Title:

The Impact of Political Instability and Corruption on the Economy of

Bangladesh.

Zaif Khan Ahon

Institute of Business Administration, University of Dhaka
April 9th, 2018

Abstract: In the context of Bangladesh, this paper seeks to establish the relationship between
corruption and economic performance while at the same time measuring the impact of political
instability. Corruption has become an everyday word for this country. Using the Corruption
Perception Index scores, it can be quantified. Using correlation analysis, this paper measures the
impact of corruption on variables such as GDP and FDI. The results show that corruption has
significant impacts on both GDP and FDI meaning it adversely affects the economic performance
of Bangladesh. Also, the impact of political instability on stock market is evident taking the year
of 2013 into account as that year can be marked to be a politically unstable and hartal-prone year
in the history of Bangladesh.
1. Introduction

1.1 Defining Corruption and Political Instability:

In simpler terms, corruption is the deviation from what’s considered to be legal specially in case
of people in power. An act of exploitation, the misuse of the authority for one’s own personal gain
or agenda. This has been the barometer of economic and performance deficiency for many
countries. It captures the essence of a country as to its economic and political conditions.

Political instability can be defined as the destabilization of the sound political condition. It might
range from the classic feud between different parties to the unrest caused by a particular group.
The word “hartal” is perhaps more than common for people in Bangladesh as this can be marked
as the epitome of political instability in Bangladesh. The frequency of this phenomenon in our
country is staggering as the records are evident.

1.2 The Impact on Bangladesh Economy

Even though Bangladesh has been one of the fastest countries in terms of economic growth, the
potential has been more than condensed due to its influx of corruption and political conditions.
The country is infested with corruption. It’s seen in every branch, every organ of the government.
From simple bribery for even a minor service to undertaking projects like bridge construction,
corruption has spread its vicious strife everywhere.

Investment sector, for example has perhaps been exposed to the worst part of it. The instability of
political conditions and the frequent transitions of power has instigated the deterioration. One party
imposes policies, another party changes it after the transition of power. The frequent number of
hartals, curfews and what not has more than impacted the productivity of firms. Smaller firms got
the worst of it on top of their struggles to survive in the market. Transportation has been halted at
times due to these phenomenons. Taking a holistic look at it provides even an uglier picture. If the
number of these political unrests are combined, the negative effects as a whole ranging from the
decrease in productivity to the number of days lost in educational institutions provides a major
debilitation. Adding corruption on top of it more than doubles the negative impact.

Bangladesh is the 143 least corrupt nation out of 175 countries, as of 2017. Corruption Rank in
Bangladesh averaged 132.78 for a decade. (Corruption Perceptions Index, 2017)

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Comparing this with the economic growth and overall economic performance measured by GDP
projects a correlation between the two. The negative impact has been there and still to this date
lingers. As we score high on corruption perception index which represents a lower degree of
corruption, the FDI and GDP is affected. And there’s a correlation between these variables.
Overall, these variables represent the economic performance of Bangladesh as a whole.

1.3 Definitions of Some Key Concepts of the Paper

GDP: GDP or Gross Domestic Product is a measure of economic performance indicating the total
income and expenditure of a country, a market value of the produced goods within the country
over a given period of time.

Business Cycles: Business cycles describe the rise and fall in GDP. It defines the economic
fluctuations and discrepancies.

Financial Crisis: A rapid downturn in financial institutions and assets deteriorating overall
financial situation.

Human Capital: Human capital is the knowledge, capacity, intellectual ability possessed by an
individual, population specifically the labor force.

CPI: Transparency International (TI) publishes Corruption Perception Index (CPI), where
countries in the world are measured in terms of the perceived corruption. It’s a way to quantify
corruption and the lesser the score in this index, higher the perceived corruption of the country.
Higher score stands for lesser corruption.

FDI: FDI or Foreign Direct Investment is the investment made by a firm or an individual of one
country in another. It takes place when an investor acquires foreign business operations or assets.

(Foreign Direct Investment - FDI, n.d.)

Hartal: Hartal stands for a mass protest that results in the shutdown of workplaces, shops, schools
and other institutions. It’s a form of general strike and a medium of conveying disobedience or
dissidence towards the government.

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2. Objectives

2.1 Broad Objectives:

The objective and purpose of this report is to establish a relationship between political instability,
corruption on the economic growth and performance. By analyzing the empirical data from
secondary source, the study seeks to establish the correlation between these variables. By focusing
on Bangladesh, an analysis of the trends of political unrest and the subsequent rise and fall in GDP
or stock prices will be done to infer the relationship.

