May 2016 Dynamics of Rural Growth in Bangladesh: SUSTAINING POVERTY REDUCTION Photo: Mahfuzul Hasan Bhuiyan The World Bank Office Dhaka www.worldbank.org/bangladesh www.facebook.com/WorldBankBangladesh Dynamics of Rural Growth in Bangladesh: SUSTAINING POVERTY REDUCTION Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. Photo: Arne Hoel Cover Photos: Mahfuzul Hasan Bhuiyan, Tanvir Murad Topu, Ismail Ferdouse 1 2 Foreword Bangladesh’s economy is vibrant. Healthy growth of nearly six percent through strong, economy-wide forward and backward linkages. An per year over the past decade has propelled Bangladesh to a important message of this study is that a balanced growth strategy remarkable position in the fight against poverty. The number of poor that focuses on agricultural as well as non-agricultural growth, and people in Bangladesh dropped by one-third over that decade. The that focuses on a more diversified strategy within agriculture, will be achievements of Bangladesh in improving food security and human more effective than single-sector strategies in delivering the higher development outcomes for its people are impressive and widely growth that Bangladesh requires to overcome poverty, malnutrition, recognized. Less well appreciated is the story behind that story—the and environmental degradation. achievements of Bangladesh in agriculture. Bangladesh’s many advances in the ongoing fight against poverty This study, “Dynamics of Rural Growth in Bangladesh: Sustaining need to be more widely known in development circles and among Poverty Reduction,” is the result of a partnership between the policymakers. The purpose of publishing this report is to inform policy, Government of Bangladesh Planning Commission and the World Bank. identify strategic directions, and generate consensus on actions that It rigorously looks at the changes taking place in the farm and can be taken to unleash resilient, sustainable growth in the rural non-farm segments of the rural economy, how well the markets for economy for overall improvement in the lives of ordinary Bangladeshi high-value agricultural products are performing, and assesses citizens. agriculture-nutrition linkages to delineate the implications for policy and strategic priorities to sustain future rural development, poverty We trust that the findings will find broad appeal with development reduction, food security, and nutrition. practitioners and contribute to global thinking on the role of agriculture in achieving rural transformation, underscoring The findings are compelling. Agricultural growth matters to—and Bangladesh’s success story both within the country and externally. directly benefits—a disproportionately large number of poor people. In fact, improved agricultural incomes have been the main source of poverty reduction since 2000. Agricultural growth also has a catalytic Ethel Sennhauser Qimiao Fan effect on broader non-farm economy; a 10 percent increase in farm Director Country Director incomes generates an increase of 6 percent in non-farm incomes Agriculture Global Practice Bangladesh, Bhutan and Nepal The World Bank The World Bank Photo: Arne Hoel 3 4 Dynamics of Rural Growth in Bangladesh: Principal findings Sustaining Poverty Reduction Agriculture in Bangladesh has performed extremely well, despite being one of the sectors that is most vulnerable to climate shocks. The trend growth rate (over rolling 10-year periods) has increased steadily for the past two decades, reaching a high 5 percent in recent years—high by agricultural growth standards. This growth has been driven primarily by productivity growth, underpinned by a combination of technical progress and efficiency gains triggered by policy reforms. The major macro-economic and trade reforms of the early 1990s, building on the momentum of previous agricultural Photo: Mahfuzul Hasan Bhuiyan reforms in agricultural input and output markets, had a significant positive impact on agricultural productivity. Total factor productivity (TFP) has grown at an average annual rate of about 2.7 percent—among the highest in the world, comparable to China and better than the star performers in East Asia. Agriculture’s performance is even more impressive considering that it The rural economy in Bangladesh has been a powerful source of has been achieved in the face of adverse incentives created by some economic growth and has substantially reduced poverty, especially macro policies (in essence, while “swimming against the tide”). Even since 2000, but the remarkable transformation and unprecedented under the much-improved policy framework, domestic terms of trade dynamism in rural Bangladesh are an underexplored, for agriculture have steadily declined. An implicit anti-agriculture underappreciated, and largely untold story. Its origins are found in the domestic policy bias has persisted with continued protection for the mutually reinforcing forces of policy reform, technological progress, manufacturing sector, likely aggravating rural-urban income and investments in infrastructure and human capital, and the persistent poverty gaps. This macro-policy context also means that while higher enterprise of rural Bangladeshi households. The progress achieved so food prices in recent years helped agricultural growth (a matter of far is commendable, yet poverty and malnutrition remain high, posing concern to many), the steadily accelerating long-term growth in a continuing challenge: how can Bangladesh accelerate and channel agriculture is not simply a price effect—it has been