Balancing Growth and Jobs: Bangladesh’s Challenge in a Frontier-Driven Economy

Bangladesh’s economic growth has been driven by highly productive frontier firms, but job creation has lagged due to regulatory challenges and limited industrial diversification. To ensure sustainable and inclusive growth, reforms in business regulations, industrial policy, and institutional capacity are essential.

Bangladesh's economic transformation over the past two decades has been remarkable, with GDP growth ranking among the top 10 percent globally and poverty reduction reaching unprecedented levels. Research institutes such as the World Bank, the Government Transparency Institute, and the Policy Research Institute have extensively documented this progress. Exports surged from $6.5 billion in 2000 to $57.5 billion in 2023, largely fueled by the ready-made garments (RMG) sector. However, despite these economic gains, a major challenge looms—job creation has failed to keep pace with economic expansion. Between 2013 and 2022, employment grew by only 0.2 percent annually, while the working-age population expanded by 1.5 percent per year. Youth unemployment has also surged, signaling a structural problem in labor market absorption. The 2024 Quota Reform Movement, which led to widespread protests and political upheaval, underscored the urgency of addressing employment concerns.

The Divide Between Frontier and Non-Frontier Firms

The private sector in Bangladesh is deeply polarized between highly productive frontier firms and a vast number of low-productivity non-frontier firms. Frontier firms, defined as the most productive 10 percent of businesses, generate three-quarters of formal sector revenues and dominate exports, particularly in the garments sector. Their productivity is 11 times higher than that of non-frontier firms, and they offer significantly higher wages while employing more skilled workers. However, their capital-intensive nature limits employment opportunities, as they account for only 15 percent of all formal jobs. The RMG sector exemplifies this dynamic: while it contributes nearly half of all formal sector revenues, it employs only one in 12 workers.

In contrast, non-frontier firms employ the vast majority of Bangladesh's labor force but operate far below the productivity frontier. These firms rely on outdated production methods, offer lower wages, and struggle to expand. The structural transformation of the economy has been slow, with job creation concentrated in low-productivity service sectors rather than high-value manufacturing or technology-driven industries. Labor productivity remains significantly lower than in neighboring countries, with Bangladeshi firms on average 66 percent less productive than their South Asian counterparts. Investments in productivity-enhancing technology, capital, and research and development are scarce, while foreign direct investment (FDI) remains low, limiting knowledge transfer and technological advancement.

Barriers to Growth: Business and Regulatory Challenges

The business environment in Bangladesh remains challenging, particularly for non-frontier firms. Regulatory inefficiencies, long bureaucratic delays, and corruption create significant barriers to entry and expansion. Businesses face high costs in securing permits, electricity connections, and import licenses, with many reporting that bribes are necessary to access government services. The cost of starting a business, including registration and compliance fees, is prohibitively high, particularly for new and small firms. These burdens make it difficult for businesses to scale up and become more productive.

Electricity shortages and unreliable infrastructure further exacerbate the problem. Power outages are frequent, causing revenue losses and discouraging investment. While all firms face these obstacles, frontier firms due to their superior resources and connections are better equipped to navigate regulatory challenges, secure favorable treatment, and access necessary infrastructure. A striking example is the disparity in electricity provision: frontier firms endure fewer and shorter power outages than non-frontier firms, reinforcing their advantage.

Government Policies: Boosting Some, Leaving Others Behind

Government interventions have historically favored export-oriented firms, particularly those in the RMG sector, through selective policies such as tax breaks, preferential credit, and duty-free import facilities. Corporate tax rates for RMG manufacturers and exporters are significantly lower than for other industries, and the sector benefits from a range of discretionary exemptions. The trade policy is also skewed in favor of exporters, allowing them to import raw materials duty-free while imposing high tariffs on other sectors.

While these interventions have contributed to the growth of RMG exports, they have also led to economic distortions. The over-reliance on a single industry limits industrial diversification, leaving the economy vulnerable to external shocks. With Bangladesh's impending graduation from Least Developed Country (LDC) status in 2026, the loss of preferential trade benefits could weaken the RMG sector's competitiveness. This further highlights the need for a broader, more balanced economic strategy that promotes diversification and supports industries beyond garments.

A major institutional weakness in Bangladesh lies in the structure of its regulatory and financial institutions. The National Board of Revenue (NBR), which is responsible for both tax policy and tax collection, lacks the capacity for effective fiscal planning and often introduces tax changes without comprehensive analysis. The banking sector is similarly constrained, with Bangladesh Bank lacking independence in monetary policy decisions, leading to inefficiencies in financial regulation. Weak land administration and opaque property rights further hinder business expansion, particularly for firms without political connections. These structural weaknesses allow well-connected frontier firms to operate with fewer regulatory burdens, further entrenching their dominance.

A Roadmap for Inclusive Growth

To address these challenges, Bangladesh must adopt a more inclusive economic strategy that enables all firms to become more productive. Simplifying business regulations, reducing bureaucratic discretion, and strengthening institutional capacity are crucial steps. Investments in infrastructure, particularly in energy and digital connectivity, would improve the overall business climate and create a more level playing field for firms of all sizes. Reforming industrial policy to promote broader sectoral diversification, rather than favoring a select group of export-oriented firms, is essential for long-term economic resilience. Encouraging innovation and technology adoption across all industries, rather than concentrating incentives on frontier firms, would drive broader productivity gains.

Strengthening financial institutions, separating tax policy from tax collection, and enhancing the independence of Bangladesh Bank would improve governance and create a more stable economic environment. A transparent and well-regulated financial sector would facilitate credit access for all businesses, not just the most connected ones. Additionally, reforms in land administration would enhance property rights and make it easier for businesses to secure land for expansion.

Bangladesh's economic achievements are undeniable, but its current development model is unlikely to sustain the level of job creation needed for long-term prosperity. Over-reliance on a small number of highly productive firms, coupled with a challenging business environment for the majority of businesses, risks leaving large segments of the population behind. A shift toward a more inclusive growth strategy, focusing on empowering all firms rather than a select few, is necessary to ensure sustainable and equitable development. By addressing regulatory inefficiencies, reforming industrial policy, and strengthening institutional capacity, Bangladesh can create a more dynamic and job-rich economy that benefits a broader cross-section of society