Reasons behind Bangladesh’s economic struggles and industrial decline

"Why do we work or seek employment?"—a question once was posed by a speaker during a discussion I attended. While many academic responses were there, the simplest and most universal truth prevailed: we work to earn money. Money enables us to live with dignity—put food on the table, provide shelter, educate our children, care for our loved ones, and aspire for a better life.

When that aspiration begins to erode—when salaries no longer cover essentials, when inflation eats away at savings, and when opportunities shrink—anxiety takes root. That anxiety grows into frustration, and eventually, hostility. It is all the more so when people see that as they are struggling, others—often shielded by privilege or corruption—escape hardship. Add to this fiscal mismanagement, social injustice, and political indifference, and the stage is set for public outrage and mass uprising.

History teaches us that economic volatility—particularly that driven by currency overvaluation—has repeatedly been a spark for social unrest. Overvalued currencies distort trade, punish exporters and remittance earners, and incentivise imports over local production. The result is deindustrialisation, job loss, and widening inequality. Despite these lessons, however, governments around the world have too often failed to follow the correct path.

IMF - International Monetary Fund - in its December 2023 country report, pointed out that Taka is overvalued by 25%. In Bangladesh, we’ve seen the consequences of that in firsthand—youth unemployment, growing inequality, and discontent among the middle class. In this article, we will explore global historical cases where overvalued currencies became the silent culprits behind economic decline and societal upheaval, and reflect on the urgent lessons for our own economy.

One of the earliest documented cases of the disastrous effects of an overvalued currency occurred in England in 1924, when the British government decided to return the pound sterling to its pre-World War I gold standard level. This decision effectively overvalued the currency by 10%, making British exports significantly more expensive and less competitive in global markets. The economic consequences were severe—widespread unemployment, declining industrial output, and economic stagnation. The Bank of England attempted to counteract these effects by restricting credit and raising interest rates, further intensifying the economic hardship.

John Maynard Keynes, one of the most influential economists of the 20th century, criticised this policy. His opinion was that it would lead to mass unemployment and an economic downturn. In his 1925 essay "The Economic Consequences of Mr. Churchill", Keynes famously stated:

"Our export industries are suffering because they are the first to be asked to accept the 10 percent reduction... Our problem is to reduce money wages and, through them, the cost of living, with the idea that, when the circle is complete, real wages will be as high, or nearly as high, as before. By what modus operandi does credit restriction attain this result? In no other way than by the deliberate intensification of unemployment."

This historical episode is the evidence of how overvalued currencies can cripple economies, stifle growth, and create social unrest—a pattern observed repeatedly throughout history in different countries and economic systems. (Shatz, H. J., & Tarr, D. G. (2003). Exchange rate overvaluation and trade protection: Lessons from experience. The World Bank.)

Overvalued currencies, where a nation's exchange rate exceeds its equilibrium value, pose a deep threat to economic and social stability. Perhaps this is the most overlooked monetary policy, with copious historical evidence of a strong correlation between currency overvaluation and subsequent economic distress, social unrest, and even political upheaval.

A further journey in cases of currency overvaluation and examining the correlation of social unrest actually shows, globally, it has happened in many countries.  According to an article published by the Bank of Canada Conference on exchange rate regimes by Richard G. Harris, a well-respected economist, states that overvalued exchange rates tend to suppress export competitiveness, making local industries uncompetitive. This often leads to job losses, economic stagnation, and rising discontent among citizens, which fuel protests, strikes, and in some cases, government collapses. The study examines cases e.g. Canada in the 1990s, the United Kingdom in the 1920s, and Argentina in the 1980s, where severe economic contractions due to currency overvaluation resulted in civil unrest and policy shifts.

The article also discusses the impact of fixed exchange rate regimes, where countries like Greece during the Eurozone crisis and Turkey in the 1970s struggled with rigid currency policies, leading to economic hardships and widespread demonstrations by the citizens. In cases like the CFA Franc Zone, overvaluation forced structural adjustments and eventually led to devaluations after prolonged social and economic turmoil. The following table attempts to summarize key findings of the articles:

How overvaluation fuels instability:

An overvalued currency makes a country's exports more expensive and imports cheaper. This can lead to a cascade of negative consequences. Following is the list of historical examples from different parts of the world where the demographics are not homogenous or similar to one another.

Sources:

China strategically manages the renminbi (RMB) to fuel export-led growth. By undervaluing its currency, China makes its exports cheaper, boosting its global market share and creating massive trade surpluses, including a record $1 trillion surplus with the US in 2024.

Mechanisms of currency manipulation

●       Pegged Exchange Rate (1994-2005): China pegged the RMB to the US dollar at 8.28, making its exports artificially cheap.

●       Managed Float (2005-present): Despite moving to a managed float, RMB remained undervalued, estimated at 28.5% in 2010.

●       Intervention: The People's Bank of China actively intervenes in currency markets, buying US dollars to suppress the RMB's value. This has led to the accumulation of trillions in foreign reserves, which are often reinvested in US Treasury bonds.

How Bangladesh's overvalued taka led to deindustrialisation and rising social unrest:

According to the Bangladesh Bank research article, Siddique and Hossain (2022), the REER of BDT has been overvalued for most of the last two decades. The study analyzes Real Effective Exchange Rate (REER) misalignment from 1992 to 2021 using the Dynamic Ordinary Least Squares (DOLS) method, finding that currency overvaluation has persisted except for brief periods between 1992-1994 and 2003-2005.

●       Export competitiveness: The overvalued taka makes exports uncompetitive, particularly impacting the crucial ready-made garment (RMG) sector, which accounts for 84% of total exports.

●       Industrial stagnation: Overvaluation hinders industrial growth by discouraging investment in manufacturing and favoring non-tradable sectors like real estate.

●       Job losses: Reduced export competitiveness and factory closures due to foreign exchange restrictions have led to significant job losses, particularly in the RMG sector.

●       Social unrest: Austerity measures, including fuel subsidy cuts and dollar rationing, coupled with high inflation, have fueled social unrest and worsened inequality.

●       Policy failures: Defending the overvalued taka has drained foreign reserves and contributed to fiscal imbalances and cuts in essential public services.

Writers: S M Saifur Rahman: Researcher and Entrepreneur; Momtazul K N Ahmed: Head of Corporate Banking, Bank of Alfalah.