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Foreign Capital Inflow and Economic Growth: A Two Gap Model for the Bangladesh Economy
Author(s): S Ahmad
Source: The Bangladesh Development Studies, Vol. 18, No. 1 (March 1990), pp. 55-79
Published by: Bangladesh Institute of Development Studies
Stable URL: http://www.jstor.org/stable/40795371 .
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The Bangladesh DevelopmentStudies

Vol. XVIII, March 1990, No. 1
ForeignCapital Inflowand Economic

Growth:A Two Gap Model forthe
Bangladesh Economy*
S AHMAD**
This paper attemptsto examine the effectof foreigncapital inflowon growth
of output, domestic saving, imports and production structure. In doing so, a
simultaneous equation model forthe Bangladesh economy in the frameworkof
the dual gap analysis has been estimated using the time series data for the
period 1960/61-1979/80. It is found that foreigncapital inflowwas conducive
for economic growth. It has substituted domestic saving as' the government
might have relaxed saving effortswith its inflow.It increased the productive
capacity of the economy financingthe developmentprojects. It facilitatedthe
expansion of the tertiarysector. The increased services Irom the tertiarysector
along with increased importsof raw materialsand intermediategoods (financed
by it.)increased output in the primaryand manufacturingsectors. Thus foreign
capital inflowchanged the productionstructureof the economy with resulting
changes in the compositionof GDP, exportsand imports.
I. INTRODUCTION
A few but important constraints to growth faced by almost all the less
developed countries (LDCs) are shortages of skilled manpower, domestic
saving and foreign exchange. Chenery and Bruno (1962), Chenery and
Adelman (1966), Chenery and MacEwan (1966) and Chenery and Strout
(1966) have examined in the framework of two-gap (deficient saving and
foreign exchange) models how foreign capital inflow is capable of easing the
saving and foreign exchange constraints and thus has a positive contribution to
economic growth of LDCs. Their two-gap approach to growth is critically
evaluated by among others Bruton (1969), Fei and Ranis (1968), Findlay
(1973), Luxton (1979), Rahman (1967) and Quibria (1981). But it is not
evaluated by anybody with respect to impact of foreign capital inflow on
strategic variables which affect economic growth. In this respect, the two-gap
approach misses some essential points which are presented below.
This articleis mainlybased on a fewchapters of the author's Ph. D. dissertation.The
author is gratefulto Dr. Robert C. Rice and an anonymous referee for their useful
comments.lie is responsibleforremainingerrorsand omissions.
"Associate Professor,Department of Economics, Universityof Dhaka, Dhaka- 1000,
Bangladesh.

56
TheBangladeshDevelopment
Studies
Firstly,all the studies on the two-gaptheoryconcentrateon how foreign

and has a favourableimpacton
capitalinflowremovesthe bindingconstraint
the economicgrowthof a LDC. But growthof outputis not the onlyvariable
whichforeign
capitalinflowcan affect.Moreover,
growthis usuallyaffected
by
changes in such strategicvariables as domesticsaving, imports,exports,
productionstructureof the economy,etc. None of the dual gap modelshave
estimated the impact that foreigncapital inflowhas on these strategic
variables.
Secondly,in two-gapmodels, foreigncapital inflowperformsthe role of
insteadof substituting,
domesticsavingin investment
as it is
suplementing,
seen to financeonlyrequiredimports.But in a LDC likeBangladeshwherethe
portionof foreign
capital inflowfinancesimports
two-gapexists,a significant
ofconsumergoodsto save millionsofpeoplefromstarvation
and malnutrition.
Whenforeign
capitalinflowfinancesimportsof consumergoods, the additive
hypothesisin a two-gapmodel that the sum of foreigncapital inflowand
becomesquestionable.
domesticsavingequals investment
Thirdly,almost all the studies on the dual gap analysis have treatedthe
required importsas one aggregatevariable in the models. The required
and capitalgoods.Whileimportsof
importsconsistof importsof intermediate
intermediategoods are essential for utilizationof the existingproductive
capacityin a LDC, the importsof capitalgoods are necessaryforcreationof
additionalproductivecapacity.In a LDC withtwogaps, consumergoods are
The financing
of thesethreecategoriesof importswithforeign
also imported.
has
divergenteffectson growthof output,gross domestic
capital normally
ofan economy.To take care of
structure
saving(GDS), exportsand production
these effectsin the analysis of the effectsof foreigncapital inflowon the
overalleconomicgrowth,it is properto use the threecategoriesof imports
and capitalgoods)in the two-gap
(namely,importsof consumer,intermediate
model.
per capita incomerises withthe growthof an economy.Withthe
Fourthly,
increasein per capitaincome,thedemandforfinalconsumergoods increases,
and so does the input requirement
forproduction.Again a rise in the per
capita incomewouldbe accompaniedby changesin the productionstructure.
If this changedproductionstructureis unable to meetthe demandforfinal
consumergoods and inputrequirements,
importswould increase.So import
demandarises notonlydue to the levelofincomebut also due to inability
of
the domesticproductionstructureto matchthe domesticdemand.Thus, to
explain the importdemand, the productionstructureshould be explicitly
takenintoconsideration.
Hardlyanydual gap modelshas done this.
the
phases and in each
Fifthly, growthprocess passes throughdifferent
phase growthis limitedby one dominantconstraint.Different
phases of the
productionstructures.In each
growthprocessare characterized
by different
phase the productionstructurepartiallydeterminesthe saving-investment
and foreignexchangegaps. These gaps are partlyclosed by foreigncapital
structurethroughincreasesin
which,in turn,changesthe production
inflow,
investment.
Thus, foreigncapital inflowaffectsthe growthprocess through
changes in the productionstructure.Again changes in the production

Ahmad: ForeignCapitalInflowand EconomicGrowth
57
structurein responseto internaland externaldemand are likelyto change

