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Eidonomics: Linkages and leakages from consumption

Rizwanul Islam
DURING the days leading to Eid, news on both electronic and print media had been replete with stories of people shopping, going home, going on vacation, etc. The messages conveyed through them have focused on issues like high prices of goods, difficulty in getting tickets for travel, crowded trains, buses and launches, bad state of roads, traffic jam, etc. But there is one message running through all of them, though not mentioned explicitly, viz., the role of domestic market in the economy of Bangladesh.
Indeed, in a country like Bangladesh where there is a sizeable population and incomes of people are increasing at a steady pace, growing domestic market can play an important role in giving further boost to the economy. The author of the present article has, on more than one occasion, pointed out the importance of a two-pronged strategy for economic growth and development in Bangladesh — focusing on external as well as the domestic market.
Although savings is important for an economy like that of Bangladesh, consumption also plays an important role by creating market for goods and services which in turn creates incentive for investment. Private consumption accounts for three-fourths of GDP in Bangladesh. Every taka spent on domestically produced goods and services creates linkage effects on the economy.
Think of items bought frequently during the run up to Eid — garments and other textiles, shoes, jewellery, toys, etc. To the extent they are produced domestically, they create linkages with other sectors of the economy and thus help boost activities throughout the economy. However, such linkages may not be created if the items consumed are imported from abroad. In that sense, there may be leakages from the potential linkage effects of consumption. Some examples of consumption with linkages and leakages may help:
Linkages: (i) domestically produced manufactured goods like garments, shoes, jewellery, toys, etc. creating linkage effects for other sectors of the economy that supply inputs, (ii) domestic travel by rail, bus, launch, creating linkage effects on production, maintenance and repair of the means of transport as well as services provided in the sector, (iii) domestic tourism, creating linkage effects for transport, hotel, restaurants, souvenirs, etc. All these linkages have positive implication for growth output as well as employment.
Leakages: (i) imported consumer goods resulting in the loss of linkage effects on the domestic economy (except for services relating to the import and marketing of the goods), (ii) international tourism (depriving the domestic tourism sector of potential clients). These leakages imply loss of potential output and employment growth.
Is it possible to associate the linkages and leakages mentioned above with income groups of consumers --at least in a broad way? Yes, it is. For example, people from the lower and lower-middle income groups are more likely to buy domestically produced goods (except of course cheap imported products), use means of transport like bus, launch and rail, and undertake domestic tourism. People in upper income groups are more likely to buy imported consumer goods, travel by private vehicles (if they travel within the country) and go abroad for tourism. This pattern becomes apparent if one follows the class differences in purchases of consumer goods, in travel as well as tourism undertaken in the run up to and during Eid. The conclusion that follows from the above typology of consumption is that the distribution of income is an important determinant of whether the linkage or leakage effect will be stronger.
What is the relative size of the various classes of consumers mentioned above? The answer to this question is not easy without a survey specifically aimed to collect this kind of information. One may, however, make some guesstimates, at least tentatively. First, consumption of imported goods, international tourism, travel by private vehicles, etc. are likely to be undertaken by consumers in the top 10% in the income scale. At the other end of the scale, those who are below the poverty line (30% of the population) are unlikely to contribute to economy boosting consumption of the type that we are talking about here. To be on the conservative side, one may also add another 20% of the population whose consumption also may be of basic type and is not the subject of today's discussion. That leaves us with 40% of the population (or nearly six and a half crore people) whose consumption may create linkage effects for the domestic economy.
A part of the 40% of the population mentioned above constitutes the so-called middle class which has for some time been the subject of some discussion in the context of the growth of consumer economy. But that kind of discussion focuses more on potential demand for sophisticated consumer goods and consumer durables. The topic of the present discussion is broader than that. Hence, we don't need to confine ourselves to the so-called middle class according to the international definition (used, for example, in a report by the Asian Development Bank in 2010). The class we are talking about is a diverse one who are buyers of a wide variety of consumer goods and services, the purchase of some of which remains concentrated during festivals of various kinds (religious and cultural). And there lies the importance of such festivals from the point of view of a consumption based boost to economic growth.
Given the importance of income and its distribution from the point of view of strengthening the consumption base of the economy and its linkage effects, it is clear that incomes need to increase at a faster pace amongst the lower end of the scale so that the size of the lower middle and middle income group increases further. And there lies the importance of improvement in income distribution -- or at least preventing a further deterioration in the distribution of income.
Consumption during festivals may also create linkage effects for raw materials and intermediate goods. One example is the one-off supply of hides and skins during Eid-ul-Azha. It may be mentioned in this context that although Bangladesh has comparative advantage in the production and export of leather and leather products, the industry in general has not been in good health. And the handling of the one-off burst in the supply of animal skin has not been very efficient. Policies are needed to improve the situation and, in particular, to create stronger incentives for adding value before the hides are exported.
The writer, an economist, is former Special Adviser, Employment Sector, International Labour Office, Geneva.