Institutional Change and Urban Poverty Alleviation in Bangladesh

Academic Paper, 2014

46 Pages

Free online reading

Table of Contents


Research Design
Core Definitions
Choice of Theory


Analysing the Specific Circumstances of Bangladesh
Social Factors
Governance and Politics

Application of Theory
Social Pillar
Path dependency
Formal and informal constraints
Bargaining Power
Conflict of Interests
Economic Pillar
Formal and Informal Constraints
Bargaining Power
Economics conclusion
Political Pillar
Formal, Informal Constraints and Bargaining Power
Path Dependency






Institutions, both the physical and the non-physical, guide the way in which we live. The framework that these institutions create defines the direction of not only individual lives but also that of society. Changes within the framework and/or the institutions can lead to changes in the way in which we view the world. Currently, the world is battling towards reducing poverty. Poverty is an issue that effects society as a whole and thus a thorough approach must be used to alleviate this issue. This is because poverty is a highly diverse phenomena. Within poverty, urban poverty is becoming an increasingly important issue to attempt to solve, because of the growing urbanisation which is occurring across the globe. This urbanisation will place further pressure not only on the environment but also the urban infrastructure and institutions. Therefore this project will look to understand what sort of changes are needed in order to further reduce poverty in an urban setting by exploring the case of urban Bangladesh.


This project will explore the urban poverty situation within Bangladesh. Urban poverty within Bangladesh is becoming more prominent even though the country is having a larger impact on the global market due to its current growth rates. This can be seen through their status as a Next 11 country. The term was coined by Jim O'Neill, the former chief economist of Goldman Sachs, as these markets will become more dominant in the coming years (Armstrong 2013). However Bangladesh has not always had the exposure that this growth rate deserved and it has mainly been seen as a source of cheap labour. Yet its ongoing growth and labour force add together to show that Bangladesh may play an important role in near future, but certain changes will need to take place in order to realise this potential. For example, most of the current labour force is employed in the textile industry. As Western nations are still interested in outsourcing production and partaking in a race to the bottom (Rudell 2006, 282), the Western world also has a role to play in the development of Bangladesh in terms of supporting textiles that are produced in safe factories and thus raise the living standards for local workers. Further changes are also needed to deal with the rapidly increasing urbanisation which Bangladesh is experiencing. For the first time in history, on a global scale, more people live in cities than in rural areas (Cities Alliance: Cities without slums 2010). This creates challenges especially for developing countries as approximately 90% of urbanisation is happening within these countries. Furthermore, the high levels of poverty within the urban setting and the fact that Bangladesh is experiencing the fastest urbanisation rate in Asia (McGee 2001), means that urban poverty is a very important issue in the Bangladeshi context. For these reasons we have decided to focus on urban poverty in this study as it has important developmental consequences. Urban poverty is a diverse phenomena that is effected in large by the increased influx of inhabitants. However it is also affected by issues regarding the social, the economic and the political institutions within Bangladesh. In order to solve these issues and to reduce urban poverty as well as raising the standard of living, institutional changes are required. Institutional change has been successful in reducing poverty in other countries. For example, China has been successful in reducing poverty through institutional change and economic growth (Ravallion 2009, 91), which gives us hope for the situation in Bangladesh. The success that China experienced, as well as the changing views on cheap labour and local attempts to reduce poverty within Bangladesh, do paint a picture of progress. Yet the levels of poverty are still high, especially among the urban population (Lewis 2011, 163). The conditions that urban dwellers must endure such as the lack of employment, the proximity to diseases, the high levels of everyday bribery and corruption within the political sector means that their situation is still desperate and that for this to alter, further change is needed (Lewis 2011, 163-164, 99-104). Thus the problem formulation, “how can institutional change effect urban poverty levels in Bangladesh,” was created. This question will enable the project team to explore the diversity of urban poverty within Bangladesh and attempt to find solutions based on the three different pillars, social, economic and political, that impact on the urban poverty mentioned above. Taking into account the Chinese example we assume that the rapid economic growth in Bangladesh can assist poverty reduction, however, it would seem that only a joint development of the pillars would result in sustainable progression.

Thus the aim of this project is to understand how poverty alleviation, in urban Bangladesh, can be approached via the connection between institutional change and economic growth.


Research Design

The research team’s desire has been to analyse the development process in a non-western upcoming country. The selection process of the country was guided by the “Next Eleven” group, coined by Jim O’Neill the former chief economist of Goldman Sachs Investment Bank. These eleven economies are very likely to have a major impact on global society in the future and therefore deserve greater academic attention (Armstrong 2013). Out of the Next Eleven group Bangladesh has been chosen as it unites several key characteristics and historical developments, which the project team regarded as beneficial for the developing process. Alongside the obvious factors such as population/market size and geographical location, there are also unique historical connections to the Commonwealth, India and Pakistan, which have impacted the Bangladeshi development in the past. These factors will most likely continue to influence the future developments.

During our initial research, urban poverty has been identified as a key impediment to the Bangladeshi development progress. Based on the initial finding the following problem formulation was created: ‘How can institutional change effect urban poverty levels in Bangladesh.’ As in many other developing countries the rapid urbanisation results in major challenges for the local society. Understanding the general risks as well as opportunities of urban poverty provides valuable insights for development scholars.