exportsand imports.Theyare expectedto affectdomesticsaving,savingof
foreignexchange and growth.Therefore,the growth process and the
To take care of such interdepenproductionstructureare interdependent.
in the two-gapmodel
dence,the productionstructureshouldbe incorporated
foranalysingthegrowth
processin LDCs.
Finally,the estimationofequationsin the two-gapmodelsare based on the
single equation method(SEM). But the SEM is incapable of taking into
accounttheinterdependence
amongvariables.In fact,thevariablesinvolvedin
the growthprocess forinstance,consumption,domesticsaving,investment,
To take of
imports,exports,productionstructure,etc. are interdependent.
such interdependence,
a simultaneousequation model can be used and
estimatedusinga simultaneousequationmethod(SIMEM).
The purposeof the presentpaper is to test the following
hypotheseswith
to Bangladeshusinga two-gapmodelwhichincorporatesthe above
reference
points:
(1) ForeigncapitalinHowis conduciveto growthofoutput.
on domesticsaving.
(2) Foreigncapitalinflowhas a positiveeffect
affectstheavailability
ofall cartegories
(3) Foreigncapitalinflowpositively
and capitalgoods.
ofimports,
notjust importsofintermediate
structure.
(4) Foreigncapitalinflowaffectsthe production
In testingthe hypotheses,an estimatingmodel is presentedin Section II,
estimationof the estimatingmodelis discussed in Section III, the empirical
a conclusionis added in Section
are analysedin SectionIV and finally
findings
V.
II. THE ESTIMATING MODEL
Our estimating
modelis deducedfromthe basic two-gapmodelconsistingof
tenbehaviouralequations,one equilibrium
variables
condition,tendefinitional
and fouridentitieswhichwerepresentedand discussed in Ahmad(1986, pp.
125-158). Details about its derivationweregivenin Ahmad(1986, pp. 158164). The variablesincludedin thebasic two-gapmodelare thefollowing.
EndogenousVariables:
sector,*
Q=totaloutput,AQ= changein totaloutput,QJ3
=outputin the primary
= outputin themanufacturing
sector
sector,QP/Qt= share of the primary
qJ11
in totaloutput,Q |/Qt = shareofthemanufacturing
sectorin totaloutput.
*The primary sector in the present study is defined to include agriculture, forestry,
fishery, livestock, mining, and quarrying. The manufacturing sector includes both small
and large scale manufacturing industries. The tertiary sector includes all the sub-sectors
except those included in the primary and manufacturing sectors and hence is considered
as the residual one. For instance, it includes the sub-sectors: construction, power, gas,
water and sanitary services; transport, storage and communications; trade services;
housing services: banking and insurance; public administration and defence; professional
and miscellaneous se naces.

Studies
58
C
T
Qt/Qt = share of the tertiarysector in total output, M ,= importsof
r
k
consumergoods, Mj = importso intermediate
goods, M , = importsof
capital goods, ML = totalimports,St = grossdomesticsaving, Yt = per
ofdomestically
capitaoutput,It = investment
producedcapital goods, Kt =
capitalstockand theexogenousvariables:
Xt = totalexportsofgoodsand services
It = gross investment,N( = population size, Ct = total consumption
M* = importsof servicesincludingnet factorpayments.Ft =
expenditure,
foreigncapital inflowdefinedas the deficitin the currentaccount of the
balance ofpayments,
expenditure
recurring
Pj = area cropped,Gt=government
=
=
Dt depreciation,
Kt_j capitalstockin the previousyear.In addition,the
subscript t denotes the time period. All the endogenous and exogenous
variablesare in realterms.
In initialordinaryleast squares (OLS) runs the disturbancetermsin the
growth,domesticsavingand importdemand functionsof the basic two-gap
For thisreason
modelare foundto violatethe assumptionofhomocedasticity.
oftotaloutputin
thevariablesin thesefunctions
are expressedas proportions
theestimating
model.As thedisturbancetermsofthe structuralequationsfor
theproductionstructurein thebasic two-gapmodelsatisfythe assumptionof
theyare retainedunchangedin the estimatingmodel.To be
homocedasticity
consistentwiththeequations1-4 oftheestimating
model,thevariablesin the
restof the relationsof the basic two-gapmodelare expressedas proportions
oftotaloutput.However,theestimating
modelis givenbelow.
1. GrowthFunction forBindingSaving Constraint

AQt =
S(
+
"" K /o" Wo
Ft
Mt
+e
(
q[" (xoo/g) qT 11
GrowthFunctionforBindingForeignExchangeConstraint
X
W
M
AQ(
Ft -M +
=(/g)
+(/g)
(o/g)
(IWg)
elt
Q^-(IWg)
p
gjop
9t

Qt
Ahmad : ForeignCapital Inflowand EconomicGrowth
59
2. Domestic Saving Function

AQt
Xt
F,
+
m2
T=s
"T+a2r+fi2r+2t
St
3. ImportDemandFunction
(, <
ct
^
Qt
Mt
(ii) -
= m4 AQ(
op
of
o"
Qt
Q,
Xt
+a4 ^
Mt
9t
() ~ =m5 it +d5 OT
M"
xt
Pt
**
9,
+ 4 Ft +E4t
f
+ a5 xt - h Ft + 5t
Q
Qf
4. ProductionStructure
P
9t
= m6 + d6 log y{ + c6 log pt + r|6
(i)
Qt
(ii)
e!11
Qt
= m7 + d7 log y( + c7 log
Q
Qt
k
Mt
Qt
+ (x6
+ t' log N( + a
Qt
AQ(
Gt
+
(iii) - =m8 + d8 +C8
^
Xt
F,
+ 8
gj^
X, +
F,
6
^
^
x,
-
+ 7 -Ft + e?t
Wt
,8(
5. Exports
X,

60
6. Gross Investment
Q
7. Per Capita Output

y, = Qi/n,
8. Population Size
N, = ,
9. Total ConsumptionExpenditure
Q
"
10. Importsof Services
11. ForeignCapital Inflow
II = II
Qt
Qi
12. Area Cropped
p.
pi
13. Govt. Revenue Expenditure
Endogenous Variables :
Exogenous Variables :
qJ
9,
s, Mf, M, Mf. 9? . 9tm
.
rr-, , q"
y
^j-,
Qt
Qt
Yr Nt q
Qi
Qt
Qt
' Pt '
Q

Qt
61
To derive the estimatingmodel, the constrainedinvestmentfunction,

conditionand all the identitiesare used. Because of this,theyare
equilibrium
droppedfromthe estimatingmodel.It is not also necessaryto keep themin
the estimatingmodelwhilethe purposeof the modelis onlyto analyse the
past. Thus the estimatingmodel has eight equations to determineeight
variables.
endogenous
III. ESTIMATION OF THE ESTIMATING MODEL
of the equations of our estimating

We have examinedthe identifiability
we have foundevery
model.Usingthe necessaryconditionforidentification,
Even thoughthe necessaryconditionis not
equationof the modelidentified.
it is usually considered for identificationin
sufficientfor identification,
practice.
Ahmad (1983) has founddomesticsaving as the dominantconstraintto
growthin Bangladeshduringthe periodunderstudy.We have estimatedthe
modelusingtimeseriesdata2 for
versionofour estimating
savingconstrained
the period1960/61 -1979/80. In estimatingthe model the OrdinaryLeast
Method(FOAM),Two-Stage
Squares (OLS) method,FirstOrderAutoregressive
Least Squares (2SLS) and Three-StageLeast Squares (3SLS) methodshave
been used. We have followedthe Hildreth-Lu
search procedure(Hildrethand
Lu 1960) in theFOAMestimationand Zellnerand Theils method(Zellnerand
Theil 1962) in the 3SLS estimation.
The OLS and FOAM methodsmay be termedas single equation method
(SEM) while the 2SLS and 3SLS methodsmay be termedas simultaneous
equationmethods(SIMEM).Apartfromthe factthatsingleequationestimates
are subject to bias, theyare also presentedand discussed. There are two
on therelationships
mostofthe findings
reasonsfordoingso. Firstly,
between
the
one
hand
and
economic
on
variables
of
the
inflow,
capital
present
foreign
studyon the other,are based on the SEM. Our singleequationestimatesare,
therefore,
expectedto serve the comparativepurposes.Secondly,we like to
findout the extentof the difference
betweenthe single equation estimates
and thesimultaneous
estimates
whenthesame data are used. Such a
equation
differencece
is expectedbecause the singleequation estimatesinclude only
the directeffectof explanatoryvariable(s) while the simultaneousequation
estimatestakeaccountoftotal(bothdirectand indirect)effects.
However,the
results obtainedby the SEM and SIMEM are givenin Tables 1, 2 and 3,
AppendixA.
The coefficients
of the SEM and the 2SLS methodare verysimilarboth in
obtainedby the 3SLS methodwidely
signand magnitude;but the coefficients
differ
fromthoseoftheSEM (i.e.,OLS and FOAM)and the 2SLS method;some
cases in sign, some cases in magnitudeand some cases in both sign and
magnitude.These differencesmay be attributedto the followingfactors.
the 3SLS methodtakes accountofboththedirectand indirecteffects
Firstly,
2 Relevant data that were used in estimation of the
estimating model ean be obtained
fromthe author on request.

