Counting the costs of political instability
Political stability and peace advances economic growth and development of society by fostering conditions that are conducive to businesses and investments. At the same time, businesses can play a decisive role in building and strengthening peace and political stability through job and wealth creations. Yet the value of peace and economic stability to Bangladesh is poorly understood and rarely discussed outside of academia. But intense and frequent discussion of the issue in the media and other platforms are badly needed in view of the ill prospects of political instability of the worst kind breaking out by the end of the present year over national elections.
It is very imperative to help raise awareness of national cost of violence, which in 2014-15 , was estimated to have been more than $4.40 billion. The political shutdowns and blockades in that period paralyzed life and destabilized the economy of this South Asian nation of over 160 million people. The estimated annual average cost of general shutdowns was between 3 to 4 percent of the country’s $110 billion Gross Domestic Product (GDP).
The costs of instability can be divided into direct costs, such as citizens killed and vehicles vandalized during shutdowns and blockades. And broader costs to the economy, such as late penalties incurred by garments manufacturers for failing to meet deadlines, businesses, other industries to various traders.
A sourceestimated that shutdowns reduced annual GDP growth by 3-4 percent during the 1990s. The Dhaka Chamber of Commerce and Industry estimated each day of shutdown costs the country’s businesses to the tune of Tk.16 billion ($200 million), or a staggering 6.5 percent of the country’s GDP per year. The Center for Policy Dialogue (CPD) has approached the question somewhat differently. It looked at the last year of a government’s tenure across the last three democratically elected administrations (fiscal years 1996, 2002, and 2007) and found smaller but nonetheless important drops in GDP growth, manufacturing sector growth, and export growth in each of these years. It appears that the trend will hold for the current fiscal year as well. Using preliminary data, CPD shows that all these indicators appear to be behind their targets. Building on a framework provided by CPD, it appears that businesses suffer from four potential types of costs: (i) the cost of work interruptions, (ii) transportation disruptions, (iii) damage to public/private property, and (iv) uncertainty about the future business environment. These four factors are clearly at work again in the backdrop of the looming national elections in the current year.
In March 2015, fifteen member factories provided the Bangladesh Garment Manufacturers and Exporters Association with financial information on the impact of shutdowns and political violence on their firms in the two preceding years. The results of that informal survey suggested that the fifteen companies had a combined loss of Tk.430.56 million ($5.51 million) plus lost potential revenue from work interruptions. The 15 factories reported incurring losses of Tk.54.7 million ($0.7 million) in discounts to buyers to compensate for late deliveries and from transportation disruptions: They estimated paying an extra Tk.133.6 million ($1.71 million) for air freight fares incurred because of an inability to get shipments from the Chittagong port; and from damage to property: They reported Tk.70.33 million ($0.9 million) for vandalism and arson attacks that occurred during shutdown and uncertainty. The surveyed firms also estimated that buyers cancelled orders worth an additional Tk.171.93 million ($2.2 million). Of course, these fifteen firms do not represent the industry as a whole and there is probably a tendency to overstate their losses. Nonetheless, these numbers clearly illustrated the challenges garment firms confronted in exporting their goods in a climate of instability and the very real danger of international buyers shifting orders to more stable countries.
In this type of a situation diverse industries are very concerned and shut their doors than bearing the costs of suspending operations. Furthermore, even when operations continue, firms might have problems transporting their goods; they might suffer direct attacks and they risk lost investment because of the poor business climate. These realities will likely be reflected in lower GDP growth, export growth, and investments. This is also to say nothing of the extra costs and risks borne by workers, who must somehow manage to come to work despite potential violence. It also seems likely that the informal economy is hurt even worse than the formal sectors of the economy mentioned here.
On the other hand, the predictions that shutdowns can cost anywhere from 3-6.5 percent of GDP appear to be overstated. Evidence is also there of the impressive ability of many Bangladesh firms to adapt to political instability. Businesses have several coping mechanisms, including (i) requiring employees to work on shutdown days, (ii) shifting operations to non-shutdown days or times, (iii) permitting employees to work from home, (iv) allowing flexible working hours, and (v) paying for transportation expenses, among others.
Nevertheless, the economy still remains at risk. Many firms have been able to adapt, but at a high cost to them and to their workers. The ability of some firms to cope should not undermine the urgency of finding new forms of political activism and resolving the current deadlock in the political system. While economic growth will continue, we can only imagine what growth could be like in an economy free from instability and poor governance.
If the country had been just 25 percent more peaceful in 2013-14 the domestic economy would have reaped an additional economic benefit just over $1.10 billion. This amount would pay for the 2 percent of GDP per annum investment estimated by the Stern Review to avoid the worst effects of climate change, cover the cost of achieving the Millennium Development Goals, eliminate the public debt and address the one-off rebuilding costs of the most expensive natural disasters.