The Promise of Bangladesh Amid U.S. and Chinese Rebalancing

Recently the US Ambassador in Dhaka, Dan Mozena, said that Bangladesh would be a “mighty contributor” to the huge flows of commerce along this 21st century trade route by turning the hub of the Indo-Pacific economic corridor thanks to its “geographical gift.”

However, Mozena added that there were constraints and challenges that need to be addressed to encourage investment in Bangladesh.

At the same time, China’s Ambassador in Bangladesh, Li Jun, said that Bangladesh could tremendously benefit from China’s experience in transportation, power and trade with a regional connectivity.

In the past, Bangladesh had its most significant trade and investment relations with Washington. Now it is also looking toward Beijing.

Low starting point, great promise 

With more than 160 million people and a rapid growth, it has often been seen as a large emerging economy. Still, the entire economy is barely half the size of Hong Kong, which has only 7 million people.

Between 2000 and 2010, growth allowed Bangladesh to reduce the extremely high poverty rates in the country.

However, industrialization has barely begun in Bangladesh and half of the labor force is still employed in the agricultural sector, in which the growth has decelerated.

Today, recovery depends on the garment sector, which suffers from slowing exports to Europe and the US, and remittances, which have been harmed by construction slowdowns worldwide.

In 2013, Bangladesh’s GDP growth decelerated for the second year in a row, to 6 percent, while inflation has moderated to 7 percent. Growth is likely to continue to trend lower, due to tighter policies, slowing economy and currency appreciation.

Between US and Chinese rebalancing 

Last fall, Bangladesh’s foreign minister Dipu Moni met her Chinese counterpart Wang Yi in Beijing to push forward the Bangladesh-China-India-Myanmar (BCIM) Economic Corridor. The initiative is a part of China’s recent cooperation initiatives and “maritime Silk Road” in Asia.

Surrounded by South Asia and Southeast Asia, Beijing sees Bangladesh as a potential regional transportation hub.

Historically, Bangladesh and China share a rich history of trade and cultural exchange. In the postwar era, the Party had close ties with Bengali nationalist leaders. In 1971, China supported Pakistan, a close ally that was mediating the rapprochement between Washington and Beijing, whereas Bangladesh was still close to India and its ally, the Soviet Union.

The assassination of Sheikh Mujibur Rahman led to a military regime, which began distancing the country from the Indo-Soviet allies and led to diplomatic relations between Dhaka and Beijing.

By 2012, the US was Bangladesh’s most important trade partner, along with Germany and UK, while China was the country’s largest import partner. But even as President Obama’s pivot to Asia has intensified, the White House’s relations with South Asia have seen significant deterioration.

Meanwhile, trade between Bangladesh and China reached a record high of $10 billion in 2013, with a growth rate of 22 percent year-on-year. The accumulated Chinese investment including that of Hong Kong and Taiwan to Bangladesh reached $1.42 billion last year, creating job opportunities for 76,000 Bangladeshis, according to Chinese sources.

China continues to facilitate Bangladesh’s three fast-track high-profile projects including the deep-sea port, Padma Bridge. In the next half a decade, Bangladesh could enjoy $500 billion of Chinese investment.

Rising political uncertainty 

While economic dreams are energizing entrepreneurs, Bangladesh is coping with rising political uncertainty. On January 5, Bangladesh held an election that was boycotted by the opposition party. More than half of the 300 parliament members were elected unopposed.

Before the elections, the US State Department had urged Prime Minister Sheikh Hasina and opposition leader Khaleda Zia to find a credible way toward elections, but without success. Since then, Dhaka has been the scene of recurring political violence as friction has deepened between the two dominant political parties – the governing Awami League (AL) and its main opposition, the Bangladesh National Party (BNP).

Prime Minister Sheikh Hasina and the AL will not start talks with the BNP unless the latter will renounce violence, drop the demand for a caretaker government and end its alliance with Jamaat-e-Islami, the large Islamic political party. The road to violence was paved two years ago, when the ruling AL scrapped the old system of a “caretaker government” to ensure fair polls. Subsequently, the BNP refused to participate in the elections.

Assuming continued uncertainty, Bangladesh’s growth is likely to slow to 5.5 percent. A more promising medium-term outlook would fuel the recovery of investment, which would make possible a return to 6.5 percent growth toward the late 2010s.

Thanks to its strategic geopolitics, Bangladesh is now being courted by both China and the United States. It is a historical moment when right economic policies, appropriate investment levels and favorable demographics could unleash a period of growth and prosperity.

However, with wrong policies, Bangladesh could suffer a new era of stagnation, poverty and fall behind its regional peers.

Originally released by China-US Focus on March 22, 2014