62
of a variable in the systemof simultaneous equations. Secondly, theremay exist

some specification errors in some equations in the estimating model.
Specificationerrorsarise due to inclusion of an irrelevantvariable or omission
of a relevantvariable in an equation, or choice of a linear relation among the
variables in an equation while the true relation is in fact,non-linear. It is very
difficultto eliminate the specification error in a particular equation where
inclusion of an independent variables is usually dictated by the theoretical
considerations, and where choice of a linear model is the rule of the social
sciences in the face of lhe complexityand difficultiesof the non-linearities.
Thirdly, the 3SLS method assumes that the disturbance term in every
equation of the simultaneous equation model satisfies the assumptions of the
classical OLS method. But in some equations of our model, the disturbance
termsare autocorrelatedbut in otherequations theyare not. In the absence of
a suitable methodof computationto estimatesuch simultaneous equations, we
have to use Zellner and Theil's 3SLS method which is partiallyinappropriate
due to some autocorrelateddisturbance terms.
It may be noted that the results of the SEM and 2SLS method are more
dependable than those of the 3SLS method because of likely presence of
specification errors in some equations of the estimating model and partial
inappropriatenessof Zellner and Theil's method in the 3SLS estimation. Since
our sample size is small and we know littleabout the small sample properties
of the 2SLS and 3SLS estimators (Pindyckand Rubinfeld 1981, p. 338), our
findingson the basis of the 2SLS and 3SLS methods are tentative.
The whole of the period 1960/61-1979/80 may be divided into two subperiods, namely the pre-liberationperiod (1960/61 - 1969/70) and the postliberation period (1972/73-1979/80). Both the sub-periods differto some
extent with respect to economic, social and political institutionsand policies.
Furthermore,the data forthe years 1970/71 and 1971/72 are not available.
For these reasons a dummyvariable (using 1 foreach year of the pre-liberation
period and 0. otherwise)is introducedin each equation estimated with use of
data covering the period 1960/61 - 1979/80. It is retained in the equation
only when its inclusion increases R2 irrespectiveof whether its coefficientis
significant or not. However, a significantdummy variable in a structural
equation suggests that the structural relation differsbetween the pre- and
post-liberation periods. For instance, a significantdummy variable in the
import demand function for intermediate goods would indicate that the
importdemand functionfor intermediategoods in the post-liberationperiod
fromthat in the pre-liberationperiod.
is structurallydifferent
We have also estimated the model using the SEM and a one-yearlag in F/Q.
The variable Ffl/t-l *s considered as simplyas an independentvariable in
each estimatingequation. All the coefficientsof Ft_j/Qt_jare found insignificant at the 5 per cent level, forwhich the results are not reportedhere.
IV. ANALYSIS OF THE EMPIRICAL FINDINGS
GrowthofOutput/GDP
In the estimatingmodel, the growthrate of GDP is made dependent on the
gross investment rate. The average imported capital coefficientfor gross

63
investment
is foundto be 0.06 (equation3 (iii).Tables 1 and 2, AppendixA). It
betweenimportsof capitalgoods and grossinvestment,
is the coefficient
both
ofGDP, and is significantly
as proportions
positiveal the 10 per centlevel.It
rate is 100, the importrate forcapital
suggeststhatifthe gross-investment
on
importsofcapitalgoods have formed,
goodson averageis 6. In otherwords,
in Bangladesh.
average,about 6 percentofgrossinvestment
The estimatedgrowthfunctionshows that GDS, foreigncapital inflowand
ofGDP, have positiveeffects
on the
importsofcapitalgoods,all as proportions
growthrate ofGDP in Bangladesh(Tables 1 and 2, equation 1, AppendixA)
are significant
at the 5 per centlevel.Thus the
and the positiverelationships
results supportthe hypothesisthat foreigncapital inflowis conducivefor
ofoutput.
growth
function
is veiylowand negative.The lowand
The valueofR2 forthegrowth
ofthegrowth
function
without
negativeR2 maybe theresultoftheestimation
In such a case, theratioofexplainedsum ofsquares to totalsum of
intercept.
sqares maynotbe withinthe range0 and 1 and hence normalinterpretation
forR2 is notvalid (Aigner1971, pp. 85-90). As a resultone cannotsuggest
that the low R2 forthe growthfunctionis an indicationof inadequacyin
capitalinflowand
explainingthegrowthofGDP by thevariables:GDS, foreign
importsof capitalgoods. It cannotalso be deniedthatotherfactorssuch as
of skilledmanpower,bureaucraticadministrative
controlson
non-availability
economicactivities,corruptionin the administration,political instability,
weatherconditions,etc. may explain,to some extent,the variationof the
growthof GDP. These factorsare not includedin the growthfunctionas we
to establisha proportional
betweenchangein total
are interested
relationship
output(AQ)and grossinvestment.
DomesticSaving
GDS has played a significantly
positiverole in the growthof GDP in
There
are
various
factors
whichmighthave affected
GDS. Among
Bangladesh.
of
them,growthrateofGDP, foreign
capitalinflowand exportsas proportion
GDP haveexplainedabout76 percentofthesavingratein Bangladesh.
Even thoughtheorectically
we expect a positiverelationshipbetweenthe
saving ratio and the growthrate of GDP, we have obtained a negative
betweenthemusingthe SEM and 2SLS method(Tables 1 and 2,
relationship
are insignificant
at the 5 per cent
AppendixA) and the negativerelationships
level.The relationshipbetweenthe savingratioand the growthrate of GDP
based on the 3SLS methodis also foundnegativebut significant
at the 1 per
centlevel(Table3, AppendixA).
The growthof the labour productivity
seemed to have increasedand hence
workedin the directionof causing the saving ratio to increase and the
increasingdependencyratio in the age structureof populationmighthave
workedin the directionofcausing it to decreasewhilethe otherfactorssuch
as fiscalinadequaciesto tax the upperincomegroupsrigorously,
tax rebates
fromincometaxation,leakages fromthe domesticsaving,etc. mighthave
preventedthe saving ratio fromrisingwith the growthrate of GDP. The
combinedeffectofall these factorsprobablycaused the negativerelationship
betweenthe savingratioand the growthrate of GDP in Bangladesh(Ahmad
1986, pp. 272-273).

