JBS Vol 21. Num 1. 2019 - Estimating Potential Growth for Bangladesh: The Performance Gap and Policy Implications

Rizwana Islam

Potential output growth, as different from actual output growth, determines how much growth the economy is sustainably capable of achieving by deploying its capital, labor, and productivity. While potential growth is used as an essential guideline for policymaking in all developed countries and also in many developing countries, Bangladesh has ignored the estimation of potential growth due to not only data scarcity, but also policymakers’ lack of interest in it. This article estimates potential growth for Bangladesh over the 1985-2018 period. Although the country’s recent annual GDP growth rate of over 7 percent seems commendable, its potential growth appears to be even higher by around 2 percentage points. The gap between the potential growth and actual growth has been dwindling slowly since the late 2000s, not only because of acceleration in actual growth, but also due to deceleration in potential growth, caused by the gradual fall in the rates of capital formation, labor supply, and productivity. Hence, reverting the falling trend of potential growth is as important as raising actual growth. To make it happen, improving growth in investment along with factor productivity and adopting reforms to improve efficiency across the board are required.