Industrial production grew by only 2.86 percent in the outgoing fiscal year — the slowest pace in recent memory. Yet the budget projects that growth will somehow jump to 7 percent next year and continue rising thereafter. Such an acceleration is not impossible, but it demands a transformation far deeper than anything currently underway.
This gap between performance and aspiration raises an uncomfortable question: why do the same constraints — weak logistics, unreliable energy, low foreign investment, anti-export policy bias, and chronic skill shortages — persist after decades of being diagnosed and rediagnosed? The answer cannot be ignorance. Policymakers have long understood these problems, and the solutions are hardly mysterious.
The persistence of these constraints points to something more structural. Industrial stagnation cannot be understood solely as the result of technical bottlenecks. It also reflects the institutional incentives that shape industrial policy, competition, and investment decisions. Understanding those incentives requires looking beyond the familiar explanations that dominate policy debates.
THE CONVENTIONAL EXPLANATION
The prevailing explanation traces Bangladesh’s industrial underperformance to weak state capacity, policy inconsistency, and short political time horizons rather than to the incentives shaping policy choices. Bureaucratic fragmentation, cumbersome regulations, inadequate infrastructure, fiscal constraints, and limited administrative capability make it difficult to implement coherent industrial strategies. Governments, whether democratic or authoritarian, also tend to prioritise visible short-term projects over long-term investments in education, energy, logistics, and institutional reform.
These explanations are neither trivial nor incorrect. Weak institutions, limited technical capacity, and political incentives all matter. But they are insufficient to explain why many of the same constraints have persisted for decades despite being widely recognised. Policymakers have long understood the importance of reliable infrastructure, export diversification, better logistics, and a more attractive investment climate. Technical knowledge is readily available, international experience is abundant, and development partners have invested heavily in building administrative capacity.
The more important question, therefore, is not why good policies are difficult to implement, but why the obstacles themselves prove so resilient. That requires looking beyond administrative shortcomings to the incentives embedded in Bangladesh’s political economy. Many of these constraints persist not simply because the state lacks capacity, but because they are embedded in an institutional equilibrium in which economic power, policy influence, and market privileges reinforce one another.
AN ECONOMY ORGANISED AROUND PROTECTED RENTS
One consequence of this institutional equilibrium is an economy increasingly organised around protected rents. Bangladesh’s large business groups played a critical role in the country’s economic transformation, investing when capital was scarce, creating jobs, and helping build a domestic entrepreneurial class. The problem is not the existence of powerful firms. Every successful industrialiser had them — from South Korea’s chaebol to China’s state-owned and private conglomerates.
The challenge is that Bangladesh has not developed institutions capable of disciplining economic power in the service of industrial transformation.
Over time, much of the formal economy has become organised around protected incumbent firms. Large business groups have expanded across manufacturing, finance, logistics, telecommunications, media, and services, while economic power and policy influence have become increasingly intertwined.
In this environment, protection, subsidised credit, regulatory discretion, and market access can become entitlements rather than instruments for building competitiveness. Firms often face stronger incentives to preserve existing advantages than to pursue innovation, export expansion, or technological upgrading.
Viewed through this lens, many familiar bottlenecks become easier to explain. Regulatory complexity raises barriers to entry. Finance flows toward established relationships rather than productive newcomers. Persistent shortcomings in logistics, trade facilitation, and export competitiveness become easier to tolerate when firms can remain profitable without competing aggressively in global markets. Underlying these patterns is an institutional environment that rewards rents more consistently than productivity.
THE NARRATIVE THAT SUSTAINS THE SYSTEM
Economic structures endure not only because they generate profits for powerful groups. They also endure because they generate ideas that justify them.
In Bangladesh, industrial policy has long been shaped by a powerful narrative: Bangladesh is different. It must follow its own development path by nurturing domestic entrepreneurial capabilities and guiding industrial transformation through active state intervention. Over time, however, this developmental narrative has increasingly come to justify preserving established firms and exercising administrative discretion over market competition.
These arguments resonate because they contain important truths. No country has industrialised without building domestic entrepreneurial capabilities, and national development cannot be outsourced to foreign investors. The problem begins when nurturing domestic capability becomes synonymous with shielding incumbent firms from competition.
The result is that industrial policy becomes more concerned with preserving existing capabilities than creating new ones. The relevant question is no longer what firms contribute to structural transformation, but whether they reinforce that order.
The problem deepens when the success of incumbent firms becomes equated with the success of the economy itself. Industrial transformation is a process of continuous renewal in which firms enter, compete, grow, and, when they cease to be productive, exit. Yet policy increasingly focuses on preserving established firms rather than renewing the industrial ecosystem.
This bias is reflected in how policy responds to success and failure. Large firms in financial distress are treated as systemic concerns because of their size and employment, while the financing, market access, and technological constraints facing thousands of small and medium enterprises receive far less attention, even though their collective contribution is indispensable to employment, innovation, and industrial diversification.
WHAT EAST ASIA ACTUALLY DID DIFFERENTLY
The weakness of Bangladesh’s approach becomes clearer when contrasted with the East Asian experience.
East Asian success was not built on free markets alone. Nor was it built on suppressing large firms or rejecting foreign capital. Its defining feature was not simply disciplined rents but continuous industrial renewal. Governments used policy support not to preserve existing firms but to create conditions in which new firms could emerge, successful firms could grow, and resources could gradually shift away from less productive activities.
Governments provided protection, subsidised credit, tax incentives, and other forms of policy support. But these privileges were conditional rather than permanent. They were tied to export success, technological upgrading, productivity growth, and integration into global markets. Firms that failed to deliver lost state support.
This took different institutional forms across countries. South Korea disciplined the chaebol through export targets and directed credit while allowing weaker firms to exit. Taiwan fostered dense networks of small and medium enterprises that continuously generated new suppliers and exporters. China combined foreign investment, local experimentation, and competition among firms and regions to accelerate technological learning and industrial upgrading.
The common thread was not a particular industrial policy but a particular relationship between the state and business. Governments remained closely connected to firms while retaining sufficient autonomy to discipline them when national development objectives required it. This has been described as “embedded autonomy” — a state embedded in business networks yet sufficiently autonomous to discipline them.
Bangladesh has achieved embeddedness. What it has struggled to develop is autonomy. Without that autonomy, support becomes difficult to withdraw, even when performance falls short.
That is the critical distinction. The issue is not whether governments create rents—every successful industrial policy does. The issue is whether those rents are conditional on performance or become permanent privileges. East Asia used state support not only to build globally competitive firms but also to continually renew its industrial base. Bangladesh has too often used it to preserve existing market positions.
GROWTH REQUIRES DISCIPLINE
If Bangladesh genuinely wants industrial growth to accelerate, it needs more than another package of incentives. Industrial policy must shift from discretionary privileges to transparent, performance-based support that rewards firms for exporting, innovating, upgrading technology, and raising productivity. That requires predictable rules, open competition, and a state capable of disciplining powerful economic actors in pursuit of broader developmental goals.
The government’s industrial growth projections implicitly assume that the existing system will generate East Asian-style dynamism. Yet East Asia’s success rested on institutions that linked privilege to performance, competition, and continuous industrial renewal. Bangladesh’s challenge is to build institutions that do the same. Without that discipline, industrial policy will remain focused on preserving today’s capabilities rather than creating tomorrow’s. Only then can the country build globally competitive industries.
The writer is the former lead economist of the World Bank’s Dhaka office.