driven by its rural dynamism to sustain the gains toward eliminating poverty, productivity growth. achieving shared prosperity, and advancing toward middle-income status? The study findings clearly demonstrate the pro-poor and catalytic nature of agricultural growth, the leading contributor to poverty The study—undertaken in partnership with the Planning reduction in Bangladesh since 2000. The analysis provides important Commission—provides an empirical basis for answering that question insights into the structural transformation underway in Bangladesh, by analyzing the dynamics of rural growth. The analysis identifies the occurring mostly within the rural space, from the farm sector to the key changes occurring in the rural economy, the principal drivers of rural non-farm sector. The fortunes of the rural non-farm economy rural incomes, the policy implications, and actions to foster future depend largely on agriculture, reflecting the changing role of growth, further reduce poverty, and improve food security and agriculture from being a direct contributor to GDP to a more leveraged nutrition. The strength of this study is its empirical foundation, contributor: analysis shows that a 10 percent increase in farm incomes bringing new evidence to address key questions identified through a generates an additional 6 percent in non-farm incomes through strong broad stakeholder consultation, building on the vast and rich existing forward and backward linkages. knowledge on agricultural and rural development in Bangladesh. 5 6 The economy-wide scenario analysis using a computable general equilibrium model further shows that a growth strategy stressing both agricultural and non-agricultural growth, and within agriculture a more diversified, strategy is superior to single-sector strategies in achieving key development outcomes including higher growth, morepoverty reduction, sustaining food security and promoting better nutrition. Photo: Arne Hoel Photo: Mahfuzul Hasan Bhuiyan The most important drivers of agricultural growth—facilitated by policy reforms since the 1980s and strategic investments in research and infrastructure—have been irrigation expansion, modern technology (high-yielding varieties), better road connectivity, more efficient markets, and increased mechanization. High real prices have helped farmers in recent years, but only by preventing a further deterioration of the terms of trade, which remain well below the levels The time is opportune to explore the most effective and efficient ways of the mid-1990s. The bulk of the growth has been through increased to support agriculture. Significant potential remains to increase yields, and more precisely through TFP growth, reflecting high returns productivity and incomes in agriculture, while making it more climate to agricultural research and policy reforms. resilient and nutrition sensitive. Farmers’ incomes and household nutrition could be significantly enhanced with a greater shift towards It is increasingly apparent that agriculture must diversify more rapidly high value agriculture (higher value crops, non-crop agriculture and if Bangladesh is to meet changing demand, improve nutrition, and value addition). To induce farmers to adopt these non-rice agricultural adapt to a changing climate. The overall structure of agriculture has enterprises, their returns need to be further stabilized and solidified changed little. Rice dominates the crop sector and has driven much of through investments in technology, markets, and infrastructure. Yet the growth in agricultural productivity. The share of high-value the much-needed investments in public goods to bring about this agriculture (horticulture, livestock, and fisheries products) has grown, change—including investments in research (especially on the but slowly. The progress on diversification partly reflects the past long-neglected non-rice crops, livestock, and fisheries), extension, and emphasis of policy and strategy on food grains, principally rice, to infrastructure—remain very low. The largest share of the public achieve food security, which remains the central objective of the expenditure on agriculture goes to fertilizer subsidies, which have government’s agriculture strategy. Policies and public interventions are increased significantly since 2007. At the same time, an important designed to promote rice production, including output price support, finding from the farm-level analysis is that considerable wastage price stabilization, and input use. Levelling the playing field to promote appears to be associated with fertilizer use. Almost half of all farmers more robust diversification is an important priority going forward, overuse fertilizer, but that excess fertilizer is not delivering any given changing consumption patterns and the need to improve additional output. Further, the overuse of chemical fertilizers imposes nutritional outcomes through a more diverse diet. A step in this large potential environmental and health costs. Priorities to address direction would be to remove the remaining regulatory constraints to this issue are to provide appropriate technical advice to farmers private sector participation in the seed sector (as has been done for through extension services while removing the remaining incentives hybrid maize and maize) to inject new technological vigor. that might encourage farmers to overuse inputs. 