Studies
64
based on the SEM, 2SLS and

ofFt/Q( in the savingfunction
The coefficient
found
to
be
3SLS methodsare
negative(Tables 1, 2 and 3, AppendixA). The
at
coefficients
obtained
by the SEM and 2SLS methodare significant
negative
at the 5 per
the 1 per centleveland thatofthe 3SLS methodis insignificant
offoreign
centlevel.Thus theeffect
capitalinflowon GDS appears to be nonofBangladeshmighthave relaxedthe
positive.It suggeststhatthegovernment
saving effortswithreceiptof foreigncapital. Any way our result does not
betweenGDS and foreign
capitalinflow.
supportthe positiverelationship
of
Exportsare expectedto have a positiveeffecton GDS. The coefficients
are
2SLS
and
3SLS
methods
but
based
on
the
SEM,
positive
insignificant
Xt/Qt
at the 5 per centlevel(Tables 1, 2 and 3 AppendixA). Thus exportsappear to
have non-negative
effectson GDS. Hence our findingsdo not contradictthe
betweenGDS and exportsin the case ofBangladesheven
positiverelationship
to supportit.
ifourdata are insufficient
ForeignExchange Allocation
A foreignexchangecrisisbegan in Pakistanafterthe KoreanWar in 1952.

Even thoughBangladeshin the pre-liberation
periodaccountedformorethan
50 per cent of Pakistan'stotalforeignexchangeearningsand obtainedonly
it becamethevictimofPakistan'sforeign
one-third
ofPakistan'stotalimports,
exchange crisis being one of its provinces.Since then Pakistan used to
preparethe foreignexchangebudget (FEB) to face the shortageof foreign
exchange.Afterliberationin 1971 Bangladeshinheritedthe foreignexchange
budgetingsystemfromPakistanand used to preparethe FEB. However,the
FEB dealt withfreeforeign
exchangewhichcould be allocatedto financeany
partof the importbill. In this sense, foreignexchangefromexportswas free
assistanceand bartertradewas notfree.
whereasthatfromforeign
we expect a positiverelationshipbetweeneach categoryof
Theoretically
ofexpports-GDP
ratiobased on the 3SLS
importsand exports.The coefficients
methods seem to suppt our expectation (Table 3, Appendix A). The
of exports-GDPratiobased on the SEM and 2SLS methodin the
coefficients
importdemandfunctionsforconsumerand intermediate
goods are positive
and significant
at the 5 and 1 per cent levels (Tables 1 and 2, AppendixA).
Theyindicatethatexportearningshave positiveeffectson the availabilityof
of
importsof consumerand intermediategoods. Even if the coefficients
ratiobased on the SEM and 2SLS methodin the importdemand
exports-GDP
at the 5
functionforcapitalgoods are negativeand statistically
insignificant
per cent level (Tables 1 and 2, AppendixA), theydo not contradictour
theoreticalexpectationthat exportearningshave a positiveeffecton the
ofimportsof capitalgoods.However,our resultsappear to suggest
availability
thatexportearningsfinancedthe importsof all categoriesof commoditiesin
Bangladesh.Thisassertionis supportedbythefeaturesofFEB and consequent
allocationof foreign
exchangefordifferent
categoriesof imports.3
The coefficient
of Ft/Qtbased on the SEM, 2SLS and 3SLS methodsare
foundto be positiveand significantat the 1 per cent level in the import
and capital goods (Tables 1, 2 and 3,
demand functionsforintermediate
AppendixA). But the coefficients
showingthe effectsof foreigncapital inflow
on importsof consumergoods have the expectedsign but are statistically
^rhc salientfeaturesof the foreign

exchangebudget(FEB) and the licensingsystems
duringthepre-and post-liberation
periodscan be seen in Ahmad(1986,pp. 237-246).

65
at the 5 per cent level (Tables 1, 2 and 3. AppendixA). Thus our

significant
results support the hypothesisthat foreigncapital inflowfinanced all
by the features
categoriesof importsin Bangladesh.This is also corroborated
the
of the FEB in both the pre- and post-liberation
period. Furthermore,
of Ft/Qtin the importdemand functionsfor
of the coefficients
significance
in the importdemand
intermediate
and capitalgoods and theirinsignificance
functionforconsumergoods suggestalso the following
things.Firstly,foreign
exchange was, at least, in past a constraintto economic developmentof
Bangladesh.Secondly,the increasedavailabilityof foreigncapital would not
necessarilyincreaseimportsof consumergoods. This is because, it was not
offoreign
capitalbut also otherexogenousfactorssuch as
onlythe availability
on importsof consumergoods (exceptfoodimports)through
highrestrictions
foreignexchange control policies, and the importlicensing system, the
the freemarket
amountoffooddeficitin case offoodimports,etc. preventing
the
mechanismfromplayingits role freelywere importantin determining
availabilityof consumergood importswithforeigncapital inflow.However,
increasedavailability
offoreign
capitalinflowis mostlikelyto increaseimports
ofintermediate
and capitalgoods.
The coefficients
of ML/Qtin the importdemandfunctionforcapital goods
have the expectednegativesign and are significant
at the 5 and 1 per cent
level(Tables 1, 2 and 3, AppendixA). It indicatesthatimportsofcapitalgoods
treatment
in foreignexchangeallocationover
appear to be givenpreferential
the importsof consumer goods. Thus our results seem to support the
hypothesisof rationalforeignexchangeallocationin a situationof foreign
exchangecrisis that consumergoods be allowed to be importedif foreign
exchangeis available afterthe importdemand forcapital goods has been
satisfied.
ImportSubstitution
Bangladeshhas almostexclusivelydependenton agriculturein 1947. Still
was the strategy
of
todayit is a fooddeficitarea. Since 1947 industrialization
in foodgrainsand manufactured
development.The goal of self-sufficiency
productswas soughtthroughimportsubstitution
duringbothpre-and postliberationperiod.
In Bangladeshimportsof consumergoods increaseddue to an increase in
total consumption expenditure.This proposition is supported by the
coefficient
of Ct/Qt in the importdemand functionfor consumer goods,
because the coefficients
ofC(/Q( based on the SEM, 2SLS and 3SLS methods
have the expectedpositivesign and are significantat the 1 per cent level
(Tables 1, 2 and 3, AppendixA). If the total consumptionexpenditureas
ofGDP increasesby 100 per cent,the importsof consumergoods
proportions
as proportions
of GDP increaseby 23 per cent (Tables 1 and 2, AppendixA).
Importsof consumergoods consistedof both agriculturaland manufactured
commodities.
Since thevariable9^/Qt is introducedas a proxyvariable in the import
demand functionfor consumer goods to indicate the presence of import
substitution
in primary
are expectedto have negative
products,its coefficients
based on the SEM, 2SLS and 3SLS methodsare negative
sign. Its coefficients
and significant
at the 5 and 1 per centlevels(Tables 1, 2 and 3, AppendixA).

