¹

Given the political clout of the owners of PCBs, and the weak rule of law, the central bank has had very little success in enforcing laws and rules against blatant forms corporate fraud and non-compliance of regulations by the bank directors. Based on scanning of print media and discussions with bankers, including current officials and ex-governors and deputy governors of Bangladesh Bank, the following appears to be the case:

1. (a) Formal regulations clearly specify the autonomy of the management from the board and the roles of the board, chairperson, and managing director, but such regulations are rarely followed by the bank authorities. In most cases, it is the board that actually runs the bank.

2. (b) The BCA (section 27) prohibits PCBs from making loans to their directors and affiliated concerns, yet insider lending has been widely practised in the banking sector, especially by insolvent banks, leading to a huge accumulation of NPLs. Insider lending takes various forms: lending to firms with which bank owners have links, lending to family members of the owners and pure theft (i.e. the adoption of outright fraudulent strategies). The latter includes the transfer of funds by owners to fictitious accounts, taking loans without adequate collateral, and flouting banking rules. Some of these people are well-known business leaders, influential cronies, and benefactors of major political parties, and they have sufficient political capital to circumvent the central bank’s disciplinary measures (if they are used against them). Their formidable power also indicates those regulatory bodies like the MOF and Parliamentary Committees are to a large extent beholden to their special interests.

3. (c) Regulatory forbearance with regard to liquidity requirement, loan classification, accounting standards, or capital adequacy can be ensured by bribing or offering lucrative private sector jobs to the senior officials of the MOF.

4. (d) By using political connections with the MOF, the Parliamentary Standing Committee, or Prime Minister’s Office, one can successfully circumvent regulatory rules and restrictions.

As mentioned earlier, the BCA was first enacted in 1991 as part of the FSRP. The act provided for the licensing, supervision, and regulation of all banks.Footnote ⁵² The BCA also provided the legal basis for the central bank’s regulatory and supervisory role in the entire banking system. However, the private sector considers the act against its interests. Right after the Act’s amendment, the BAB and other prominent business associations (mainly the FBCCI) began a systematic campaign to further amend or simply end some of the more stringent rules and regulations. Organized business has successfully lobbied the political authorities in recent decades to relax, and in some cases completely reverse, the more stringent provisions in the act (prudential regulations in the process of repaying loans). In other cases (supervision of the central bank over internal management of PCBs), new rules have remained unchanged as compulsory formal laws in the book, but largely ignored by market actors in practice.

Non-compliance with the rules has been possible due to collusive linkages of these actors with the supervisory authorities (bureaucratic or political), at the highest levels of the hierarchy.

Financial Sector Development in Bangladesh

An extensive theoretical and empirical literature has pointed to the critical functions of the financial system, including by (i) providing transaction services and thus enabling specialisation of labour; (ii) intermediating funds from savers to entrepreneurs; (iii) assessing investment projects ex-ante and monitoring borrowers ex-post, thus mitigating principal–agent conflicts; (iv) mitigating liquidity risks, allowing savers ready access to funds while enabling long-term investment; and (v) enabling investor cross-sectional and intertemporal risk diversification. An expansive literature has shown a positive relationship between financial development and economic growth, robust to reverse causation and omitted variable bias, and particularly strong in developing countries such as Bangladesh (see Popov, Reference Popov, Beck and Levine2018, for a recent overview).

One key challenge when assessing the relationship between financial development and real sector outcomes, as well as when comparing financial sector development across countries and over time, is how to measure the efficiency and development of a country’s financial sector. While theory points to specific channels and mechanisms, as discussed above, the empirical literature has not been able to map these different functions onto very specific empirical measures. Critically, several of these functions are complementary to each other: for example, the pooling and intermediating of savings goes hand in hand with the screening and monitoring of borrowers. Similarly, pooling and intermediating savings implies liquidity transformation. By offering payment services, banks learn about potential borrowers and thus get better at screening and monitoring them.

In the absence of variables capturing the individual functions of the financial sector, the literature has used crude proxy variables focusing on the size and activity of financial intermediaries and markets, most prominently private credit to GDP, which is the total claims of financial intermediaries on domestic private enterprises and households in an economy, divided by GDP. By capturing the total amount of financial intermediation by regulated intermediaries in the economy, this variable proxies for the total volume of intermediation. The main advantage of this indicator is that it is available for a large cross-section of countries and over longer time periods, as the underlying data (total credit outstanding and GDP) go back until 1960 for many countries. Confidence in the measure is further increased as it is significantly correlated with other indicators of the efficiency of the financial system, available for fewer countries and over shorter time periods, such as interest rate spreads and margins.

While academics have focused mostly on the facilitating role of the financial sector, which consists of mobilising funds for investment and contributing to an efficient allocation of capital in general, policymakers have often focused on financial services as a growth sector in itself, as captured by the contribution of the financial sector to GDP. However, it is important to distinguish between the importance of the financial system within overall value added in an economy and the support that the financial system provides for the real economy. A larger financial system can both support the real economy but also be a burden on the rest of the economy, by, for example, drawing talent away from the real economy (Kneer, Reference Kneer2013a, Reference Kneer2013b). Based on a sample of 77 countries for the period 1980–2007, Beck Degryse, and Kneer (Reference Beck, Degryse and Kneer2014) find that intermediation activities increase growth and reduce volatility in the long run, while an expansion of the financial sector along other dimensions has no long-run effect on real sector outcomes. One specific example is Nigeria, which liberated its financial sector in the late 1980s. Very low entry requirements and the high market premiums that could be earned with arbitrage activities in the foreign exchange markets explained why the number of banks tripled from 40 to nearly 120 in the late 1980s, employment in the financial sector doubled, and the contribution of the financial system to GDP almost tripled. At the same time, however, deposits in financial institutions and credit to the private sector, both relative to GDP, declined (see discussion in Beck, Cull, and Jerome, Reference Beck, Cull and Jerome2005).

Comparing financial sector development across countries and over time is made difficult by different and changing socio-demographic structures. One way to address this challenge is to construct a synthetic benchmark based on a panel regression model of many countries over time (see Barajas et al., Reference Barajas, Beck, Dabla-Norris and Reza Yousefi2013 for further discussion). Among the explanatory variables included in this model are GDP per capita to proxy for demand-side effects, the young and old dependence ratio to proxy for demographic trends, total population to proxy for scale effects, and also year-fixed effects to control for global trends. This regression model makes it possible to predict financial sector indicators, such as private credit to GDP, for each country and year, and to compare it to the actual value. Figure 5.4 shows the actual and predicted value for private credit to GDP for Bangladesh for the years between 2000 and 2016. Strikingly, for all years, the actual value is above (though not by much) the value predicted by the socio-economic characteristics of Bangladesh.

Figure 5.4 Benchmarking private credit to GDP in Bangladesh.

Source: Author’s calculations, based on World Bank data

What Drives Financial Sector Development?

Beyond socio-economic characteristics, financial sector development is critically influenced by the macroeconomic environment and the institutional and regulatory framework (see Beck, Reference Beck, Beck and Levine2018 for an in-depth discussion and literature review). I will discuss each in turn.

Bangladesh has a long history of macroeconomic volatility, as illustrated in Figure 5.5. While the inflation rate has been relatively stable (between 5% and 7%) over the past three years, going back further shows variation between 2% and 16%. Given the intertemporal nature of financial contracts, macroeconomic volatility undermines the appetite and willingness of both lenders and borrowers to commit to long-term contracts.

Figure 5.5 Inflation in Bangladesh (%).

Source: World Bank data

Given the intertemporal and often abstract nature of financial contracts, the financial system is also among the most sensitive sectors in an economy to the institutions of contract enforcement and property right protection. A second important area is therefore the institutional framework, which encompasses the rights of secured and unsecured creditors, the quality of court systems and efficiency of contract enforcement, and the existence and quality of collateral registries. Table 5.3 presents three indicators from the World Bank’s Doing Business database, showing the relative performance of Bangladesh compared to several other countries in the region. In most cases, Bangladesh lags behind the regional comparator countries.

The Governance Challenges in Bangladesh’s Financial Sector

The situation as described in this chapter points to a lack of both market and supervisory discipline, and regulatory capture, not only by the state-owned banks but also by domestic private banks. Bank licences seem to be granted for politically connected entrepreneurs. There is a lack of de facto independence of the Bangladesh Bank, in addition to a long-standing ‘default culture’ (both for borrowers and banks), which explains the high level of NPLs. There is effectively no resolution of failed banks, but rather regulatory forbearance and recapitalisation. Finally, there is a lack of ‘reputational agents’, that is private institutions that provide information on bank performance and thus enable market discipline – except for the print media.

In 2006, I co-authored a paper assessing the development and stability challenges of the Bangladeshi banking system that painted a very similar picture (Beck and Rahman, Reference Beck and Rahman2006). One thing I noticed was that the financial and regulatory regime of high government guarantees and limited supervisory discipline resulted in high bank fragility. Moving to a regime with a stronger emphasis on market forces implies a carefully managed transition towards a more autonomous and powerful supervisory authority, privatisation of state-owned banks, and the establishment of a bank resolution framework, before one could move towards a more market-based banking system (Figure 5.6). In the 2006 paper, I made several policy suggestions, including (i) de jure and de facto autonomy of the Bangladesh Bank supervision from the Government, and (ii) complete divestiture of the Government from nationalised commercial banks. As Hassan, Bidisha, Mahmood, and Raihan eloquently describe, there has been no progress on (ii), and there has been a further deterioration in (i).

Figure 5.6 The interaction of government guarantees and supervisory approach.

Source: Beck and Rahman (Reference Beck and Rahman2006)

What to Do?

The governance challenges in the Bangladeshi banking system call for strong policy responses. But it is important to understand that de jure reforms might not – at least by themselves – address the governance challenges. While privatisation of state-owned banks reduces direct government ownership, it does not address governance and efficiency problems in the private banks. Evidence from other countries (such as Mexico in the 1990s) has shown that privatisation to insiders can create new frictions and fragility. While a strengthening of the de jure autonomy of the Bangladesh Bank is laudable, its de facto autonomy is endogenous to the political structure of the country. And while de jure bank governance can be strengthened by legislation, enforcement is again endogenous to the political environment. Finally, a stronger stance against large and politically connected defaulters is necessary, but hard to enforce in the current political state.

I therefore make two suggestions that, though they might not have as strong effects, do take into account political constraints. First, foreign banks are less open to political pressure and can help break the link between politicians, borrowers, and bankers, as the example of Central and Eastern Europe has shown (see, e.g. Gianetti and Ongena, Reference Gianetti and Ongena2009). Foreign banks can certainly have their shortcomings, as they often lack incentives and knowledge to reach out to the most opaque and smallest borrowers; however, evidence from Pakistan has also shown that foreign banks from geographically and culturally closer countries are less subject to such constraints (Mian, Reference Mian2006). Second, strengthening private monitors (reputational agents) is an important reform item. Such reforms can include: (i) the creation of an FCA-style institution (separate from Bangladesh Bank) that focuses on bank conduct and supervision; (ii) steps to force more disclosure by banks beyond balance sheets and income statements, giving broader insights to depositors, media, and other stakeholders on their ownership structure and business; and (iii) improvements in the quality and governance of the accounting and auditing industry in Bangladesh. The latter can also include a mandatory rotation of auditors for banks.

Bangladesh has developed from ‘history’s basket case’ (as it was referred to by Henry Kissinger) to a rapidly developing and emerging economy, with aspirations of becoming a middle-income country. The banking sector has not yet played the role in this process that it can play. The necessary reforms are clear; what is less clear is how to overcome the political constraints in order to implement them.

A Supply-Side Variables

1 Level of Development and Tax Handles

The most fundamental issue is why the tax to GDP ratio has remained stagnant at around 9% of GDP over the past decade or so, despite rapid strides in GDP growth that have led per capita income to accelerate in current prices from US$ 800 in FY2010 to US$ 1,767 in FY2018. In constant 2010 dollars, this amounts to US$ 1,535 in FY2018, a healthy 8.5% annual growth in real per capita income. The very low tax performance of Bangladesh relative to countries at a similar per capita income level is striking (Figure 6.4), suggesting that Bangladesh is a negative outlier in the area of tax performance. This suggests that the low level of development is not the main concern but that there are other factors at play, including the Government’s tax reform efforts, tax administration, and willingness to pay.

Figure 6.4 Tax performance in comparable countries in 2017 (per capita income US$ 1,000–US$ 2,000).

Source: World Bank World Development Indicators

The tax performance model formalised by Bird et al. identifies several supply-side variables: per capita income; share of agriculture in GDP; size of the informal economy; access to natural resources; and share of trade in GDP. The latter two variables reflect the availability of easy tax handles.

The low per capita income relative to developed countries explains a part of the reason for the low tax to GDP ratio in Bangladesh. But, as noted, the low level of per capita income alone cannot explain the poor tax performance in Bangladesh because its tax to GDP ratio is only 50% of the average tax to GDP ratio in developing countries.

Regarding the roles played by the share of agriculture and the size of the informal economy, again they are a part of the factors that account for the low average tax ratio for Bangladesh relative to developed countries, but they do not explain the very low tax to GDP ratio for Bangladesh relative to other developing economies. Moreover, the GDP share of agriculture has fallen sharply over the years and continues to decline, while the share of the industrial sector has grown substantially. For example, between FY2013 and FY2018, the GDP share of the industrial sector grew from 29% to 34%, and the share of agriculture fell from 17% to 14%, but the tax to GDP ratio did not pick up, but instead declined from 9.5% of GDP in FY2013 to 8.7% of GDP in FY2018. Indeed, the 2018 industrial sector share in Bangladesh (34%) is substantially higher than the average for low-income countries (25%), yet the tax performance is substantially weaker than the average for low-income economies.

Concerning the role of the informal economy, unfortunately reliable estimates of its size and changes over time are not available. Nevertheless, a priori it is likely to be an important contributor to the low tax performance in general. However, it is not very likely that the share of the informal economy is substantially higher in Bangladesh than the average for low-income economies, and therefore, it is unlikely to be a reason for the very low tax performance relative to countries with similar per capita income.

2 Tax Composition and Structure

The composition of Bangladesh tax revenues is shown in Figure 6.5. The structure of taxation in Bangladesh has improved significantly over the years. The share of income and domestic production/consumption taxation has increased, while the reliance on international trade taxation has declined. The introduction of the VAT in 1991 made a major difference to both improving the tax structure and increasing the tax to GDP ratio. Thus, the increased role of domestic production/consumption taxation reflects the growing importance of the VAT in revenue generation. This is a positive development; yet the revenue yield of the VAT has been stagnant since FY2011 (Figure 6.6). When compared with the statutory VAT rate of 15%, the low yield is indicative of the low productivity of the VAT.

Figure 6.5 Bangladesh tax structure (% share in total taxes).

Source: Ministry of Finance, Government of Bangladesh

Figure 6.6 VAT revenue yield (% of GDP).

Source: Ministry of Finance, Government of Bangladesh

A useful way of assessing the quality of the tax structure is to compare the Bangladesh experience with other countries. Using data from the International Monetary Fund’s (IMF’s) International Financial Statistics for the years 1996–2001, Gordon and Li (Reference Gordon and Li2005) summarise the results of the international tax structure by income groups, as illustrated in Table 6.1. The income groups were selected from the World Bank classification of low-income (below US$ 745); lower middle-income (US$ 746–2,975); upper middle-income (US$ 2,979–9,205); and upper-income (greater than US$ 9,206) prevailing during 1996–2001. Although the data in the table are a bit outdated, it illustrates well the major differences in the observed tax structure by income groups, which is not likely to change much with updated data. However, the relative weakness of the Bangladesh tax structure will likely be magnified.

Table 6.1 Sources of government revenue, 1996–2001

GDP per capita	Tax revenue (% of GDP)	Income taxes (% of total taxes)	Corporate income taxes (% of total income taxes)	Consumption and production taxes (% of total taxes)	International trade taxes (% of total taxes)
<US$ 745	14.1	35.9	53.7	43.5	16.4
US$ 746–2,975	16.7	31.5	49.1	51.8	9.3
US$ 2,976–9,205	20.2	29.4	30.3	53.1	5.4
All developing	17.6	31.2	42.3	51.2	8.6
>US$ 9,206	25.0	54.3	17.8	32.9	0.7
Bangladesh (FY2018)	8.7	29.9	51.0	40.2	29.9

Source: Gordon and Li (Reference Gordon and Li2005).

Table 6.1 tells a useful story about the international experience with the modernisation of the tax structure as income grows and development proceeds. The main messages are set out in the following paragraphs.

First, the survey confirms that the tax to GDP ratio correlates positively with per capita income on average. Related to this, in order for the tax to GDP ratio to increase with income growth, the structure of taxation should be such that it responds well to income growth. In other words, the tax structure must be buoyant with respect to the expansion of economic activities, as reflected by the level of GDP.