7 8 Pathways out of poverty are neither linear nor predictable, as A strategy to promote robust development of the rural non-farm confirmed by the analysis of the dynamics of poverty. Even during a economy should pay attention to the country’s secondary cities. Aside period of robust growth such as 2000–13, a large share of households from agriculture, key drivers of growth in the rural non-farm sector are regularly “churn” into and out of poverty, indicating a high level of connectivity and proximity to urban areas. The need to focus on vulnerability. Given the substantial risks associated with both farm previously neglected secondary cities is highlighted by an interesting activities (mostly natural risks, but also market-related risks) and combination of facts. More jobs are located near the mega-cities of non-farm activities (which carry economic and business as well as Dhaka and Chittagong, but the growth has been in informal and personal and health risks), upwardly mobile households pursue seemingly vulnerable jobs, while (surprisingly) the shares of all other multiple strategies for generating income, diversifying their risks, and (more productive) types of jobs have fallen. Well-connected cities have adopting reinforcing pathways out of poverty. It is thus not surprising had positive growth in better quality jobs (especially businesses). to find that most rural households rely on both farm and non-farm Poorly connected cites have shown no dynamism when it comes to incomes, with over 87 percent reporting at least some income from creating employment, calling attention to the need for infrastructure agriculture. In other words, most rural households retain one “leg” in development. agriculture as central to their strategy to climb out of poverty. These findings are important for Bangladesh’s development strategy; they An emerging concern is that rural non-farm activities do not seem to also contribute to the global thinking on the role of agriculture for be growing in scope or sophistication over time. Many rural non-farm poverty reduction and shared prosperity. activities are linked to agriculture, consistent with the process of transformation—processing, trading, food preparation, and so on. But Although agriculture remains the dominant source of rural livelihoods, the conundrum is that they are not progressing much from basic to non-farm incomes will continue to grow in importance, and so will the more sophisticated activities. This stagnation in the types and quality need to adopt strategies to promote more robust development of the of non-farm activities is puzzling, because such rural non-farm rural non-farm economy. As farm sizes decline, even more households enterprises are associated with higher returns. A binding constraint on will seek to earn income off of the farm. The 2010 LabourForce Survey rural non-farm enterprises appears to be the lack of credit, as well as shows that rural non-farm employment in Bangladesh is almost 50 the lack of infrastructure (power and water). percent greater than all urban employment put together. Rural non-farm employment is also growing faster than urban employment, With a large share of rural non-farm enterprises engaged in trading and three-quarters of rural households have at least some form of agricultural produce, the good news from surveys of traders and non-farm income. Clearly, facilitating more rapid economic farmers is that markets appear to be functioning very well. The transformation requires strategies that will improve the enabling market survey found very little evidence on the cartelization of environment for creating better and more productive jobs in the rural markets by a few powerful traders fleecing farmers, or other forms of non-farm sector. uncompetitive behavior. Marketing margins are reasonable and transport costs are the major source of traders’ variable costs. Findings Photo: Mahfuzul Hasan Bhuiyan also show that physical post-harvest losses are very low (under 5 percent)—much lower than the 30–40 percent generally quoted. While the liberalized markets of Bangladesh serve both producers and consumers very well, but further improvements in market infrastructure and better access to finance are vital to move Bangladesh to the next level of more modernized and more efficient supply chains. Further investment is needed in roads, electricity infrastructure, and upgraded market facilities. Traders, especially those operating in markets for high-value products, require substantial working capital and better access to finance. 9 10 Photo: Ismail Ferdouse Projections indicate that the future supply of rice relative to demand is A more immediate policy priority is to achieve better outcomes in unlikely to be a major concern, but the supply of other food groups nutrition. Malnutrition rates remain high, with serious human needs to grow significantly faster. This has implications for strategic development and economic impacts. Nutritional security is a complex, priorities and public investments. The prospects for agricultural multi-sectoral challenge, with many contributory factors, among growth, food security, and nutrition are closely linked. Fortunately the which agriculture is prominent. The empirical findings show a trade-off appears to be less of an issue now than in the past, when significant impact of agricultural diversification (out of rice) on dietary self-sufficiency in rice was the overarching imperative. The scope for diversity, which remains very low in Bangladesh. They also show that improving rice yields is substantial, especially if farmers succeed in dietary diversity has a strong, direct impact on the nutritional status of closing the yield gaps for aman and aus rice. With a continued focus on fathers but not mothers. Women suffer from basic undernutrition, as agricultural research to push the production frontier forward and to seen in the body mass index (BMI) of mothers, which is significantly build agriculture’s resilience to climate and biophysical stress, there is affected by calorie insufficiency (at the household level). Regarding significant potential to release land for much-needed crop nutritional outcomes in children under five years of age, the BMI of diversification. both parents has a strong negative influence, as do relative prices of foods, reflecting the significant impact of agricultural policies on nutrition. 