The project team is aware that the specifics of the Bangladesh urban poverty situation is affected by the social and cultural factors of the society and therefore the results will not be universally applicable. However, this approach could potentially be applied for poverty reduction in other countries.

Core Definitions

Urban&Poverty:&In line with the rather broad theory of Douglas North, we decided to take a wide view of urban poverty as well. Our perception of urban poverty is not de=ined by a statistical poverty line e.g. 1.25 USD (World Bank V 2014), but rather focuses on people who are lacking in general access to good living conditions, education, proper nutrition, the option for professional development and a political in=luence. As our paper deals only with the urban settings of Bangladesh, we focus only on the inhabitants of these areas.

Poverty& Reduction: There are many different approaches that target poverty reduction. In this paper we have been inspired by the approach of North. In our view poverty reduction is related to a common development of the social, economic and political sphere in a country. While each sphere has a major impact on the overall situation, none of the spheres alone is suf=icient to reduce poverty on a larger scale.

Institutional& Framework& and& Institutional& Change: The framework is created through a combination of the rules, norms and enforcement (North 1990, 83). The framework structures the daily life within a society, which is in=luenced by all the key points mentioned above. Institutional change can happen if either the society or the ruling class has enough bargaining power and motivation to change the current system.

Development and poverty alleviation: We would like to point out that for the sake of this project the words ‘development’ and ‘poverty alleviation’ will be used interchangeably.

Finally we would also like to point out that the words: ‘sphere’, ‘pillar’ and ‘sector’ will also be used interchangeably for the sake of this project.


To gain a broader understanding of the issues involved in urban poverty reduction within Bangladesh, one must first gain an understanding of the overall situation. The project team has been guided in this process by the Theory of Institutional Change by D. North. As noted above there are many issues within Bangladesh related to poverty that need to be remedied in order to allow Bangladesh to develop. Thus we will make use of the secondary analysis methodology as there is extensive literature available on the topic. This is important because urban poverty is a very diverse entity that should be approached from many different angles. The literature describes and explores these issues and thus can be used to gain a deeper understanding of these situation. It can also help with the overall structure of the project and therefore the project will take its departure within the secondary data that is available. Through reviewing the literature, the project will be able to take a critical stance towards the different key elements, from D. North’s theory to the institutions and spheres that will come into focus. Thus the project can create a broader picture, which will allow the reader primarily to understand the situation in Bangladesh and also to understand the theory and its impact.

In order to gain an overview of urban poverty within Bangladesh the Theory of Institutional Change will be broken down, according to D. North, into three key elements or spheres; the social, economic and the political. The theory explains that successful or efficient development, and in this specific case poverty reduction, involves an equal progression within these three spheres. Should there be deficiencies within one or all of these spheres then development will be difficult. Therefore the project will explore these three different spheres individually within the Bangladeshi context in an attempt to discover where the deficiencies are and how they are effecting urban poverty reduction in Bangladesh. Within each sphere North points to certain key elements that have an impact on each particular sphere. These key points are; formal and informal constraints, enforcement methods, path dependency, bargaining power and forms of knowledge. This knowledge can be either tacit or communicable. The projects research will thus be guided by these points in its attempt to find and understand issues within the three spheres. In other words we will use these points and the impact that they have on the sphere, be it political, economic or social, to define whether or not the sphere is functioning and to what degree this impacts on urban poverty and poverty reduction. Furthermore it has been decided that both local and overall examples will be used to express the key points mentioned above. We believe that this is important because urban poverty is such a diverse phenomena, which involves a myriad of actors at both levels. Thus it is important to include these elements in order to gain a complete understanding of the situation. However, not every key point will be included in the analysis of the three spheres, this is because not every key point is relevant to each sphere. Utilising this method will potentially enable us to discover to what extend the Theory of Institutional Change can be used to reduce poverty in an urban setting.


Due to the deliberate narrowness of the focus area, several other development aspects have to be ignored as they are not in direct connection with the chosen topic. Firstly we chose to limit our focus to urban poverty, which ignores other areas of poverty within Bangladesh. Therefore other connected aspects such as international trade relations, have been neglected during the analysis of poverty reduction.

Furthermore we chose to focus on the dramatic living conditions in urban Bangladesh and the rapid tendency of urbanisation, this means that factors such as urban poverty among others are not included in this project.

There are several poverty reduction plans for Bangladesh such as middle class empowerment, 5 year plans from the IMF and WB, grassroots organisations, etc. While these plans are highly relevant to the overall poverty reduction, we decided to put a lower emphasise on them, as they mainly focus only on one specific pillar of our main theory.

Every theory application assumes a certain social context, however we are not using specific case studies on the Bangladeshi poverty diversity or specific social structure changes on the target area. Therefore we tend to generalise urban poverty as a tendency with all the negative effects of homogenisation. However, we feel that the examples chosen provide excellent support for our arguments within the three pillars.

Finally, while the main focus of our project is poverty alleviation, it is in fact the outcome of successful institutional change. Therefore we chose not to focus on particular poverty alleviation processes such as analysing governmental projects or civil society movements among other such projects, as we assume that poverty alleviation is a bi-product of institutional change.

