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Fiscal Policy Determinants of Bangladeshi

Economic Growth: An Econometric Analysis



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Md. Al Mamun Hannan Mia

La Trobe University University of Dhaka


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International Journal of
IJAR-BAE (May 2012) Applied Research in
Vol. 01. Issue 02. Article No. 06 BUSINESS
Full length Original Research Paper ADMINISTRATION &
IJAR-BAE ISSN: 1839-8456

Fiscal Policy Determinants of Bangladeshi Economic Growth:

An Econometric Analysis
Md. Al Mamun1*, Dr. Md. Abdul Hannan Mia FCMA2*
Al-Mamun, Md., Senior Lecturer in Finance, Department of Business Administration, East West University. Dhaka, Bangladesh.
Dr. Md. Abdul Hannan Mia FCMA, Professor in the Department of Management Information System (MIS), University of Dhaka.
*Corresponding authors e-mail:,

Article History ABSTRACT

Received: 25-04-2012 A Today Bangladesh is exactly 41 years old today. However, even after four decades
Accepted: 18-05-2012 of her independence Bangladesh still remains as one of the most impoverished
Available online: 31-05-2012 countries in the world. Even though from day one of her independence government
fiscal policy was targeted to improve the living standard of its people, till today
poverty remains as its key challenge as its per capita income is one of the lowest in
the world. Adaption of democratic free market policy back in 1990s was seen to be a
Keywords: major breakthrough for Bangladesh towards its economic growth and prosperity as
Autoregressive, economic various liberalized economic policies including its fiscal policy changes has been
growth, fiscal policy, market made to achieve the economic objectives. Therefore, this study intends to focus on
failure, regulations, identifying the impact of various fiscal policy determinants of Bangladeshi economic
growth along with drawing a comparative analysis of the impact of fiscal policy
variables on the economic growth of Bangladesh during the pre-economic
liberalization and post economic liberalization periods. Using fiscal policy variables
data set from 1972 to 2009, the study concludes that government expenditure,
development assistance and export are the most important factors leading to
economic growth. Moreover, the study reveals is no significant difference between
JEL Classification: the economic performances measured by GDP in post liberalization and pre
E100, E120, E130, C010, C020. liberalization regime.
Citation: Al Mamun Md. et al. (2012), Fiscal Policy Determinants of Bangladeshi Economic Growth: An Econometric Analysis.
IJAR-BAE 1(2): p. 46 - 55.

Copyright: @2012 Al Mamun Md. et al. This is an open access article distributed under the terms of the Creative
Common Attribution 3.0 License.

1.0 Introduction

Bangladeshi economy has been plugged with several challenges over the years. According to World Bank
(2009) Bangladesh remains a poor, overpopulated, and inefficiently-governed nation for most part of its
life time. Although more than half of its Gross Domestic Product (GDP) is generated in the service sector,
nearly two-thirds of its work forces are employed in the agriculture sector, with an overall absence of
much needed productivity enhancing logistics. Since 1991 with the adaption of democratic governance
the economy has grown at the rate of 4.5-6% per year despite the presence of violent political unrest,
inefficient state-owned enterprises, delays in exploiting resources, insufficient power supplies, and slow
implementation of economic reforms, ADB (2003). Garments exports and remittances from Bangladeshis
working overseas have been and still are two most important drivers for the economic growth in
Bangladesh, ADB (2003).

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Moreover ADB(2003) and World Bank (2009) suggested that, Bangladeshi economy suffers from various
shocks in both the supply and demand side with high poverty, imperfection in factor and product market,
continuous disequilibria in the economy, defective administrative structure, and inappropriate tax
structure, heavy dependence on external sector, lack of capital stock, infrastructure bottlenecks, high
unemployment rate, low standards of living, low level of savings and investment, unskilled labor market,
acute balance of trade deficit and low gross domestic growth rate. Moreover, Bangladesh is not only
technologically and managerially inefficient but also underdeveloped in the areas of key infrastructure
such as transport, telecommunication, and energy sectors, World Bank (2009). Against all these
drawbacks a recent study by World Bank (2011) suggests that the growth in real GDP has significantly
grew to 6.7 percent in FY11, which is a sharp upward trend in growth after declining during FY06-09. But
as mentioned earlier this strong performance can only be repeated in FY12 if exports continue to grow
especially in garment exports and remittances continue to pour into the country. Additionally World
Bank (2011) suggested that investment must be boosted by improved infrastructure services
particularly power to continue the growth rate.