66
Studies
occurredin consumergoods produced

Theysuggestthatimportsubstitution
in the primarysector, because an increase in primaryproduction in
Bangladesh in a particularyear, other thingsremainingthe same, would
share in GDP but decreaseimportsofprimaryproducts,
increasethe primary
as proportions
of GDP, in that particularyear. Such primaryproductsare
mainlyriceand wheat(Ahmad1986, pp. 313-314).
foodgrains,
The coefficients
of Qm/Qt4 in the importdemandfunctionforconsumer
at
goodsobtainedby theSEM and 2SLS methodare negativebut insignificant
the 5 per cent level (Tables 1 and 2. AppendixA). Theysuggestthat import
consumergoodsbut such
substitution
mighthave takenplace in manufactured
of Q/Qînthe
is not significant.
Againthe coefficients
importsubstitution
at
importdemandfunctionforcapitalgoods beingnegativeand insignificant
the 5 per centlevel(Tables 1 and 2, AppendixA) are indicativeofinsignificant
in capitalgoods.
importsubstitution
of AQt/Q(în the importdemandfunctionforintermediate
The coefficients
at
goodsobtainedby theSEM and 2SLS methodare positiveand insignificant
the 5 per centlevel (Tables 1 and 2, AppendixA). Theysuggestthatimport.
GDP ratioforintermediate
goodsdid notdeclinewiththe growthrateofGDP.
But theirpositivity
ofan increasein the
does notalso ruleout the possibility
ratio
with
an
increase
in the growthrate
for
intermediate
import-GDP
goods
ofGDP. Probablytwofactorsare mainlyresponsibleforthis. Firstly,importGDP ratio for intermediategoods did not decline because of the selfsufficiencystrategyin foodgrainand manufacturedproducts. Secondly,
increased dependence on foreigncapital mighthave tied Bangladesh to
importintermediategoods forthe aid-financedprojects,completedor onto reduce imports
going,fromthe donorcountriesand thus made it difficult
of intermediate
goods.
ProductionStructure
The productionstructurein the Bangladesh economyunderwent"
some
changes in the processof economicgrowth.There weresome discontinuous
shiftsin thesectoralsharesin GDP fromtheprimary
to themanufacturing
and
sectors.
Various
factors
caused
such
shifts
but
discussion
would
be
tertiary
limitedto thefactorsincludedin themodel.
ProductionStructureand PerCapitaReal Income
we expecta negativerelationshipbetweenthe primaiyshare
Theoretically
and per capita real income.The coefficients
ofy{obtainedby the SEM, 2SLS
^hinepositivityof the coefficients
of Qj /Qtin the importdemand functionforconsumer
and capital goods obtained by the 3SJS methodis theoretically
unexpected.
^Thc significantlynegative coefficientsof AQ{/Q{ in the importdemand functionfor
intermediategoods obtained by the 3Sl^S method is not discussed here because Ahmad
(1986, p. 4761) have found no empiricalevidence to importsubstitutionin intermediate
goods.

67
and 3SLS methodsin the functionforthe primaryshare are positiveand

at the 1 per cent level (Tables 1, 2 and 3 AppendixA). It means
significant
thatper capitareal incomehad a positiverelationship
withtheprimary
share.
The main reasonforthiswas the continuousfallin the absoluteexpenditure
on the primaryproducts for the Bangladesh economyas a whole with
decliningtrendof per capita real income.The decliningabsoluteexpenditure
on theagricultural
share to decline.
productscaused theprimary
A positiverelationship
is expectedbetweenthemanufacturing
share and per
ofytobtainedby the SEM, 2SLS and
capita real income.But the coefficients
3SLS methodsin the functionforthe manufacturing
share are negativeand
at
the
5
and
1
cent
levels
2
and
1,
3, AppendixA). They
(Tables
per
significant
a
between
the
share and per
suggest negativerelationship
manufacturing
capita real income. It implies that the absolute exppenditureon the
manufacturedproductsincreasedin spite of the decliningper capita real
incomeforthe economy.This was probablydue to the greaterincreasein the
absolute expenditureof the upper income groups offsetting
the smaller
decrease in the absolute expenditureof the lower income groups on the
manufactured
products.
Since the per capita real income declined throughoutthe period under
it is ruledout as a causativefactor
study,on thebasis oftheoretical
knowledge
fora rise in the tertiary
share. Instead,growthrate of outputis used as an
variableto explainit.The coefficient
ofAQj/Qjbased on theSEM
independent
and 2SLS methodare insignificant
at the 5 per centlevelwhilethatbased on
the 3SLS methodis positiveand significant
at the 1 per centlevel(Tables 1, 2
and 3, AppendixA). The 3SLS resultsuggeststhatthegrowthrateofGDP had
a positiveimpacton the tertiary
share. Perhapsthe rise in the tertiary
share
was partlycaused by demand for increased services associated with the
ofGDP.
growth
ProductionStructureand AreaCropped,ImportsofCapitalGoods,Population,
EconomicOverheads,and Government
RevenueExpenditure
Area croppedhad a negativerelationshipwiththe primaryshare whichis
at the 1
unexpectedand the negativerelationshipis significant
theoretically
per centlevel(Tables 1, 2 and 3, AppendixA). Increasedarea croppedcaused
increased primaryproductionand increased value added in the primary
sector. Since the rates of change of output in manufacturing,
trade and
transportservicesare highlycorrelatedwiththe rate of change of outputin
agriculture(Islam 1977, p. 139), the increasedarea croppedenhanced the
value added in themanufacturing
and tertiary
sectorsmuchfasterthan in the
sectorand thus caused theprimary
shareto decline.
primary
A positiverelationshipis expectedbetweenthe primaryshare and imports
of capitalgoods as proportions
of GDP. On the contrary,
we have obtaineda
between
them
and thenegativerelationship
is significant
negativerelationship
at the 5 and 1 per cent levels (Tables 1, 2 and 3. AppendixA). The negative
relationshipperhapswas caused by the factthat an increase of importsof
capital goods was associated witha decrease of productionin the primary