Choice of Theory

The project team utilised Douglas North’s Theory of Institutional Change1, which deals with the effects of institutional change in economic development as the main framework. Before applying the main theory, the project team felt the necessity to analyse the country specific context. As an analytical tool the concept of ‘Clinical Economics’ from J. Sachs’ book ‘The End of Poverty’ has been utilised. This tool provides a method of highlighting the specific characteristics of a society and thus reduces the risk of developing solutions which will not be effective in practise as they are not embedded in the social context. Within Sachs’ text we decided to focus only on the analytical part and neglect his country specific examples and recommendations. We found that his analytical chapter2 provides valuable support to our main theory of Institutional Change as it describes in more detail the path dependency concept which is the starting point for D. North’s theory.

After having achieved a more sophisticated understanding of the cultural, geographical, social, economic and political aspects of Bangladesh, the main theory can be applied. The research team believes that D. North’s theory is well suited as a framework theory for the project as it provides the option for a combined analysis of the political, social and economic features of the Bangladeshi society. The theory points out the necessities for a smooth development process as well as the parties that need to be involved. As Bangladesh is still in its initial stage of development the project team concluded that there are various issues blocking the development progress outlined by North. While we drew our conclusions mainly from the ‘Economic Performance’ part of the book, we also utilised the previous parts for an extensive analysis. The aforementioned key points (formal and informal constraints, enforcement methods, path dependency, bargaining power and forms of knowledge which can be tacit or communicable) are based on those first parts of the book. In the discussion we decided to provide examples of secondary theories which can be used to empower each pillar individually.


The framework theory of our research project is based on the book Institutions, Institutional Change and Economic Performance . This is directly connected to our assumption that there are several shortages in the Bangladeshi institutional framework. In this book North creates a Theory of Institutional Change3, which can be seen as a critique on neoliberalism. North s theory rejects the neo-liberal view that each player has the same initial chances and that the transaction costs are negligible (North 1990, 11-26).

The Theory of Institutional Change focuses on the differences in human behaviour and the costs of transaction. North states that each society has institutions which create the overall framework for the daily life. Furthermore there are organisations, which are groups of individuals, who join forces in order to exploit in the best possible way the opportunities these institutions provide (North 1990, 3-10). This can be seen especially in Bangladesh, as the high levels of corruption allow influential organisations to impact the political sphere. This situation is affected by formal and informal constraints, which are different in each society and therefore the reason why societies develop various levels of efficiencies. In a rational world without these constraints each society would achieve the same level of efficiency in the long-term by copying the best working approaches from other societies. This, however, is not the case. According to North the informal constrains - which are based on cultural norms and behavioural codes - are stronger than the formal ones - which are based on laws and written rules. In the case of Bangladesh such informal constraints include bribery, corruption, patronage network, etc. He argues that such informal rules are the basis for the formal rules, and also their extensions, i.e. laws are created on the basis of cultural norms and even though a law cannot cover every aspect of life, the underlying idea still guides individuals in their decisions (North 1990, 36-53). Finally he points out that the enforcement and the transaction costs are a crucial point for the development of societies. Underdeveloped countries show a stagnation in their development process, because they do not have the institutions to enforce a stable framework. The society has to use other frameworks e.g. the black market, which provides the same outcome as a well functioning institutional framework would do, but which also adds to the costs (North 1990, 54-71). These transaction costs can be seen as one reason why the Bangladeshi urban poor are very vulnerable to informal constraints.

It is important to understand that organisations will incrementally alter the institutional framework over time (North 1990, 73). However, within organisations themselves changes also occur, which in turn effect the institutional framework. This is based on the idea that entrepreneurs within the system are busy attempting to create a change as they partake in wealth maximising behaviour (North 1990, 78). For such behaviour to come about the individual makes use of two specific types of knowledge, communicable and tacit. Communicable knowledge is knowledge that is “transmitted from one person to another.” (North 1990, 74). While tacit knowledge is only partly communicable and is based on learning by doing (North 1990, 74). The individual makes use of these two sets of knowledge in order to maximise their efforts and thus profits. These forms of knowledge also effect the characteristics of institutions. The way in which the individual makes use of these types of knowledge, and how this effects the organisations that they are a part of and thus the institutional framework, creates the characteristics of the institutions (North 1990, 80). However, to describe these characteristics further, one must understand the adaptive efficiency, which is concerned with “the kinds of rules that shape the way an economy evolves over time ” (North 1990, 80). It therefore attempts to understand changes and the characteristics of certain societies or economies through looking at the willingness of a society to acquire knowledge, be it tacit or communicable. This may induce further creative and potentially risky behaviour that will lead to development. Adaptive efficiency therefore can be seen as providing incentives that allow for decentralised decision making processes which in turn can lead to maximising efforts that are required to solve problems (North 1990, 81). All societies face problems and it is the institutional framework and characteristics that will decide whether or not the society has the ability to properly overcome the problem. It can do this through encouraging or dis-encouraging creative behaviour. Thus adaptive efficiency allows for these problems to be overcome. Because of the high levels of corruption citizens are too caught up in the process of bribing others and thus do not have time to focus on creative behaviour which could help overcome urban poverty issues.

