For years, Bangladesh enjoyed the sobriquet “Bengal Tiger Cub,” and for good reason. After averaging a respectable 3.5 percent growth in the 1980s, the pace rose to 4.7 percent in the 1990s, 5.5 percent in the 2000s and a blistering 6.6 percent from 2010 to 2019. Per capita income has more than tripled to close to $10,000, putting Bangladesh in the same league as neighboring India. 

Yet, despite this stellar economic performance, mass demonstrations against her administration forced Prime Minister Sheikh Hasina, who had ruled continuously since 2012, to flee the country in August. The stock explanation for her fallis anger over her increasingly authoritarian behavior — especially in the wake of elections in 2014 and 2018, which were marred by voter suppression and maybe out-and-out fraud. Nor did it help that Hasina curtailed freedom of speech and used security forces to crush political opposition.

Shadows Over Success

The proximate cause of her downfall came with the government’s refusal to alter its job quota system, which reserved the cream of civil service positions for veterans of the 1971 War of Independence from Pakistan and (more relevant) their descendants. When student protests mushroomed, Hasina prudently headed for the proverbial hills. But the unanticipated fragility of her hold on power suggests other factors were at work — in particular, underlying weaknesses in the economy that didn’t stop growth but did fail to deliver overdue political and social reform. The contradiction even has a name: the Bangladesh Development Paradox, in which Bangladesh’s success defied conventional expectations of stagnation in light of the economy’s continuing low levels of institutional quality, widespread corruption, and political instability. 

How did growth triumph for so long in this decidedly third-world environment — and why did discontent blossom when it did? A simple answer is that the country’s deficient governance structures only became a decisive liability as the economy grew more complex and depended more on sophisticated investment and improvements in labor productivity. A more complete answer requires a closer look at the country’s informal institutions governing commerce and production, and their interaction with its so-called “deals environment.” 

Since gaining independence in 1971, Bangladesh’s informal institutions have sustained economic growth, particularly in sectors where formal institutions that create guardrails for market capitalism were weak. These informal networks allowed economic actors to bypass governance barriers, facilitating social and economic cooperation.

Grameen Bank, founded by Muhammad Yunus in 1983, is a prime example. The Bank’s signature microfinance model, making tiny loans to entrepreneurial households who had no other access to capital, became a global success story. It allowed millions to start businesses — among them, a disproportionate number of women. This profoundly impacted Bangladesh’s rural economy, fostering a culture of entrepreneurship, contributing to poverty reduction and suppressing anger among the have-nots.

During the 1980s, Bangladesh’s ready-made garment industry expanded rapidly through informal networks that connected small manufacturers with international buyers. Using personal relationships and trust-based agreements, local entrepreneurs created value chains that connected rural labor to the global economy. These informal systems provided a flexible and cost-effective way of doing business, avoiding the government red tape (and open palms) endemic in poor countries. Business employed workers, many of them women, without formal contracts or benefits, which kept labor costs low and contributed to the competitiveness of the garment sector.

But by the 2010s, the limitations of informal economic organization were becoming more apparent. First, export-led growth was tough because foreign buyers demanded certainty in transactions. The garment industry, for example, faced increasing scrutiny from international buyers and regulators over labor rights and working conditions. The informal labor markets that kept costs low were a liability in terms of compliance with global labor standards.

Second, success made it more difficult for entrepreneurs to evade government interference. Informal institutions, while once agile and adaptive, became increasingly co-opted by political elites vulnerable to pressure to formalize and regulate markets in labor, finance, and trade. This was driven by internal factors (such as labor rights movements) and external pressures from international organizations and trade partners. By the 2010s, the dependence on informal systems that had initially fueled growth was edging into liability, slowing the integration into global markets that demanded transparency and accountability.

Meanwhile, the 1971 war of liberation had given unprecedented power to new elites, creating an environment in which a “deals environment” developed. Initially, the deals space was relatively open and ordered, but it became progressively more closed as incumbents worked hard to defend captured markets and enlisted government to help. Under Hasina’s reign, decision-making became more centralized, limiting the paths entrepreneurs could follow to stay out the way of the corrupt bureaucracy. With hindsight, it’s plain that the failure to open the deals environment to a broader range of participants has restricted innovation and diversification.

Winners and Losers

One consequence of these trends: in 2019, the youth unemployment rate was about 12 percent. Today, it is over 15 percent. As important, a great deal of employment is masked. Some 6.8 million people are underemployed — and of these, 1.4 million are college graduates. Among graduates, 20 percent wait two years for a job, which explains in part why the student protests over job quotas that favored political insiders proved to be a flashpoint.

Facing slippage in growth, businesses outside politically connected circles struggle to access resources like credit, licenses and government contracts. The World Bank predicts that nearly a half-million Bangladeshis will descend into extreme poverty (defined as living on less than $2.15 per day) this year.

A Little Perspective, Please

Bangladesh’s economy has done better in the past three decades than most expected. But without reliable institutions to sustain competition, minimize corruption, and ensure that workers are paid, you would expect a widening income (and satisfaction) gap between those protected by these informal networks and the rest of the population. 

The most plausible revival strategy for Muhammad Yunus, who took over national leadership when Hasina sought refuge in India, would be to accelerate the transformation of informal institutions into a coherent rule-based system that didn’t discriminate against outsiders. But that’s easier said than done. Rules would lead to losers as well as winners, and only time will tell whether Bangladesh is ready to join the club of middle-income countries that manage to put competition and innovation ahead of resting on its laurels.