These observations of development partners like World Bank and ADB must have some theoretical
background with strong practical underpinnings, since an assessment of the real contributors of
Bangladeshi economic growth can help the government to design its economic policies especially the
fiscal policies.

2.0 Literature review

The earliest organized school of macroeconomic thought is the classical school. The classical
economists supports market price mechanism which is built on the assumption of a smooth functioning
market with effective resource allocation, Ekanem and Iyoha (1999) to guarantee economic freedom for
all the citizens of the state within its built-in flexibility mechanism. This school of economic thoughts
excludes the need for conscious government intervention in the market and planning for economic
output. However history including the latest global economic crisis has proven the fallacies of such
idealistic economic thought as evident by frequent market failure and general level of economic
disequilibrium. Peter G. Brown (1992) suggested four reasons for market failure including the facts that
market cannot decide certain unavoidable questions which is essentials to economic wellbeing.
According to Ogiji (2004) the market mechanism has historically failed to achieve a satisfactory level of
welfare for the society and ensuring equitable or fair distribution of income and wealth. The 1930s Great
Depression was a confirmation of the reality of the failure of the market economy which led to the
development of Keynesian school of economic principles. More recently the global economic meltdown
has highlighted the need for optimum government intervention for greater social good. In Keynesian
economic model government intervention has a definite place in the economic life of the society and
government does so through the use of macroeconomic policies such as fiscal and monetary policies.

In fact the role of fiscal policy variables in determining the economic output has been documented under
Keynesian economic model in various studies. For example Solow (1956) in his study suggested that the
larger the investment and saving rate are the more cumulative capital per worker is produced. Tyler
(1981) examining a sample of 55 developing countries reported that exports and investments are the
main determinants of economic growth. Moreover Plossner (1992) suggested that the gross capital
formation affects the economic growth either increasing the physical capital stock in domestic economy
directly or promoting the technology indirectly. Levine and Renelt (1992), Knight, Loyaza and Villanueva
(1993) and Nelson and Singh (1994) all confirmed that public investments on infrastructure have an
important positive effect on economic growth over the period 1980-1990. Moreover, lomstoerm,
Lipsey, Zejan (1994) found a unidirectional causal relationship between FDI inflows as a percentage of
GDP and the growth of per capita GDP for all developed countries over the period 1960-1985. Working
with the European Union data over the period of 1980-1996, oudatsou (2003) suggested that FDI
inflows have a positive effect on economic growth both directly and indirectly through trade
reinforcement. More recently Panagiotis Konstantinou, Athanasios Tagkalakis (2011) found evidence
that cuts in direct taxes generate a positive effect on consumer and business confidence, while the same
applies in cases of higher non-wage government consumption. However, higher government wage bills

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and government investment reduce confidence, with the effect being more pronounced when the debt to
GDP ratio is high.

Zhang (1999) examined the causal relationship between foreign direct investment and economic growth
with Granger causality analysis for 10 Asian countries. The results of the study suggested that there is a
unidirectional causality between foreign direct investment and economic growth with direction from FDI
to GDP except in the case of Indonesia where the direction is bi-directional and no causality evidence for
Korea and Philippines. Therefore this literature has produced contrasting results and no definitive
agreement on the impact of fiscal policies on growth has yet emerged. In fact the debate on the
effectiveness of fiscal policy for promoting growth and development remains inconclusive, since various
empirical studies have come up with varying results. Moreover Adeoye (2006) using the studies of
Thornton (1990), Lin and Liu (2000) who found a net positive effect of fiscal policy variables on
macroeconomic outcome; Baily (1980) and Feldstein (1980) who found a net negative effect of fiscal
policy variables on macroeconomic outcome and finally Anderson and Jordan (1968), Hafer (1982),
Saunders (1995), Saunders (2006) who provided an inconclusive result regarding the effectiveness of
fiscal policy on economic growth and stability; argued that fiscal policy has variant empirical effect on the
economic outcome of a country. Matthieu Charpe, Peter Flaschel, Florian Hartmann, Christian Proao
(2011) studying the role of fiscal and monetary policy in stabilizing unstable economies by using a Tobin-
like macroeconomic portfolio approach, and the interaction of heterogeneous agents on the financial
market to characterize the potential for financial market instability. They found that specific but
unorthodox fiscal and monetary policies have to be used to stabilize such unstable macroeconomics.
Ingrid Ott, Susanne Soretz (2008) argued that depending on the region's size a certain type of the fiscal
policy in the form of public input maximizes economic growth. Simon Feeny, Mark McGillivray (2010)
looks at interactions between foreign aid and the public sector in developing countries, especially those
considered to be fragile. The study concluded that foreign aid increases investment and consumption
expenditures and decreases the level of borrowing and tax revenues.