Problems can lead to a lack of stability and this is something that most people would like to avoid. North defines stability as “being accomplished through a complex set of constraints that include formal rules nested in a hierarchy, where each level is more costly to change than the previous one.” (North 1990, 83). The key agents of change are still the individual entrepreneurs and if they see it in their favour to change the hierarchy then they may try do so, even if this challenges the stability. However, there are further factors that can effect an institutional change, namely preferences and relative price changes. Relative price changes have a distinct effect on the hierarchy, should there be a change, then a restructuring of the hierarchy may be needed in order to maximise the potential gains of the changes. Relative price changes “alter the incentives of individuals in human interaction.” (North 1990, 84). An example of price changes could be the change in labour to land relations or labour to capital relations. If the urban poor living in Bangladesh could gain ownership of the land they are currently occupying, then this would change their incentives within the system and thus lead to a restructuring of the hierarchy. The only other way in which changes can occur is through a change in preferences, or tastes. This, according to North, is hard to define as it is rather abstract (North 1990, 84). However it can be seen through the changes that have occurred through out history. The key point is that societies change the way in which they view a certain issue and thus adjust the informal constraints that surround the issue. It is also important to note that such actions are also defined by the sorts of institutions that are present. Political institutions, be they informal or formal, can provide a hospitable framework for such change (North 1990, 89-90). However, it is here where conflicts can arise because, “formal rules change but the informal constraints do not.” (North 1990, 91). This means that informal constraints, though they have evolved from earlier formal rule, last much longer and thus they have a deeper influence on society. This can lead to a conflict of interests between the informal and the formal which can effect society as a whole. Which is very important as it can explain, to some degree, why conflicts arise, because when the formal rules are changed, the informal constraints do not change simultaneously. North rejects institutional development ideas which are based on Darwin’s evolutionary theory. According to this theory inefficient institutions should be wiped out and only the most efficient ones will survive. North argues that especially the varying informal constraints hamper the adaption of the most efficient solution in all societies (North 1990, 92-93). This could be one explanation as to why Bangladesh has not yet adapted the most efficient political and social system.

As the role and shaping effect of institutions has already been pointed out above, there is a framework, which sets up certain parameters for economic actors. The existences of these parameters are widely acknowledged. and they are even admitted by the most adamant neo-classical scholars. However, according to D. North the institutions are fundamentally determining the performance of economics. Therefore economic change can only be explained through institutional change. This assumption challenges the neo-classical school in its fundamental approach. According to the Theory of Institutional Change there is no perfect economy where every actor has all the necessary information to make the best decisions. The individual actors have different capabilities and different chances in accessing information on market preferences. Even if the institutional framework is well managed, individual (mis)behaviour will create inequality. The rational behaviour of the players undermines the rules of the game because they tend to cheat or behave as free riders. In terms of minimising the transaction costs and providing more equal access to information the best practice seems to be the Western democratic model. However it’s far from perfect, but it is still able to provide progressive economic outcomes (North 1990, 107-110). We have to consider that the informal rules, norms and values are different in every country therefore the role of institutions also differs. Every institutional change is different because it is effected by the country specific historical background, therefore the result of these changes are also country specific (North 1990, 110-112). “Path dependence is the key to an analytical understanding of long- run economic change. The promise of this approach is that it extends the most constructive building blocks of neo- classical theory” (North 1990, 112). North argues that Path Dependency is not a model to predict the future, but that it can explain why certain parties have currently a stronger bargaining power than others. This however, gives the strongest parties the biggest say for future development. Nevertheless, Dependency Theory must not be seen as the only possible outcome, as the players made choices at each stage, which determined their current position.

The changes that economies have experienced over time have had a distinct effect on societies and humans. Therefore it is important to understand how economies develop and grow. According to North it is the relationship between the polity and the economics and how these effect economic growth that is most useful in gaining an understanding of these changes (North 1990, 118). Path Dependency, as explained previously, allows for such an understanding and also describes why some economies are dynamic and others are stable and relatively unchanged (North 1990, 118-119). The institutions that humans use to provide order, and the relationship between the polity and the economics, define the changes and development of the economy.

North combines elements of neo-classical theory, i.e. the increased productivity and thus economic development via the supply of technology with various informal constraints, which differ from country to country. The newly supplied technology has to face a constantly changing feedback from society. This feedback is based on the cultural understanding of the society, i.e. cultural norms and behavioural codes, and thus determines the benefits, which can be gained via technology and the speed of the development process. While there can be a general orientation on well-performing countries, the different informal constraints make an adjustment of borrowed approaches necessary (North 1990, 131-140).

Analysing the Specific Circumstances of Bangladesh


A major problem with development economics over the past decades has been that standard economic tools have been applied to various countries without taking in consideration their specific characteristics. This period was heavily influenced by former U.S. President R. Reagan and UK Prime Minister M. Thatcher and is commonly referred to as the ‘structural adjustment era’ (Nissanke 2001, 2). However, such an approach has its flaws as development and poverty reduction are highly complex issues and the structural adjustment approach is often regarded as too simplistic (Sachs 2006, 81). As the project team has chosen to follow the theoretical framework of D. North, a more sophisticated tool was required to cover at least the three pillars spoken of earlier , society, economy and political institutions.

The project team decided to base its country related research on the ‘Clinical Economics’ model created by J. Sachs in his book ‘The End of Poverty’. This model is based on the idea that the solving of development problems does not depend on the perfect application of standard economic principals, as taught by traditional development economics. According to Sachs economists need to understand the underlying features of a country and its society in order to adjust standard economic principals to the country situation and thus produce effective solutions for real-world problems (Sachs 2006, 74-75).

