This paper attempts to examine the effect of foreign capital inflow on growth of output, domestic saving, imports and production structure. In doing so, a simultaneous equation model for the Bangladesh economy in the framework of the dual gap analysis has been estimated using the time series data for the period 1069/61-1979/80. It is found that foreign capital inflow was conductive for economic growth. It has substituted domestic saving as the government might have relaxed saving efforts with its inflow. It increased the productive capacity of the economy financing the development projects. It facilitated the expansion of the tertiary sector. The increased services from the tertiary sector along with increased imports of raw materials and intermediate goods (financed by it) increased output in the primary and manufacturing sectors. Thus foreign capital inflow changed the production structure of the economy with resulting changes in the composition of GDP, exports and imports.

The paper estimates relative rates of return, both in financial and economic terms, among three major textile weaving techniques of Bangladesh. For tradeable inputs and for outputs. “border prices” were inferred by using observed nominal rates of protection. For nontraded inputs, plausible conversion factors were used such that, if anything, true economic rates of returns of handlooms were understated. The central result of the paper is that handlooms are economically the most efficient of any of the alternatives for weaving of virtually all fabrics types of any consequence to consequence to consumption of textiles in Bangladesh, except polyester suiting. This is the result one gets whether one uses static or dynamic cost-benefit analysis. This relativity stood up well against a sensitivity test performed with respect to nominal protection and capacity utilisation rates, as also to “high” and “low” valuation—basis for fixed capital. There is a case, therefore, for providing protection to the handloom output relative to the competing techniques, as the latter can count on lower input prices, as also have received larger public resources, than have the handlooms. The case for raising the rate of indirect taxation of powerloom sector while handlooms are exempted is made, especially since the current level of indirect taxation of the former is next to nothing. Howsoever hard this is likely to be to raise the indirect taxation of the powerloom sector, if is of great priority, because the simultaneous achievement of efficiency and equity is something that can’t be too strongly emphasised.

At the heart of trade and industrial policy reform in developing countries are efforts to pinpoint, quantify, and then eliminate the distortions and inefficiencies that characterize tariff and tax structures. Sometimes overlooked, however, is the fact that such policy reforms have macroeconomic implications too: changes in tariff rates, for example, affect both government revenue and import demand. This paper develops a general equilibrium model of the Bangladesh economy in order to examine the macroeconomic and intersectoral consequences of proposed trade and industrial policy reforms in Bangladesh. We find that the proposed tariff reform, which would lower tariffs on industrial products to around 20-30 per cent, would result in a decline in tariff revenues, and therefore reduce total government resources, although moderate increases in excise taxes would be sufficient to recover much of the revenue lost. Replacing the current off-budget export subsidy, based on retention of foreign exchange earnings, by export subsidies financed out of the government budget would promote exports; furthermore, it would have little detrimental fiscal impact, since higher exports would yield increased corporate tax revenue, while also permitting more imports, and thus higher tariff revenues.