68
Studies
sector due to mechanical breakdownof agriculturalmachineryand bad

weatheror thatgoodharvestsaccompaniedby goodweatherconditionsevenif
thecapitalgood importswouldhave declined.
share based on theSEM, 2SLS
ofN withthe manufacturing
The coefficients
at the5 and 1 percentlevels( Tables 1,
and 3SLS are positiveand significant
for
2, and 3, AppendixA). Theysuggestthat populationsize was important
expansion of the manufacturing sector providingwide market to the
manufactured
productsand economiesofscale in theirproduction.
betweenthe manufacturing
We have theexpectedpositiverelationship
share
T
of Q t /Qtbased on
and the tertiary
shareeven thoughthe positivecoefficients
at the 5 per centlevel( Tables
the SEM an4 2SLS methodare insignificant
at
1 and 2, AppendixA) and thatobtainedby the3SLS methodis significant
the 1 per cent level (Table 3, AppendixA ). Thus the positiverelationship
sectorparticularly
economicovertheads.
suggeststhatactivitiesofthe tertiary
bankingand construction,etc. appear to support the developmentof the
sector.
manufac-turing
share obtainedby the SEM, 2SLS
The coefficients
of Gt/Qtin the tertiary
at the 1
and 3SLS methodshave theexpectedpositivesignand are significant
per cent level (Tables 1, 2 and 3, Appendix A). They indicatethatgovernmentrevenueexpenditureincreasedthe value added in the tertiarysector
throughdirectand indirectexpansionofemployment.
ProductionStructureand Exports
sharebased on the threemethods
ofXt/Qtwiththe primary
The coefficients
are positiveas expected and that obtained only by the 3SLS method is
at the 1 per cent level (Tables 1, 2 and 3. AppendixA). This
significant
sector.
that
impacton the primary
exportshaveexpansionary
implies
The coefficientsof Xt/Qt have the unexpectednegativesigns in the
share
withthe manufacturing
share. Its negativerelationships
manufacturing
at the 1 per centlevel.Theymightbe caused by the factthat
are significant
processingof the primaryproducts increasedthe value added and share of
the manufacturingshare but increased manufacturedproduct were not
associated with increased manufacturedexports due to consumption
liberalization
(Khan 1963, pp. 208-231) and importsubstitutionstrategyof
industrialdevelopment
(Ahmad1986. pp. 305-308).
We have the expected positive relationship between the exports as
based on
share.The positiverelationships
ofGDP and thetertiary
proportions
the threemethodsare significantat 1 per cent level (Tables 1, 2 and 3,
thatexpansionofexportsincreasedthevalue added in
AppendixA) suggesting
sector.
the tertiary
Structureand ForeignCapitalInflow
Production
(i) PiimarySector
of Ft/Q| in the primaryshare are expectedto be negative
The coefficients
but they are found positiveusing the SEM 2SLS and 3SLS methods of

69
obtained
estimation(Tables 1, 2 and 3, AppendixA). The positivecoefficient
at the 5 per cent level whilethatbased on the
by the SEM is insignificant
at the 5 per centleveland thatbased on the 3SLS
2SLS methodis significant
at 1 per centlevel.This impliesthatwe have obtaineda
methodis significant
shareand foreign
betweenthe primary
capitalinflowas a
positiverelationship
is
below.
for
this
The
of
GDP.
relationship
given
proportion
justification
sectorwas receivedin the formoffood
Foreigncapitalinflowin the primary
assistance and projectassistance. Food assistance in
assistance,commodity
for
was
used
foodgrainimportsunder PL-480 whichgenerated
Bangladesh
funds.
Some
part of the counterpartfundsfinancedthe Rural
counterpart
WorksProgramme
( RWP)and Food forWorks Programme(FWP).Withthe
foodassistance increasedagricultural
of these programmes,
implementation
and area undercropproductiondirectly
productivity,
agriculturalproduction
throughprovidingirrigation,drainage. Hood control embankmentsand
ofruraland landless
ofroads and employment
throughconstruction
indirectly
labourers. It also created disincentivesforfarmersto produce. It is very
difficultto draw conclusions about its overall effectson the Bangladesh
wouldhave been muchlowerhad the subsidized
economy.Its negativeeffects
to theextremely
distributed
been
poorconsumers.
imported
foodgrains
The commodityassistance contributedto increasing productivityand
productionin the primarysector throughfinancingthe procurementand
ofagricultural
distribution
inputsto farmers.
The projectassistance in the agriculturalsectorwas spenton production
undertakenby the AgriculturalDirectorate,the Bangladesh Agricultural
the ForestDirectorate,
the ForestIndustries
Development
Corporation(BADC),
Development Corporation (FIDC), the Fisheries Directorate, Fisheries
DevelopmentCorporationand the LivestockDirectorate.Projectsof these
organizationsare both productionorientedand research oriented,which
sector.
or indirectly
increasedproductionin the primary
directly
ofBangladeshin the
Projectassistancewas allocatedto theruralinstitutions
post-liberationperiod. It financed projects which increased production
directlythroughprovidingagriculturalinputs, credit and services, and
indirectlythroughextendingphysical facilitiesforresearch and training,
and weavers.
fishermen
providing
trainingfacilitiesforfarmers,
a largeamountof projectassistance was spenton floodcontrol,
Relatively
and electricity
generationprojectsof the Flood Controland Water
irrigation
Resource Development.These projects through provision of irrigation
facilities,protectionfromflooddamage, improveddrainage of waterlogged
facilitatedthe increased productionin the
areas, and rural electrification
sector.
agricultural
(W ManufacturingSector
share to be
We expect the coefficients
of Ft/Q( with the manufacturing
but
have
them
with
the
obtained
SEM, 2SLS and
positive
negativesign using
3SLS methods( Tables 1, 2 -and3, AppendixA). The negativerelationships
between the manufacturing
share and foreign
of
capitalinflowas proportions

Studies
70
GDP are significant

at the 5 per cent and 1 per cent level.They may be
explainedas follows.
industrialization
in
Foreigncapitalinflowsupportedthe importsubstituting
sectorbut withan inappropriate
Bangladesh.It developedthe manufacturing
It createdtheindustrialcapacitymuchofwhichwas not utilized,
technology.
underutilization
beinghigherin the post-liberationperiod comparedto the
pre-liberationperiod in spite of higher inflowof foreigncapital. Some
industrieswere over-expanded
withforeign
capitalinflowbut theycontribute
outputdue to negativemarginal
nothingat themarginto themanufacturing
of
labour
and
in
those
industries
capital
productivity
(Soligoand Stern1965).
the productivity
offoreign
Furthermore,
capitalwas apparentlygreaterforthe
and tertiary
soctorthan the manufacturing
sector.Therewas foreign
primary
in the manufacturing
sectorbut the reportedvalue added
privateinvestment
fromthe industriesset up withforeignprivatecapital was verysmall or
negativebecause of artificially
highaccountingpricesof theirimportsfrom
theirparentcompaniesabroad.Thus the foreigncapital inflowhad boththe
on themanufacturing
sector.Probablyits negative
positiveand negativeeffects
effectswerelargerthanits positiveeffects
causingthe negativerelation.
(Hi) TertiarySector
The coefficients
share have the expectedpositive
of Ft/Qtwiththe tertiary
based on the SEM, 2SLS and 3SLS methodsare
sign and the coefficients
at the 5 per cent, 1 per centand 10 per cent level,respectively
significant
(Tables 1, 2 and 3, AppendixA). Theysuggestthatforeigncapitalinflowhad
share. This positiverelationship
positive impacton the tertiary
significantly
maybe explainedin thisway.
Aid financedprojectsin the tertiary
sectoremployedlocal people and thus
directlyincreasedits value added. Some of these projectshelpedproduction
and distribution
directlyand sometimes withsome timelags. Some other
projects facilitatedeconomic growththroughthe generationof external
economics.Some portionof the commodity
assistance was also used to
financemaintenanceimportsforthissector.Some of theaid financedprojects
in the agriculturaland manufacturing
sectors involvedconstructionworks
which directlyincreased the value added in the constructionsector.
Construction
activitiesunderthe RWPand FWP in theruralsectorincreased
the value added in this sector.Thus foreigncapital inflowas a proportion
of
GDP was foundto havea significantly
on thetertiary
share.
positiveeffect
V. CONCLUSION
Studies on the two-gaptheoryhypothesizethat foreigncapital inflowcan

constraintsto growth.Like the
promoteeconomicgrowthin LDCs by relieving
empiricalstudies of Cohen ( 198), Papanek ( 1973 ), Voivodas ( 1974) ,
Stoneman(1975),and Gupta( 1975),our studysupporttheabove hypothesis
and Enos (1970) who have founda negativerelationship
opposingGriffin
betweengrowthofoutputand foreign
ofGDP.
capitalinflowas proportion