Second, as development proceeds, the share of income taxes grows. Indeed, developed countries raise more than 50% of their revenues from income taxes. The rationale for this is based on the need to have a tax structure that meets three desirable principles of taxation: the ability to pay; equity principles of taxation; and the buoyancy argument.

Third, developed and upper middle-income countries rely much more on personal income taxes relative to corporate taxes. Thus, developed countries obtain as much as 45% of their total tax revenues from personal income taxes; corporate taxes account for less than 10% of total tax collections. The rationale here is that unduly high taxation of the corporate sector would tend to reduce investment incentives and lead to capital flight, which would hurt growth.

Finally, as development proceeds, the revenue role of international trade taxes tends to disappear. Thus, it accounts for less than 1% of total tax revenues for high-income countries and around 5% for upper middle-income countries. Even lower middle-income countries get less than 10% of their tax revenues from international trade taxes. The rationale for this is that trade taxes tend to distort resource allocation, hurting exports, and breeding inefficiency within domestic production.

Against this international evidence, the Bangladesh tax structure has many shortcomings. Bangladesh continues to rely very heavily on international trade taxes (30%), as compared with less than 9% for all developing countries. Even the low-income countries on average get only 16% of their revenues from international trade taxes, which is nearly 60% lower than in Bangladesh. This heavy reliance of Bangladesh on international trade taxes is a seriously negative policy development and indicates the distortionary effect of the tax structure.

The improvement in the performance of income taxes is a positive outcome. It is now roughly comparable with the average for low-income economies. But there are a number of major concerns. Although the share of income taxes from the corporate sector has been falling, it still accounts for more than 50% of income taxes. Corporate tax rates vary considerably by activities, with a heavy load on a few cash cows. Some sectors like mobile phone services, tobacco, and banks are required to pay hefty profit tax rates ranging from 40% to 45%. They account for most of the corporate tax yield. There are many exemptions that lower the average yield of corporate taxes.

A major issue of the tax structure is the very low yield from personal income taxes (Ahmed, Reference Ahmed2015). Very few people pay personal income taxes. Bangladesh does not have a universal income tax base, owing to exemptions of many sources of income and the very low taxation of capital gains. In addition, tax compliance is very low. The poor performance of personal income taxation is one of the primary reasons for the low tax buoyancy in Bangladesh, which has constrained the overall tax performance. Sadly, this also speaks volumes about the inequitable nature of the tax structure. Income inequality has grown substantially in Bangladesh, but the collection of personal income taxes has not increased much.

Finally, as noted, the productivity of the VAT has been stagnant, owing to many exemptions and inadequate coverage. This is yet another factor that explains the low buoyancy of the Bangladesh tax structure.

B Willingness to Pay: Demand-Side Issues

Bird et al. (Reference Bird, Martinez-Vazquez and Torgler2014) have argued convincingly that ‘a more legitimate and responsive state appears to be an essential precondition for a more adequate level of tax effort in developing countries’. They capture this effect of social and political institutions on tax performance by developing a fuller model of determinants of tax performance that includes the traditional supply-side variables as well as demand-side variables. Using cross-country data for mean values for 1990–1999 for 110 developing countries, they estimate the tax performance model (tax to GDP ratio) using a various mix of supply- and demand-side variables. The structure of the economy (measured by the GDP share of non-agriculture sectors), representing the supply side, and quality of governance (measured by the World Bank governance indicators and the International Country Risk Guide (ICRG) index), representing the role of institutions or demand-side variables, yield the most robust results. They conclude that institutions are a major determinant of tax performance.

Other econometric studies provide similar supportive evidence about the role of institutions in explaining tax performance (Ghura, Reference Ghura1998; Gupta, Reference Gupta2007; Nguyen, Reference Nguyen2015; Ricciuti et al., Reference Ricciuti, Savoia and Sen2019). Ghura (Reference Ghura1998) focuses directly on the role of corruption in explaining tax performance in African countries and finds that corruption is significantly and negatively correlated with tax performance. Using panel data over 25 years for 105 developing countries, Gupta (Reference Gupta2007) finds a negative contribution of corruption to tax performance and a positive contribution of political stability. Nguyen (Reference Nguyen2015) finds evidence that institutional quality has a significant positive impact on tax performance in low-income and lower middle-income countries. Ricciuti et al. (Reference Ricciuti, Savoia and Sen2019), in their empirical research focusing on the role of political institutions in building tax capacity, find evidence that the existence of effective constraints on the head of the government makes the tax system more accountable and transparent.

The governance challenges facing Bangladesh are well known. For example, an international ranking of corruption prepared by Transparency International puts Bangladesh at the bottom 15% of the countries ranked (149 out of 175 countries) for 2018. The World Bank governance indicators (2017) rank Bangladesh as follows: voice and accountability (bottom 30th percentile); political stability and absence of violence/terrorism (bottom 10th percentile); government effectiveness (bottom 22nd percentile); regulatory quality (bottom 21st percentile); rule of law (bottom 28th percentile); and control of corruption (bottom 19th percentile). These results suggest that there are major governance issues and challenges in Bangladesh that might serve to constrain tax performance. Drawing from the econometric evidence summarised above, it is most likely that corruption and other elements of weak governance are major factors for the low tax collection in Bangladesh.

The adverse impact of corruption on Bangladesh’s economic management is well recognised. It tends to operate through four main channels: land markets; financial markets; public procurement; and taxation. The corruption in tax administration is pervasive. This is a major factor underlying low tax compliance in all areas of taxation, which is a major constraint to tax revenue mobilisation.

The weakness on the demand side raises an important political economy issue. Are Bangladeshis unwilling to pay taxes because they do not feel that resources are used effectively? This is an empirical question that needs further research before an answer can be provided, but some preliminary observations can be made.

There is at least some degree of truth that higher tax collection is possible if citizens can see more and better public service provision in areas related to health, education, water, sanitation, and drainage. In developed countries, these services are typically provided by local government institutions. Bangladesh, on the other hand, is heavily centralised. While there are elected local government institutions, they are highly resource constrained in the absence of fiscal decentralisation (Ahmed, Reference Ahmed2017). Local government institutions collectively raise a meagre 0.16% of GDP as tax resources in Bangladesh (Ahmed, Reference Ahmed2017), as compared with an average of 6.4% of GDP in industrial countries and 2.3% of GDP in developing countries (Bahl, Linn, and Wetzel, Reference Bahl, Linn and Wetzel2013). Better services can also provide greater resource mobilisation through greater use of cost recovery policies (non-tax revenue measures). Strengthening of local government institutions and the associated fiscal decentralisation associated with more and better basic public services can certainly play a major role in increasing tax and non-tax revenues in Bangladesh.

However, there is also evidence that the demand for public services is growing in Bangladesh, and the Government has been making some efforts to respond to them. The budget making process involves considerable public consultation with various citizens groups, including business, non-governmental organisations, research and think tank institutions, and the media. This is conducted at quite a high level, involving the Finance Minister. The budget is also debated in the Parliament. The public consultation process is fairly open and considerable discussions about expenditure priorities and tax reform options are aired in these consultation process. The importance of increasing allocations for health, education, social protection, and infrastructure are raised every year. In response, the Government has done a fairly good job in keeping broad expenditure priorities focused on the development agenda. The Government has also protected total public expenditure as a share of GDP from falling despite shortfalls in revenues by running a budget deficit that is financed by foreign and domestic borrowing. This deficit has grown slightly over the past 10 years but is now capped at around 5% of GDP as a part of the Government’s self-imposed fiscal discipline.

The Government’s response to the need for tax reforms has also been positive in recent years, with as many as three reform efforts in the past eight years, but implementation has lagged behind due to political economy and administrative capacity considerations. These are discussed in detail in the next section.

The budget debate and discussions in the Parliament are less productive than they could be because the Parliament is usually dominated by the government in power. Tax issues are often raised and discussed but not in a forceful way that could bring about major changes. Additionally, the time when the budget is shared with the Parliament is less than a month before the current fiscal year ends and the new fiscal year begins. The budget is already approved by the cabinet and the prime minister, and the documents are printed. This leaves very little time and opportunity for any substantive budget debate and discussion in the Parliament. This is one area where the budgetary consultation process could be improved. One possible option is to involve the appropriate Parliamentary Committee responsible for oversight on budget and finance issues early in the process of budget making, to get timely inputs into the process. Another possible step would be for the Parliamentary Committee on budget and finance to request national researchers to prepare background papers on tax and expenditure issues and to discuss these with the committee early in the budget process. They could also seek technical assistance on the draft budget as inputs to their own review and discussions.

The Cabinet review of the draft budget could also be made more productive by requiring each Cabinet minister to make a presentation on their development targets and objectives for the year, and how adequate the proposed resource allocations are. Stronger participation by the Cabinet members in the budgetary process could be very useful in bringing out the internal tensions and the challenges posed by the revenue constraints upfront, so as to allow proper policy choices to be made, including the need for meaningfully strengthening revenue mobilisation. The Cabinet could also seek a technical briefing by NBR on the reasons for stagnant tax performance, and possible solutions.

A Major Tax Reforms

A large part of the reason for the low tax performance and weak and stagnant revenue structure is the relative absence of tax reforms in Bangladesh. Tax reforms have generally taken a back seat in Bangladesh. The first and only successful major tax reform was carried out in 1991, when the VAT was introduced. This was the only tax reform that succeeded, despite considerable hiccups. The introduction of the VAT also coincided with a major reduction in trade protection, involving the removal of most quantitative restrictions and a cut in customs duties during the 1990s (Ahmed and Sattar, Reference Ahmed and Sattar2019). Since then, the tax system has been occasionally tweaked, particularly in the area of international trade taxes over the 2000–2010 period, but the underlying motivation was to reform the heavily protected trade regime often as condition for access to international aid. These second-phase reforms of the customs duties did not yield much benefit in terms of a reduction in trade protection. Indeed, once the heavily protected trade regime was brought down to more moderate levels during the first phase of trade and investment deregulation in the 1990s, trade taxes re-emerged as a major tool for revenue mobilisation based on the introduction of a complex system of regulatory and supplementary duties (Ahmed and Sattar, Reference Ahmed and Sattar2019).

The Government sought to re-engage in tax reforms in FY2011, when it announced a major Tax Modernisation Plan (NBR, 2011). This reform was a part of the FY2011 budget, although this was not converted into a law. The Government’s Sixth Five-Year Plan incorporated the main features of the Tax Modernisation Plan in articulating its macroeconomic framework and associated policy reforms. This was a fairly ambitious reform effort that sought to modernise the Bangladesh tax system, including reforms of tax laws, tax institutions, tax administration, and capacity building. The record shows little progress in its implementation: some limited progress was achieved in the computerisation of VAT administration, but overall tax administration remains as constrained as before.

A third attempt at tax reform happened in 2012, prodded by the IMF. As a part of its Extended Credit Facility agreement with the IMF, the Government adopted a new VAT reform act, called the ‘VAT and Supplementary Duty Act 2012’, which aimed at modernising and expanding the scope of the VAT. The reform promised to improve the efficiency of VAT collection and to raise substantial new revenues. However, the 2012 VAT Law remains on paper only and has not been implemented, in view of opposition from politically well-connected vested interest groups.

Finally, the new government elected in 2018 has now announced another round of tax reform in the National Budget FY2020 (Government of Bangladesh, 2019b). It has adopted the PP2041 as the long-term development vision and seeks to initiate implementation of the underlying macroeconomic and fiscal framework. In this regard, it has acknowledged the dismal tax performance in the past and seeks to change this by setting a lofty goal of increasing the tax to GDP ratio by an unprecedented 3% of GDP in one year. This massive tax target is to be achieved by focusing on the implementation of a revised version of the 2012 VAT Law and by strengthening income tax administration. Preliminary assessment of the proposed tax reforms suggests that the proposed tax reforms are inadequate and will not yield the desired revenue outcome (Ahmed, Reference Ahmed2019). There may be some marginal improvements in the tax to GDP ratio, but a substantial improvement will not be possible based on the inadequate reform proposals. The budget did not specify what institutional reforms will be undertaken to help mobilise such a massive increase in the tax to GDP ratio. Even the revised VAT 2012 proposal was not well defined in terms of which VAT rate would apply to which activities, and how it would be administered.

B Discretionary and Discriminatory Tax Treatment

Although the only successful major tax reform happened in 1991, in the context of the annual budget cycle, the tax laws/rules/regulations are invariably modified to introduce new measures or to provide exemptions or special tax treatments for activities or entities. This is most prevalent in the area of customs duties and the VAT. These annual interventions are mostly conveyed through the Statutory Regulatory Order (SRO). While it is understandable that budget management needs flexibility and reform measures are needed to increase revenues, the main issue with these annual interventions is that they are not based on proper analysis of the revenue and resource allocation effects of the interventions. More often than not, tax measures are ad hoc and based on easy tax handle considerations. For example, the annual changes in income tax measures tend to target easy handles such as tobacco, mobile telephone operators, and the banking sector. The VAT/customs duties tend to target imports. Indeed, to compensate for the revenue and protection loss from tariff reforms, a range of special supplementary duties and regulatory duties have mushroomed, which has offset the positive effects of tariff reforms on resource allocation, seriously distorted trade incentives, and hurt exports (Ahmed and Sattar, Reference Ahmed and Sattar2019). Furthermore, the reduction in the predictability of tax laws is an important constraint on the investment climate for the private sector.

Importantly, the introduction of exemptions and special tax treatment of activities/entities not only dilutes the transparency and predictability of tax policies, it substantially reduces the effectiveness of the tax base and is a major factor for lowering the revenue yields of the tax system. In most instances, these exemptions and special treatments, and often new budget measures, especially those related to trade taxes, are dictated by the political power of the beneficiaries. The potential revenue loss and adverse consequences for resource allocation (especially through the distortion of trade policy) are of no consequence. The large prevalence of discretionary and discriminatory tax interventions also creates room for corrupt practices by the staff of the NBR.

The way SROs reduce the transparency and predictability of the tax system is illustrated dramatically by a review of customs duty–related SROs issued between FY2015 and FY2019. As many as 926 SROs were introduced, each aimed at providing a special benefit to a target group. A sample from this long list of SROs is provided in Annex 6.1, to give a flavour of the kind of negotiated settlements that happen in taxation in Bangladesh. In most cases, these special treatments were allowed as a response to political lobbies by the beneficiary group. There are similar SROs related to income tax, the VAT, and regulatory/supplementary duties. The SROs are also a good illustration of the absence of systematic tax policy analysis. The SROs are mostly introduced to benefit politically well-connected groups: there is almost no concern about what this does to resource allocation or tax collection. This ad hoc approach to tax policy and tax administration is a serious problem that must be addressed in order to modernise the tax system in Bangladesh.

C Political Economy of Tax Reforms

The absence of significant tax reforms in Bangladesh despite an overall buoyant economy and the growing fiscal constraint on development is a serious problem that threatens to undermine the long-term sustainability of development progress. The half-hearted attempts with the implementation of the 2011 Tax Modernisation Plan, the inability to implement the 2012 VAT Law, and the inadequacy of the latest attempt to reform the tax system in the FY2020 budget suggest a combination of inadequacy of political will and a lack of readiness to tackle the tax challenge. The transparency and predictability of the tax system is further complicated by the introduction of new budget measures every year on an ad hoc basis along, with new exemptions and special tax treatments.

The tax literature recognises the political nature of taxation (John, Reference John2006; Brautigam et al., Reference Brautigam, Fjeldstad and Moore2008; Prichard, Reference Prichard2010; Bird et al., Reference Bird, Martinez-Vazquez and Torgler2014; Besley and Persson, Reference Besley and Persson2014; Ricciuti et al., Reference Ricciuti, Savoia and Sen2019). One important piece of research in the context of Bangladesh that has sought to analyse the tax reform impasse and the frequent use of ad hoc tax measures through SROs by applying the political economy lens is that by Hassan and Prichard (Reference Hassan and Prichard2014). Their paper argues that the prevailing tax system in Bangladesh is the outcome of a complex set of negotiations between formal and informal institutions based on micro-level incentives for each of the political actors. As a result, the tax system is highly informal, is administered manually rather than on an automated computerised basis, and involves high levels of discretion. This dysfunctional system is sustained because it serves the interests of powerful political, economic, and administrative actors. Specifically, ‘the current system delivers low and predictable tax rates to businesses, provides extensive discretion and opportunities for corruption to the tax administration, and acts as an important vehicle for political elites to raise funds and distribute patronage and economic rents’ (Hassan and Prichard, Reference Hassan and Prichard2014, p. v). Reform efforts are constrained by the need to preserve this ‘political settlement’. Reform outcomes are weak or they fail because the resultant negotiations that seeks to reconcile the interests of the various competing groups with the need for reforms cause the reforms to be either abandoned or weakened considerably. In this framework, the SROs are simply instruments for favour distribution through discretionary and discriminatory application of the tax laws and rules and regulations.