2.2 Specific Objectives:

1. Measuring the effects of political unrest on investment sector.

2. Measuring the effects of corruption on FDI.

3. Measuring the correlation between corruption and economic performance using the corruption
scores and GDP.

4. Measuring the effects of hartals and election on the stock market.

5. Measuring the sectoral fluctuations in stock market due to political unrests.

6. Developing a final conclusion combining all the findings.

3. Literature Review

The impact of corruption on the economy of Bangladesh has been evident for many years. The
study by Habibullah Pulok sought to establish the long run relationship between economic growth
and corruption in Bangladesh. Using the neoclassical model of economic growth and Auto-
Regressive Distributed Lag bounds test method, the results indicated that there has been a direct
negative impact of corruption on per capita GDP onwards the economic development of
Bangladesh. (Pulok, 2010)

Corruption is seen to be (I) negatively associated with cross-country differences in economic

growth and gross domestic investment and (II) reducing the growth by driving away foreign direct
investment which is a major source of capital investment. The impact here on investment due to

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political instability and corruption is significant since FDI is highly dependent on the perception
of security which in turn is debilitated by corruption. (Rahman, Kisunko, & Kapoor, 2000)

It is observed that different types of political unrest such as hartals, coups, onset of civil war,
religious resurgence, social unrest, election anomaly, transition of a new power etcetera have
significantly affected Bangladesh Economy over time. The study by Jahangir Chawdhury backed
up the facts that multiple hartals in a week initiated a substantial productivity loss for the firms in
Bangladesh. Small firms are seen to be taking the bigger brunt of the consequences which poses a
threat to their short-term existence. The findings as a whole indicated that the relationship between
political stability and economic growth are much more intricate that the commonly held
assumptions. (Chawdhury, 2016)

There’s a whole new side of corruption that fights shy of the common eyes. The so called “romantic
view” explains that for developing countries ruled by corrupt government, a minimal level of
corruption brings efficiency in the market. And this is good for the economy. The argument from
this study state that fighting corruption may not be so costly as not to be worthwhile as found in
the report by Tanzi and Davoodi (Tanzi, Vito, Davoodi, & Hamid, 2001) mentioned in Ahmad
Kaiku’s report. (Kaikus)

Conventional estimators and models that analyze the efficiency implications of corruption are
insufficient as they ignore the political constraints in their allocation process. The efficiency effects
of corruption depend on how the rights to be transacted are chosen.

The questions as to why some countries like South Africa might show decent economic
performance in spite of having an unsatisfactory level of corruption can be answered by taking the
efficiency implications into account. This will help explain the overall effects of corruption on
Bangladesh Economy not ignoring the fact that corruption to some extent may be a necessary evil.
Performance is related not to the extent of corruption but to the political structures through which
rights are created and reallocated. Where patrons are powerful, the range of rights transacted is
limited and the allocation is likely to be efficiency maximizing as opposed to when patrons are
week where it’s vice versa. This in turn highlights the efficiency implications of corruption. (Khan,
1996)

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4. Methodology

It’s a quantitative, conclusive research that includes the relationship between the economic
variables and the measure of corruption and political instability. It identifies the variables first
using the secondary data, then quantifies the variables and measure their effect on overall
economic performance.

4.1 Analysis Type: The study uses the statistical method known as correlation analysis. Using the
empirical data collected from secondary sources, the statistical model is drawn and correlation is
measured in Microsoft Excel. Rather than a cause and effect relationship, the correlation analysis
focuses on the strength of positive or negative association between two or more variables. Here,
the variables are Gross Domestic Product (GDP), Corruption Perception Index (CPI) scores and
Foreign Direct Investments (FDI).

4.2 Data Sources:

The data source is secondary in nature. The data is collected primarily from the websites “Trading
Economics”, “Amar Stock”, and “Dhaka Stock Exchange”. The first website is used for the data
of yearly FDI, GDP and Corruption scores of Bangladesh by Bangladesh Bank and Transparency
International. The second website contains DSE data that will be needed to measure the stock price
fluctuations. (Trading Economics, 2018) (Amar Stock, 2018) (DSE, n.d.)

5. Analysis

5.1 Effects of political fluctuations and instability on Investment market:

First, we’ll be identifying the most hartal-prone years of Bangladesh. Then averaging the sectoral
stock prices of those years and comparing them to least hartal-prone years will yield the effect of
hartals on the investment sector.

Date Total Days/ Duration of the Hartal

Between 2007 and 2008 Unknown
Between 2010 and April 2013 17 Days
November 30th, 2010 All Day
April 2nd, 2013 All Day

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 April 9th, 2013 Al Day
April 10th, 2013 Al Day
April 11th, 2013 All Day
April 23rd, 2013 All Day
April 24th, 2013 All Day
Between November 26th, 2013 and November 28th, 2013 3 days
(List of hartal in Bangladesh, n.d.)

It can be said that the year 2013 had the most hartals compared to others so there’s been a political
instability throughout the year. Also, it is important to mention that the year 2013 was an election
year.

