Over the past decade, under the previous Awami League government, Bangladesh’s economic landscape has been defined by growing crony capitalism, a situation in which business success is not determined by competitive advantage but through political connections and favoritism. Crony capitalism has discouraged the growth of private investment, both domestic and foreign. At the heart of crony capitalism is the fact that business entities that have intimate relationships with political elites always prove to be unduly advantaged. These benefits range from preferential access to government contracts and resources to regulatory leniency and tax exemptions.

The quintessential example is the banking sector, where a few politically connected conglomerates have cornered a disproportionate amount of loans with little or no collateral. The lack of proper regulatory oversight has led to an increase in non-performing loans (NPLs), which now pose one of the biggest potential risks to the stability of the financial sector. Furthermore, there have been cases of numerous contractual agreements in the electricity and energy sector, with companies with obvious political connections, regardless of their questionable feasibility or effectiveness, particularly with regard to PEIs.

Crony capitalism essentially cannot avoid granting more undue privileges to a select few in the business world to the detriment of a majority of private investors. These uneven playing fields therefore discourage genuine entrepreneurs, who have no political connections, from competing effectively. Small and medium-sized enterprises (SMEs), which play a crucial role in job creation and economic diversification, are generally unable to grow due to their exclusion from lucrative markets dominated by politically connected companies.

It is also not easy for foreign investors. They are eager to invest in sectors that offer strong growth opportunities, but they shy away from them because the playing field is never truly level. Lack of regulatory transparency and the threat of arbitrary policy changes persisted under the previous regime, preventing the emergence of a favorable business environment for foreign investors. This is one of the reasons why foreign investment has not increased in Bangladesh.

Ineffective regulatory mechanisms and bureaucracy, as well as the lack of transparency of the systems, posed serious problems for doing business. For example, essential permits, licenses, and approvals were time-consuming and prohibitively expensive unless motivated by political patronage.

Furthermore, the legal system related to the protection of intellectual property rights and the enforcement of contracts remains weak – a fact of primary concern to local and international investors. In a nutshell, without strong legal protection, companies risk losing their investments or intellectual property to powerful competitors who could use their political networks for their own benefit.

Several policies and practices have been designed to benefit politically connected businesses at the expense of the economy as a whole. The banking sector saw many new licenses, many of which were granted to companies close to power, which therefore benefited from preferential access to credit, leading to an increase in non-performing loans. Payment defaults were pervasive due to insufficient due diligence, with few consequences for large, high-profile defaulters. Tax evasion was a common feature, with selective enforcement allowing politically connected companies to escape through waivers and amnesties. In the electricity sector, independent and quick-lease power producers have received preferential treatment due to their political connections, while mega infrastructure construction projects have generally been non-transparently awarded to politically favored companies. Real estate deals benefited from preferential land allocations, while powerful groups manipulated the stock market. Politically connected industries benefited from export incentives and trade policies, which disadvantaged smaller competitors. This dominance of crony capitalism has been facilitated by a strong “anti-reform coalition” among corrupt political elites, corrupt business elites, and corrupt bureaucrats.

One of the most worrying features of crony capitalism in Bangladesh was the extent to which politically connected companies were able to influence policymaking, a phenomenon often referred to as “state capture.” Examples of state capture include those in sectors such as telecommunications, clothing, banking, real estate and energy, where major policy decisions have been entrusted to a few selected actors.

Political distortions favoring cronies have led to an economy that is less diversified and more dependent on a few sectors dominated by a handful of influential players. This concentration of economic power has stifled competition by erecting barriers for new entrants and inhibited the growth of sectors that could otherwise promote economic diversification and sustainability.

Corruption in Bangladesh is pervasive and has facilitated the emergence and consolidation of crony capitalism. Paying bribes or kickbacks is a common practice to obtain contracts, as well as to speed up bureaucratic processes or evade regulatory fines. Such an atmosphere discourages ethical business practices, in addition to increasing the cost of doing business for those who do not engage in corrupt practices.

Corruption has led to the diversion of wealth from the public sector, as money that would have been used to build infrastructure, health care or a school has been spent on selfish interests. Resources that should contribute to inclusive economic development have been poorly allocated.

The solution to the problem of crony capitalism must be multifaceted. First, there needs to be a much greater commitment to the rule of law. Anti-corruption measures must be applied; regulatory bodies must be given complete independence to do their work without any form of political interference. In this way, companies will have equal opportunities to compete with each other, where success will be determined by competence and competitiveness rather than political connections.

Second, public procurement and policy formulation processes must be made more transparent. Online public procurement systems reduce personal contact between businesses and officials, thereby reducing opportunities for corruption. Furthermore, policies should aim to encourage fair competition, innovation and investment in all sectors, not just selected sectors.

Third, institutions involved in monitoring the financial system need to be further strengthened. Banking regulations must be strengthened and the Bangladesh Bank must have the authority and resources to enforce regulations without discrimination. Not only will NPLs require financial restructuring, but it is also important that future new lending is based on full transparency and risk-based criteria.

It is equally important to define a culture of accountability among political leaders and economic elites, and these must be held accountable for unethical practices, while at the same time, civil society organizations must be encouraged to raise their voices for greater transparency and reforms. A strong legal framework that punishes corrupt practices and protects whistleblowers would go a long way in undermining the structures of crony capitalism.

Crony capitalism is deeply rooted and stands in the way of a truly vibrant and inclusive economy in Bangladesh. Until the structural problems that create and sustain crony capitalism are resolved, a conducive investment climate cannot be established and sustainable economic development through large-scale domestic and foreign investment cannot be ensured.

Dr Selim Raihan is a professor at the Department of Economics, University of Dhaka and executive director of the South Asian Network for Economic Modeling (SANEM). He can be reached at (protected email).

The opinions expressed in this article are those of the author.

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