Therefore the academic literature cited above creates a research gap for studying the effects of fiscal
policy variables on Bangladeshi economic growth. If Bangladesh were to develop as a middle income
country by 2015 with less than three years remaining, the understanding of the effect of fiscal policy
variables on the economic growth can hardly be overemphasized. In fact just before when a budget is due
by June of any year in Bangladesh, the policy makers must revisit how fiscal policy variables like
government expenditure, private investment, inflation rate, capital inflow, balance of trade, domestic
capital formation, remittance, private consumption etc can affect the GDP of the country.

3.0 Data & methodologies

The study has been conducted using a list of fiscal policy variables regarding Bangladeshi economy from
1972 to 2009 with data retrieved from various sources including Bangladesh Bank, Ministry of Finance
(MoF) and in World Bank data source. Even though data is available up to 2011, however, to have
equaled number of observations for pre liberalization and post liberalization period the study was
restricted to the window of analysis form 1972-2009. The fiscal policy variables collected over this 38
years includes: GDP, consumption (C), government expenditure (GE), export (EX), import (IM), gross
domestic savings (GDS), gross fixed capital formation (GrossFCa), development assistance (DA), private
consumptions (PC), total remittance (RM). Latter on the study adapted a comparative analysis
methodology as followed by Ogbole F. Ogbole, Sonny N. Amadi and Isaac D. Essi (2011). The comparison
has been made possible by introducing a dummy variable to assess the structural break i.e. if there is a
difference in the affect of fiscal policy variables in post liberalization and pre-liberalization period on the
outcome variable i.e. Bangladeshi economic growth measured by GDP. The entire set of analysis involves
stationarity test, ordinary least square regression (OLS) and Cochrane-Orcutt for residuals to test the
suitability and the stability of the regression model(s).

Regarding the test of stationarity, it may be mentioned that, such a test is very important since
macroeconomic time series data are considered non-stationary i.e. they follow unit root. Nelson and
Plosser (1982) led a large volume of literature investigating possible non-stationarity of macroeconomic
time series data. Since the current study employs a dummy variable to see the effectiveness of fiscal
policy variables on Bangladeshi economic growth, it is imperative to check for non-stationarity, because

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the presence of unit root means change in government policy after post liberalization period compared to
the post liberalization period will have little or no meaningful impact on the economic outcome. Even
though the problem of autocorrelation due to the presence of unit root in time series data is a serious
threat, theoretically still an OLS conclusion can be somehow important. However the study has taken
care of such problem. Moreover, the issue of multicollinearity also affects the result since the OLS may
produce a higher R2, but with most of the independent variable having no statistically significant
explanatory power. This is a real comedy of error. Thus the study has taken care of these issues by
considering lagged log estimation before running the OLS to find the effective determinants of
Bangladeshi economic outcome from amongst the various available fiscal policy variables.

Therefore, the present study has at first conducted a multiple correlation test to get a hint of
multicollinearity problem. Then proceeded with the unit root test using Dickey, D. A. and Fuller, W. A.
(1979) and Peter C. B Philliphs and Perron, P. (1988) methodology to get rid of the non-stationarity
problem as suggested by Plosser (1982). Latter on the optimum autoregressive AR (*) level has been
identified to solve autoregressive problem. Moreover, several OLS have been tested including for the
overall time period of 1972-2009 and for time period of 1972-1990 and then 1990-2009 to see the effect
of dummy variable used as a proxy for counting the effect of restoration of parliamentary democracy in
the 1990 and onward. Latter on the residual tests have been conducted to justify the result of OLS.