We drew inspiration from the CIA World Factbook4 in order to create a shortlist of relevant areas, which enabled us to analyse the country specific characteristics of Bangladesh. To produce a high-quality understanding of a certain country this source suggests a variety of relevant topics. As the project team has a very specific focus, not all of the suggested topics are required for this paper. The negligence of these characteristics does not reduce their general importance, but simply states that the topic at hand does not require an in-depth analysis of these areas. We chose to focus on the social, political and economic spheres of Bangladesh as they are in correspondence with the framework theory. Furthermore the geographical sphere has been added as it has an impact especially on the social and the economic sphere. There are other important topics which could be included in a long term development strategy such as; the energy sector or long distance transportation. The restructuring of the energy sector would be important as the average slum dweller often does not have a connection to the local power grid and gains energy by burning fossil fuels. The long-distance transportation, such as a sophisticated railway system would enable a more efficient internal trade network. The faster internal movement of goods, people and labour would lead to an increase in living standards for the population over time (CIA Factbook 2013). While these factors do not play a major role in the current project, they could provide an interesting starting point for further research.

Social Factors

In order to gain a complete understanding of Bangladesh as a country one must understand the social context and historical background. Bangladesh, compared to many other countries, has a rather short history. The state emerged after the independence of India from the British Empire. The British spilt their former Indian colony into two states, India and a new Muslim dominated state, East and West Pakistan. In 1971 East Pakistan proclaimed independence and thus created the new state of Bangladesh. During the first years of its existence the new country suffered from various military coups, political struggles and natural disasters. The influence of the Islamic religion on the political system increased until it was established as state religion in 1988. While Bangladesh has a democratic system, it has suffered during frequent periods of political unrest and riots. Even though this unrest has not been overcome completely, recently democracy is recovering which has created a higher stability within the social environment (BBC 2014).

Bangladesh is the country with the highest population density in the world. The total population is approximately 150 million people, with a population density of ca. 1150 people per sq. km (World Bank 2014). This factor is likely to remain in the future as Bangladesh has a modest population growth rate. Approximately 30% of the population live in an urban setting and the average life expectancy across the country is 70 years (UNICEF 2013). Furthermore Bangladesh has a highly homogenous population. 98% of the population belong to the ethnical group of Bengalis, accompanied by a small population with tribal heritage (Heitzman and Worden 1989). Because of this composition Bengali is the official state language. However due to the British heritage English is commonly understood and used by the educated elite, while Arabic is also used among the Muslim population (Federal Research Division: Library of Congress 2010). The average literacy rate is 57%, however, the rate amongst the youth is approximately 80% (UNICEF 2013). In regards to religion, 89% are Muslim, 10% Hindu and 1% is made up of other religions (CIA Factbook 2013).

Within the society there is a high rate of gender inequality. Women are facing discrimination, through both cultural norms and laws. Often not even the lowest standards of protection are enforced by the state. Girls are seen mostly as a burden to the family, while there are recent improvements in women empowerment, the situation remains rather serious (World Vision). This can also be seen through the fact that the average age of girls giving birth to the first child is only 18 years (CIA Factbook 2013). Bangladesh has a surprising unemployment rate of only 5%, however approximately 90% of the workforce is employed in the informal sector. The majority of the work force has received basic education and is between 20 - 44 years of age. Irregular paid labourers work on average 54h per week (Asian Development Bank 2012, 1-3). In terms of child labour, Bangladesh is often seen as one of the worst performing states. Especially in urban slums or remote rural areas, children have to work for long hours and in dangerous environments. The consequences are injuries, harassment and abuse. As with gender inequality, the low standards for child labour protection are hardly enforced due to the lacking capacities of the state (United States Department of Labor 2012, 1-4).

In conclusion it can be said that the social environment within Bangladesh is rather unfavourable for the majority of its citizens, but that signs of improvement are emerging. Nevertheless, because of the social situation many Bangladeshi citizens face economic issues such as underemployment, lack of education, low health conditions and insufficient transportation networks.


While economics deals mostly with overall patterns, the social groups who participate only on a day-to-day basis in economic activities - this includes the majority of slum dwellers - are also affected by the national economic trends. In the case of Bangladesh there have been some positive developments in the last decades. The most impressive change has probably been the reduction of people living under the poverty line from 56.6% in 1992 to 31.5% in 2010 (World Bank VI 2014). This sharp decline is closely related to the growth in labour income. A major contributing factor to this has been female empowerment which can be seen through an increase in education and an increasing number of women in the workforce. Today 80% of the workers employed in the garment industry are females. Furthermore, there has been a decreasing fertility rate which has led to lower dependency ratios. The Bangladeshi government has also implemented a rather successful strategy based on five year plans direct at assisting the private sector.5 Progress has also been made in the healthcare, rural infrastructure, education and energy sector (World Bank II 2013) (IMF 2013) (World Bank III 2013).