The research from Bangladesh and other international experiences support the hypothesis that tax reforms are essentially political in nature and cannot succeed without reform champions at the highest level. They also recognise the strong link between economic and political governance, state tax capacity, and revenue mobilisation. As with any major reform, there are winners and losers from tax reforms. The stakes are particularly high with tax reforms because substantial amounts of money are involved. The beneficiaries of the present tax system in Bangladesh (political elites, big business, and the NBR administration) are happy with the status quo. The influence of these powerful lobbies will need to be offset by reform champions within the political system and in the civil administration.

This political economy lens can help us understand why the 1991 VAT Law was successfully implemented while other tax reform efforts failed. The successful implementation of the 1991 VAT Law and hurdles faced with the implementation of the Tax Modernisation Plan 2011 and the 2012 VAT reform experiences are also consistent with the lessons from international experience that suggest that tax reforms cannot succeed if they are donor-driven or led by international advisers (Dom and Miller, Reference Dom and Miller2018). Tax reforms must be led by the Government, with the Finance Minister in the lead, strong support by the NBR, and solid political backing from the head of the government. It must also have strong technical foundations based on sound background research, and implementation support in terms of suitable administrative infrastructure, including ICT solutions.

The 1991 VAT reform met all of these conditions. The reform was home grown. The technical work was led by senior staff of NBR and supported by technical assistance from the IMF. Overall policy leadership was provided initially by a technocrat Finance Minister and subsequent ministers carried through the work to the implementation stage. An IMF fiscal expert of Bangladeshi origin was procured and stationed in Dhaka on a long-term basis. Most importantly, the reform had the political backing from all heads of the government involved from the design to the implementation phases.

The 2011 Tax Modernisation Plan was grounded in the recognition by the Finance Minister that the tax revenue was inadequate and needed to be increased substantially. Accordingly, the Tax Modernisation Plan targeted an increase in revenue by 4 percentage points of GDP over a four-year period (FY2011–FY2015). The Plan was home grown and developed by a reform-minded Chairman of the NBR. He had the initial support of the Finance Minister, who was enthused by the prospect of substantial gains in tax revenues. But this support was more personal than institutional. The nature of the reforms envisaged required the full support of the prime minister and the cabinet, but a broad-based discussion of the reforms with the prime minister and the cabinet did not happen. Importantly, technical preparations were inadequate. There was also absence of ownership at the NBR staff level. Most unfortunately, the champion of the NBR Modernisation Plan 2011, the NBR chairman, was replaced by a new chairman in 2013. Unlike in the case of the VAT Law 1991, where the reform momentum continued despite the change in government because of a continuity of core NBR staff who were pushing the reform, the change in NBR leadership, combined with the absence of strong support from the political leadership, caused the 2011 reforms to fail.

The VAT 2012 reform was mainly pushed by the IMF under the Extended Structural Adjustment Facility programme. Within NBR, the Member VAT Policy and Member Customs were the main champions. There was also a solid technical assistance programme to help with the design of the new law and its implementation. At the political level, the Finance Minister provided support. The initial delay was caused by the need for adequate preparatory work. Finally, when the NBR was basically ready to launch implementation in the context of the FY2018 budget, it faltered because of strong opposition from the retail-level trading community, represented by the politically powerful and well-organised Federation of Bangladesh Chambers of Commerce and Industry (FBCCI). This opposition was grounded in the reality that except for the large retail units, most retail-level traders are a part of the informal economy and are therefore out of the tax net. The introduction of the new VAT Law would require the exposure of transactions and earnings to NBR through proper record-keeping. In this way, they could be exposed to higher tax obligations and/or rent-seeking intrusions by the tax officials. The prime minister decided to postpone the implementation decision in view of the strong FBCCI opposition and advice from the prime minister’s political party about the potential downside risks to the party in the then upcoming 2018 national elections, which were scheduled for the end of December 2018.

The half-hearted attempt to reform the tax system in the FY2020 budget is largely explained by the inadequacy of understanding regarding the complexity of the tax challenge and by an absence of strategic thinking. The installation of a new government elected in 2018 and involving a new Finance Minister provided a major opportunity for Bangladesh to rethink its tax reforms. As noted, there was indeed some positive intent. But the review of the FY2020 budget document shows that this positive political intent is not backed by a well-defined reform strategy and adequate associated specific reforms of tax policies and tax administration. Most unfortunately, instead of implementing the well thought out 2012 VAT Law in its original form, and taking advantage of the administrative progress already made, the new Finance Ministry team developed a hodgepodge variant of the 2012 VAT Law that was not properly studied or analysed in terms of revenue impact and the nature of the administrative preparations that would be required. Additionally, ambitious tax targets for personal income tax yields were set that had no policy or administrative reform content beyond the idea of recruiting additional income tax collectors. This is unfortunately a reflection of the ‘policing approach’ to tax collection that has proven to be the bane of the income tax system, as further explained below. So, political willingness alone is not enough. It must be backed by sound tax policy analysis and administrative reforms to improve the tax system.

D Tax Administration Issues

A Tax Institutional Reforms

Consistent with the analysis of weak state fiscal capacity, some minimum institutional reforms are essential to see any systematic progress with tax revenue effort. These include the following:

1. 1. Separation of tax policy from tax collection: An essential institutional reform is to separate tax policy from tax collection. Although the NBR is entrusted with both tax policy and tax collection, it de facto serves as a tax collection entity. While it has senior tax policy staff, the overwhelming focus is on tax collection. This single-minded focus on tax collection has come into serious conflict with the design of a broad-based tax policy that is consistent with revenue goals, ensures the efficiency of tax collection, and avoids adverse implications for incentives and national resource allocation. It also explains the ad hoc nature of tax policy during the annual budget cycle, where the focus of tax policy is on raising revenues to meet the budget target, without regard to the impact of the tax measure on resource allocation or efficiency. A better arrangement would be to assign the NBR the primary responsibility for collecting taxes and giving tax policy responsibility to either a special unit within the Internal Resource Division or to the Budget Division of the Ministry of Finance. The advantage of assigning this to the Budget Division is that this entity has substantial macroeconomic policy analysis capabilities. It also has the responsibility for developing the medium-term budgetary framework and the annual budgets. These provide the Budget Division with considerable knowledge and stronger capabilities to formulate tax policies than the NBR or the Internal Revenues Division.

2. 2. Strengthening tax policy and tax collection agencies: Whatever institutional arrangements the Government may adopt, both tax policy and tax collection efforts have to be substantially strengthened through the induction of better professional staff. The Government has considerably increased civil service salaries in recent years, which has improved incentives for professional staff to apply for public service positions. The tax departments (the NBR and the tax policy unit) need a much stronger combination of professional staff with civil service staff. If needed, some additional incentives could be provided to attract fixed-term tax professional experts to the Ministry of Finance. This small investment in tax administration capacity would have a high rate of return in terms of better tax policy and revenue performance.

3. 3. Selection and tenure of the NBR chairman: The frequency of changes of the NBR chairman has a serious negative impact on tax collection. The Government might want to delink the position from the civil service, select the chairman on a professional basis, and establish a minimum tenure of four to five years. This will strengthen the quality of tax administration leadership, de-politicise this position, and provide stability and an incentive for the chairman to take tough actions against corrupt practices.

4. 4. Fully digitising the tax administration: Consistent with the policy of the prime minister to rapidly adopt online technology as the primary mode of transactions with the Government, full digitisation of the tax administration is of the highest priority. Some progress has been made for the customs and VAT administration, but there is a long way to go, especially for income tax administration. Full digitisation of tax administration, especially personal income taxation, will go a long way towards reducing corruption, increasing compliance, and increasing tax revenues.

5. 5. Strengthening the budget consultation process: The Government already has a healthy consultation process involving the citizens. This should continue. However, the participation of the Cabinet and the Parliament could be strengthened considerably. The Cabinet review of the draft budget could be made more productive by requiring each Cabinet minister to make a presentation on their development targets and objectives for the year, and to discuss the adequacy of the proposed resource allocation to secure them. This process could be very useful in bringing out the internal tensions and the challenges posed by the revenue constraints upfront, so as to allow proper policy choices to be made, including the need for meaningfully strengthening revenue mobilisation. Regarding the Parliament, one possible option is to involve the appropriate Parliamentary Committee responsible for oversight of budget and finance issues early in the process of budget making, to get timely inputs into the process.

6. 6. Promote fiscal decentralisation: Greater fiscal decentralisation could help mobilise revenues by providing a better link between service delivery and accountability. The Government has made some progress with administrative decentralisation by instituting a system of elected local government institutions. The next step is to assign clear service delivery responsibilities without overlap with competing national entities, build local government institution service delivery capacities, and institute a well thought out fiscal decentralisation system.

B Reform of the VAT

The proposed reform of the VAT leading to the VAT Law of 2012 was sound. Technical assistance to help with implementation had also progressed well. It is most unfortunate that this progress was ignored by the new government and a hodgepodge VAT reform was introduced in the FY2020 budget. As most tax experts familiar with the Bangladesh VAT system agree, the FY2020 VAT reform will likely not work. The Government is hesitant to accept this view and is bent on implementing the modifications to the VAT system it introduced in the FY2020 budget. It is hoped that the implementation experience with the VAT modifications of the FY2020 budget will provide good evidence of its limitations and the need to revert back to the provisions of the 2012 VAT Law. This hopefully can set the stage for the implementation of a solid VAT reform in the FY2021 budget.

C Reform of Income Taxation

Notwithstanding all the caveats associated with political and administrative constraints on income tax collection, it is high time that the Government made a serious effort to reform the income taxation regime, especially as it seeks to achieve upper middle-income tax status.

D Corporate Taxation

Several actions can be taken in regard to corporation taxation, including streamlining the corporate tax rate in a series of steps. As a first step, with the exception of tobacco, the maximum rate of taxation should be lowered, starting with 30% in FY2021 and 25% in FY2022. As rates come down, exemptions and tax holidays for foreign direct investment or specific sectors must be eliminated over a well-defined period, so that by and large all investors are required to pay taxes. Once the tax rates are lowered and made internationally attractive, exemptions will not be needed. Capital flight for taxation purposes will not be an issue because the investor will have to pay taxes in other countries as well.

E Personal Income Taxation

The personal income reform needs a substantial overhaul based on further research and analysis. The reform that is required is to lower the marginal and average tax rates and to increase the tax base through voluntary compliance. Bangladesh can learn the lessons from the positive experience with income taxation from other countries. These lessons include the following:

• The best approach to increasing the tax base is to provide incentives for voluntary compliance. Having large marginal tax rates and putting pressure on those who pay is a recipe for disaster. It is like killing the goose that lays the golden eggs. Many taxpayers will find ways to escape the tax net by entering into collusive behaviour with the tax collectors, as presently.

• The tax system must be based on the principles of universal income, self-assessment, and productive and selective audits. It must be fully digitised wherever possible, with no interface between the taxpayer and tax collector, except when subject to audits.

• The tax system must be simple, with a low compliance cost. Indeed, the simpler the system and the lower the tax rates, the more likely it is that there will be voluntary compliance and the less the scope for tax harassment and corruption.

• The audit system should be highly selective and productive. The objective of the audit system should be to discourage tax avoidance and not serve as an instrument of harassment or to extract a bribe. The audit system should be based on a computer-driven model developed on the basis of well-identified criteria that, if violated, would trigger an audit. The criteria must make the audit productive so that the collection cost is only a fraction of the total taxes raised through audits. It should be highly selective, with no more than 5% of returns audited systematically.

• The attitude of the NBR should change from tax ‘policing and harassment’ to voluntary tax compliance based on a user-friendly and tax service approach.

• Self-assessment, digitisation, and simplification of personal income tax filing with a user-friendly and service-oriented approach will vastly increase tax compliance and tax collections, as reflected in the experience of countries with good income tax collection records.

F Property Taxation

Most upper middle-income and high-income economies have a well-established system of fiscal decentralisation whereby the property taxes are assigned to local governments as the major source of tax revenues. In Bangladesh, such a political decision on fiscal decentralisation has yet to happen, although it is imminent as Bangladesh aspires to attain upper middle-income status. Indeed, the PP2041 puts considerable emphasis on the need for fiscal decentralisation. The next step is the political debate and buy-in at the top level.

In the interim, the Government should design and implement a modern property tax system that is different from the present fragmented two-part system whereby the NBR collects a wealth tax as a part of the income tax and local governments collect some nominal taxes on properties. A modern property tax that is based on the true market value of properties and evaluated and updated systematically using a computerised property ownership database is an essential element of a modern tax system. There are many models of a well-designed property tax system that can be researched and implemented in the specific political economy context of Bangladesh. Implementation can proceed in a phased manner, starting with the capital city of Dhaka and then extended to other divisional cities and finally to all urban areas.

G Reform of the Customs System

Recognising the continued high cost of customs administration and its adverse effects on trade logistics and private investment, the NBR has recently developed and adopted a new customs reform programme known as the Customs Modernisation Strategic Action Plan 2019–2022 (NBR, 2019). This is a comprehensive and ambitious endeavour that seeks to improve the efficiency of the customs system and reduce the transaction costs related to international trade. Tariff rationalisation is also an objective, although the end game of tariff rationalisation (reduction of trade protection) is less clear. Nevertheless, this is a welcome initiative and its sound implementation should be a high policy priority.

Introduction

The taxation system in Bangladesh is one of the worst in the world. It has a tax to GDP ratio of approximately 9%, as compared to the developing country average of 17–18%, and has been stagnant for the last eight years, reducing the scope for development spending.

The tax system is poorly administered and corrupt, with tax officials harassing taxpayers and extracting bribes to accept low tax payments. Also, politically connected taxpayers are able to reduce their tax payments. Even the government is complicit in reducing tax revenues by the use of SROs that effectively grant extra-statutory tax concessions to favoured entities, with no analysis of their revenue effects.

Also, the compliance rate for VAT-registered businesses is estimated at only 12%, among the lowest in the world. The VAT also has low productivity, of about 3% of GDP, when the statutory rate is 15%. This probably reflects the limited coverage of the VAT, which has not yet been extended to the retail level.

The corporate tax system is very unusual, with as many as nine different tax rates (from 45% to 3%), according to KPMG’s Bangladesh Tax Profile (September 2018). Such a complex system must cause considerable administrative difficulties for businesses that produce products in different tax rate categories. As most countries have only one or two corporate tax rates, this structure suggests political favouritism for particular businesses, producing inefficiency and an uneven playing field for businesses.

Difficulties in Raising Tax Revenue

Effective taxation in low-income countries is difficult for a number of reasons:

1. 1. A large proportion of the population is likely to be self-employed, as farmers or individual businesses. This makes them hard to identify. It also means that they are unlikely to keep accurate accounts.

2. 2. For this reason, tax authorities often focus on businesses, which are usually easier to identify as, normally, they need some sort of business licence in order to operate.

3. 3. In some countries (including Bangladesh), corrupt tax officials conspire with taxpayers to reduce their tax payments, with the tax reduction shared between the taxpayer and the official.

4. 4. Some countries (including Bangladesh) have unnecessarily complex tax schedules, especially for corporate income tax, increasing the burden on tax officials and increasing the scope for corruption.

5. 5. As Bird et al. (Reference Bird, Martinez-Vazquez and Torgler2008) have argued, ‘a more legitimate and responsive state appears to be an essential precondition for a more adequate level of tax effort in developing countries’. This argument has particular resonance for Bangladesh because its citizens generally see little in return for the taxes that they pay, with the resulting shortfall in tax revenue. It is therefore not surprising that tax compliance is so low.

Businesses

Businesses generally provide the largest contribution to tax revenue in both high-income and low-income countries. This is partly because they can usually be identified easily, partly because of the requirement for accounts to be kept, and also because they are able to report the incomes of both the employees and of the owner(s) of the business. The accounts also provide information on business purchases and sales, allowing the calculation of liability for VAT or sales taxes.

However, there is a large incentive for businesses to understate their sales and overstate their costs, in order to reduce their tax liabilities. They may reduce their reported income by failing to give receipts to the purchasers of their products, reducing their apparent income. Some countries have tried to reduce this problem by providing purchasers with an incentive for purchasers to demand receipts. For example, in Italy, it is illegal to leave a shop without a receipt for the payment they have made, and the police can demand to see the receipt when the customer leaves the shop.

In addition, there are businesses that are unregistered and that operate outside of any regulatory control.

The Self-employed

Although many self-employed people have low incomes, it is important to make sure that those on higher incomes are subject to tax. It is difficult to identify the wealthy self-employed because they have a strong interest in concealing their incomes. However, this can be done by comparing the lifestyle of the self-employed with their declared incomes. As these investigations can take considerable time and require scarce specialist knowledge, it is best to focus on those self-employed people whose lifestyles are clearly beyond what can be afforded by most rich people.