Therefore the study has identified several models including:

GDP = f(C, GE, EX, IM, GDS, GrossFCa, DA, PC, RM).
The above functional relationship can be expressed in following log-transformed OLS format:

Moreover, the first differenced OLS with introduction of a dummy for structural break identification can
be expressed as:
GDP 0 1LCt 1 2LGEt 1 3LEX t 1 4LIMt 1 5LGDSt 1 6LGrossFCat 1 7 LDAt 1 8LPCt 1 9LRM t 1 10Dummy i

Moreover, a priori expectation is: 1 , 2 , 3 , 5 , 6 , 7 , 8 , 9 , 10 0 and 4 0.

4.0 Analysis and findings

At the very outset it is important to highlight the nature of the data with preliminary statistical analysis.
The first part of figure 01 shows that from 1972 to 2009 there is a clear upward trend of the log-
transformed GDP of Bangladesh measured in US$. This indicates a possible presence of autocorrelation in
the data set. Moreover, the second part of figure 01 also figure out that, the log-transformed GDP over the
period of 19721990 is much more volatile with a deterministic upward trend while the log transformed
GDP of 1991-2009 is much more stable with a deterministic upward trend as well. Furthermore it is
clearly evident that the economic performance of Bangladesh measured in term of GDP is much higher
during the post 1990s democratic regime than the GDP of Bangladesh in the autocratic and dictatorial
regime of the pre 1990s. In the overall trend of the GDP from 1972-2009, the period of 1973-1974
represent drastic growth in the GDP. One possible explanation of this is presence of relatively high
amount of development assistance from abroad. It is clear from the graph that from 1974 to 1977
Bangladeshi economy suffered much due to political turmoil; however the overlook continued to become
better as time progressed.

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Figure 01: Log-transformed GDP of Bangladesh

3.01 Testing for multicollinearity and stationarity

At initial stage a multiple correlation test has been considered at 5% significance level to assess the
possible presence of multicollinearity. The result presented in table 1 clearly hits out that there is a
serious presence of multicollinearity problem.

Table 01: Pearson Correlations Matrix

LGDP 0.78 0.57 0.67 0.65 0.64 0.79 0.57 0.79 0.55
(0.00*) (0.00*) (0.00*) (0.00*) (0.00*) (0.00*) (0.00*) (0.00*) (0.00*)
LC 0.48 0.71 0.70 0.60 0.94 0.58 0.74 0.47
(0.00*) (0.00*) (0.00) (0.00*) (0.00*) (0.00*) (0.00*) (0.00*)
LGE 0.66 0.66 0.56 0.51 0.85 0.38 0.73
(0.00*) (0.00*) (0.00*) (0.00*) (0.00*) (0.01*) (0.00*)
LE 0.99 0.45 0.75 0.70 0.56 0.58
(0.00*) (0.00*) (0.00*) (0.00*) (0.00*) (0.00*)
LI 0.45 0.74 0.70 0.54 0.57
(0.00*) (0.00*) (0.00*) (0.00*) (0.00*)
LGDS 0.62 0.42 0.49 0.18
(0.00*) (0.00*) (0.00*) (0.14*)
LFCF 0.62 0.70 0.49
(0.00*) (0.00*) (0.00*)
LDA 0.45 0.89
(0.00*) (0.00*)
LPC 0.44
* the test is significant at 5% level

Moreover, the study also tried to test the stationarity of the data, by using both Dickey, D. A. and Fuller,
W. A. (1979) and Peter C. B Philliphs and Perron, P. (1988) methodologies. This has been done for all the
variables including dependent and independent variables only after the variables have been log

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transformed to ensure normality. Moreover, the unit root test has been performed for both level and first
difference with intercept only and with trend and intercept. This is because any time series data should
have an intercept and a possible deterministic trend. The result suggests almost all the variables show no
unit root at first differenced at 1%, 5% and 10% level of significance. However, a number of variables
have been found to have unit root free distribution even at level but with both trend and intercept. One
interesting observation is that a higher number of variables have shown unit free distribution at level
with trend and with trend and intercept in case of Peter C. B Philliphs and Perron, P. (1988) methodology
than in case of Dickey, D. A. and Fuller, W. A. (1979) methodology. This is simply a methodological
difference between Phillips-Person and ADF tests. The complete result has been presented in the
following table of 02.

