Estimating Potential Growth for Bangladesh: A Production Function Approach

This study attempts to estimate potential output growth for Bangladesh over the 1985- 2015 period. Potential growth, as different from actual growth, determines how much growth the economy is capable of achieving by deploying its trend capital stock as well as the natural level of employment at a point in time. Data paucity is the main challenge to calculating potential growth in any developing economy and Bangladesh is not an exception in this respect. While data on capital stock can be framed with less disputes, various labor data generate widely different measures for potential growth. After determining the capital stock, this study considers different estimates of labor and suggests a more acceptable approach to eventually calculate potential growth for Bangladesh. Despite various versions, this work finds potential growth to remain at least one to two percentage points higher than actual growth particularly in the recent decade, suggesting the presence of policy gaps that made the economy perform less than its potential level. Additionally, the trend of potential growth shows gradual slowdown after the early 2010s, requiring some policy steps to review whether both actual and potential growth can be accelerated in the medium term.

Study Team: Biru Paksha Paul and Rizwana Islam