Bangladesh first nationalised the economy. Then it privatised the state

Bangladesh began life with ambitious economic promises available to a poor country. It emerged from war declaring equality and social justice as national aspirations. But the country failed to build socialism and it subsequently failed to discipline capitalism. Then it failed to manage oligarchy. 

Out of these three disappointments emerged a compromise…a rentier society in which fortunes are made by controlling access to land, credit, licences, government contracts, regulatory exemptions, bank ownership, political protection or simply the right phone number.

The Bangladesh economy is not socialist, certainly. Nor is it straightforwardly capitalist. It is better understood as an economy in which capitalism operates inside a political market. And this distinction matters.

In 1972, the new country inherited an economy shattered by war, abandoned industrial assets, an emaciated domestic capitalist class and an administrative machinery hardly designed for revolutionary economic management. Nationalisation therefore appeared practical. Yet declaring property public is easier than making public property productive.

The problem of Bangladesh’s early socialism was that the state trying to practise it was exceptionally weak. A useful way of thinking about this is the “tragedy of the commons”. Collective ownership requires institutions capable of determining who is accountable and who bears the cost of failure. Otherwise everybody owns an enterprise theoretically and nobody owns its losses practically. 

Private owners can go bankrupt but a state enterprise can simply acquire another committee. Bangladesh discovered this distinction, rather quickly. By 1974, the mood among the country's own economists had darkened. At the first conference of the Bangladesh Economic Association, its president Mazharul Huq questioned the “usefulness of talking about socialism” while the country appeared to be doing precisely the opposite. Plunder, conspicuous consumption and extravagant expenditure were already being identified as symptoms of the new order.

The ‘socialist’ state had discovered an awkward truth that abolishing capitalists does not abolish privilege, rather it merely changes the queue for privilege. Managers, bureaucrats, political intermediaries, licence holders and people with access to government allocation could become substitutes for the bourgeoisie that socialism was supposed to displace.

The means of production belonged to the people. The means of obtaining permission belonged to rather fewer people. There was also a mismatch between ambition and administrative capacity. A government that struggled to collect taxes, enforce contracts, maintain inventories and prevent smuggling was expected simultaneously to allocate capital, run factories, determine prices, distribute scarce imports and plan investment.

By the middle of the 1970s the experiment was exhausted. The country gradually turned towards markets and export-oriented industrialisation. Farmers transformed agriculture and small entrepreneurs built businesses. Women entered garment factories by the millions. Migrants went to the Gulf, Malaysia and elsewhere and sent money home. NGOs experimented with microcredit, health, education and family planning. 

Much of Bangladesh’s success happened because Bangladeshis were allowed to get on with things. The most productive parts of Bangladesh capitalism consequently developed from below and the least productive parts increasingly developed from above. That is where the second failure begins.

Deceptive oligarchic system

Bangladesh abandoned socialist economic management without constructing the institutional architecture required for competitive capitalism. Markets expanded, but regulators remained weak. Private banks multiplied, but supervision did not necessarily improve with them. 

Political parties needed money and businesses needed access. Each discovered that the other possessed something useful and a marriage followed. This is oligarchic capitalism’s basic bargain. The businessman receives privileged access to credit, contracts, licences, land or regulation. The politician receives financing, influence, loyalty or occasionally a television station. The bureaucracy supplies paperwork giving the arrangement the reassuring appearance of administration.

Everybody is a capitalist except the taxpayer, who remains the involuntary socialist underwriting the losses.

The evolution became particularly visible in sectors where the state itself was the principal customer or gatekeeper. Energy and infrastructure offered fertile territory. Special arrangements could accelerate investment and, indeed, Bangladesh badly needed electricity. Capacity increased and economic growth benefited.

This is why oligarchic systems can be deceptive. They need not prevent growth immediately. Japan had its keiretsu; South Korea its chaebol. Governments sometimes cultivate large firms because scale and capital concentration can accelerate industrialisation.

But there is an essential difference between creating Samsung and creating somebody who owns a bank because he knows somebody. The developmental state disciplines capital but the rentier state is disciplined by it. Bangladesh increasingly crossed that line.

As politically connected economic groups became stronger, the banking system became irresistible. Why earn money slowly by manufacturing goods when a bank contains money already? Bank ownership, insider lending, loan rescheduling, regulatory indulgence and the strange Bangladeshi category of the “wilful defaulter” became parts of the political economy. A loan could cease to resemble a commercial obligation and start resembling a negotiation.