Table 02: Test Result for Stationarity in the Variables and Determination of Optimum Lags
Variables Phillips-Person ADF Tests
Level First differenced Level First differenced
Intercept Trend and Intercept Trend and Intercept Trend and Intercept Trend
only intercept only intercept only intercept only and
LGDP -0.154 -4.120** -9.734** -10.895** 0.583 -7.548** -8.639** -7.444**
LC -1.669 -1.621 -6.127** -6.201** -4.231** -1.621 -6.127** -6.182**
LGE -13.156** -21.941** -5.939** -6.387** 2.939 -5.299** -5.939** -7.881**
LEX -3.458* -2.172 -6.091** -6.633** -2.688 -2.368 -6.091** -6.351**
LIM -3.453* -2.175 -6.067** -6.529** -2.716 -2.351 -6.067** -6.335**
LGDS -4.924** -7.241** -19.486** -26.260** -1.743 -1.444 -4.605** -12.113**
LGrossFCap -1.787 -1.691 -6.034** -6.163** -2.152 -1.703 -3.464* -3.714*
LDA -10.507** -9.282** -12.429** -16.947** -11.403** -10.522** -9.882** -9.939**
LPC -1.166 -3.780* -10.228** -10.424** -0.860 -3.624* -8.111 -8.018**
LRM -3.284* -2.081 -5.676** -6.046** 3.588* -0.674 -3.564* -6.638**
** indicates reject the null hypothesis of a unit root at 1%, 5% and 10% criteria.
* indicates rejection of the null hypothesis of a unit root at 5% and 10% criteria only. Moreover, the selection of lag is
on Schwaraz informationLEAST SQUEARE
criterion (SIC) and(OLS) REGRESSION
Bartlett MODELS:
Kernel criteria.

3.01 The result

The log-transformed GDP and other variables have been used in developing the OLS models. A total of
four models have been estimated with Model 1 and 2 focusing on the entire period of 1972-2009.
However the difference between model 1 and 2 is that model 1 considered lagged dependent and
independent variables while Model 2 considered level dependent and lagged independent variables.
Moreover, Model 3 covered the period of 1971-1990 while model 4 covered the period of 1991-2009
with considered level dependent and lagged independent variables. The lagged form has been used to
solve the problem of multicollinearity. Additionally as all the variables data have shown significant
presence of unit root, autoregressive i.e. AR (1) has been added with all these models to neutralize the
effect of serial autocorrelation. The OLS result has been presented in the following table no 3.

The results of the regression indicates the predictors explains 95.9% of the variance in lagged GDP over
the period of 1971-2009 (R2 = .959, F = 47.27, p <.01), explains 99.1% of the variance in log-transformed
GDP over the period of 1971-2009 (R2 = .991, F = 75.45, p<.01), explains 98.8% of the variance in log-
transformed GDP over the period of 1971-1991 (R2 = .988, F = 45.34, p<.01), and explains 99.8% of the
variance in log-transformed GDP over the period of 1991-2009 (R2 = .998, F = 378.99, p<.01) for model
1, model 2, model 3 and model 4 respectively.

The result from model 1 regarding the overall period of 1972-2009 suggests that the regression model
best fits with maximum regressors considered significant under lagged dependent and independent
variables model with development assistance, export, government expenditure are positively related to
the GDP while consumption, gross domestic savings, import, private capital, remittance, dummy variable

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for structural break and autoregressive AR(1) is negatively related to the lagged LGDP of Bangladesh.
The result is bit surprising since under Keynesian model of four sectoral economies, consumption should
foster economic growth. Moreover, remittance and private capital should have played a positive role the
development of Bangladeshi economy. Other model selection criteria like AIC and SIC, log likelihood and
squared sum of residuals also shows that model 1 nicely fits in explaining the fitted lagged LGDP of
Bangladesh. It may be worthy to mention that, the general sense of economic wisdom prevails in case of
the positive contribution of export and negative contribution of import in an open economy like
Bangladesh. The result suggests that export is the most of important contributor in Bangladeshi economy
with = 1.99 and p <0.05. Moreover the effect of development assistance has been found to be very vital
for Bangladeshi economic growth with = 0.56 and the p < 0.05. Interestingly even after taking the
lagged variables, AR (1) still showing a statistically significant impact on the outcome of Bangladeshi
economic growth. However, the dummy variable is not statistically significant for Bangladeshi economic
growth indicating that there is no difference on the trend of economic growth of Bangladesh during the
pre and post liberalization period. Thus the policies taken after 1990s with the introduction of free
market policy have yielded statistically no significant positive impact on Bangladeshi economic growth.
This is true for model 2 as well, where the dependent variable was LGDP without any lag. on The reason
behind this is might be the pervasive nature of corruption that Bangladesh suffers from in its overall
macroeconomic management, coupled with poor and inefficient infrastructure like lack of electricity and
other alternative sources of energy, poor transportation infrastructure etc.