Many self-employed people attempt to hide their existence from the tax authorities completely, as evidenced by the relatively small proportion of the population that submits tax returns. One way for the tax authorities to reduce this problem is to make use of the Block Management System developed by Tanzania in 2002, and subsequently adopted by Uganda (African Tax Administration Forum, 2014). This works by identifying an area, like a city block, and systematically counting all the people who live in the block and registering them for tax, making sure that all doors are opened to prevent people from hiding. This resulted in a very substantial increase in the number of businesses registering with the tax administration. Once registered, it is much simpler for the tax authorities to follow up businesses in later years.

Corruption

In some countries, corrupt tax officials can be bribed to reduce the taxpayer’s assessments, allowing the taxpayer to reduce their tax liability. This form of corruption can be reduced by ensuring that all communications between the taxpayer and tax officials are in written form and in such a way that the taxpayer does not know the identity of the tax official who assesses the taxpayer’s liability.

Complex Tax Schedules

Most countries have corporate tax rates that are very simple, with either just one rate that applies to all business profits, or one main rate and a slightly lower rate for small businesses. However, Bangladesh has a large number of different rates of corporate income tax for different products. This makes it very difficult for businesses to calculate their corporate tax liability and provides opportunities for businesses to reduce their tax liability by misrepresenting the type of product, or products, that they produce.

It also increases the burden on tax officials, to check that the correct corporate income tax rates have been applied.

In addition, SROs are used frequently to provide special benefits to particular target groups that are politically well connected, without any concern about the revenue losses.

Improving Tax Revenues

It is very hard to improve tax compliance in a country whose tax system has been as dysfunctional as that of Bangladesh. However, Bangladesh will never progress if important improvements are not made to both tax policy and tax administration.

The main measures that should be applied are the following:

1. 1. Increase the number of tax officials and the level of their training.

2. 2. Prevent tax officials from having personal contact with taxpayers. All communications between the taxpayer and the tax administration should be in writing and should be sent to the tax office for processing without revealing who dealt with the case. This should reduce corruption in the tax administration.

3. 3. Increase the penalties for corrupt tax officials.

4. 4. Ensure all taxpayers submit a completed self-assessment tax form, as the basis for the calculation of the tax due. This includes all government officials and their relatives.

5. 5. Ensure a sample of these self-assessment is audited, in order to verify their accuracy. If the taxpayer’s income is found to be higher than shown in the self-assessment form, penalties should be applied. The forms of government officials should be examined particularly carefully, with any irregularities reported to the legal authorities.

6. 6. Remove the requirement for taxpayers to file a wealth statement along with their tax return. This should encourage taxpayers to file tax returns and allow them to become compliant with the tax system.

7. 7. Ensure that SROs are only approved if their purpose is explained and their financial implications are properly calculated. All SROs should be published, including the reason for them and their financial implications. The costs of each one should be clearly stated as part of the annual financial statements of the Government.

8. 8. The VAT administration should be modernised and computerised, to allow easy registration of traders and simple procedures for submitting tax assessments. VAT should be extended to the retail level as soon as possible.

9. 9. The rate structure of the corporate income tax should be simplified to have one main rate. If particular products – such as tobacco products – are judged to require additional taxation, this additional taxation should be in the form of an excise duty rather than part of the corporate tax.

10. 10. Each year, a sample of businesses should have their accounts audited, to ensure that they are reporting accurate VAT and profit figures and to ensure that they are fully reporting the wages that they pay to their employees.

11. 11. A form of the Block Management System should be used to identify those businesses and the self-employed that operate outside the system, earning money without declaring it to the tax authorities.

A Complex Coexistence of Various Actors

Bangladesh has one of the largest primary education systems in the world. There are more than 134,000 primary schools; these are run by public, private, and non-governmental organisations (NGOs), and religious providers, and are overseen by a complex bureaucracy involving multiple ministries (DPE, 2018b). The primary schools in Bangladesh are managed by the MoPME and the DPE, the Ministry of Commerce (MoC), NGOs, the Ministry of Education (MoE), and other authorities (Figure 7.2).

Figure 7.2 Share of institutes by type of management authority in 2018 (%).

Source: Education Statistics, Bangladesh Bureau of Educational Information and Statistics

With more than a 56% share in the number of primary schools, MoPME/DPE is the dominant actor in the primary education system in Bangladesh. MoPME/DPE manages eight types of schools, of which GPS and NNPS are considered as the GPSs. The MoE is responsible for three types of formal primary schools and madrasahs. The MoC administers two types of schools and the NGO Bureau oversees two types of school. Other authorities manage non-aligned institutes (DPE, 2018b). A description of these schools is provided in Annex 7.1.

One explanation for the existence of multiple actors in the primary education system in Bangladesh might be that Bangladesh aimed to achieve universal education, reduce dropouts, improve the completion rates, and provide high-quality education in primary schools, but that attaining these targets was a challenge. Shouldering the whole responsibility alone was a difficult task for the Government. The multiplicity of primary schools helped in promoting basic formal and non-formal primary education in the country. It helped to bring more children into primary schools. For example, the engagement of NGOs in providing primary education helped the Government reach the marginalised population of the country.

In this chapter, we focus only on the government primary schools (GPSs and NNPS), run by the MoPME/DPE, which constitute more than 50% of the primary schools. The institutional structure of primary education in Bangladesh, operated by the MoPME/DPE, accommodates three major actors – central, regional, and local (Figure 7.3).

Figure 7.3 The complex coexistence of various actors in government primary education in Bangladesh.

Note: The figure shows the central, regional, and local actors in the MoPME.

Source: MoPME and DPE

Teachers’ recruitment, salary, and contributions to General Provident FundFootnote ⁸ and pension are conducted by the central authority. However, transfer, promotion, stipends to pupils, school building construction, reparation and reconstruction, school electricity bills or land development tax, the PEC examination, teacher training, and primary school visits are transferred from MoPME to primary schools through regional actors, that is Upazila (or Thana) Primary Education Office (UEO).Footnote ⁹ Nevertheless, the presence of many actors in the government primary education system in Bangladesh makes the management of the system difficult. For instance, the transfer of teachers in primary schools involves many steps and multiple actors. This makes the whole transfer process complicated and time-consuming. Further, the involvement of many actors reduces transparency and creates opportunities for rent-seeking activities, for example bribes for transferring teachers (see the discussion in Section IV.C.3). The overlapping responsibilities may contribute to the poor-quality services and the failure to attain the expected outcomes in primary education.

B Challenges Related to Resources

C Teacher Management in Government Primary Schools

D Curriculum and Teacher Training in Primary Education

A Enhancing the Budgetary Allocation for the Primary Education Sector

As discussed earlier, the primary education budget has been historically low in Bangladesh. This budget in Bangladesh has two expenditure components: the recurrent budget and the capital budget – at present around 70% of the budget is spent on teachers’ salaries (recurrent expenditure). In proportion to GDP, Bangladesh should significantly increase the allocation to the primary education sector in line with the average allocation observed in many comparable countries. This will result in an increase in the salary of the teachers and will attract qualified and talented graduates to GPSs. Along with enhancing the budget allocation to the primary education sector, attention should also be given to ensure the effective utilisation of the budget. Also, a significant part of the additional budget should be allocated to the capital budget so that infrastructure development, essential maintenance, and repair works can be undertaken.

B Better Salary and Career Paths for Primary Teachers

It has been pointed out that the low salary and the lack of career path do not attract young and qualified teachers and discourage them from continuing their careers in the primary education sector. There was a major pay hike of government job salaries by 91–101% in December 2015, but, by both international and national standards, teacher pay remains largely unsatisfactory. This will remain the case unless further pay hikes are implemented.Footnote ⁴⁸

The FGD with GPS teachers also confirmed that many talented teachers continued teaching only for 6–12 months before switching to better jobs. Moreover, career progression opportunities are very limited in the primary education sector. In this context, part of the additional budget allocation should be allocated to the higher salary and facilities for the primary school teachers so that the sector attracts qualified teachers.

The lack of promotion or progression to a higher post after some years of service is another adverse factor in the primary education system. The following new posts may be created in the primary education sector to encourage talented teachers to pursue this career: (i) senior assistant teacher (proposed); (ii) senior teacher (proposed); and (iii) assistant headmaster (proposed).Footnote ⁴⁹

C Improving the Recruitment Process for Primary Teachers

As discussed earlier, the recruitment process for GPS teachers is a huge undertaking in Bangladesh. Further, as we discussed, corruption is prevalent in the recruitment process. It should be re-emphasised that high-quality teaching and effective learning at schools, among others, critically depend on the recruitment of high-quality teachers. In this context, several initiatives may be considered. First, at present, graduate degree holders from any recognised university with a minimum second division/class are allowed to apply for the post of assistant teacher. MoPME/DPE may contemplate modifying this requirement by adding teaching degrees, such as DPEd, BEd, etc. to the prerequisites list. Second, written examinations at centres that are identified with question leaks may be scrapped, which may discourage this type of malpractice. Third, currently, the written examination is the MCQ type, which to some extent is open to question leaks. Thus, the current format may be modified with 30 marks for MCQ and the rest of the marks, 50, on essay-type questions. Finally, districts may not be allowed to take a viva or interview candidates from the same districts. Rather, a different district within the same division may be given the responsibility of taking the viva and interview, or some random allocations, at the last moment, between candidates and recruitment committees can be made. This move may discourage bribes from being paid.

D Initiatives to Improve the Quality of School Infrastructure

The state of infrastructure (i.e. school building, classroom, functional water, sanitation, and security) in most of the primary schools has been reported as poor. Inadequate budget allocation and the low share of capital budget over a long and sustained period has resulted in the poor-quality infrastructure of the primary education sector in Bangladesh. It is alleged that the paucity of classrooms, libraries, and playgrounds are responsible for poor-quality education at primary schools. Therefore, there is a need to allocate part of the additional budget allocation to the improvement of the infrastructural quality of the primary education school system. The MoPME/DPE may undertake a special development project under the annual development programme for the wholesale improvement of the primary school infrastructure, with a special focus on classroom amenities, water and sanitation, and security.

E Initiatives to Improve Facilities to Increase School Attendance

MoPME/DPE is providing more than 33,000 students of 175 primary schools with cooked food. By 2023, DPE aims to provide cooked food to all the schools in the country. An internal assessment by MoPME/DPE shows that school attendance increases by up to 11% if students are provided with cooked food, whereas when supplied with only biscuits, the attendance rate increases only up to 6%.Footnote ⁵⁰ MoPME/DPE also plans to provide each primary level student with BDT 2,000 for their uniform on the understanding that students with new uniforms, and nutritious and delicious food in their schools will feel more attached to their institutions. These initiatives are perhaps policies moving in the right direction. But there is uncertainty about the full implementation and sustainability of these initiatives. Thus, the attempt should be to ensure full implementation and sustainability through the allocation of sufficient resources.

F Improving the Curriculum and Examination System

Given the large gap between acquiring the certificate and actual learning, the emphasis should also be given on reforming the entire primary education system in Bangladesh. In this context, the Government should implement the National Education Policy 2010, which suggested extending primary education to Grade 8. This move will transform the exam-centric education system into a dynamic, learner-centric one. Primary level students should not be assessed through public exams; rather, they should be assessed through continuous academic performance. The Government needs to improve the classroom environment, the training of teachers, and pay more attention to co-curricular activities.

G Ensuring Accountability and Transparency in the Evaluation of Both Teachers and Learning Achievement

As discussed earlier, institutional challenges in the education system and the resultant corruption are not significantly different from those seen in other public sectors in Bangladesh. Therefore, a more accountable education system needs to be built as part of an overall accountable public service. The ways to achieve effective accountability in the primary education system include hefty penalties for bribery, establishing rules for conflict of interest and codes of conduct, delinking the administration from political influence, merit-based recruitment and career development rules, access to information, and complaint mechanisms for students and parents.

Technology may be used for assessing the accountability of the teachers. Technological advances and improved accessibility of devices such as digital cameras, tablets, and smartphones have facilitated the ability of communities to hold teachers accountable. Most use of technology focuses on reducing teacher absenteeism. However, as mentioned earlier, though the Government has considered introducing biometric attendance to reduce the absenteeism of teachers, so far there has not been any progress in this case.

A UNESCO (2017) report highlighted that in Udaipur, India, students used cameras with tamper-proof dates to photograph their teachers at the start and close of the day. Initial research suggested that this, jointly with the financial incentives provided, helped decrease absenteeism. Also, a Ugandan project to raise teacher attendance in 180 rural public primary schools distributed mobile phones equipped with software to report teacher absence to education officials. The phone monitors were headteachers or parents from the school management committee. In Pakistan, to monitor the attendance of over 210,000 education staff in 26,200 schools, biometrics – fingerprints and photos, coupled with Global Positioning System coordinates – were introduced. As at February 2017, 40,000 absent teachers and 6,000 absconders (employed but long absent) have been disciplined. India’s 2016–2017 economic survey recommended the use of biometrics to tackle teacher absenteeism in primary schools. However, overuse or improper use of technology may have negative consequences. UNESCO (2017) report also mentioned that thousands of classrooms in China were livestreamed, allowing parents and the public to monitor and comment on teaching practices and student behaviour. However, critics were concerned that continual surveillance violates teachers’ and students’ privacy rights and could negatively affect instruction.

A performance pay programme for primary school teachers can also be effective in reducing teacher absenteeism and enhancing learning achievement. Muralidharan and Sundararaman (Reference Muralidharan and Sundararaman2011) presented the results from a randomised controlled trial of a programme, which was employed in rural schools in the Indian state of Andhra Pradesh. The programme, administered by an NGO, provided teachers in government-run primary schools in rural India (Grades 1–5) with financial bonus payments of about US$ 14 for each percentage point gain in their students’ maths and language test scores. The bonuses were designed to address the interrelated problems of low teacher effort in rural India, such as pervasive absenteeism, minimal teaching activity even among many of those present (as shown in Kremer et al., Reference Kremer, Muralidharan, Chaudhury, Rogers and Hammer2005), and low student achievement, as reflected in the findings from an all-India survey of rural households that approximately half of students enrolled in Grade 5 cannot read at a Grade 2 level (as shown in Annual Status of Education Report Centre, 2014). Muralidharan and Sundararaman (Reference Muralidharan and Sundararaman2011) showed that the programme produced gains in all four subjects measured (maths, language, science, and social studies), increasing the average achievement score by between 6 and 13 percentile points in performance pay schools compared to control schools, over a two- to three-year period.

Parents and communities may also be involved in monitoring teachers’ presence in the schools. A review of the national education plans of 40 mostly low- and middle-income countries by UNESCO (2017) found an increasing role of parents and communities in teacher accountability. In the absence of clear guidelines, participatory approaches can be organised in a bottom-up manner, relying on community motivation to monitor teaching. Other forms may also be used in this regard. Representatives of local communities can visit classrooms, for instance, to ensure that teachers are present. The UNESCO (2017) study also suggests that community-led surveys concerning teachers have been used in several low-income contexts, especially in rural or disadvantaged regions.

Following these global experiences, Bangladesh may adopt a properly designed technology-powered accountability system in the primary education system. This will enhance accountability and transparency for the evaluation of both teachers and learning achievement in primary schools in Bangladesh.

H Harmonisation of the Coexistence of Various Actors

Finally, in the case of the coexistence of various actors in the primary education system in Bangladesh, there is a need to bring all schools under a single umbrella. The MoPME/DPE can create that umbrella so that many institutional challenges are addressed, and high-quality of education is ensured across all schools.

More and More Equal Education

Over the past two decades, Bangladesh achieved an unprecedented expansion in enrolment rates in basic education. As a result, the country’s average schooling attainment has exceeded the average attainment in India and Pakistan and is approaching the averages in Sri Lanka, Indonesia, and Malaysia (Figure 7.4). This achievement was a result of effective education programs sustained since the early 1990s and a growing economy.

Figure 7.4 Estimated average years of schooling, adults 25 and over, males and females, Bangladesh and other Asian countries.

Source: Barro-Lee, 1950–2010; HCI, 2018

The most remarkable feature of this achievement is the dramatic increase in girls’ enrolment rates and average years of schooling. This is worth noting because the large gains in women’s schooling made possible the growth of its garment industry which, in turn, fuelled the country’s recent economic growth, as noted in de Melo’s comments in this volume. The study by Heath and Mobarak (Reference Heath and Mobarak2015) documents this positive interplay between the progress in women’s education and the expansion of the garment industry. They found that young girls were more likely to be enrolled in school after garment jobs arrived, and that older girls were more likely to be employed outside the home in villages closer to garment factories. Although the growth of the garment industry spurred educational development, it was the government’s conditional cash transfer program to encourage female enrolment at the secondary level, launched in 1994,Footnote ⁵¹ that put the country firmly on the steeper path to progress. The stipend program increased girls’ years of education by 14–25%, as well as changed several life outcomes for them: girls now marry later, have fewer children, work in the formal sector more than in the agricultural or informal sector, and enjoy greater autonomy in making decisions about household purchases (Hahn, et al., Reference Hahn, Islam, Nuzhat, Smyth and Yang2018). These are long-term impacts that will yield significant spillover benefits in generations to come.