This progress has been supported by a continuous GDP growth of roughly 6% per year in recent times, and a slowly growing GNI6 (World Bank VI 2014). Compared to other Asian countries there are however still shortages. In the case of Bangladesh this can be seen for example in the ‘Doing Business’ report, which talks about the ease of doing business within a country. In Bangladesh the supply of electricity, the registering of property and the enforcing of contracts hamper Bangladesh’s business potential (The International Bank for Reconstruction and Development 2013, 7-8). The economy is still mostly based on agriculture, with 47% of the labour force working in the agricultural sector, contributing 17.2% of the total GDP (CIA Factbook 2013). Therefore, there are several government led attempts to diversify the industry. In combination with the potential extraction of natural gas and the increased foreign direct investment7 which could build the foundation for a sustainable economic growth process (BBC News 2014). This process can be further supported if the good relations with India continue to work in Bangladesh’s favour. For example, a 750 million USD loan has been provided by India in order to develop the trade related infrastructure such as sea ports, roads, etc. Furthermore both governments have started regional cooperation by for example allowing the Indian manufacturers in the North-East to transport via Bangladesh territory (Askari 2014).

For the unskilled labour living in slums, the above mentioned issues have an effect on their daily lives. Thus, while many people have been able to find jobs in the urban centres due to the general improvements there is still a very high, 40%, ratio of underemployment8. Furthermore, the safety regulations and working conditions for unskilled labour is only improving slowly. For example, the collapse of a ready-made-garment factory resulted in the death of more than 1,100 workers in Dhaka in 2013 (Burke 2013). This and similar events have created social pressure by Bangladeshi workers as well as reactions from international companies. Consequently recent positive changes have been made in the working conditions of unskilled labour coming from the Bangladesh slums (Burke 2013). While these positive trends reduced poverty for many slum dwellers there is a need to continue with the national development programs as other sources of development proved to be rather unreliable. For example, remittances enable ca. 15% of the private consumption in Bangladesh. For 2014 the financial inflow via remittances is expected to fall, which could endanger the positive progresses of the last years (Asian Development Bank 2014, 160). Both the economic and the social sphere are influenced by the political leadership of the country, therefore a complete analysis of the internal politics also has to be included.

Governance and Politics!

The governance of Bangladesh has a varied history. The current system of parliamentary democracy has been preceded by several military dictatorships and a long battle for independence. Since the successful independence from Pakistan in 1971 the individual interests of politicians have heavily dominated the political sphere. The independence of state powers is distinctly controversial. The corrupt judicial system and the privatisation scandals are emblematic examples of the strong dominance of the actual political party. The levels of the internal accountability within the public sector are very low. The practice of bribery and the fear of loosing jobs have also led to the demoralisation of the public sector. The alliance of political actors and the public officials - especially police officers - creates privileged economic positions. Without political party loyalty or family acquaintances the chance of breaking out of poverty is very low (Alam 2012, 863-871). According to Transparency International the two most corrupt sectors are the police department and the political parties, both fall into the “extremely corrupt” category (Transparency International 2010). The confrontation between the two major political parties also inhibits the everyday practice of the decision-making. The two largest parties are the Awami League (AL) and the Bangladesh Nationalist Party (BNP), which are long- term rivals (Knox 2009). This resulted in a situation which the opposition boycotted 60% of the parliamentary sessions between 1990 and 2011 (Alam 2012, 876). “The ruling classes in Bangladesh have failed to develop democratic norms and values or to introduce minimum standards of governance practice. ( … ) In essence, the governance agenda is not driven by demand from below, but by pressure from development partners from above ” (Alam 2012, 884) . Because of the confrontational nature of the politics the level of trust in the government is very low and the result of the elections will likely lead to rebellion movements. The post-electoral practice shows that loosing parties are not willing to accept their political defeat. Elections are often followed by armed conflicts and chaos as happened in 2009 when the newly elected government - after certain replacements of the important military leaders - immediately deployed the army to reinstate public order (Knox 2009 , 458). This predatory form of democracy has formed an elite ruling class where 80% of the Members of Parliament have an influential and successful business carrier background. While the system is namely democratic, in reality the political system is designed to maintain the existing political structure (Hossain 2010, 298-299).

As mentioned above the policies created to deal with poverty do not meet the demands of the poorest sectors of society. Therefore this gap between the rich and poor remains a feature of Bangladesh. Even though there is this controversial policy making procedure, we find it important to mention some examples of different poverty alleviation processes. A significant sector of the Bangladeshi poverty reduction is foreign aid, however the public opinion on international aid is not unified within the country. There is a strong nationalist trend, which is fighting against the international influence in general. In their opinion the western world is economically interested in providing aid and only motivated by the possible investment opportunities. In their view the roll of the World Bank and the IMF is very negative. The key for poverty alleviation would be an international aid-independent nationalistic way of development. The domestic efficiency of international aid is also controversial because of the corrupt aid allocation system. The enormous amount of international aid, which has flowed in to the country since the independence was often spent on military expenses and private political interests (Lewis 2011, 35-39). Nevertheless the situation of the Bangladeshi poor is improving. The poverty alleviation programs are widely implemented in governmental policies and civil society measurements as well.