Table 03: Ordinary Least Square Result with LGDP(-1) and LGDP as Dependent Variable in Model 1 and
Remaining Models Respectively
Model 1 (Overall) Model 2 (Overall) Model 3 (1972-1990) Model 4 (1991-2009)
LC(-1) -0.02 0.01 0.01* 0.01 0 0.02* 0.02 0.01 0.03* 0.61 0.54 0.31
LDA(-1) 0.56 0.14 0.00* 0.18 0.08 0.04* 0.46 0.13 0.01* -0.18 0.07 0.05*
LEX(-1) 1.99 0.32 0.00* 0.35 0.18 0.05* -0.12 0.29 0.69 0.72 0.22 0.02*
LGDS(-1) -0.04 0.02 0.01* -0.01 0.01 0.23 0.01 0.02 0.61 1.10 0.82 0.23
LGE(-1) 0.07 0.02 0.00* 0.80 0.08 0.00* 0.38 0.17 0.05* 0.41 0.28 0.21
LFCF(-1) 0.02 0.01 0.11 0.00 0.01 0.88 0.01 0.01 0.19 -1.26 0.29 0.01*
LIM(-1) -2.55 0.33 0.00* -0.37 0.24 0.14 0.39 0.43 0.40 0.29 0.28 0.34
LPC(-1) -0.02 0.01 0.01* 0.00 0 0.98 -0.01 0.01 0.39 0.00 0.01 0.93
LR (-1) -0.23 0.06 0.01* -0.05 0.06 0.41 0.18 0.15 0.27 0.38 0.10 0.01*
DUMMY -0.07 0.07 0.32 -0.02 0.04 0.56 - - - - - -
AR(1) -0.40 0.15 0.01* 0.00 0.01 0.70 -0.02 0.02 0.37 -0.62 0.42 0.20
R2 0.959 0.991 0.988 0.998
Adjusted R2 0.939 0.986 0.966 0.996
SSR 0.11 0.021 0.005 0.000
Log likelihood 55.09 76.75 47.87 69.41
DW-stat 2.01 2.09 2.24 2.58
AIC -2.27 -3.75 -3.985 -6.75
SIC -1.70 -3.166 -3.392 -6.16
F-statistic 47.27 75.45 45.34 378.99
Prob(F-stat) 0.0000 0.0000 0.000 0.000

Moreover the second model shows that there is a positive contribution of lagged consumption,
development assistance, export, government expenditure, in the overall economic development of
Bangladesh. However, amongst these variables the contribution of government expenditure is the most
significant with = 0.80 and p < 0.05 followed by export with = 0.35 and p 0.05 and then the
contribution of development assistance with = 0.18 and p< 0.05. Both models 1 and 2 find a
statistically significant role of intercept in the models.

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Though the role of market liberalization has been found to cater statistically insignificant result for the
growth of Bangladeshi economy, yet the present study has generated OLS for the periods of 1972-1990
and 1991-2009 separately. For the period of 1972-1990, consumption ( = 0.02 and p < 0.05),
development assistance ( = 0.46 and p < 0.05), government expenditure ( = 0.38 and p 0.05) have
been found to be the most important contributor for economic growth of Bangladesh. Finally for the
period of 1991-2009, development assistance ( = - 0.18 and p 0.05), export ( = 0.72 and p < 0.05),
fixed capital formation ( = -1.26 and p < 0.05) and remittance ( = 0.38 and p < 0.05) was found to be
the most important contribution for Bangladeshi economic growth. However, there has been a sign
problem in the fourth model especially with fixed capital formation. Moreover in this model development
assistance has been found to be negatively contributing to Bangladeshi economic growth. This finding is
different from the earlier three models. Additionally the contribution of remittance in this model has
been recognized in this model. In fact export and remittance has been found to be the most important
contributor for the growth of Bangladeshi economy.