Bangladesh not only closed the gender gap in education but also narrowed the gaps between urban and rural areas and among income groups within a decade (Table 7.1). Innovative non-government and community programs, such as BRAC schools, for which Bangladesh is known, contributed to this progress.Footnote ⁵² In acknowledging its educational successes, the narrowing of these large disparities, especially when comparing wealth quintiles, deserves note. A previous review of the primary education sector concluded that Bangladesh’s recurrent public spending in primary education has been largely pro-poor. Public spending per child in the poorest quintile of upazilas was 30% higher than in the wealthiest quintile, although this pro-poor spending has not eliminated large disparities (Steer, Rabbani, and Parker, Reference Steer, Rabbani and Parker2014).

But Schooling Is Not Learning

The importance of learning, not just schooling, has been the focus of recent major education reports because of its critical contribution to economic growth and overall development (Education Commission, 2016; World Bank, 2017). When students go through school without acquiring basic knowledge and skills that they need for life and work, families, communities, and economies do not reap the potential benefits of education. In Bangladesh, as evidence cited in this chapter shows, learning outcomes have not risen apace with years of schooling. According to Asadullah and Chaudhury (Reference Asadullah and Chaudhury2015), about half of the children fail to pass a written numeracy competence test, a finding that also holds for those who had completed primary school. While there is a statistically significant and positive correlation between schooling attained and numeracy competence, this relationship is quite low. Table 7.2 compares Bangladesh with other Asian countries with respect to the quantity and quality of schooling attainment (World Bank, 2020b). Because of deficiencies in the quality of schooling measured by harmonized test scores (Altinok, Angrist, and Patrinos, Reference Altinok, Angrist and Patrinos2018), the expected schooling attainment in Bangladesh of 11.3 years is equivalent to just 6.5 learning-adjusted years. It performs better than India or Pakistan, but the distance from the other comparator countries is greater.

Improving the quality of primary education is inarguably Bangladesh’s next education challenge. This chapter argues that institutional change in four areas are needed to meet this challenge: (1) high fragmentation due to the complex coexistence of multiple actors; (2) inadequate financing resources; (3) low-quality teachers and poor teacher management in GPSs; and (4) lack of a common curriculum and teacher training.

Addressing the Fragmentation of Primary Education System

The high fragmentation of the primary education system in Bangladesh is evident. It consists of several types of primary schools under different central agencies, alongside many types of non-government schools. In addition, the public school system itself is overseen by deconcentrated administrative units, with local subdistricts (upazilas) playing a major administrative role. Nationalization of all schools, as recommended by this chapter, however, is hardly the solution to the problems that arise from high fragmentation. A diverse system of provision may be what the country needs in order to meet the diverse needs of its population, also as suggested by this chapter, and perhaps how Bangladesh was able to achieve the educational development it has today. Nationalization is likely to eliminate an important part of this diversity, in particular, the NGO and private schools that serve rural and poorer areas. Instead of nationalization, what may address the problems of fragmentation is a governance structure that is consistent with decentralized delivery and yet is led by a central agency that sets and oversees common standards of delivery, enforces regulatory guardrails across all schools, and monitors learning outcomes nationwide, all towards achieving shared goals. Even in a decentralized system that assigns responsibilities to local governments and is open to both public and private providers, the central government can – and should – have a critical role for leading a coherent national school system. This view is implied but not elaborated in this chapter’s several recommendations, including that on the harmonization of multiple actors.

One important policy and programming tool for the central government is ensuring that timely and reliable information on the whole school system is widely available and that that information is used for decision-making and management. Especially in as large a school system as Bangladesh’s, the flow of adequate school data is the key to facilitating decisions and removing implementation blockages, identifying spending gaps, and addressing workforce problems. For example, this chapter is right in calling attention to fraud and corruption in the certification, recruitment, and transfer of teachers and to the significant budgetary resources left on the table and unspent in spite of the low national expenditure allocation for education. These are indicators of the school system’s weak management and poor implementation capacity. Without adequate system-wide data, those who formulate policies and manage programs are disadvantaged by not knowing whether their spending decisions and policies are appropriate and whether those decisions affect school performance. When system information is open and shared widely, politics and vested interests are also less likely to drive policy and spending decisions. Studies have shown that robust accountability and transparency mechanisms help raise the quality of service delivery because the scope and complexity of what governments must do to achieve education goals is nearly impossible without reliable and timely data. This is a lesson that the best performing education systems have learned over time; Bangladesh could use it too in order to transform its primary education system.

Improving the Primary Education Workforce

A large part of this chapter is rightly devoted to institutional issues related to teachers. Teachers are the system’s biggest investment and also its most powerful lever for change. How teachers are trained, recruited, inducted into the profession, supported, assessed, and compensated are all relevant to improving teacher performance in any education system. This chapter describes the multi-layered, highly complex mechanism for hiring teachers, that is nonetheless vulnerable to fraud and corruption and hires teachers who do not meet quality standards. This chapter also discusses how this recruitment process can be simplified and be more transparent and efficient. One change that this chapter identifies as a disincentive for improvement in teacher performance is the lack of prospects for promotion and recommends that an additional position of assistant headmaster be created so that teachers can aspire for a promotion. This chapter also argues that teacher salaries are too low and recommends an increase in basic teacher pay. Neither recommendation by itself is likely to obtain better teacher performance, however. What is missing from this chapter is a discussion of teacher reforms that are focused on achieving good teaching and more learning. If the aim is to improve teaching quality and learning, then these lessons, to highlight just a few, from other school systems would be useful:

• In recent reviews of the literature about effective teacher professional development, among the most recommended interventions are changing the pedagogy used in teacher training institutes so that it is more directed to individual levels; provide training with specific subject content rather than general theory since different subjects require different pedagogies; provide follow-up mentoring visits for new teachers and allow new teachers to practice with other teachers; support continuous learning opportunities for current teachers; and involve teachers in curriculum development (Popova, et al., Reference Popova, Evans, Breeding and Arancibia2018). Many resources are spent on teacher development programs, so a reform of these programs would raise significantly the cost-effectiveness of public spending on education.

• Studies have shown that financial incentives do improve the supply of new teachers and the performance of current teachers (e.g. Duflo, Hanna and Ryan, Reference Duflo, Hanna and Ryan2012), but the design of these incentives matter. This chapter recommends increasing teacher pay. Higher salaries do not guarantee better performance, however. Indonesia’s experience with a national unconditional increase in teacher salaries in the early 2000s serves as a cautionary tale. The government was expecting a doubling of teacher salaries to improve teacher morale, motivation, and job satisfaction, thereby increasing teacher effort and ultimately student learning. After the pay increase, teachers were indeed more satisfied with their income and less likely to report financial stress, were less likely to have a second job and worked fewer hours on second jobs, but they did not score better on tests of teacher subject knowledge and did not reduce absenteeism and student learning did not improve (de Ree et al., Reference de Ree, Muralidharan, Pradhan and Rogers2015). Key lessons from other countries about how to make financial incentives more effective are summarized by Imberman (Reference Imberman2015): first, the choice of metrics and the incentive structure matters for its effectiveness; poorly designed schemes can make outcomes worse while also more costly. Second, incentives should be based on multiple outcomes, of which better student performance is one of several metrics and at least one of which should be qualitative (e.g. principal evaluation or classroom observations). Third, teachers should be rewarded for reaching certain performance targets, such as for their students performing better relative to a set of comparison students.

• A teacher accountability mechanism is broader than using financial incentives for performance; it should link teacher performance also to promotion and retention outcomes. Its goal is to make teaching an attractive and rewarding profession by recognizing and rewarding high ability and good performance. Effective teacher evaluation systems share a common set of features (Kraft et al., Reference Kraft, Blazar and Hogan2018): (1) the use of multiple measures of teacher performance including test-based performance measures such as value-added measures or student growth percentiles, and a qualitative assessment such as classroom observation by school principals or senior teachers; (2) the use of evaluation ratings to inform career ladders and personnel decisions such as promotion and retention. For example, Singapore’s teacher performance appraisal process feeds into career ladders by highlighting teachers’ abilities to collaborate with each other, their emerging leadership skills, and their teaching skills as part of the regular evaluation system (NCEE, 2016). The model includes three paths that a teacher can follow: a teaching track, a leadership track, and a senior specialist track, and each of these tracks has its own career ladder. Through the teaching track, teachers can aspire first to be Senior Teachers, then they can become Lead Teachers, and then progress further to the level of Master Teachers.

Hossain et al. (Reference Hossain, Hassan, Rahman, Ali and Islam2017) warn that reforms that are related to teacher performance are difficult because teachers are politically important in Bangladesh, as they are in many other countries, so reforms that are ‘more carrot than stick’ are more likely to be acceptable, but their success depends on the inherent motivations of teachers. This is a reminder that successful teacher reforms need an astute political leader in the education system.

Increasing Resources for Education

The world of the future will require higher levels of skills and the ability of individuals to acquire new skills throughout life, to know how to adapt to changing social and environmental conditions, and to work flexibly. This is why higher school quality and better academic outcomes is the next education challenge for Bangladesh. Ensuring that the primary education system is equipped to meet that challenge will require greater resources for schools and better management of those resources. This chapter makes a good case for expanding the resources for primary education given the empirical evidence on the returns to economic development and poverty reduction of basic education in Bangladesh, the very low share of education spending to GDP of Bangladesh compared to that of comparator countries, and the poor physical condition of schools and the need for schools to provide more services to low-income students such as meals.

The increase in education expenditures must be accompanied also by a willingness of the education leaders at different levels of government to take bold measures to make those additional resources count. Wastage and leakage of resources due to fraud and corruption must be reduced, and education resources must be allocated to where they can contribute most to higher school quality. Research on other developing countries suggest some useful measures to try, but even better would be for Bangladesh to invest in more program experimentation and evaluations on how to improve quality.

A Institutional Structure of Land Administration

The existing structure of land administration in Bangladesh is multi-layered (see Figure 8.1). The system is paper-based and maintenance of record is done mostly manually. These records are kept in different offices, which creates duplication and a lack of coherence. The land administration system in Bangladesh is managed by multiple government authorities simultaneously. These government offices are entrusted with the transfer of land rights from one party to another in sale, lease, loan, gifts, and inheritance; control of land and property development; land use and preservation; revenue gathering from land through sales, leasing, and taxes; and resolving conflicts regarding ownership and usage of land.

Figure 8.1 Land administration and management structure in Bangladesh.

Source: Transparency International Bangladesh (TIB) (2015)

The current institutional structure of land administration in the country comprises four major bodies under two ministries: the Ministry of Land, and the Ministry of Law, Justice and Parliamentary Affairs (MoLJPA). The four major bodies that administer the land management system are the Directorate of Land Records and Surveys, the Land Reform Board, and the Land Appeals Board under the Ministry of Land, and the Department of the Land Registration System (under the MoLJPA).Footnote ¹³ However, the Ministry of Public Administration, formerly known as the Ministry of Establishment, is authorised to appoint an Assistant Commissioner (Land), who is the responsible authority connected to both the Ministry of Land (through the Land Reform Board) and the Ministry of Public Administration (through the Deputy Commissioner’s (DC’s) office). Other government bodies that play a minor role in administering land management are the Ministry of Forests, the Fisheries Department, the Directorate of Housing and Settlement, and the Department of Roads and Railways.

There are four core stakeholders in the land administration and management system in Bangladesh:

1. i. The Settlement Office: The Settlement Office generally takes on the task of updating the Record of Rights. Moreover, this office is appointed with the task of preparing, printing, and distributing the mouzaFootnote ¹⁴ and thana maps of every district, defining borders among the mouzas, thanas, and districts, and providing training to the newly recruited civil service cadres working at the field level of different directorates, as well as ministries, such as the administration, land, and forest. In addition, the determination of ownership of land is done by surveying neighbourhoods every 30 years.

2. ii. Assistant Commissioner (Land): Under the State Acquisition and Tenancy Act 1950, the Assistant Commission of Land authorises the transfers of land rights, except during land survey. The country is administratively differentiated in various levels, starting from unions; with a couple of unions forming a sub-district or thana or upazilaFootnote ¹⁵; a couple of thanas forming a district; a couple of districts forming a division; and eight divisions forming the whole country. The land administration follows this hierarchy in a broad sense. According to a report published by the Local Government Engineering Department, United Nations Development Programme (UNDP), and UN-Habitat (Shafi, Reference Shafi2007), land management functions through the Commissioner at the division level, the Deputy Commissioner at the district level, the Assistant Commissioner (Land) at the thana level, and the Tahsildar at the union level. Assistant Commissioner (Land), the executing authority of the Assistant Commission (Land), discharges all the activities of the upazila land office through a detailed structured administrative system comprising various levels of clerical assistants. The Assistant Commissioner (Land) has to perform multiple responsibilities regarding land, including those of Upazila RevenueFootnote ¹⁶ Officer, Upazila Settlement Officer, Circle Inspector, Revenue Circle Officer,Footnote ¹⁷ and Revenue Circle Inspector.Footnote ¹⁸

3. iii. Sub-Registry Office: The Sub-Registry Office is administered under MoLJPA and is appointed with the responsibility for registering lands and other properties under the Registration Act of 1908. The Sub-Registrar is the executive authority of the Registry Office and the representative of the MoLJPA at the upazilaFootnote ¹⁹ level. The Sub-Registrar registers the transfer of land through a stamped deed declaring the property value. There are 503 Registry Offices in Bangladesh, including one in every upazila, where, on average, 7,000 land transfers occur per year. These offices provide BDT 14 billion (equivalent to US$ 165 million) in tax revenue every year, which is 0.4% of total government tax revenue; this is not managed by the National Board of Revenue (Ministry of Finance, 2019).

4. iv. Land Survey Tribunal: The State Acquisition and Tenancy Act 1950 lays down the provisions for the Land Survey Tribunal and the Land Survey Appellate Tribunal. In case of any disputes, for example fake documents or fake mutations,Footnote ²⁰ the affected party files a lawsuit with the Land Survey Tribunal. In consultation with the Supreme Court, the Government appoints the judge of the Land Survey Tribunal from the Joint District Judges.Footnote ²¹ Against a decision of the Land Survey Tribunal, an appeal can be made to the Land Survey Appellate Tribunal, which is constituted with a judge who is or has been a judge in the High Court division of the Supreme Court.

Upazila administration, which is under the jurisdiction of the Ministry of Public Administration, is primarily concerned with updating the Record of Rights in regard to mutation. Land buying or transfer of rights is directly connected to both the Sub-Registry Office and the Assistant Commission (Land) office. If any interested party enquires about the land that he/she intends to purchase by formally applying to the Sub-Registrar, he/she is granted the aforementioned information. Deeds are maintained by generating both alphabetically and plot number-wise ordered content so that information can be provided. When land transfer occurs, theoretically two parties have to agree on the price of the property and then the buyer will have to arrange the deed preparation. Next, both parties will visit the Sub-Registry Office together so that the Sub-Registrar can establish the money transfer between the two parties and collect the immovable property tax. The Sub-Registrar finally registers the transfer and forwards the record of land transfer to the Assistant Commission (Land) office, where the tahsildarFootnote ²² inspects and updates the record. Through this process, the Record of Rights, locally known as Khatiyan, is supposed to be updated. Moreover, buyers can check the Record of Rights from the Assistant Commission (Land) office to confirm the rightful owner of the property he/she intends to buy. Nonetheless, this land transfer has to be notified while the land survey is done by the settlement office. Figure 8.2 illustrates the land transfer procedure that would occur if the system worked properly.

Figure 8.2 The official process of land transfer in Bangladesh.

Source: Authors

Interviews with two Sub-Registrars and two Assistant Commissioners (Land) from the Northeast and Northwest regions of the county, and FGDs with relevant stakeholders, reveal that the land transfer process often takes a detour in the steps involving the Assistant Commission (Land) office. Inherited lands are not mutated properly in most cases, due to lack of awareness among the landowners. In some cases, land mutation of sold land goes through years of red tape, ultimately reaching the DCs’ office from the upazila land office via the local tahsil office (revenue office). Often the process of the Registry Office sending the land transfer record to the Assistant Commission (Land) office takes too long, and sometimes it does not take place at all. The lack of timeliness in the process results in a lack of coherence of information between the stakeholders. Therefore, the possibility of multiple landowners existing in different government records for the same property arises, creating the opportunity for fraudulent activities and litigation. When a potential buyer attempts to check the ownership of the property, the information he/she obtains from Assistant Commission (Land) office might not be synchronised with the information in the Registry Office. The buyer can obtain information from the Assistant Commission (Land) office only, limiting his/her chance of comparing the information regarding ownership of the property. In this way, forgery and intentional multiple-selling of the same land can take place.

