JBS Vol 15. Num 1. 2013 - Can Bangladesh Grow Faster than India?

Biru Paksha Paul

Bangladesh and India, the two fastest growing economies of South Asia, have displayed remarkable policy synchronization of privatization since the mid-1980s and that of liberalization since the early 1990s. Despite this policy synchronization, Bangladesh lags behind India quite substantially in economic growth. In the 1986–2010 period, Bangladesh grew at 5 percent and India 6.5 percent on average. What is behind this growth differential is the focus of this study. As this study finds, differences in capital formation appear to play the most crucial role in determining the growth differential between the two countries. India exceeded Bangladesh in economic growth whenever India’s capital growth exceeded Bangladesh’s. Bangladesh had been able to reduce the growth gap with India when Bangladesh’s capital growth had exceeded India’s. Using the Solow model and the Cobb-Douglas production function, this study suggests that Bangladesh has to increase capital formation to surpass or at least to catch up with India in growth. Institutional indicators are an area where Bangladesh requires massive improvements. This comparative study has policy implications for other emerging markets that aspire to grow fast but confront low capital formation barriers and institutional bottlenecks.