Highlights:
- Bangladesh’s development surplus has gradually turned into a development deficit
- Stronger economic and social outcomes have not produced stronger institutions
- Institutional inertia and regression help explain the widening governance gap
- Banking-sector weaknesses, policy delays and fragile state capacity illustrate this reversal
- The series examines how governance shapes growth, jobs, finance and public services
Remember Joey Tribbiani from “Friends”? His signature “How you doin’?”, delivered with a tilted head and a knowing look, was less a question than an invitation to a conversation whose destination was anyone’s guess.
Suppose Joey turned to Bangladesh’s economy and asked the same question. Unlike the usual smile or giggle, the answer here is likely a sigh, carrying the weight of accomplishments shadowed by missed opportunities and the faint melancholy of what could have been.
From paradox to puzzle
Bangladesh’s development trajectory has evolved from a paradox into a puzzle. The paradox was that development occurred despite weak institutions. The puzzle is that stronger development has not produced correspondingly stronger institutions.
During the 1990s and 2000s, Bangladesh attracted international attention for achieving social-development outcomes well beyond what its income per capita would suggest. Professor Wahiduddin Mahmud called this a development surplus. Explaining the phenomenon became known as the Bangladesh Paradox. Despite limited resources and fragile institutions, Bangladesh achieved more than conventional wisdom suggested was possible.
The explanation for Bangladesh’s early development success lies not in a single factor but in a rich combination of technological, social, aspirational, political, and policy forces. Low-cost technologies such as oral rehydration therapy and family planning enabled major advances in health and fertility at a fraction of the cost associated with conventional interventions. NGOs and community networks extended the reach of public action. Rising aspirations induced households to invest in education, migration, and women’s economic participation. Political elites broadly preserved a development-oriented consensus, while public policies facilitated export growth and overseas employment.
Bangladesh now confronts a harsher reality. The development surplus that once defied expectations has given way to a development deficit. The confidence born of repeated success has yielded to doubts about what comes next. What was once held up as evidence that development could outrun institutional weakness now invites a different question: whether that very weakness has finally caught up with development itself.
Bangladesh’s experience bears some resemblance to the Great Reversal described by Acemoglu and Johnson in their book Power and Progress. The reversal, however, concerns development rather than income. What was once celebrated as an exceptional development success story has lost much of its exceptionalism. The paradox lay in success that should not have happened. The puzzle lies in outcomes that, by all reasonable expectations, should have followed from that success but did not.
The disconnects extend to the systems supporting economic activity. Despite gains in public health, school enrolment, and gender parity, Bangladesh continues to face substantial deficits in human capital accumulation, particularly in learning, workforce skills and labor productivity. Energy supply expanded, yet reliability and affordability remain persistent concerns. The financial system grew even as its capacity to allocate credit efficiently weakened. Despite a growing economy, the government’s ability to mobilise revenue remains severely constrained.
Unpacking the reversal
The series is a narrative about how Bangladesh’s development surplus has turned into a deficit. Surplus and deficit refer to performance relative to what the country’s income per capita would predict. Evidence examined throughout the series, at different levels of analysis, traces these parallel trajectories. Their correspondence does not establish causation, but it raises a fundamental question: What explains the emergence of both deficits?
Two processes help unpack the reversals: inertia and regression. Inertia occurs when institutions and governance practices stagnate or improve too slowly to meet evolving needs. Regression occurs when previously established standards, capabilities, or safeguards deteriorate. Both can widen the gap between the observed governance performance and what the country’s income predicts.
The banking sector illustrates regression with unusual clarity. Connected lending, regulatory forbearance, and weakened supervision have eroded lending discipline and accountability, contributing to rising loan defaults, impaired financial intermediation, and declining public confidence in banking institutions.
State capacity illustrates inertia. Despite decades of economic progress, Bangladesh’s ability to formulate and implement policies, enforce rules, and deliver public services has not improved commensurately. Persistent shortcomings in infrastructure maintenance, education, healthcare, and social protection illustrate the resulting gaps between public needs and institutional performance.
Macroeconomic management illustrates how inertia and regression overlapped. Delayed policy adjustments and the erosion of policy safeguards allowed economic imbalances to accumulate. Bangladesh’s recent growth slowdown, persistent inflation, and foreign-exchange pressures underscore that economic outcomes are determined not only by the shocks policymakers inherit, but also by the mistakes they make.
Development is never automatic. How effectively economic resources improve people’s lives depends on how opportunities are created and shared, public goods are provided, markets function, and institutions respond to changing needs. Weaknesses in these processes can leave a country with development outcomes below those typically associated with its income.
The governance that never caught up
Governance is the common thread running through these developments. It shapes how public resources are allocated, markets are regulated, opportunities are distributed, and institutions are held accountable. Bangladesh’s earlier achievements demonstrated that development could proceed despite significant institutional weaknesses. Its more recent experience suggests that when governance fails to evolve alongside a changing economy and society, it can constrain the quality, reach, and sustainability of further progress.
Bangladesh’s governance indicators reveal an uneven trajectory. Several improved during the 2000s, particularly between 2003 and 2010, before deteriorating in subsequent years; others remained stubbornly stagnant. Viewed alongside the country’s rising income and social achievements, these patterns help explain how an earlier development surplus gradually gave way to a development deficit. The Bangladesh Paradox and the Bangladesh Puzzle are therefore not competing narratives but successive chapters of the same development story.
But what exactly is governance? Consider the game of cricket. Success depends on more than the formal rules. It also depends on the impartiality of the umpires, the conduct of players, the integrity of the cricket board, and the shared expectations of spectators. Governance concerns how the game is actually played, monitored, and judged. The same is true of an economy. Formal laws and regulations matter, but so do the incentives, norms, expectations, and mechanisms of accountability that determine whether those rules shape behavior in practice.
Beneath the surface
The shift from paradox to puzzle did not occur overnight, nor can it be traced to any single failure. It emerged gradually through the interaction of economic outcomes, institutional incentives, and policy choices. The remainder of this series examines that process from multiple perspectives.
The next nine articles examine growth, employment, human capital, macroeconomic stability, financial intermediation, remittances, energy, state capacity, and central banking. Together, they explore the interplay between economic performance, institutional inertia, and institutional regression. The two articles that follow draw on cross-country evidence to assess how Bangladesh’s experience compares with broader patterns of development and governance, and where the search for explanations should begin.
The series concludes with the political economy question at the heart of Bangladesh’s development puzzle: why are institutions that appear socially beneficial so often politically unattractive?
The author is a former lead economist at the World Bank’s Dhaka office.
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