Preliminary evaluation of economic development and its effect on income distribution in Bangladesh.

• Author: Haque, Mohammed Ohidul
• Position: Report

Abstract

This paper investigates the progress of economic development and its effects on income distribution in Bangladesh since her independence in 1970. Various Household Expenditure Survey data are used to evaluate economic development based on per capita income, percentage expenditure on non-food items, non-agricultural occupation, population below poverty line; and family size. While the traditional Gini index, shares of income of the top and bottom deciles as well as some new measures of income inequalities are used to show income distribution in Bangladesh since independence. It is shown that Bangladesh has made noticeable economic development but income inequality has increased at a rapid pace over time since her independence. This paper also investigates the relationship between economic development and income inequalities, using a new functional form that fits the data well. Results suggest that income inequality has a significant positive effect on economic development. It reconfirms the Kuznets' (1955) hypothesis that at an early stage of development the inequality of income increases.

Introduction

This paper investigates the progress of development and its effects on income distribution in Bangladesh from the early 1970's to the end of the century. This is the time when Bangladesh achieved its independence, as well as "since 1975 the world has not only become a richer place, but the world's poor have seen their incomes grow faster than the world's rich. From this perspective, therefore the world economy has been performing a lot better in the last quarter century than in the previous two hundred years" (see J.B Delong, 2001).

Various economic, modernisation, urbanisation and demographic criteria are used in this study to measure the degree of development. This study also uses various economic inequalities such as the Gini coefficient, shares of the incomes by the top and bottom deciles, as well as the quotient and difference of the top and bottom deciles of the population using various Household Expenditure Survey (HES) data collected by the Bangladesh Bureau of Statistics (BBS). The objectives of the study are as follows.

* This study investigates how Bangladesh has performed during the last 30 years since her independence.

* It also investigates what happens to the income distribution in Bangladesh during the last three decades, which is popularly known as the world's 'period of development'.

* This study also examines whether there does exist any relationship between economic development and income inequality.

Descriptive statistics and techniques of econometrics are used to investigate the above objectives. This study is organised as follows. A brief description of the data used for the study is provided in the next section. The following section is concerned with economic development in Bangladesh. It is then followed by a discussion on the measurements of income inequalities in Bangladesh. While, the relationship between economic development and income inequalities is then presented in the next section. Finally, some concluding remarks and limitations of the study are given in the last section.

Data

This study uses various Household Expenditure Survey (HES) data collected by the Bangladesh Bureau of Statistics (BBS), which is discussed as follows. The first HES was undertaken in mid fifties in Bangladesh, but was restricted to only four big cities. This was later extended to cover the rural areas to provide information about labour force inquiries. After independence, the first HES was carried out by the BBS in 1973-74. The HES was then undertaken in 1974-75, 1975-76, 1976-77, 1977-78, 1978-79 and 1981-82. But the detailed information of these HESs was not published. In 1983-84, the diary system for collecting information of expenditures on various consumption items was first introduced in Bangladesh and it then continued until the end of the century, even though it has undergone some changes from various versions of the HESs. We have used various information for development and inequality indicators based on the 1973-74, 1983-84, 1985-86, 1988-89, 1991-92, 1995-96 and 2000 HES data collected by the BBS for Bangladesh.

Development Indicators for Bangladesh

Bangladesh is situated in the fertile Ganges valley. It is a small country with approximately an area of 55,750 sq miles. Its present population is 126.11 million (BBS: 2000), one of the most densely populated country in the world. It was a part of India before 1947. During the British rule almost the entire country (present Bangladesh) was used as a hinterland to supply raw materials to the British industries either in UK or in India. They did not develop any industry in Bangladesh at all. In short, there was no economic infrastructure at all during the British period. After independence in 1947, Bangladesh became a part of Pakistan and it was known as 'East Pakistan'. Unfortunately, the Pakistani government treated Bangladesh like the British. They too used Bangladesh as a hinterland to get raw materials for their industries, but did not develop any economic infrastructure in Bangladesh. They further exploited the weak situation of Bangladesh and took away the proper share of national wealth from Bangladesh. More importantly, the then Pakistani Military Junta failed to handover the administrative power to the democratically elected majority party, the Awami League elected from East Pakistan, and also there was military crack down all over Bangladesh when they killed more than three million people all over the country. As a consequence, civil war broke out for "Bangladesh Self Rights" and subsequently it turned out to be the "Fight for Independence for Bangladesh." On December 16, 1970 the Pakistani army was defeated and Bangladesh became an independent country, which virtually had no economic infrastructure, and started from zero development.

The new independent Bangladesh started with zero development, but began with high hopes for economic, social and other prospects for all Bangladeshi people. In this paper we investigate the progress of economic development in Bangladesh based on the following five broad criteria of development for the first three decades since her independence.

* Per capita income

* Expenditure share for non-food items

* Share for Non-agricultural occupation

* Family size

* Percentage of population below poverty line

In this study, per capita income observed from the HES is used as an indicator for direct economic development rather than per capita gross national product, which was used previously by a number of authors such as Mbaku (1997), Ram (1995), Papanek and Kyn (1986), Hicks and Streeten (1979), Saith (1983), Simpson (1990) and Ahmed (2004). The development is usually judged on the basis that the higher the per capita income the higher the development and vice versa. The expenditure share for non-food items is also used as an indicator for development by many authors such as Ahmed (2004). The idea here is that the more money you spend on non-food items, the better your economic conditions. This means that if someone spends a lesser percentage of expendable money for food then the more expendable money is left for other essential items such as housing, clothing, education, etc. This implies that the higher the percentage of non-food items the higher the living standard, which implies that they will get better quality goods and services with the increasing development. Most people in underdeveloped and developing countries maintain their livelihood working in the agricultural sector. But with the progress of economic development people gain variety of skills and undertake more marketable occupations by giving up agricultural occupations. The opportunities for non-agricultural occupations are generally created in the urban areas. Hence, as urban activities expend people...