Productivity Growth of Bangladesh Economy: A Study with Reference to Extended Solow Residual

Bangladesh's economic growth over the past four decades raises questions about its sustainability, necessitating further research. Traditional measures of productivity growth, which focus solely on human capital as indicated by education, do not adequately capture the intricate aspects of labor quality. Factors such as human security, represented by purchasing power and health, along with other interconnected elements, are essential for accurately assessing productivity growth. A novel human security variable is incorporated into the Cobb-Douglas production function and estimated using non-stationary time series data from 1981 to 2023. Data on real GDP, employment, and the human capital index were sourced from the World Development Indicators and Penn World Table. Capital stock data was derived using the perpetual inventory method, and the human security index was normalized. All inputs and outputs exhibit non-stationarity at the level but stationarity at the first difference. The Johansen test verifies the cointegration relationships, and the vector error correction model (VECM) confirms long-run causality between inputs and outputs. Fully-modified ordinary least squares (FMOLS) and canonical cointegrating regression (CCR) are employed to ensure the robustness of the results. Post-estimation of the Cobb-Douglas production function yields the Solow residual and the extended Solow residual. The study reveals that capital's share in output in Bangladesh ranges from approximately 45% to 82%, which is atypical for a developing nation. This anomaly is due to the abundance of labor reducing production elasticity and the scarcity of capital exerting a greater influence on output growth. Further, the findings show that the traditional Solow residual is positive or less negative, whereas the extended Solow residual, obtained upon adjustment of labor quality for human capital and human security, becomes less positive or more negative. This suggests that human capital, human security, and they jointly positively contribute to output growth, while productivity growth's contribution is negative or less positive. The negative productivity growth is attributed to inefficient resource utilization. The economic growth of Bangladesh is predominantly dependent on capital accumulation and the quality of labor, with productivity growth contributing minimally. To attain sustainable growth, it is imperative for the country to enhance the utilization of human capital, promoting technological adoption and innovation, investing in human security, and improving institutional quality and growth measurement methodologies.