B Challenges Related to Land Administration

The land administration system in Bangladesh is characterised by pervasive corruption, incidents of land-grabbing by vested interest groups and influential politicians, and social tensions emanating from land-related conflicts. The land management system in Bangladesh is still based on traditional regulations, with most of the rulebooks framed during the British period. Therefore, inefficiency in the provision of legal and administrative services related to land intensifies corrupt practices in this sector. Box 8.2 sets out some examples of corruption in the land administration system in Bangladesh that have been discussed in the national media.

Figure 8.3 provides a schematic representation of the complexities of land administration, and the respective consequences in Bangladesh. The land-related challenges occur for two main reasons: internal issues (e.g. a lack of adequate infrastructure, the analogue records system, and inconsistent human resources) and external issues (e.g. lack of coordination among the administrative entities). The subsequent sub-sections provide an analysis of these challenges.

Figure 8.3 A schematic presentation of the complexities in land administration, and their consequences.

Source: Authors

C Dynamics of Political Power and Institutional Configurations

The complexities of land administration and management are greatly compounded by the political economy, which prevents problems from being solved. The more explicit scenario includes land-grabbing and congestion of litigation, for which politically influential groups and the beneficiary business elites are directly responsible.Footnote ³⁰ Furthermore, in many cases, the same parties have created internal and external issues related to land administration, as already discussed.

The recruitment procedures for the land administration are beset by corruption and nepotism.Footnote ³¹ Due to the corrupt recruitment process, including bribing and enforcing political influence, the recruited manpower in the land administration system is mostly inefficient, unenthusiastic about the service they are required to provide, and prone to further corruption. KIIs and media reports reveal that there are unnecessary numbers of employees who are overcharging people in the Registry Offices.Footnote ³² As discussed before, while digitisation can solve some of the administrative problems, including corruption, the KIIs suggest that digitisation would decrease the number of currently employed people, and there is a resistance to such reforms from vested interests. Also, these vested interests are closely linked to the local politically influential elites, who are also the beneficiaries of the rent being generated from the corrupt practices in the land offices (Chowdhury and Panday, Reference Chowdhury and Panday2018). Due to the substantial benefit from corruption, Sub-Registrars are generally reluctant to be promoted to district-level registrars. The reasoning for this also partially lies in the lack of capacity bestowed upon a District Registrar as well.Footnote ³³

The issues related to infrastructure, congestion of legal disputes, access to information, fake documents, and the manpower required to manage the whole chaotic current process can be improved by digitisation. However, despite the overwhelming consensus about the necessity of digitisation, the self-interest of various stakeholders with political influence, who are directly benefitting from the current system, prevents the system changing for the better. These interest groups of politically influential people and business elites with political connections are directly or indirectly involved in the corruption related to land tax submission procedures, land registration procedures, mutation of ownership, changing land type to acquire an unjustified price from potential industrialists and other buyers, selling water bodies to uninformed buyers, and unnecessary bureaucratic complexities.Footnote ³⁴ According to the Minister for Land, as reported in a newspaper article, land surveys are entangled with corruption to such a degree that surveys provide millions to the people who are involved in the process, and they are ‘ruthless’.Footnote ³⁵

While some business elites are in favour of reforms of land management, the ruling political elites are not very keen as reforms would eliminate sources of rents, including among Assistant Commission (Land) and Sub-Registrar employees, who are likely to be there because of loyalty to the ruling political elites. However, powerful business elites with strong political connections are able to bypass the system.

A SEZs in Bangladesh

SEZs are geographically delineated ‘enclaves’ in which the regulations and practices related to business and trade differ from the rest of the country, and therefore all the units located therein enjoy special privileges (Raihan, Reference Raihan2016). According to Ge (Reference Ge1999), SEZs are characterised, in general terms, ‘as a geographical area within the territory of a country where economic activities of certain kinds are promoted by a set of policy instruments that are not generally applicable to the rest of the country’. Theoretically, SEZs are supposed to accommodate both export-oriented and domestic market-oriented industries.

Under the Bangladesh Economic Zones Act, 2010, BEZA was established as the public regulatory body for implementing SEZs. Till now, BEZA has approved 88 SEZs, through its governing body, which comprises 59 government SEZs and 29 private SEZs.

BEZA has started to work on four types of SEZs: government, private, public–private partnerships, and foreign. Feasibility studies, land acquisition, area-specific social and environmental studies, and other initiatives are underway for these approved SEZs. There are plans to acquire approximately 75,000 acres of land for these SEZs. By 2030, BEZA expects to create employment for about 10 million people and to export US$ 40 billion worth of products annuallyFootnote ³⁶ by establishing 100 economic zones nationwide.

Although BEZA plans to establish SEZs in 31 districts, most of the projects are situated within Dhaka and Chattogram region. Regardless of the authority given to BEZA, there is a need for concerted effort from all the state stakeholders to implement its plan. The SEZs require a massive amount of land acquisition, which concerns all the stakeholders of land administration. Although BEZA is supposed to ease the complications in respect of accessing land, pace has been slower than expected.Footnote ³⁷

Among the private SEZs, so far success has been seen in the case of the Meghna Industrial Economic Zone, which is located beside the Dhaka–Chattogram highway. Situated on 110 acres of land, in February 2020, this economic zone started its operation with nine new industrial units (related to consumer products and industrial raw materials), at a cost of BDT 40,000 million (around US$ 0.5 billion).Footnote ³⁸

B Challenges in Land Acquisition under SEZs

Land acquisition in a densely populated and land-scarce country like Bangladesh is always a complex task. Therefore, the success of the SEZs policy will depend on the way the institutional challenges in the land administration system are handled. At the same time, the tempting facilities of SEZs present the possibility of relocating firms for rent-seeking reasons (Razzaque et al., Reference Razzaque, Khondker and Eusuf2018).

Land acquisition refers to the process by which the Government forcibly acquires private land for a public purpose with or without the consent of the owner of the land, compensating the owner in exchange for the aforementioned land in an amount which can be different from the market price of the land.Footnote ³⁹ Land acquisition is intricately connected to development blueprints envisaged by the Government of Bangladesh, such as its five-year plans, the Delta Plan, and so on. Additionally, appropriate land acquisition procedures assist in the timely execution of development projects. According to the KIIs with land owners and officials of the land office, legal owners are regularly harassed and exploited at the land offices throughout the country. Moreover, the financial compensation related to land acquisition perpetuates an overwhelming amount of corruption around the DC offices of the country. Many development projects are hindered for years due to land acquisitions and the corresponding compensation process.

In this context, the land acquisition process for SEZs required clarification in order to resolve the complex issues surrounding compensation. In this context, the Acquisition and Requisition of Immovable Property Act 2017, currently used by BEZA for land acquisition, was developed to replace the Acquisition and Requisition of Immovable Property Ordinance 1982, which in turn was descended from the Land Acquisition Act 1894, established during the colonial period. In the 2017 Act, a detailed clarification is provided of the compensation process. Although the Ordinance of 1982 prohibited the state from evicting people from their homesteads, the vagueness of the law obstructed marginal people from receiving compensation. However, the 2017 Act also needs further amendment to solve complexities at the ground level.

As the success of SEZs depends on effective land acquisition, the land acquisition process for SEZs needs to be different from the usual land acquisition processes applied for any other purposes. However, our FGDs and KIIs confirm that the land acquisition process for SEZs has not been very different from the usual process, and it suffers from several of the corrupt practices related to land administration and management mentioned in Section IV. For example, in the land acquisition process, while the last owner of the deed, whose name has been mutated and who provides revenue receipt, should be treated as the actual owner of the land, corrupt officers in land offices send the land acquisition notice to various previous owners and thereby complicate the situation. In this process, opportunists, in association with corrupt officers in the land offices, file claims for compensation for the acquisition of land. In the end, the actual owner of the land has to bribe the corrupt officers in the land office to provide the compensation.

Our FGDs and KIIs also reveal that the news of a land acquisition causes hasty construction to acquire higher compensation for the hollow land by opportunists, in order to obtain higher compensation.Footnote ⁴⁰ People who do not have any connection with political elites are forced to pay bribes in order to receive compensation. However, a bribe often does not ensure the compensation. Filing for compensation can lead to encounters with influential goons and middlemen who seek to snatch away the money. The presence of intermediaries or middlemen in the land acquisition offices worsens the woes of the actual owners. Intermediaries distribute bribes to the different levels of employees in the land acquisition office.Footnote ⁴¹

One example of the aforementioned difficulties in land acquisition for SEZs is the Sreehatta Economic Zone. The presence of fake landowners, a mismatch in the price of land, and inadequate compensation angered villagers, who filed hundreds of cases in the courts, delaying the zone’s development.Footnote ⁴²

C Sreehatta Economic Zone: An Example

Sreehatta Economic Zone is located in Moulavibazar district (Northeast of Bangladesh), which is to the east of Sylhet, west of Habiganj, north of Sunamganj, and south of Moulavibazar district. This SEZ was established on 352 acres of land in Sherpur at Sadar upazila, with a view to generating employment for 44,000 people in the Sylhet division. In March 2017, six private entities invested US$ 1.4 billion to establish their industries in this economic zone. Moreover, land development, utility supply, and lake development have already started in this zone under the supervision of BEZA. Figure 8.4 depicts the land acquisition process of SEZs under the Ordinance of 1982. Sreehatta Economic Zone acquired 240 acres of land from approximately 2,000 families and the remaining 112 acres from government khas land.

Figure 8.4 Land acquisition process.

Source: Authors, through review of official documents

While maintaining the valuation methods described in the Ordinance of 1982, the process takes into account whether the land is used for agriculture, habitat, and so on. The overall value also depends on the details of the usage, that is the type of crop being cultivated on the land. For the Sreehatta Economic Zone, the Sub-Registrar’s office determined a market price of BDT 34,600 per decimal of Aman landFootnote ⁴³ and BDT 66,700 per decimal of Aus land.Footnote ⁴⁴ Generally, the responsible DC office requires assistance from the Housing and Public Work Division, Agriculture Division, and Forestry Division to determine the value of infrastructure, food, crops, and trees, respectively. According to the Ordinance of 1982, the affected owners should get 150% of the market price as compensation. Although in Sreehatta Economic Zone, around 85% of total compensation has been paid, it took three to four years for the amount to be paid, revealing the challenges faced by the owners. Thus, closer inspection of marginal landowners’ cases reflects the critical situation in the land acquisition process. Also, as mentioned earlier, hundreds of cases were filed in the courts related to confirming the legal ownership of the acquired land.

As mentioned earlier, the Acquisition and Requisition of Immovable Property Act 2017 replaced the Ordinance of 1982. But the late implementation of the new law prevented many people obtaining fair compensation in the case of Sreehatta Economic Zone. The landowners accused the Assistant Commission (Land) of undervaluing the land price since the then market price of agricultural land was more than the price determined by the Assistant Commission (Land). Moreover, according to the Acquisition and Requisition of Immovable Property Act 2017, if in consequence of the acquisition of the property, the affected person is compelled to change his/her residence, reasonable expenses, if any, incidental to such a change must be considered in determining compensation. However, there are allegations of violations of these provisions in the case of the compensation provided to the landowners in the case of Sreehatta Economic Zone.

We investigated the land acquisition cases of two people: E and T, who are brothers. They live in Sherpur village at Sadar upazila in Moulvibazar District. About 7.66 acres of land were acquired from them for the purpose of Sreehatta Economic Zone. Out of this 7.66 acres, 1.52 acres was agricultural land (Aman) and the remaining 6.14 acres included a homestead, pond, and plantation. The two brothers received BDT 7.81 million (after deducting taxes, including income tax) as compensation for 1.52 acres of agricultural land (Aman type), on the basis of the compensation of per decimal land was BDT 51,000 (150% of the market price determined by the Assistant Commission (land)). They also received around BDT 12.9 million as compensation for infrastructure, trees, food, and crops. However, the compensation for the 6.14 acres of homestead land is still unpaid. Since there was a legal dispute in the High Court regarding these lands, the payment was stalled by the DC’s office at the time of payment. During the valuation process, the Assistant Commissioner (Land) categorised the lands (6.14 acres) as agricultural land and accordingly the total unpaid amount was BDT 32.63 million. Since the land from the aforementioned economic zone was acquired under the old law, that is the Ordinance of 1982, the landowners (E and T) were dissatisfied with the valuation process. Therefore, as the aforementioned land was homestead type and located beside the road, they claimed further compensation and rehabilitation support. After formally complaining to BEZA, they received only indifference, and presently the situation is at an impasse.

Rural Development

Section III describes the evolution of laws pertaining to land ceilings, redistribution, and tenancy protection in Bangladesh. Section IV focuses on problems in land administration and enforcement, with a detailed explanation of organisational structure. Various weaknesses are highlighted: the lack of digitisation of land records; poor infrastructure; human resource problems (such as lack of training and skills, and low motivation); and the overlapping jurisdictions of different divisions, resulting in lack of coordination. The discussion clearly illustrates how these weaknesses reduce land security, inhibit land transfers, and promote corruption. Data from household surveys indicate that corruption and lack of transparency are pervasive. Comparisons with neighbouring Asian countries on land registration delays and the quality of land administration shows the situation in Bangladesh to be considerably worse than in those countries.

One would like to learn more about these problems, and in particular their consequences for rural development in Bangladesh. For instance, when were the last cadastral surveys completed? For the country as a whole, how much land has been acquired under the land ceiling rules, and distributed? How many sharecroppers were registered? I am not sure if there are any statistics readily available on these, which might be compared with neighbouring countries or regions (such as West Bengal in India, which, in conjunction with Bangladesh, historically constituted a united province until the partition of 1905, engineered by the colonial British authorities). Some facts noted in passing suggest a very low extent of implementation of land reforms. For example, the progress achieved with respect to the distribution of vested land in the 1970s was far lower than expected; only 0.2% of agricultural value added was collected in the form of land taxes during the 1980s. The recommendations of the Muyeed Committee on the rationalisation of land administration were ignored. About 90% of the rural population in 1991 were unaware of their entitlements under the existing legislation.

Additional research is probably needed to create a systematic database on land reforms implemented and to answer important questions relating to the evaluation of land policies in the past as regards rural development in the Bangladeshi context. While these are probably beyond the scope of this chapter, I list some questions below, in the hope that future research efforts will be directed towards answering them. I mention in this connection the work of Abhijit Banerjee, Paul Gertler, and Maitreesh Ghatak (Journal of Political Economy, 2002), which showed a significantly higher growth of rice yields in West Bengal compared with Bangladesh during 1978–1994, ostensibly owing to substantially greater success in implementing tenancy reform laws.

1. (a) How did the land distribution change over time, and what role did land reform policies play? How active is the land market? Have land markets equalised or dis-equalised landownership?

2. (b) It appears that many of the regulations in place are intended to protect small and marginal households in the rural sector, who are poor and comprise a large fraction of the population. In evaluating the implications of existing land regulations, one therefore needs to understand whether these redistributive policies retard or enhance economic growth. Are small farms more or less productive than large farms? How much agricultural tenancy exists? What are the nature of tenancy contracts, the regulations they are subject to (e.g. crop shares or eviction rights of landlords), and the effects of such regulations? Are there increasing returns to scale in farming? To what extent do scale effects depend on differential access of small and large farmers to credit, technology, infrastructure, or marketing? How smoothly does the market for leasing or buying land function? Are there restrictions on outsiders buying land? What are the effects of land policy on migration to the urban sector?

3. (c) To what extent are landholdings fragmented? What are the productivity effects of fragmentation? If this is a serious problem, is there any scope for the Bangladesh government to coordinate land consolidation efforts?

4. (d) This chapter indicates many dimensions on which land policies are poorly implemented, owing to lack of transparency, poor land records, and low motivation of land administration officials. As in neighbouring West Bengal, only a small fraction of land collected for redistribution has actually been distributed to the poor. More details of the implementation process would throw more light on the underlying reasons. For instance, who decides on how to select beneficiaries, and on what basis? What happens to the undistributed lands: do they lie fallow or are they used in some way (if so, by whom)? If implementation has been a major problem, to what extent is this a result of weak political will, rather than weak institutions?

5. (e) Related to the question of political will, what are the political economy effects of land concentration? Do those with large landholdings exercise disproportionate power by virtue of their access to politicians and political parties? If so, what effects does this have on tax evasion and local government revenues, on the allocation of local infrastructure, or the implementation of land regulations? Is there scope for wider reforms of electoral processes and empowerment of local governments in Bangladesh which may improve the implementation of land policies?

6. (f) How important are water management problems, such as groundwater extraction, irrigation/electricity pricing, or conservation incentives? Are there serious problems of sustainability, for example encroachment on forests, and other common properties? How is the rise of the water level near the coast affecting neighbouring farming and fishing communities? What policies are being considered to help them adapt and possibly to resettle in the future?

