Since independence in 1971, Bangladesh has received more than $30 billion in grant aid and loan commitments from foreign donors, about $15 billion of which has been disbursed. Major donors include the World Bank, the Asian Development Bank, the UN Development Program, the United States, Japan, Saudi Arabia, and west European countries. Bangladesh historically has run a large trade deficit, financed largely through aid receipts and remittances from workers overseas. Foreign reserves dropped markedly in 2001 but appear to have now stabilized in the $2.2 to $2.5 billion range (or about 2.0-2.2 monthly import cover). On May 5, 2005, reserves stood at $3.24 billion.

In the mid-1980s, there were encouraging, if halting, signs of progress. Economic policies aimed at encouraging private enterprise and investment, denationalizing public industries, reinstating budgetary discipline, and liberalizing the import regime were accelerated. From 1991 to 1993, the government successfully followed an enhanced structural adjustment facility (ESAF) with the International Monetary Fund (IMF) but failed to follow through on reforms in large part because of a preoccupation with the government's domestic political troubles. In the late 1990s the government's economic policies became more entrenched, and some of the early gains were lost, which was highlighted by a precipitous drop in foreign direct investment in 2000 and 2001. The current government has promised a return to liberalization. In June 2003 the IMF approved 3-year, $490-million plan as part of the Poverty Reduction and Growth Facility (PRGF) for Bangladesh that aims to support the government's economic reform program up to 2006. Seventy million dollars was made available immediately. In the same vein the World Bank approved $536 million in interest-free loans.

Efforts to achieve Bangladesh's macroeconomic goals have been problematic. The privatization of public sector industries has proceeded at a slow pace--due in part to worker unrest in affected industries--although on June 30, 2002, the government took a bold step as it closed down the Adamjee Jute Mill, the countryís largest and most costly state-owned enterprise. The government also has proven unable to resist demands for wage hikes in government-owned industries. Economic growth has been further slowed by a largely dysfunctional banking system. This has impeded access to capital. State-owned banks, which control about three-fourths of deposits and loans, carry classified loan burdens of about 50%.

The IMF and World Bank predict GDP growth over the next 5 years will be about 4.5%, well short of the 7%-8% that they feel is needed to lift Bangladesh out of its severe poverty. The post-September 11, 2001 global economic downturn hit especially hard Bangladesh's main export industry--readymade garments. As a result, exports, which were growing 18% annually, are now growing 8%. The initial impact of the end of quotas under the Multi-Fiber Arrangement has been moderate and uneven with some sectors, especially knitwear, experiencing gains while other sectors report a 10-20% drop in orders. Downward price pressure means Bangladesh must cut final delivered costs considerably if it is to remain competitive in the world market. Foreign investors in a broad range of sectors are increasingly frustrated with the politics of confrontation, the level of corruption, and the slow pace of reform. Bangladesh may well lose not only potential investors but also those already invested if governance does not improve.

Despite the country's politically motivated general strikes, poor infrastructure, and weak financial system, Bangladeshi entrepreneurs have shown themselves adept at competing in the global garments marketplace. Bangladesh exports significant amounts of garments and knitwear to the U.S. and the European Union (EU) market. As noted, the initial impact of the end of quotas on Bangladesh's ready-made garment industry has been moderate. Downward price pressures, however, mean Bangladesh must cut final delivered costs considerably if it is to remain competitive in the world market. Bangladesh has been a world leader in its efforts to end the use of child labor in garment factories. On July 4, 1995, the Bangladesh Garment Manufacturers Export Association, International Labor Organization, and UNICEF signed a memorandum of understanding on the elimination of child labor in the garment sector. Implementation of this pioneering agreement began in fall 1995, and by the end of 2001, child labor in the garment trade virtually had been eliminated.

The Bangladesh Government continues to court foreign investment, something it did fairly well in the 1990s in private power generation and gas exploration and production, as well as in other sectors such as cellular telephony, textiles, and pharmaceuticals. In 1989, the same year it signed a bilateral investment treaty with the United States, it established a board of investment to simplify approval and start-up procedures for foreign investors, although in practice the board has done little to increase investment. Bangladesh also has established successful export processing zones in Chittagong (1983), Dhaka (1994) and Comilla (2000), and has given the private sector permission to build and operate competing export promotion zones (EPZs).

The most important reforms Bangladesh should make to be able to compete in a global economy are to privatize the state-owned enterprises (SOEs), deregulate and promote foreign investment in high-potential industries like energy and telecommunications, and take decisive steps toward combating corruption and strengthening rule of law.