Timothy Taylor is on the case. He quotes from Kaushik Basu:
“One notable point is that the main garment firms in Bangladesh are large—especially compared to those in India, owing largely to different labor laws. All labor markets need regulation. But, in India, the 1947 Industrial Disputes Act imposes heavy restrictions on firms’ ability to contract workers and expand their labor force, ultimately doing more harm than good. The law was enacted a few months before the August 1947 independence of India and Pakistan from British imperial rule, meaning that both new countries inherited it. But Pakistan’s military regime, impatient with trade unions from the region that would become Bangladesh, repealed it in 1958.
“Thus, having been born without the law, Bangladesh offered a better environment for manufacturing firms to achieve economies of scale and create a large number of jobs. And though Bangladesh still needs much stronger regulation to protect workers from occupational hazards, the absence of a law that explicitly curtails labor-market flexibility has been a boon for job creation and manufacturing success.”
Hmm, this one gets my skepticism spider sense tingling. Ok, maybe Bangladesh found and has maintained one tiny niche in the global market for textiles, in part because of higher competitiveness resulting from incentives of a better legal environment.
But consider: Bangladesh may have been born without the law … 71 years ago. But it didn’t get much advantage from the arbitrage opportunity for a long, long time: it’s been extremely poor for almost all of that period, and indeed, is still much poorer than India (which has anywhere from 50-90% higher GDP per capita, depending on which estimates you prefer. Bangladesh Nominal GDP per capita at current exchange rates is about $1,400 a year.)
Despite being much larger, Bangladesh used less aggregate electricity than Hong Kong or Singapore until 2010. Here’s a comparison of countries in terms of electricity production per capita from the latest BP statistical review of world energy:
Japan: 8.03
China: 4.74
India: 1.13
Pakistan: 0.64
Bangladesh: 0.46
So, still less than 10% of Chinese levels per capita.
That might lead us to conclude that Bangladesh’s actual advantage could simply be that poverty, that is, extremely low prevalent wages, lower than other likely competitors. That would make more sense when it comes to the recent timing of growth. The legal advantage has been there a long time, but the wage advantage is something that has emerged more recently, perhaps as more stellar growth in places like China start to make wage costs in labor-intensive industries uncompetitively expensive there.
+1
Null hypothesis rears its head
Yeah, the part where Bangladesh controls a navigable river system leading from Saudi Arabia (via the Suez Canal and Indian Ocean) toward China is probably a much bigger factor than some quirk of labor law.
There is much about gender equality in the story. I wonder if this is truly an important causal factor or endogenous, a byproduct of the growth itself?
It’s great to see how non-regulation, over time, has helped an important industry lead to economic growth.
Similarly, tho contrarily highlighted, LOW taxes have helped. Let’s recall that great thought by Adam Smith – all that’s needed for economic growth is low taxes, light regulation, and reasonable justice.
Unfortunately, big-gov’t World Bank & IMF corruption-cheerleaders don’t want Bangladesh to continue growing:
“Tax reforms are urgently needed to increase the very low tax revenues. With tax revenues below 10.0 percent of GDP, there is a pressing need to boost collection. This will create room for increased public investment and improved social safety nets, without undermining fiscal sustainability.”
Let’s rephrase this expert opinion: Tax reform is needed because low tax revenues mean low corruption. Now at less than 10% of GDP, corrupt rent-seeking gov’t snobs should be able take more from the real producers, and still not get thrown out of office. There has been good economic growth without gov’t corrupt investment, and morally hazardous gov’t handouts to the careless & irresponsible, but more “free money” should be a bigger vote winner and the gov’t can afford it.
Argh. Econ PhD overpaid bureaucrats actually calling for more tax increases for more gov’t consumption (=corruption).
Most young independent states since WW II have been following this terrible modern advice, instead of the low tax advice of Adam Smith (from 1776) — and the results have been continued poverty and pretty slow growth for the higher taxing places.
2 points. First point, Bangladesh is still very poor, with GDP per person on a PPP basis of $4200. Second point, one should remember when Bangladesh was born, Kissinger said something like it would become the world’s permanent basket case. So given the very poor cards Bangladesh was dealt, it has done OK.