7. (g) What is the potential for the development of modern export-oriented agribusiness? What restrictions currently apply on ownership of land by large firms or foreigners? Can a multinational corporation invest in agribusiness, acquire land, and operate large farms, hiring local labour? Are there restrictions on contract farming? Do land regulations constrain the growth of agribusiness? If there has been any significant agribusiness development in Bangladesh (e.g. in fishing or specific cash crops), what have their growth and distributional impacts been?

Land Acquisition for Industry and SEZs

The remainder of this chapter provides many interesting details about SEZs in Bangladesh and raises a number of important policy questions concerning land acquisition and compensation policy.

I think it is useful to distinguish between two issues here. The first concerns broader aspects of SEZ policy, which do not necessarily have anything to do with land policies per se. SEZs typically include the provision of infrastructure and subsidies, the relaxation of labour/environmental regulations, and fast-track approval on a preferential basis for large investors in manufacturing and services. The aim is to attract and stimulate investment by relaxing constraints and regulations that are pervasive in the economy. By its very nature, this creates a dual system. The authors raise concerns about differential access between small and large investors, between those oriented towards the domestic market and those oriented towards the export market, and between regions. This suggests an underlying tension between efficiency/growth objectives and equity/fairness goals that Bangladeshi policy-makers need to confront. Could it be better to focus on growth and to foster special privileges favouring large, export-oriented investors and urban centres, and then expect the resulting benefits to gradually trickle down to the rest of the economy via migration and internal trade?

The second set of issues concerns the specific problems created by poor land administration institutions, which this chapter discusses in detail. Complications owing to poor land records and lack of transparency are illustrated by this chapter’s Sreehatta Economic Zone case study. The land authorities deliberately created problems that enhanced corruption and delays, such as informing both the prior and current owners. Problems arose with market price assessment procedures, raising the question whether they should include rehabilitation costs. Some of the problems seem similar to those in West Bengal that I found in my research (in the 2012 article with Maitreesh Ghatak, Sandip Mitra, and Anusha Nath that the authors cite). Those problems arose from failure of land records to verify land quality, thinness of land markets (which makes it difficult to assess the market price for comparable properties), and undervaluation of properties owing to incentives among owners to evade stamp duty on land transfers. However, the West Bengal study did not indicate corruption in the compensation process to be as important as the authors suggest is in the case of Bangladesh. This is broadly consistent with the poorer quality of land administration in Bangladesh reported earlier in this chapter.

Before concluding, let me raise some additional questions regarding land acquisition and compensation policy for academics and policymakers in Bangladesh to consider, in the wake of the West Bengal experience:

1. i. Should compensation to owners of acquired properties be related to market price? How should market price be assessed? At which point of time (relative to the acquisition date) should market price be assessed? These tend to arise for the following reasons. After land is acquired and makes way for industrial or real estate development, property values tend to rise. Previous owners often claim it is unfair to let all the benefits of property appreciation accrue to the new investors. Moreover, linking the compensation amount to future appreciation would reduce the incentive for previous owners to hold out and litigate, thereby reducing delays.

2. ii. How should rules and procedures for government acquisition of land and provision of compensation to owners be designed? For instance, should procurement auction–based mechanisms be used to allow existing owners more autonomy? What should be the minimum proportion of owners whose assent is necessary for an acquisition to be authorized? To what extent should local governments, communities, and non-governmental organisations be involved in the acquisition process? Is there scope for flexibility regarding form of compensation (e.g. lump sum payments, shares in property within the SEZ, training/employment in SEZ firms, or indexed annuities)? Such procedures can alleviate the hardship on previous owners who tend to be displaced and lower the political resistance to land acquisition.

3. iii. How should tenants and workers be compensated? Their livelihoods are disrupted by land acquisition, thereby raising inequality and poverty, and threatening the political viability of the transition process. The design of rehabilitation and resettlement policies is perhaps the most critical, and most difficult, aspect of policy design and implementation. The 2011 Land Acquisition Bill passed in India mandated tribunals to listen to and adjudicate on these concerns, besides mandating high minimum compensation levels. These are widely viewed to have contributed to the post-2010 growth slowdown. This is yet another manifestation of the growth–equity trade off that each society has to confront.

A An Overview of the Structure of the Judiciary

The current justice system of Bangladesh has its roots in both the traditional subcontinental justice system which was developed over centuries during the reigns of Hindu and Muslim rulers, including the Mughals, and the common law justice system introduced by the British colonial ruler in the subcontinent (Halim, Reference Halim2008). Moreover, the Constitution of the Peoples Republic of Bangladesh lays out the structure of the judiciary, and has undergone multiple amendments since independence in 1971. Among these amendments, some have greatly influenced the structure, functions, and jurisdiction of the higher and lower courts. Currently, the judiciary of Bangladesh is composed of three adjudicative bodies: the higher judiciary, the lower judiciary, and specialised tribunals. The structure of the judicial system of Bangladesh is presented in Figure 9.1.

Figure 9.1 The structure of the judicial system of Bangladesh.

Source: Based on Judicial Portal Bangladesh, www.judiciary.org.bd/en/judiciary/court-structure (accessed 15 May 2019)

The higher judiciary refers to the Supreme Court, which consists of the Appellate Division and the High Court Division.Footnote ² The Appellate Division is the constitutional court, with no original jurisdiction. It hears appeals against: (a) High Court Division orders, judgements, decrees, or sentences involving constitutional interpretation, capital punishment, life imprisonment, and sentences for contempt; and (b) judgements or orders of specialised tribunals, such as the Administrative Appellate Tribunal and International Crimes. The courts that are subordinate to the Supreme Court – namely, the Appellate Division and the High Court Division – were established under Article 114 of the Constitution. The Civil Courts Act 1887 directs the subordinate civil courts, and the Code of Criminal Procedure guides the courts of magistrates and sessions. In the case of civil courts, there are five grades, including: Courts of Assistant Judge, Senior Assistant Judge, Joint District Judge, Additional District Judge, and the District Judge. The District Judge heads these courts for all districts except for the three Chittagong Hill Tracts districts.Footnote ³ There are also five classes of subordinate criminal courts: the Courts of Session, Metropolitan Magistrate, Magistrate of the First Class, Magistrate of the Second Class, and the Magistrate of the Third Class. In the Court of Sessions, the District Judges are empowered to function as Session Judges. In addition, the Government of Bangladesh has enacted the Village Court Act 2006 and has taken the initiative to activate village courts at the union level (UNDP and Government of Bangladesh, 2019). However, village courts have yet to be established throughout the country. When they are, their jurisdiction will be very limited, and they will deal only with civil issues.

The Constitution of Bangladesh guarantees human rights and freedom, equality, and justice and the rule of law for all citizens (Huda, Reference Huda1997). In agreement with the Constitution, there are three basic requirements of a judicial system: fairness (which includes various dimensions); the effectiveness and the expeditiousness in the procedures; and the independence of the judges. The available evidence on various measures of the effectiveness of the judicial system in Bangladesh is discussed in the following subsections.

B Degree of Fairness of the Judiciary

Access to justice is one of the basic principles of the rule of law. If access to justice is hindered and any form of discrimination or bias persists in the process of delivering justice, this can undermine the voice and rights of the people. According to an estimate by the OECD, around 4 billion people around the world live outside the protection of the law, mostly because they are poor or marginalised within their societies. The lack of legal accountability propels local corruption and diverts resources from where they are needed the most. In addition, women are particularly affected by legal exclusion as they often face multiple forms of discrimination, violence, and sexual harassment. Thus, access to justice and fairness of the judiciary are essential to enable the basic protection of human rights (OECD-OSF, 2016).

In Bangladesh, there is a lack of well managed data regarding the various features and functioning of the judiciary. Thus, in order to capture some dimensions of the fairness of the judiciary, in the analysis in this section, three indicators are considered from the World Justice Project (WJP) Rule of Law IndexFootnote ⁴ (WJP, 2019): ‘people can access and afford civil justice’, ‘civil justice is free of discrimination’, and ‘civil justice is free of corruption’. It should be noted that the selected indicators are related to civil justice. This is because the main focus of this chapter is land dispossession litigation, which falls under the jurisdiction of civil courts, and this chapter principally intends to highlight the situation of civil justice when discussing the performance of the judiciary.

It should be noted that the WJP Rule of Law Index contains a number of limitations. First, the index has been constructed based on a significant proportion of subjective information given by both experts and the general public. Second, the opinions and perceptions of the individual respondents may vary to a great extent across time and geographic region. Despite these limitations, the WJP Rule of Law Index 2019 provides an opportunity to examine the relative position of Bangladesh compared to another 125 countries. Out of the total 126 countries in the index, roughly 28 can be broadly categorised as developed countries and the rest as developing countries.

The first indicator ‘people can access and afford civil justice’ measures the accessibility and affordability of civil courts, including whether people are aware of available remedies and can access and afford legal advice and representation. It also measures whether people can access the court system without incurring unreasonable fees, or facing procedural hurdles or physical and linguistic barriers. The second indicator ‘civil justice is free of discrimination’ measures whether the civil justice system discriminates in practice based on socio-economic status, gender, ethnicity, religion, national origin, sexual orientation, or gender identity. The third indicator ‘civil justice is free of corruption’ measures whether the civil justice system is free of bribery and improper influence by private interests (WJP, 2019).

Bangladesh ranks 106 among the 126 countries for the ‘people can access and afford civil justice’ indicator of the WJP 2019, with a score of 0.4498, compared to the median score of 0.5637. Likewise, for the ‘civil justice is free of discrimination’ indicator Bangladesh’s relative position is 115 among the 126 countries. Again, its score is 0.3613, relative to the median score of 0.5623. Finally, Bangladesh ranks 100 among the 126 countries for the ‘civil justice is free of corruption’ indicator, with a score of 0.3674, in comparison to the median score of 0.5224. The data show that Bangladesh’s relative performance in all of the three areas with regard to the fairness of the judiciary is in the bottom quintile or the bottom decile of a set of 126 countries.

C Expeditiousness of the Judicial Procedures

One of the fundamental aspects of the effectiveness of the judiciary is the expeditiousness of the judicial procedures. The well-known legal maxim ‘justice delayed is justice denied’ is based on the principle that if redress is not available in time and there is little hope of resolution, it may well be regarded as there being no redress at all. This principle forms the basis of the right to a speedy trial and similar rights which are meant to expedite the legal system. Thus, the expeditiousness of the judicial procedures is often considered to be a critical element for ensuring an effective justice system. If the judicial system guarantees the enforcement of rights, creditors are more likely to lend, businesses are dissuaded from opportunistic behaviour, transaction costs are reduced, and innovative businesses are more likely to invest (OECD, 2013; IMF, 2017; World Economic Forum (WEF), 2018; World Bank, 2017). The relative picture regarding the current degree of expeditiousness of the judicial procedures in Bangladesh is discussed here.

The ‘civil justice is not subject to unreasonable delay’ indicator of the WJP Rule of Law Index measures whether civil justice proceedings are conducted and judgements are produced in a timely manner without unreasonable delay. It can be observed that Bangladesh’s performance is again particularly poor for this indicator, ranking 121 out of the 126 countries in 2019, with a score of 0.1917, compared to the median score of 0.4384.

A closer examination of the primary data reveals that the case backlog is especially acute in the subordinate or district courts of the country.Footnote ⁵ The total civil case backlog at the end of 2018Footnote ⁶ was 1,321,038, and the number of total cases including new cases was 1,396,350. Among these, only 58,234 cases were resolved, which is about 24 times less than the total cases. A comparatively smaller number of cases (6,001 cases) were transferred or received a stay order from the higher courts, and also a few (1,716 cases) were resolved through Alternative Dispute Resolution (ADR). It can also be observed that the total number of civil and criminal cases has increased overtime in the High Court and Appellate Division.

A number of factors may have propelled the growth of the total number of pending cases in the higher and subordinate lower courts of Bangladesh. One of the main reasons behind the growth of pending cases in the last decade is the lack of capacity and resources in the judiciary. The total number of judges compared to the total population and number of cases is still quite low in Bangladesh. According to the annual report of the Supreme Court of Bangladesh, there were a total number of seven judges (including Chief Justices in the Appellate Division and 95 judges in the high Court) in 2018 (The Supreme Court of Bangladesh, 2019), which shows the lack of capacity of the overall system. Similarly, the total number of approved posts of judges for the lower courts was 1,655, of which 387 remained vacant until 2017 due to delays in the recruitment process (Sarkar, Reference Sarkar2017).

In addition, in Bangladesh, civil cases are generally based on documented evidence and oral evidence is only taken as a supplement to documents. The civil courts still follow the Evidence Act of 1872, the Civil Courts Act of 1887, the Code of Civil Procedure of 1908, and some other special laws that are applicable to the operation of civil cases. The common practice of examining witnesses in civil courts involves stating the whole case line by line, with the judge writing every statement out by hand. If this manual recording is not followed, then further clarification is required according to the Code of Civil Procedure 1908.Footnote ⁷ For this reason, the present nature of peremptory hearings consumes a considerable amount of time and the dependence on manual paperwork contributes to increasing case backlog (Tahura, Reference Tahura2015). Likewise, as mentioned earlier, along with a shortage of judges, a number of systematic problems compound the backlog problem, including poor investigation by the police, too many adjournments at courts, an absence of witness, the lack of capacity of legal professionals, a lack of coordination among different government departments, and the unwillingness of some lawyers to settle the case within a short time (Tahura and Kelly, Reference Tahura and Kelly2015; The Supreme Court of Bangladesh and UNDP, 2015; Transparency International Bangladesh, 2017; Rahman, Reference Rahman2018; The Justice Audit Team, 2018).

Moreover, political turmoil and deterioration of the rule of law over time has caused an increase in the number of cases in recent years (Sarkar, Reference Sarkar2015). Besides, according to Bangladesh Bank, the central bank of Bangladesh, more than 55,500 cases involving default loans were pending with the courts as at June 2018 (The Daily Star, 2018b). Furthermore, the Vested Property Return Act of 2013 came as an additional complicating factor as it allowed the Government to confiscate the property of individuals considered to have acted as an enemy of the state during the India–Pakistan war of 1965 (Yasmin, Reference Yasmin2016). From 2013 to 2016, the Government of Bangladesh activated special tribunals throughout the country to restore vested property. Since 2016, claims for vested property have been managed by the formal judiciary.

The upshot of the above situation is that the judicial system of Bangladesh is increasingly burdened with a backlog of cases due to various socio-economic, political, and historical factors. A lack of initiative to compel clerks, advocates, litigants, or witnesses to comply with the due codes, rules, and processes leads to inordinate delays at the different stages of the litigation procedure. However, along with the lack of any adequate initiative to improve the performance of the judiciary, institutional failures in other areas – especially with respect to land management, default loans, and the overall deterioration of rule of law – are also producing a significant growth in the backlog and the slower disposal of cases. This growing backlog and slowly disposed cases are seriously hampering the overall performance of the judiciary. This scenario especially holds in the three major business and administrative hubs of Bangladesh, namely Dhaka, Chittagong, and Khulna. As a result, individuals, businesses, and private investors are increasingly facing uncertainties and challenges. Ultimately, the low level of expeditiousness of judicial procedures in Bangladesh is a severe impediment for the overall business climate and competitiveness of the country.

D Independence from the Executive Branch of the Government

Independence of the judiciary is based on the axiom of the separation of powers: the judiciary should remain separate and independent from the executive and legislative branches of government. The independence of the judiciary depends on certain conditions like the mode of appointment of judges, security of their tenure in office, and adequate remuneration and privileges. Such independence enables the judiciary to perform its due role in the society, thus inspiring public confidence in it. The independence of civil justice thus requires a set of detailed rules and procedures to ensure that a dispute will be treated in a neutral way, without biases in favour of any party (OECD, 2015).

In Bangladesh, despite a constitutional mandate for the separation of the judiciary from the executive organs of the state, the recruitment of subordinate court judges used to be conducted by the Bangladesh Public Service Commission (Islam, Reference Islam2014). However, the government-versus-Masdar-Hossain case in 1999Footnote ⁸ produced a landmark judgement regarding judicial independence. Nevertheless, until 2006, the judgement remained largely unimplemented. In 2007, the caretaker government took initiatives to implement the judgement.Footnote ⁹ This removed the impediment to the separation of the lower judiciary from executive control and the appointment of judicial magistrates (Biswas, Reference Biswas2012). However, the ordinances of the caretaker government have not yet been fully enacted and the judiciary has yet to be completely separated from the influence of the executive branch. The Law and Justice Division of the Ministry of Law, Justice and Parliamentary Affairs has the constitutional authority to manage the appointment, transfer, resignation, and removal of the judicial officers, judges,Footnote ¹⁰ and additional judgesFootnote ¹¹ of the Supreme Court of Bangladesh and the Attorney-General.Footnote ¹² In addition, the appointment of the next senior Judge of the Appellate Division of the Supreme Court as the Chief Justice is also the responsibility of the divisionFootnote ¹³ (Law and Justice Division, 2019). This leaves the judiciary somewhat vulnerable to political manoeuvring and vested interests (Huda, Reference Huda2017; Islam, Reference Islam2017; The Daily Star, 2018c).