71
Rahman (1967) and Griffin(1970) have propoundedthe "Psychological

Hypothesis"thatan increasein foreigncapital inflowcauses a relaxationof
domesticsavingeffortsand thus reduce domesticsaving.
the government's
Since the domesticsaving was the dominantconstraintto the economic
relationshipbetween
growthofBangladeshand we have founda non-positive
the domesticsaving and foreigncapital inflow,our study suggests that
Thus it tendsto
Bangladeshgovernment
mighthave relaxedits savingefforts.
as
Rahman
the
Griffin
(
1968),
(1970),
support
"Psychological
hypothesis"
Ahmed(1971), Weisskopf(1972), Papanek (1973), and Gupta (1975) have
it.
corroborated
Since foreigncapital inflowwas found to have a positiveeffecton all
categoriesofimportsin Bangladesh,our studylendssupportto thehypothesis
ofMassel,et al. (1972) and Voivodas(1974) thatthereis positiverelationship
betweenimportsand foreign
capitalinflow.
Like Cheneryand Syrquin(1975) we have foundthatforeigncapital inflow
structureoftheBangladesheconomy.They
caused a changein theproduction
have foundthattheprimaiysharedeclinesand themanufacturing
share rises
with an inflowof foreigncapital in LDCs. We have obtained a positive
relationshipbetween the primaryshare and foreigncapital inflowas
of GDP, and a negativerelationshipbetweenthe manufacturing
proportions
ofGDP. Thus, our findings
shareand foreign
are
capitalinflowas proportions
oppositeto thoseofCheneiyand Syrquinwithrespectto theeffectsofforeign
capital of Cheneryand Syrquinwithrespectto the effectsof foreigncapital
and manufacturing
shares. However,theyand we have
inflowon the primary
obtainedthe similarfindingof a positiverelationshipbetweenthe tertiary
as proportions
ofGDP.
shareand foreign
capitalinflow
to the growthof GDP but
Foreigncapitalinflowhad a positivecontribution
made the government
of Bangladeshto relax the savingefforts.
Therewere
in all categoreisof importsbut the extentof import
some importsubstitution
substitution
was notadequateenoughto reduceoverallimportdemand.There
wereshiftsin the sectoralshares ofGDP but such shiftswerediscontinuous.
Thus therewerestructural
changesin theBangladesheconomyduringthelast
two decades but such changes were not adequate to ensure self-sustained
capitalinflow.
growthreducingits dependenceon foreign
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74
Studies
AppendixA
TABLE 1
ESTIMATION OP THE MODEL FOR BANGLADESH

BY THE SEM : 1960/61-1979/80
(t-ratios in parentheses)
1.
Growth Function : OLS

AQl
-r^
yt
Si
R
= 0.18-r^ + 0.1877+
t
n.
(2.01)c
2.
(2.01)c
Mt
-l
0.18
9
R2= - 0.18d.f.l6
I)W=
(2.01)c
1.90
Saving Function : FOAM
^- + 0.10-O.6I)
0.05-^1
H
1.23 ll
wt
(0.47) (-0.91)
+1.14
(-3.09)
(-0.49)
R2 = 0.76 d.f.12
-=f
Wl
DW=1.24
(1.21)
3. (i) Import Function lor Consumer Goods : FOAM
<
ct
9t
= 0.23r^--
0.32
9t
(3.34)a
or
0.09
q
(- 2.93)b
0.82
<
9t
9t
(-0.80)
,,
(- 2.71)b
x,
+0.23 7^- +0.26-^
(1.31)
(2.02)c
R2=0.58
(ii)
(- 2.91)b
(iii)
OW= 2.49
Import Function for Intermediate Goods : OLS

Mt
- =- 0.02D+
Q
^t
AQ,
Ft
0.02 7=^+0.2277-+
t
^t
(1.21)
(3.69)a
d. f. 11
X,
0.5677t
o
R2 = 0.78 d.i. 13
(7.59)a
D'V=1.98
Import Function lor Capital Goods : FOAM

-
0.04D
+ 0.06
9t
(4.31)a
(1.83)c
I
^^
0.07
1-0.46
9t
(-0.70)
(5.79)a
Ir
X
- O.20
-^**
^
(-1.45)
R2 = 0.83
DW=1.19
___
7V'K/JBi (Conici.)

75
Ahmad : ForeignCapital Injlow and EconomicGrowth
TABLE 1 (Conici.)
4. (i) FunctionforPrimaryShare : OLS

-
Qt
= 0.92+0.73 log y -1.35 log '' -2.20
+ 0.66-^- + 0.05râ
(- 2.60)b
(- 3.92)a
(1.53) (3.62)a
9l
Qi
(1.28)
(0.13)
R2 =0.77
d.f. 11
I)W = 1.67
(ii) Function for Manufacturing Share : FOAM
= 0.08+0. 121) -0.22
log y + 0.28 log Nt+0.17
Qt
0.39^-1.06^.
^
9t
(0.60) (5.38)a (- 2.85)b
(2.69)b
(1.44)
(- 3.01)b
(- 6.22)a
R2 = 0.86 d.f. 10
DW=2.81
(iii) Function forTertiary Share : FOAM
9(
=0.21 - 0.070 (12.25)a (- 3.38)a
F
X,
AQ,
Ci,
0.05-~+ 1.36 r+ 0.45 77-+ 1.40 -~-
(-1.33)
(7.99)a
9t
(2.73)b
9(
(4.24)a
R2 = 0.92 d.f. 11
DVV=2.08
Two-tailed t-test is performed

a = significant at 1 per cent level
b = significant at 5 per cent level
e significant at 10 per cent level.