Average Sectoral Stock Closing Prices

Sector Year Average Stock Closing Price (In BDT)

Banking 2012 39.41
Banking 2013 22.43
Banking 2014 24.06
Banking 2015 23.45
Textile 2012 68.31
Textile 2013 69.02
Textile 2014 79.17
Textile 2015 60.99
Pharmaceuticals 2012 210.47
Pharmaceuticals 2013 216.56
Pharmaceuticals 2014 305.68
Pharmaceuticals 2015 371.36
Investment 2012 98.22
Investment 2013 90.75
Investment 2014 95.78
Investment 2015 70.75

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 Sectoral Average Closing Prices
400
350
300
250
200
150
100
50
0
Banking Textile Pharmaceuticals Investment

2012 2013 2014 2015

Source: (DSE, n.d.)

The year 2013 has lesser average stock prices than the year 2014 in every sector. This is an
important indicator for measuring the effects of political instability on stock market. Also, it has
to be mentioned that the year 2013 was an election year. The combined effects of election and
hartal can be seen in the sectoral average stock prices of the year.

5.2 Correlation Analysis of Corruption Perception Points, GDP and FDI

Year GDP (In Billions) Corruption Perception Index Scores FDI (In Millions)
2001 54 4 ----
2002 54.72 12 391
2003 60.2 13 376
2004 65.1 15 276
2005 69.44 17 800
2006 71.82 20 743
2007 79.61 20 793
2008 91.63 21 748
2009 102.48 24 961
2010 115.28 24 913

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 2011 128.64 27 779
2012 133.36 26 1195
2013 149.99 27 1731
2014 172.85 25 1480
2015 195.08 25 1834
2016 221.42 26 2003.53
2017 273 28 ----
Source: (Trading Economics, 2018)

According to the CPI scores, higher scores will mean lower corruption and vice versa. Taking this
into account, two correlation analyses have been done using Microsoft Excel.

Correlation between GDP and Corruption Perception Index Scores:

GDP (In Billions) Corruption Perception Index

GDP (In Billions) 1

Corruption Perception Index 0.749422131 1

So, the correlation between GDP and CPI scores is .7494 which states that there’s a moderately
strong correlation between the two variables. On a scale of -1 to 1, the .7494 result suggests that
the two variables are positively correlated.

This means that higher the CPI scores, higher the GDP. In other words, lower the corruption,
higher the GDP.

Correlation between FDI and Corruption Perception Index Scores:

FDI (In Millions) Corruption Perception Index

FDI (In Millions) 1

Corruption Perception Index 0.776414702 1

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So, the correlation between FDI and CPI scores is .7764 which states that there’s a moderately
strong correlation between the two variables. On a scale of -1 to 1, the .7764 result suggests that
the two variables are positively correlated.

This means that higher the CPI scores, higher the FDI. In other words, lower the corruption, higher
the FDI.

6. Findings and Conclusion

The first finding of the research indicates that political instabilities such as hartals and election
together with other fluctuations affect the investment market. As the frequency of these events can
be seen to bring about some discrepancies in stock prices. This finding is evident due to the
decreased stock prices in the politically unstable and hartal-prone year of 2013.

The second finding indicates a more important implication. As the level of corruption decreases,
the GDP and FDI both increases. And the correlation between corruption perception score and
GDP is positive as it is with FDI. Overall, both FDI and GDP decreases with the rise of corruption.
The scores are consecutively .7494 and .7764.

So, it’s safe to say that corruption has adverse effect on the economic performance of our country.
The impact of political instability and corruption is negative for the economic performance of
Bangladesh. Even though a minor amount of corruption can be beneficial for some countries,
Bangladesh can not be said to be among one of those countries. Corruption is a threat to the
economic development of Bangladesh. And the final result of the research approves of this fact.

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References
(n.d.). Retrieved from DSE: http://www.dsebd.org/
(2018). Retrieved from Trading Economics: https://tradingeconomics.com
(2018). Retrieved from Amar Stock: https://www.amarstock.com/
Chawdhury, J. (2016). Political Instability: A Major Obstacle to Economic Growth in Bangladesh.
CENTRIA UNIVERSITY OF APPLIED SCIENCES.
(2017). Corruption Perceptions Index. Transparency International.
Foreign Direct Investment - FDI. (n.d.). Retrieved from Inestopedia:
https://www.investopedia.com/terms/f/fdi.asp
Kaikus, A. (n.d.). Corruption: A Case Sdudy on Bangladesh. The 4th Multi-country Study Mission
on Public Governance.
Khan, M. H. (1996). THE EFFICIENCY IMPLICATIONS OF CORRUPTION. Journal of
International Development.
List of hartal in Bangladesh. (n.d.). Retrieved from Wikipedia:
https://en.wikipedia.org/wiki/List_of_hartal_in_Bangladesh
Pulok, M. H. (2010). The Impact of Corruption on Economic. Munich Personal RePEc Archive.
Rahman, A., Kisunko, G., & Kapoor, K. (2000). Estimating the Effects of Corruption Implications
for Bangladesh. World Bank Report.
Tanzi, Vito, Davoodi, & Hamid. (2001). Corruption, growth, and Public Finances. The Political
Economy of Corruption. New York: Arvind K. Jain (ed.) Routledge.

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