The Political Economy of Bangladesh's Industrial Slowdown: Structural Inertia and the Manufacturing Dilemma of the Global South

The Disconnect Between Industrial Data and Policy Vision

Bangladesh's industrial value-added growth for the just-concluded fiscal year was only 2.86%, the lowest in recent years. Yet the new fiscal year's budget projects this indicator to jump to 7% and continue rising thereafter. This gap is not insurmountable, but it demands a structural transformation far deeper than any current measures.

The chasm between performance and ambition raises an unsettling question: Why do constraints that were diagnosed decades ago and repeatedly mentioned—poor logistics, unstable energy, low levels of foreign investment, anti-export policy bias, and chronic skill shortages—still persist? The answer cannot be ignorance. Policymakers have long understood these problems, and the solutions are no secret.

The persistence of these constraints points to deeper structural causes. Industrial stagnation cannot be seen merely as a result of technical bottlenecks; it also reflects the institutional incentives that shape industrial policy, competition, and investment decisions. Understanding these incentives requires looking beyond the familiar explanations in policy debates.

Limitations of Conventional Explanations

The mainstream view attributes Bangladesh's poor industrial performance to weak state capacity, policy inconsistency, and political shortsight—rather than the incentive structure that shapes policy choices. Bureaucratic fragmentation, cumbersome regulations, inadequate infrastructure, fiscal constraints, and limited administrative capacity make it difficult to implement a coherent industrial strategy. Governments (whether democratic or authoritarian) also tend to prioritize visible short-term projects over long-term investments in education, energy, logistics, and institutional reform.

These explanations are neither trivial nor wrong. Institutional weaknesses, limited technical capacity, and political incentives do matter. But they are insufficient to explain why many of the same constraints persist for decades despite being widely recognized. Policymakers have long understood the importance of reliable infrastructure, export diversification, better logistics, and a more attractive investment climate. Technical knowledge is readily available, international experience is abundant, and development partners have invested heavily in building administrative capacity.

Thus, the more important question is not why good policies are difficult to implement, but why the obstacles themselves are so persistent. This requires looking beyond administrative deficiencies to examine the incentive structures embedded in Bangladesh's political economy. Many constraints persist not merely because the state lacks capacity, but because they are rooted in an institutional equilibrium—where economic power, policy influence, and market privileges reinforce each other.

An Economy Organized Around Protected Rents

One consequence of this institutional equilibrium is that the economy is increasingly organized around protected rents. Bangladesh's large business conglomerates have played a key role in the country's economic transformation: investing when capital was scarce, creating jobs, and helping nurture a domestic entrepreneurial class. The problem is not the existence of powerful firms—every successful industrializing country has them, from Korea's chaebols to China's state-owned and private conglomerates.

The challenge lies in Bangladesh's failure to develop institutions that can constrain economic power to serve industrial transformation.Over time, a large portion of the formal economy has become organized around protected incumbent firms. Large business groups have expanded into manufacturing, finance, logistics, telecommunications, media, and services, with economic power and policy influence increasingly intertwined.

In this environment, protection, subsidized credit, regulatory discretion, and market access may evolve into privileges rather than tools for enhancing competitiveness. Firms often face stronger incentives to maintain existing advantages rather than pursue innovation, export expansion, or technological upgrading.

From this perspective, many familiar bottlenecks become easier to explain: regulatory complexity raises entry barriers; capital flows to established connections rather than productive new entrants; when firms can be profitable without intense international competition, persistent shortcomings in logistics, trade facilitation, and export competitiveness become more tolerable. Underpinning these patterns is an institutional environment that consistently rewards rents rather than productivity.

Narratives That Sustain the System

Economic structures persist not only because they generate profits for powerful groups, but also because they produce ideas that justify them.

In Bangladesh, industrial policy has long been shaped by a powerful narrative: Bangladesh is different. It must follow its own development path by nurturing domestic entrepreneurial capabilities and active state intervention. However, this development narrative has gradually been used to justify protecting incumbent firms and administrative discretion.

These arguments resonate because they contain important truths: no country has industrialized without cultivating domestic entrepreneurial capabilities, and national development cannot be outsourced to foreign investors. The problem begins when nurturing domestic capacity becomes protecting incumbent firms from competition.

The result is that industrial policy is more concerned with maintaining existing capabilities than creating new ones. The relevant question is no longer what firms contribute to structural transformation, but whether they reinforce the existing order.

The problem deepens when the success of incumbent firms is equated with the success of the economy itself. Industrial transformation is a process of continuous renewal: firms enter, compete, grow, and exit when they are no longer productive. Yet policy increasingly focuses on protecting existing firms rather than renewing the industrial ecosystem.

This bias is reflected in policy responses to success and failure. Large firms in financial distress are seen as systemic problems due to their size and employment, while the constraints faced by thousands of small and medium enterprises in financing, market access, and technology receive far less attention—even though their collective contribution is indispensable for employment, innovation, and industrial diversification.

What East Asia Actually Did

The weaknesses of Bangladesh's approach become clearer when contrasted with the East Asian experience.

East Asia's success was not built on free markets, nor was it achieved by suppressing large enterprises or rejecting foreign capital. Its defining feature was not merely constrained rents, but continuous industrial renewal. Governments used policy support not to sustain existing firms, but to create conditions for new firms to emerge, successful firms to grow, and resources to gradually shift from low-productivity activities.The government provides protection, subsidized credit, tax incentives, and other forms of policy support. However, these privileges are conditional rather than permanent. They are tied to export success, technological upgrading, productivity growth, and integration into global markets. Firms that fail to achieve these goals lose state support.

Different countries have adopted different institutional forms. South Korea imposed strict performance standards on chaebols; Taiwan focused on networks of small and medium-sized enterprises; Singapore relied on deep linkages between multinational corporations and local firms.

Conclusion: The Internal Logic of Structural Reform

Bangladesh's industrial slowdown is not an isolated case. Many countries in the Global South face similar institutional inertia and path dependence. Breaking this equilibrium requires going beyond technical fixes to reshape policy incentives: linking protection to performance, reducing dependence on rents, strengthening competition mechanisms, and fostering an ecosystem capable of nurturing new firms.

Jump forecasts in budget figures cannot substitute for actual reform. There is no shortcut to industrial transformation; only through difficult institutional design at the political-economic level can sustainable growth be achieved.