76
Studies
TABLE 2
ESTIMATION OP THE MODEL FOR BANGLADESH
BY THE 2SLS METHOD: 1960/61-1979/80
(t-ratios in parentheses)
1.
GrowthFunction
.v,k
-r-i-- 0.18 rf --0.18ri- +0.18

01
l.
9t
g
(2.07)b (2.07)b
(2.07)b
2.
Saving Function
S(
77-= 0.10 -
yt
3.
(0.85) (- 0.90) (- 0.54)
ty
(- 2.94)a
(1.13)
ImportFunctionforConsumerGoods
C.
-Mt-= 0.23 ---
0.31
0[
0.09
0t
o,
Qt
(- 2.83)a
(3.24)a
(ii)
Xi
Ft
1.21 ^+1.10-^-
AQt
0.6D - 0.06-^
0.81
Mt
o,
(-2 06)'1
(-0.78)
v
p.
+0.26-^-^
!
gi
+0.23
(1.29)
(2.00)
Import Function lor Intermediate Goods

i
AQ
- -- 0.02) + 0.02
0.22 ^- + 0.57 -r^-1+
*^t
^t
^t
O
wt
(8.70)a
(4.19)a
(- 3.36)a (0.99)
(iii) ImportFunctionforCapital Goods
Mt
I.
. 0.04D + 0.06 ~
Qt
q
(4.19)a
(1.77)r
.
0.07
(-0.64)
.
9t
9(
rt
+ 0.45 -^
(5.60)a
ft
Xt
0.20 rf
Qt
(-1.41)

(Conta.)
Ahmad : ForeignCapital In/lowand EconomicGrowth
77
TABLE 2 (Contei.)
4.
Function forPrimary Share
of=0.37
- 0.98 log yt
(- 3.51)a
(0.50) (3.80)a
M+
1.39 log pt - 5.07
9t
(- 3.16)a
x.
r-
iv
Wl
Wl
1.60^-+0.77
(2.21)b
(1.44)
(ii) Function for Manufacturing Share
or= 0.09 + 0. 121) -
0.22 logyL
. . +0.28
log
- N( + 0. 18
03HQyt
Qt
(0.65)
(5.28)a (- 2.83)a
(2.61)a
(- 2.95)a
(1.44)
105
(- 6.06)a
(iii) Function for Tertiary Share
9t.
- =0.21
Q
wt
(12.06)a
0.071)
I- 3.33)a
jq{
0.05-7:7-+
9t
(-1.30)
g,
1.37 r~+
t
(7.90)a
''
0.44 7^+
9t
(2.66)a
x,
1.40 rf
Q[
(4. 18)a
In 2SlvS method of estimation, t-statistics follow an asymptotic standard normal

distribution.
a = significant at 1 per cent level
b = significant at 5 per cent level
c = significanI at 10 per cent level.

o
yt
Studies
78
TABLE 3
ESTIMATION OF THE MODEL FOR BANGLADESH
BY THE 3SLS METHOD: 1960/61-1979/80
(I -ratios in parentheses)
1. Growth Function
Qt
St
Mt
F(
tm0A5i
+0I5qT+ai5T
wt
(1.79)c
(1.79)c
(1.79)c
2. Saving Function
^+0.14
wt
- 0.150 0.27^--wt
(2.85)a (1.77)b (- 7.85)a
0.82 rj- + 0.93 rr*yt

i
(-1.41)
(0.84)
3. (i) Import.FunctionforConsumer Goods

0.60
=0.36 -^
9|
Qt
(6.65)a
+0.60
Qt
( 7.51)a
-f0. 16 --+0.4O -
1.5)
(3.2<5)a
9t
Q{
Q{
(O.HO)
( 4.7:'0tl
9l
(2.55)b
(ii) Import Function lor Inlerniediate Good*

Mt
Q
- !- +0. 19- F( + 0.63~-X,

= - 0.031) - 0.03 AQ,
l
[
Wt
(- 4.50)a
(- 2.58)a
(10. 14)a
(3.83)a
(iii) Import Function lor Capital Goods
..k
Mt
=- O.01D +
q
(-1.59)
I,
+0.11
0.13^-9t
(15.45)a
^m
9t
(2.<>3)a
9t
+ 0.32
Xl
Ft +
0.39 r
-jM
^
(3.29)a
""
(3.8 l)a

(Contd.)
79
TABLE 3 (Con Id.)

4. (i) Function for Primary Share
Of=0.23+
1.23 log yt-
(0.64)
(3.27)a
1.81 log p( - 25.24

(- 3.40)a
Mf+7.53 p
-+7.02^.
(-14.08)"
(3.93)a
(7.37)a
(ii) Function for Manu laetu ring Share
Q? = 0.12
+0.1 ID -0.20
Q{
" + 0.20 log Nt +0.28

logyt
(2.26)b (8.32)a (- 4.29)a
(4.45)a
(5.31)
9t
a
a25^
Ft
(- 3.30)a
wt
X.
Gt
Ft
=0.26 - 0.09D +0.11 AQt
"0^+0.81 ^ -29 "+ 138 ~
(18.18)a(-4.39)a
(4.95)a
(6.43)a
(1.86)c
(4.89)a
In 3SLS method of estimation, t-statistics follow an asymptotic standard normal

distribution.
a = significantat 1 per ceni level

b = significantat 5 per cent level
c = significantat 10 per cent level.

(- 7.83)a
(iii) Function for Tertiary Share

9t
xt
L12?^

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Foreign Capital Inflow and Economic Growth: A Two Gap Model for the Bangladesh Economy

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The Bangladesh DevelopmentStudies

ForeignCapital Inflowand Economic

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Firstly,all the studies on the two-gaptheoryconcentrateon how foreign

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Ahmad: ForeignCapitalInflowand EconomicGrowth

structurein responseto internaland externaldemand are likelyto change

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1. GrowthFunction forBindingSaving Constraint

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Ahmad : ForeignCapital Inflowand EconomicGrowth

2. Domestic Saving Function

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The Bangladesh DevelopmentStudies

7. Per Capita Output

10. Importsof Services

11. ForeignCapital Inflow

12. Area Cropped

13. Govt. Revenue Expenditure

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Ahmad: ForeignCapitalInflowand EconomicGrowth

To derive the estimatingmodel, the constrainedinvestmentfunction,

of the equations of our estimating

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The Bangladesh DevelopmentStudies

of a variable in the systemof simultaneous equations. Secondly, theremay exist

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Ahmad: ForeignCapitalInflowand EconomicGrowth

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based on the SEM, 2SLS and

A foreignexchangecrisisbegan in Pakistanafterthe KoreanWar in 1952.

^rhc salientfeaturesof the foreign

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Ahmad: ForeignCapitalInflowand EconomicGrowth

at the 5 per cent level (Tables 1, 2 and 3. AppendixA). Thus our

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occurredin consumergoods produced

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Ahmad: ForeignCapitalInflowand EconomicGrowth

and 3SLS methodsin the functionforthe primaryshare are positiveand

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sector due to mechanical breakdownof agriculturalmachineryand bad

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Ahmad: ForeignCapitalInflowand EconomicGrowth

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GDP are significant

Studies on the two-gaptheoryhypothesizethat foreigncapital inflowcan

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Ahmad: ForeignCapitalInflowand EconomicGrowth

Rahman (1967) and Griffin(1970) have propoundedthe "Psychological

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Bruton1969: H. J. Bruton,The Two-GapApproachto Aid and Development:

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Ahmad: ForeignCapitalInflowand EconomicGrowth

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ESTIMATION OP THE MODEL FOR BANGLADESH

Growth Function : OLS

Saving Function : FOAM

3. (i) Import Function lor Consumer Goods : FOAM

+0.23 7^- +0.26-^