The elegant capitalist principle that borrowers repay lenders acquired local qualifications. This is where oligarchy turns into rentierism.

Rent is income obtained from controlling an asset or privileged position rather than creating corresponding productive value. The classic landlord earns because he owns scarce land. The modern rentier may control finance, regulation, intellectual property, government procurement or market access. Bangladesh has proved inventive in expanding the category.

Here the deeper rentier economy operates through political scarcity. If the state restricts entry, a licence acquires value. If banks allocate credit politically, connections acquire value. If contracts are distributed selectively, proximity to the government acquires value. If regulators can be persuaded not to regulate, persuasion acquires value. The entrepreneur therefore faces a rational choice.

He can invest in machinery, train workers, develop products, compete internationally and hope to earn perhaps 10%. Or he can invest in relationships.

Bangladesh did not invent this problem. Market concentration, corporate power and regulatory capture have produced rent-seeking across modern capitalism. UNCTAD researchers found an increase internationally in “surplus profits” among dominant firms during the decades of globalization. But Bangladesh supplied particularly favourable soil because political and economic institutions matured at different speeds.

Here GDP grew faster than governance and banks grew faster than banking regulation. Also political spending grew faster than political accountability. The result was not the replacement of markets by oligarchs. That would almost have been simpler. Instead, Bangladesh developed two capitalisms.

One land of two capitalisms

One is fiercely competitive.

A garment manufacturer negotiates with international buyers who will happily move an order to Vietnam. A farmer calculates fertilizer and crop prices. A migrant worker borrows money, travels abroad and works twelve-hour shifts. A small shopkeeper survives on narrow margins. These people inhabit capitalism in its traditional form: risk, labour, competition and occasionally reward.

Above them exists another economy where competition can sometimes be softened by access. The first capitalism creates wealth but the second positions itself near the wealth-creation process and installs a toll booth.

This probably helps explain one of Bangladesh’s great economic paradoxes. The country can simultaneously possess entrepreneurial energy and poor institutions. It can produce garments competitively for the world while accumulating a staggering amount of non-performing loans at home. It can send millions of workers overseas through individual initiative while allowing politically influential borrowers repeated indulgence.

The elite probably prefer this arrangement. Socialism promised to prevent private concentrations of economic power by giving the state control over capital. That failed partly because the state itself could be captured. Capitalism was then supposed to correct the failure by decentralising economic decision-making. But without strong institutions, capitalists discovered that capturing pieces of the state was more profitable than escaping it.

Thus Bangladesh completed an absurd ideological circle. 

This is why Bangladesh’s problem cannot be solved merely by choosing between “socialism” and “capitalism”. Democratic socialism of the Scandinavian variety depends on regulated markets, redistribution, pluralist democracy, hybrid ownership and strong social protection. These require capable institutions. Competitive capitalism requires them too.

There is no ideological shortcut around the boring business of government. Courts must enforce contracts. Banks must expect loans to be repaid. Regulators must be able to say no. Procurement must be competitive. Political connections must not constitute collateral. Failure must be permitted to fail. That last requirement is perhaps the hardest.

A genuine capitalist system contains an unpleasant but useful institution called bankruptcy. Bangladesh’s political capitalism has frequently preferred resurrection. The politically important enterprise is refinanced and the bad loan is rescheduled. Capitalism without bankruptcy is a little like cricket without wickets. One can continue playing indefinitely, but the score becomes increasingly theoretical.

Nations fail gradually when institutions designed to defend the public interest are captured and repurposed for narrow elites. The consequences follow a certain sequence…uncertain rules deter investment, connected businesses crowd out honest ones, public banks facilitate insider lending, bad loans rise and citizens cease believing the economy is fair.

That is the real danger of rentierism. It changes what everybody else thinks wealth is. When young people observe that property appreciates faster than wages, they aspire to own property. When businesses observe that connections outperform innovation, they cultivate connections. Eventually rent-seeking stops being corruption around the economic system. It becomes the economic system’s operating logic.

Bangladesh has not reached that terminal point. Its great protection remains the very people who made its economic transformation possible. They remain stubbornly productive despite the incentives surrounding them. The question is whether the state will reward them or continue rewarding those who discover ingenious ways of charging admission to their productivity.

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Faisal Mahmud is the Managing Editor of Daily Waadaa