11 12 Priority areas for action Based on the findings summarized here, the five priority areas for Rationalizing public expenditures to emphasize investments in action are: research (with increased attention to non-rice crops, livestock, and fisheries), extension services, markets, and infrastructure will help to 1 A balanced development strategy. A development strategy enhance incomes, value-chain efficiencies, and competitiveness. that stresses both farm and non-farm growth, and pursues a Finally, removing the remaining regulatory and institutional diversified strategy within agriculture (favoring no agricultural constraints to private sector participation in the seed sector will have a subsector over others), is superior to alternative sector-specific large potential payoff. strategies in all dimensions of development: pursuing growth, furthering the gains in poverty reduction, reducing economic 4 An enabling environment for robust rural non-farm vulnerability, maintaining food security, and promoting better growth and more efficient value chains. For rural non-farm nutrition outcomes. growth to flourish, especially the growth of business enterprises, the empirical analysis reaffirms the essential role of the enabling 2 More rapid diversification in agriculture—with carefully environment. Access to finance, power, and roads are critical elements, balanced attention to rice. Within agriculture, diversification into as are better access to technology and information, and the removal of high-value agriculture (non-crop agriculture and crops other than rice) business environment barriers, such as those influencing terms of is a priority, but it is important to neither neglect nor overemphasize trade, discriminatory taxes, and stifling regulations. Value-chain the rice sector. Consolidating the prospects for rice is important and is analyses highlight the importance of focusing on food safety eminently feasible, through an approach that emphasizes exploiting standards and modern market infrastructure, given the large share of the remaining yield gaps, investing in traditional and non-traditional rural non-farm enterprises that pursue agriculture related activities technologies (planting hybrids and responsibly realizing the potential (such as trading and processing). The value-chain analyses also clearly of biotechnology), and leveraging the private sector to move the show that agricultural markets are functioning quite efficiently, with current technology frontiers. This approach will safeguard past low marketing margins (driven mostly by transport costs), dispelling achievements while injecting new momentum into productivity the general myths on the distortions and inefficiencies associated with growth and will be critical in building resilience to potential climate the liberalized market environment. The priority is to avoid distracting change impacts. Strategic priorities include improving aman rice yields debates and focus on improving market infrastructure and facilitating and freeing up the more suitable boro rice areas for a diverse range of more efficient value chains. high-value and more sustainable crops, and giving greater attention to various aspects of developing the high-value crop, livestock, poultry, 5 Continued investment in connectivity. The widespread and fisheries subsectors. impact of connectivity is well demonstrated. Looking to the future, continued investments in infrastructure are a high priority. Rural roads 3 Further improving the policy framework and have been a key part of the past success in raising productivity, rebalancing public expenditure priorities. At the macro level, promoting the limited diversification that has taken place, and policy distortions protecting the non-farm economy remain and create creating better employment opportunities. Closely related to an implicit anti-agriculture domestic bias. The Diagnostic Trade connectivity is the need to focus on secondary cities that remain poorly Integration Study by the World Bank analyzed the main issues and connected, because they are potential drivers of economic activity and identified key actions to address them. Among sectoral policies, a better quality jobs. The evidence shows that while the mega-cities careful review is warranted to assist farmers in pursuing economically have attracted more employment, they have overwhelmingly attracted and ecologically optimal use of inputs. Overuse of chemical fertilizers informal jobs with higher vulnerability. Well-connected cities have had causes significant wastages (with large environmental and health positive growth in business jobs, while poorly connected cities have costs), which may be due to insufficient technical knowledge or languished, with no structural change in the types of jobs created. inappropriate incentives. 13 14