“(T)he government of Bangladesh has attempted to “complement” the tree stands of its overall development policy thrust (growth-centred economic policies, governance and institutional reforms and the development of physical and human capital) by putting in place a set of social protection policies and programs.” (Lewis 2011, 188). These policy instruments are mainly based on cash transfer and food transfer methods, through cash-for-work programs or school meal programs. According to the World Bank reports these policies are finally targeting the most vulnerable layers of the society. The combination of the food-transfer programs and the micro-credit programs targets a more sustainable poverty reduction in the urban and rural areas. Thanks to the many partnership agreements with civil society organisations the efforts are much more effective than before. However, the impact of these programs is limited. Out of the nearly sixty million poor people of the country, only ten percent can reach such assistance. The long run sustainability of the safe net programs and the dilemma of targeting the right people are also highly controversial in the sector. Furthermore the social expenditure rate remains very low (Lewis 2011, 188-190). In the last decades there has been progress both in the education and the health care sector as well. The partial privatisation of both sectors delivered quite promising results. However the disparity of access between poor and rich is still very big in in both. “In June 2010 the government approved, a new National Education Policy that aims to bring all students in Bangladesh under a single unified system (...)” (Lewis 2011, 195). At the same time the Bangladeshi NGOs are also involved mainly in the non-formal educational sector with several empowerment and literacy training programs. The biggest advantage of this sector is the aim for reaching the poorest people of the society instead of targeting a wide range of people (Lewis 2011, 190-194). On top of the unfavourable situation created by the aforementioned causes Bangladesh also faces several geographical hazards. Such as environmental pollution, water contamination, diseases and climate change.


Bangladesh has a very interesting geography and environment. The main aspects of the environment that effect slum dwellers are: environmental pollution, water contamination and the climate.

Environmental pollution poses a major threat to urban dwellers in Bangladesh. To begin with, air pollution has risen with the increase in population and modernisation. It is closely related to the burning of fossil fuels, the industrial discharges as well as the way in which families warm their homes and cook their meals. Value adding industries such as garment factories are also instrumental contributors to the air pollution within the urban environment (G. J. Alam 2003). However, it seems that the biggest issue for the urban population is water pollution. The key issue is that much of Bangladesh’s ground water is contaminated by arsenic9 (K.Matin and Bhattacharyab 2004). Furthermore, there is a lack of understanding within the Bangladeshi society of this issue and thus much of the water is not purified (Akter 2009, 6).

Contaminated water is one of the main ways in which diseases are spread (Unicef II 2008, 1-2). Such disease poses a major threat to the urban population with it being posited that 30-45% of slum dwellers are sick at any one time (IRIN: Humanitarian News and Analysis 2012). Among the main diseases that plague Bangladesh is diarrhoea. Diarrhoea causes up to 100,000 child deaths per year ( 2014). Many urban poor also struggle to gain access to adequate health care to help alleviate these diseases. This can be seen through the fact that, “nationwide there is one doctor for every 3,200 residents and one hospital bed for every 1,738 people. ” (IRIN: Humanitarian News and Analysis 2012). Furthermore within these hospitals there is often talk of neglect and unprofessional work ethics (IRIN: Humanitarian News and Analysis 2012).

Bangladesh experiences heavy rainfall, averaging 1600mm of rain annually. It is also susceptible to typhoons and has a very hot and humid climate (Weather Online 2014). Because of the climate and the amount of rainfall it is not uncommon that up to a quarter of the country is submerged during the monsoon season (OECD 2011, 3). One study posits that approximately 70% of slum dwellers in Dhaka have suffered from some form of environmental shock (Akter 2009, 2). Such shocks occur approximately every three years and are a major cause of death and destruction (OECD 2011, 2).

The shear amount of water and the climate creates many hazards for the slum dwellers. Firstly it effects the levels of migration. Because of the damage caused by flooding and cyclones as well as a rising sea level many people are displaced and thus move into urban areas. This has been a major cause of the increase in slum dwellers that Bangladesh is experiencing (Akter 2009, 1-2). This in turn is placing more pressure on the slums and their infrastructures. While floods and cyclones pose cyclical threats, the physical environment poses a daily threat to slum dwellers. According to one survey of slums in Dhaka, only 1% of the population had used dustbins to dispose of waste (Akter 2009, 6). Furthermore, most households dumped waste in waterways or merely on the street. Such an environment is very detrimental to slum dwellers, especially children, as they spend much of their time in the streets and/or close to waterways.

Application of Theory

The following graphic demonstrates the application part of the theory, which should provide a better overview for the various steps of following chapter.

illustration not visible in this excerpt

The Theory of Institutional Change describes the ideal development situation as a condition in which the social, the economic and the political sphere are all moving forward at the same pace. Consequently, countries with low living standards which also have low development rates, suffer from an imbalanced progress in these three areas. The project team therefore decided to analyse each pillar of North’s theory separately in accordance with the fundamental elements that North describes - formal and informal constraints, enforcement, path dependency and the bargaining power.

The data presented in the previous chapter - Clinical Economics - should be seen as the starting point for the investigation. Based on these findings we assumed that there is an uneven progress in the three pillars. While especially the economic sector is developing very fast and thus has helped lift millions of people out of poverty, the social sector is developing at a much slower pace while the political sector it could be said is stagnating. Therefore, a first step in the analysis has to be to gain knowledge about the shortages, before improvement suggestions can be presented in the Discussion Chapter. Gaining an understanding of the shortages is the first step in helping with poverty reduction. By attempting to solve issues simultaneously across the three spheres one will be able to reduce poverty.