Looking at the value of R2 it can be easily found that R2 <DW statistics for these four models and more
importantly the value of DW-statistics is more than 2.00 i.e. 2.01 for model 1, 2.09 for model 2, 2.24 for
model 3 and 2.58 for model 4. Since the value of R-squared is lower than DW statistics, it clearly confirms
that the there is no possible presence of spurious regression.

Moreover, the OLS result clearly suggests that AR (1) has performed a good job in neutralizing the effect
of serial autocorrelation. Yet to be absolutely assured of this, the study has employed the Cochrane-
Orcutt two-step method for residuals diagnostics. In this method the first step is to calculate the OLS and
determine the residual term. After determining the residual term a modified regression based on the
residuals of the equation suspected of having the first-order autocorrelation must be run to identify if the
OLS calculated earlier suffers from serious autocorrelation problem. This new regression equation is run
on the basis of this equation i.e. t t 1 t . The result of the residual diagnostic based on the
Cochrane-Orcutt two-step methodology has been presented in the following table 4.

Table 04: Residual Diagnostic based on the Cochrane-Orcutt two-step Methodology

Items Model 1 (Overall) Model 2 (Overall) Model 3 (1972-1990) Model 4 (1991-2009)
Resid(- -0.026
-0.079 -0.128 -0.302
Resid (-1)t-statistic -0.153 -0.442 -0.515 -1.189
Resid (-1) p-value 0.878 0.661 0.614 0.254
Resid (-1) R2 0.000 0.005 0.016 0.091
Resid (-1)DW stat 1.946 1.705 1.957 2.163
The estimated result of the table above shows that the residual is statistically not significant with the first
order lagged term; therefore the hypothesis of the existence of first-order autocorrelation in residuals
can be rejected for all the four models, i.e. there is not further problem of serial autocorrelation in the
regression estimations. Moreover the following figure 02 also highlights the residual plot to confirm the
findings of the Cochrane-Orcutt two-step methodology.

Figure 02: Plot of Residual Diagnostics

Model 1 (Overall: 1972-2009) Dep: LGDP(-1) Model 2 (Overall: 1972-2009) Dep: LGDP
11.2 11.2

10.8 10.8

10.4 10.4

.12 .2
10.0 10.0
.1 9.6
.04 9.6

.00 .0
-.12 -.2
1975 1980 1985 1990 1995 2000 2005 1975 1980 1985 1990 1995 2000 2005

Residual Actual Fitted Residual Actual Fitted

Model 3 (Overall: 1972-2009) Dep: LGDP Model 4 (Overall: 1972-2009) Dep: LGDP

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10.6 11.0

10.4 10.9

10.2 10.8
.08 .012 10.7
.04 .008 10.6
.00 .004 10.5
-.04 .000

-.08 -.004

-.12 -.008
72 74 76 78 80 82 84 86 88 90 1994 1996 1998 2000 2002 2004 2006 2008

Residual Actual Fitted Residual Actual Fitted

4.0 Discussions and conclusion

Therefore in a nutshell it can be said that the growth of Bangladeshi economy vastly depends on the
proper management of government expenditure, improvement export capabilities, continuous finding of
development assistance and its proper utilization and ensuring the flow of remittance.

Since the direction of the relationship between development assistance and LGDP has been found to be
positive for first three models, therefore, current government policy of avoiding and agitating World
Bank for its allegation against the government of corruption can bring serious negative consequence for
the potential growth of the GDP of Bangladesh. Moreover as both consumption and export has
statistically significant positive impact on the GDP of Bangladesh, government should have redesign the
process of smoothening the export and increasing this capacity to make sure Bangladesh quickly
develops as a middle income country. Interestingly government expenditure has been found to be one of
the most important fiscal policy variables. Thus public expenditure by government and its transparency
is crucial for the development of Bangladesh. The result highlights that planned government expenditure
in infrastructure and capacity buildings will surely help Bangladesh develop quickly as a strong economy.
Finally in conclusion it can be said that, probably the most important practical implication of this study is
the revelation of no significant difference of economic performance between pre 1990s and post 1990s
period. Therefore both the periods of democratic and the military ruling yielded similar economic
outcome for the country. A possible explanation for this can be found in the wide scale corruption,
misappropriation and poor governance and politically motivated public expenditure at far greater rate
under current democratic system of governance. Thus without a strong, transparent and effective
political governance, Bangladesh will remain as one of the most poverty prone country in the world no
matter what ever economic prescription the government undertakes.


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