Summary and conclusions
We have developed a simple macroeconometric model of Bangladesh economy in order to evaluate the Five Year Development Plan. Although the model contains only five behavioral equations and two identities because of restrictions imposed by the availability of data, the sample period ex-post predictions are nearly as good as those of large scale econometric models of the US economy (OBE and WHARTON-EFU models). The consistency of the Five Year Plan was tested by comparing the plan target for major economic aggregates with projections of the same aggregates based on econometric model. Four scenarios were developed for projections. They are:
Rapid restoration of business confidence with imports unrestricted,
Rapid restoration of business confidence with imports restricted,
Gradual restoration of business confidence with imports unrestricted,
Gradual restoration of business confidence with imports unrestricted.
The final year (77/78) values of model projections for real GNP, real private investment and nominal taxes are generally in line with the plan targets, while the model projections of other aggregates varied widely depending upon the assumptions. In general, the plan targets are reasonably consistent with the model projections except for price level and nominal import targets. As for the import targets, it is clear that the Bangladesh government intended to restrict the growth of imports by the use of qualitative and quantitative control measures. What is surprising to us is that the inflationary effects of import restriction is so pronounced that a more cautious import policy and a more aggressive export policy seem to be a desirable alternative. It does not seem to be a right time to introduce import-substitution policy after such devastating exogenous shocks as the civil war and subsequent floods, which reduced the productive capacity and busines confidence tremendously.
Another flaw in the Five Year Plan is revealed by the examination of dynamic paths of model projections. The charts 7–10 reveal that, towards the end of the planning period, the rate of growth of real GNP slows down considerably while the rate of inflation somewhat accelerates. The rate of inflation during the middle of the planning period is projected to be considerably lower than those at the begninning and end of the period. While it should be expected that after the recovery to a normal state of economy from the postwar uncertainty and instability, the rate of growth of real GNP will slow down, 2.9 percent growth in the final year is not enough to increase the per capita real GNP since the population growth rate of the final year of plan is expected (but not assured) to be 2.8 percent. Thus a more rapid capital accumulation program towards the end of the planning period seems to be called for.