The ‘civil justice is free of improper government influence’ indicator of the WJP Rule of Law Index measures whether the civil justice system is free of improper government or political influence. Bangladesh ranked 76 out of 126 countries in 2019, with a score of 0.4412, compared to the median score of 0.4907. This shows that Bangladesh has an average level of performance in terms of judicial independence. Overall, there is still much room for improvement with regard to the complete separation of powers in Bangladesh.

An independent and strong judicial system is an essential element of a free, fair, and just society and an efficient economy. If the independence of the judiciary is undermined, it further aggravates many other issues and concerns. For example, when it comes to ensuring the legal accountability of government officials, the judiciary can exercise suo muto (by own initiative) power to uphold justice (Mollah, Reference Mollah2010).Footnote ¹⁴ Again, the judiciary can ensure checks and balances in a society through judicial activism. However, these practices will not be effective in the absence of an independent and well-functioning judiciary.

A Land Conflicts and Litigation

It should be noted that the terms land dispossession and land grabbing are sometimes used interchangeably in the Bengali language. In general, land grabbing is synonymous with large-scale land appropriation, usually by large corporations (Rudi et al., Reference Rudi, Azadi, Witlox and Lebailly2014; Semedi and Bakker, Reference Semedi and Bakker2014; Suhardiman et al., Reference Suhardiman, Giordano, Keovilignavong and Sotoukee2015; Tura, Reference Tura2018). As mentioned earlier, Bangladesh is a land-scarce country and due to extreme population pressure, large-scale land appropriation by private companies does not occur on a scale compared to some other countries of the world where land constraints are not as prominent. However, the Government sometimes acquires sizeable quantities of land for special economic zones or other similar economic activities. What appears to be the major land issue is forced or fraudulent takeovers of land of relatively small or moderate size. For this reason, the nature of land grabbing in Bangladesh may best be described as the involuntary dispossession of land. This chapter therefore centres on cases of such dispossession and looks at the effectiveness of the judiciary in resolving them.

2 Land Litigation in the Formal Judicial System

As suggested by Figure 9.2, the first step of any civil litigation process in Bangladesh begins with the filing of suit to the sherestadar, a court officer. The suit is then entered into the register of suits. The defendant is informed about the case and provided with a copy of the plaint, and thus summons is served. Then if the defendant appears at the court with his written statement, the court tries to mediate between the parties. If the mediation fails, the court fixes a date for a first hearing. At the first hearing, the court examines the claims of the parties and frames the issues. After that, the court announces the date for a peremptory hearing and orders the parties to submit a list of witnesses. The peremptory hearing is followed by a further hearing and presentation of the arguments. Subsequently, the court pronounces the judgement on the day of the trial or later at a fixed date. Ultimately, the court may pass an order. However, if the defendant does not appear before the court throughout the overall litigation process, then an ex-parte hearing takes place. In this case, the evidence is recorded and an ex-parte order is given. Finally, based on the argument and evidence, the court draws up the decree irrespective of the appearance or absence of the defendant at the hearings.

Figure 9.2 Procedure of land litigation in Bangladesh.

Source: Based on Judicial Portal Bangladesh, www.judiciary.org.bd/en/judiciary/trial-procedure/subordinate-court/civil-court (accessed on 15 May 2019)

Thus, a plaintiff usually first goes to the muhuri to have an appointment with a lawyer. The lawyer then files the case and sends it to the court. The case is then recorded in the sheresta by the sherestadar and summons is issued through the nezarat by the nazir. After that the date of the hearing is usually managed by the peshkar of the court.

B A Qualitative Appraisal of Judiciary Dysfunction in Land Matters

2 Findings

There are a number of possible causes of institutional inefficiencies in the judiciary. However, we focus here only on the causes of institutional inefficiencies in relation to involuntary land dispossession litigation. Based on the analysis of primary data, these inefficiencies can be attributed to various factors, including: the ambiguity of procedural laws; poor updating and preservation of land records; a shortage of qualified personnel and misallocation of roles; unequal access to justice; delays in procedures; and influence peddling and power asymmetries. A brief account of the causes of institutional inefficiencies in the judiciary with respect to involuntary land dispossession litigation is presented in the following subsections.

I Actors Involved in the Land Litigation Process.

The analysis of the qualitative data reveals that different actors are involved at each level of involuntary land dispossession litigation, with different interests and degrees of power or influence (Box 9.2). However, it is worth noting that the actors are connected to each other through various degrees of contest and coalition. The identified actors can be grouped in four categories: state actors, non-state actors, internal actors, and external actors.

Box 9.2Categories of actors involved in the land litigation process in Bangladesh

	State actors	Non-state actors
Internal actors	Police Public prosecutors Judges Sherestadar Nazir Peshkar	Muhuri Lawyers Plaintiffs Defendants
External actors	Union parishad chairmen and members Tehsil offices Kanungo Sub-registrars ACs Land Upazila Nirbahi Officer Deputy Commissioner (DC) offices Politicians of the ruling party (holding public office)	District Lawyers’ Associations District Bar Associations Local brokers Local influential people Local businessmen Politicians of the opposition party

Note: The above categorisation and the position of the actors in the matrix may sometimes vary based on different contexts.

Source: Authors’ analysis.

State actors refers to actors who hold positions in government offices and who have a role in land litigation in one way or other. Many of these actors do not have any direct authority over the litigation process: for example, the union parishad chairman has only informal influence over the process. Although the union parishad chairman is not directly a part of the formal litigation process, he can influence the legal support-seeking behaviour of common citizens. On the other hand, non-state actors are those who have a stake in the litigation process but have no official authority to influence the outcome of the litigation. For example, as a professional body the lawyers’ association plays an important role in identifying the appropriate lawyer for the litigation. Usually, the leader of the lawyers’ association has informal influence over the proceedings of the court as the support of the leaders of the lawyers’ association may help to speed up the litigation process.

Similarly, there are brokers active in the court area who can connect a service-seeker to an influential lawyer who might not be known to the service-seeker otherwise. These brokers are people who live on their network with court staff and lawyers. However, while monetary transactions take place between the different actors involved in the litigation process, among these payments only the court fee and lawyer’s fees are officially due, while the rest are unofficial fees. In addition, lawyers are also active in national politics and many lawyers aspire to a career in politics. These kinds of intangible interests also play a role in influencing the litigation process. Although the power and influence of the key actors in the land litigation process may vary depending on the context, a general scenario of the interplay between the interests and influence of the main actors is presented in Figure 9.3.

Figure 9.3 Influence and interest matrix of actors.

Note: The above categorisation and the position of the actors in the matrix may sometimes vary based on different contexts; ‘government officials’ in this figure refers to the formal state actors from Box 9.1 (i.e. police, prosecutors, sherestadar, etc.).

Source: Authors’ analysis

Figure 9.3 shows that the judge and other court officials have a high degree of influence over the proceedings, but they also have a low degree of interest in them because they are overburdened with cases. However, the lawyer and the lawyers’ associations have a higher interest and relatively higher influence. If they want, they can increase or decrease the speed and cost of the process. On the other hand, petty court officials like peshkar and serestadar have a high degree of interest because they are usually paid in an unofficial manner by clients for their support and services. On the other hand, they do not wield a high level of control over the litigation process: they have a facilitating role but cannot determine the outcome of that process.

II The Ambiguity of Procedural Laws.

The current structure of the judiciary also bears the historical legacy of the colonial period and is still heavily guided by the institutional traditions of the British era. For this reason, sometimes the laws, rules, and procedures regarding the civil litigation are not clearly articulated in the local language or contain inherent flaws. One senior lawyer explained during an interview that, after a number of amendments, the current law states that a defendant will receive a maximum of three chances to respond to a summons. However, the law does not clarify what will happen after the three opportunities are over. It is unclear whether the case will then become an expert judgement or an unreported right. In sum, the cumulative legacy of the past creates difficulties for the general public to effectively comprehend, access, and use the judicial system.

III Poor Updating and Preservation of Land Records.

Land management in Bangladesh is done by several government agencies, among which coordination is almost non-existent.Footnote ¹⁷ Mismatches in historical government records and personal records are a major source of institutional inefficiency as these create inconsistency regarding the identity of the landowner and the size of the landholding at stake. In the case of a land ownership transfer, the sub-registrar office registers the new deed in the book of records (balam bohi). In Anwara, there are two separate index books for accessing these balams. They are ordered according to the names and the daag or plot number. However, as these records are handwritten and manually preserved, they are prone to damages and accidents. Furthermore, the sub-registrar offices do not have access to the khatian or Record of Rights (RoR), which is managed by the AC Land office. It is therefore quite difficult for a sub-registrar to verify the information regarding the ownership, and this again contributes to creating further conflicts and backlogs. In addition, when it comes to the transfer of ancestral property, most contracts are informal in nature, which creates fertile terrain for conflicts.

IV A Shortage of Qualified Personnel and Misallocation of Roles.

There is lack of professional and well-trained civil lawyers in Bangladesh. A land litigation process requires a substantial amount of knowledge and expertise as the relevant documents contain sophisticated and complicated information. Nonetheless, the key informant interviews and focus group discussions reveal that most of the time lawyers are not adequately trained to successfully manage land litigation. In addition, the newly recruited judges and workforce in the judiciary may also not be well equipped to deal with complicated cases. As a result, hearings become lengthy, and this ultimately adds to the overall backlog. Moreover, a lack of resources and a lack of proper infrastructure are another major cause behind the huge case backlog in Bangladesh. Finally, during the fieldwork, one of the judges mentioned that people in the different administrative tiers often make wilful mistakes (e.g. misreporting and fraudulent behaviour by local people or rent seekers) and one of the main causes of land disputes in Chattogram is mistakes made during the Bangladesh Survey.Footnote ¹⁸ This judge also suggested that government officials are not doing their part, thus forcing people to file cases to obtain a correction of the mistakes made in the survey. Consequently, the judges now have to bear the extra workload involved in correcting petty mistakes.

V Unequal Access to Justice.

In recent years, the Government of Bangladesh has been acquiring land for the implementation of a number of large-scale or mega infrastructural projects. In many instances, poor and illiterate people have fallen victim to land dispossession in such cases, due to a lack of proper knowledge regarding their legal rights. On top of this, there is also a lack of adequate state-supported legal services for ordinary citizens. One of the respondents from Anwara described how about two years ago, the Government acquired a large amount of land in order to build the Karnaphuli Tunnel. As a result, around 300–400 households may have been evicted from their ancestral land. A good number of these evicted families have filed a case against the Government. However, according to the law of the acquisition of land, if a person files a case against the decision of a government acquisition, he/she cannot receive any compensation until the litigation is over. In the absence of adequate state-supported legal aid facilities, local brokers easily mislead illiterate and helpless people to file such cases and repeatedly seek to obtain various rents from both the victims and lawyers. This is due to the fact that landowners, or the victims in general, lack the proper information, and lawyers and brokers are usually more informed. As a result, lawyers and brokers exploit the lack of knowledge of the owners or victims.

VI Delayed Procedure.

According to one of the senior lawyers of the Chattogram District Bar, there are often undue delays in the issuing of notices. Nevertheless, when the date of the hearing finally arrives, it is quite common for either the plaintiff or the defendant not to be present in the court room. This unnecessarily prolongs the case time. The judge has to set another date for the hearing, and this occurs repeatedly. In this scenario, a judge can declare a one-sided verdict and stop the process. However, some respondents believe that in recent years, as judges usually want a full hearing in the presence of all parties to a case, and as these hearings are often piecemeal in nature, this again is causing a backlog and delays. A number of respondents mentioned the prevalence of numerous such dilatory tactics in the courts.

VII Influence Peddling, Fraud, and Corruption.

When asked about the main reason for the case backlog and delays in the process of land litigation, each of the key actors in the overall land administration and litigation process claimed that they are doing their part and that the other parties involved are to be blamed for the existing problems. During interviews, the local government authorities largely blamed the judges and lawyers, while one of the local judges blamed the local government authorities and lawyers. The latter mentioned that the executive influences the judiciary in a number of ways. Similarly, during the interviews, the lawyers mainly blamed the judges and also the local government officials. Behind this game of responsibility shifting, there is a complex dynamic of power and influence that affects the overall scenario of land dispossession litigation in Bangladesh.

Corruption and rent sharing is one of the propelling forces behind the overall institutional inefficiency of litigation system of Bangladesh in respect of land dispossession. Sometimes people are forcefully evicted or compelled to sell their land at an unfair price to large companies due to widespread corruption (i.e. bribery, extortion, cronyism, nepotism, patronage, etc.). During the fieldwork, one of the respondents in Anwara explained that large companies first buy small amounts of land in a scattered fashion and then they start pushing the surrounding land owners to sell their lands to them. In most cases, these big companies have established a good understanding with the local government officials and the law enforcement agency. For this reason, the local land owners are often compelled to sell their land off to them at an unfair price, and sometimes are even forcefully evicted. Local small landholders are not strong enough to go up against these big companies. They often do not report malpractices or seek any redress, out of fear.

Moreover, local government officials sometimes exercise their authority to seek undue rent. In one of the case studies,Footnote ¹⁹ Mr X, a resident of Anwara, explained that a pond that is part of his ancestral property was mistakenly recorded as khas land or government-owned land during the time of the Pakistan Survey.Footnote ²⁰ Although his father had ownership of this pond according to the Cadastral Survey (CS),Footnote ²¹ he had to file a case and go through the costly litigation process to recover his claim, which took almost three years. Finally, the verdict was in his favour and he went to land office and applied for mutation. However, the upazila office disagreed to act upon the verdict and gave away the lease to another company. Mr X went to the DC and requested him to solve the matter. The DC ordered the Thana Nirbahi Officer (TNO) and AC Land to look into the matter. Even after that move, the problem was not solved, and eventually, Mr X had to go to the High Court. Up until the time of interview, he could not obtain a hearing data.

In addition, Anwara upazila is one of the most unique areas in Bangladesh from the viewpoint of social and demographic features. According to the locals, around 72% of the inhabitants are followers of the Hindu religion, while all other upazilas surrounding Anwara are Muslim-dominated. As a result, there is constant tension between the Hindus and Muslims over the ownership of land. It was also observed that women in general face greater challenges in seeking justice or redress. However, no matter which religion one follows, it is usually the poor and underprivileged segment of the society which is the victim of the worst forms of involuntary land dispossession. In one of the case studies,Footnote ²² Mr Z mentioned that once his grandfather rented part of his ancestral land to a Muslim farmer for share cropping. Later, when his grandfather became old, that farmer forcefully took over the land. Mr Z’s family went to the local authorities but failed to obtain any redress. Mr Z claimed that this is because he belongs to a religious minority in his community. Eventually his family filed a case; the case has been pending in the court for almost 12 years.

In one of the case studies from Gazipur, Mr A reported that his cousin fraudulently sold his land without his consent. When Mr A went to the shalish for redress, his cousin’s husband, who is a dominant political leader, threatened him and influenced the shalish through bribery. There were even instances of intimidation and vandalism. The local police even arrested Mr A instead of the perpetrators. He was in jail for about two months. After getting bail, he filed a case. There was a verdict five years ago which according to Mr A was distorted, and he did not appeal due to his poor economic condition.

VIII The Problem of Illegal Occupancy.

It is often the case that absentee owners or migrants face special problems regarding their land or property. The absence of the owner creates room for illegal occupancy by others. Moreover, if the owner is absent during land surveys, and if he does not claim possession, other people can provide incorrect information to the surveyor and change the ownership in the government land records. In one of the case studies,Footnote ²³ Mr D from Gazipur mentioned that his father’s uncle had claimed false ownership of his property during his absence as a migrant worker. Mr D came back from abroad and filed a case, which has been pending for around two years now. Most of the time, the defendant, who is a local political leader, has not been present at the hearing. According to Mr D, money plays a vital role throughout the litigation process. From lawyer to muhuri, everyone demands money every time there is a hearing date. This scenario was repeated in a number of other case studies. Mr C from Gazipur was also a migrant worker, and in his case,Footnote ²⁴ it was his uncle who deprived him of the proper share of his ancestral land. His case has been pending in the courts since 2010. According to Mr C, frequent transfers of judges, excessive bureaucracy in the court room, and political influence hinder a fast disposition of the cases.

Similarly, during the absence of Mr Y, a migrant worker from Anwara, a group of people claimed false possession of his property on the occasion of the Bangladesh Survey.Footnote ²⁵ When he learned about this issue, he filed a case at the District Court and the court ordered the correcting of the mistake in the Bangladesh Survey. The opposite party in his case appealed against the verdict at the High Court. According to him, there might be some kind of collusion between the lawyers of both parties as none of them wants to end the case soon. He believes that the peshkar, lawyer, and muhuri are all informally connected and have conspired to lengthen the duration of the case.