Social Pillar

Path dependency

Path Dependency will form the basis for the initial view of the social pillar. Since the foundation of the People’s Republic of Bangladesh the state has had to deal with extensive amounts of impoverished people and the religious conflicts inherited by the separation, first from India and later (West) Pakistan. Many skilled civil servants with a Hindi background left East Pakistan/ Bangladesh after the separation from India, which resulted in a rapid restructuring of the society. This new social order was rather inefficient to begin with and probably contributed to the high levels of poverty in the past (Federal Research Division of the Library of Congress II 2013). Thus the current social situation in Bangladesh is affected by the historical events of the country.

Due to the high levels of poverty within Bangladesh the society has been forced to come up with creative solutions. Measures such as micro credits have been invented by Bangladeshi organisations such as the Garmeen Bank. Such initiatives have contributed to the social development in Bangladesh and give further hope for future improvements.

Formal and informal constraints

However, there are still several social constraints restricting the evolvement of the Bangladeshi institutional transition. The formal and informal rules form a key part of these constraints. As seen in the chapter analysing the special circumstances of Bangladesh, there is movement and progress in the social sphere, but the initial steps are still hampered by tensions between the formal and the informal constraints. According to North’s Theory of Institutional Change, such conflicts lower the efficiency of the institutional framework. In the social system of Bangladesh the biggest tension between formal and informal constraints is the social perception of various ethnical groups. While the constitution of Bangladesh states in §28 that there must “not (be discrimination) against any citizen on grounds only of religion, race, caste, sex or place of birth ” (The Constitution of The People's Republic of Bangladesh 1972, §28), the informal perception is still dominating the peoples believes. Other examples include the practices of Imams10 who have a major impact as opinion leaders on political factors and are often seen by the rural population as having supernatural attributes. This superstitious belief system often contradicts with the increasing modernisation, especially in the case of the urban population. However, while these tensions used to create violent conflicts in the past, there is now a relatively peaceful environment between various religions or ethnic groups (Harris 2014).

Another informal factor, which influences heavily upon the progression of the Bangladeshi society is the perception of the family. Family is regarded as the core unit of the Bangladeshi society which effects the living circumstances, the nuptial arrangements and the selection of a profession. An example of how strong the kinship relations can effect the social structure could be seen in the events following the Bangladeshi independence. Here the leading positions of the new system were distributed between a small number of powerful families (Federal Research Division of the Library of Congress II 2013).

For the urban poor this creates several problems. Normally slum dwellers are lacking higher education and thus their traditional views prove more difficult to transform. Especially the acceptance of the Hindu caste system result in stagnation in a certain social position.11 Furthermore is the concept of arranged marriages at a young age which is especially common among poor Bangladeshi, as the girls are often seen as a burden to the family. Both examples, social stagnation and early marriages, are currently becoming less dominant in the picture of the Bangladeshi society, but they are still strongly influencing the less wealthy and educated parts of society. These and similar social conflicts between the formal and the informal constraints make it more challenging for the Bangladeshi social sector to develop, especially for the urban poor.

Bargaining Power

Bargaining power, or lack there-of, is also a serious issue for urban poor. Within this aspect of the social pillar, the slum dwellers suffer from a lack of bargaining power and thus cannot influence the institutions which effect their state of poverty. This is exemplified through the way in which children are used as income earners. Many children from a very early age are sent out to work in order to contribute to the family income, because the alternative would be to starve. It is estimated that 15 million children aged between 10-14 are employed in the workforce (Basak 2014). In fact, no matter whether they are a boy or a girl many slum dwelling families see children as a source of income rather than as a child. They are expected to be mature and to make adult decisions as well as work long hours (Basak 2014). This is a clear example of how it is the individuals or organisations that have the most bargaining power who regulate the rules by which the others have to live. There is obviously a need to change the framework to enable the children, and in this case the parents as well, a larger bargaining power so that their interests are also represented.

The role that women play within Bangladesh is also an important example of bargaining power and how it effects society. Bangladesh is a highly patriarchal society and this has had a significant impact on the role of women. It is interesting to note that there have been a very small number of women who have reached high levels of power within the political sphere (Harris 2014), but for the most part they have been discouraged from properly entering public life (Ferdaush and K.M. Mustafizur 2011, 16). Traditionally the sphere that women occupy has been the household and it has been discouraged that they move far beyond that sphere (Harris 2014). This matched with the aforementioned fact that many women marry early and thus are tied to these traditional values for a longer period of time shows the lack of bargaining power that they have. This lack of bargaining power results in women having less access to education, employment and health care services. There have been attempts to resolve these issues which can be seen through the recent increase in access to both primary and secondary education (Ferdaush and K.M. Mustafizur 2011, 8). Even though recent changes have occurred, the general patriarchal mind-set and traditional views on women have impacted on further female empowerment. This can be interpreted as being a situation where the individuals and organisations with the most bargaining power do not want to change the system. Furthermore the lack of bargaining power that women have within the society means that a change to the overall framework is unlikely until this imbalance is resolved.


Knowledge also plays an important role within the social sphere, especially regarding health. For example the way in which diarrhoea, that causes up to 100,000 child deaths per year ( 2014), is dealt with and perceived shows the impact that knowledge can have. Alleviating diarrhoea is an important issue because if children are sick then they will miss school and this will have a negative impact on their future (Unicef II 2008). One of the key issues with diarrhoea is that parents are constrained in their knowledge of how to deal with the issue (Akter 2009, 7). New research has shown that a mix of sugar, salt and water (known as ORS or Oral Rehydration Salts) can alleviate diarrhoea, the problem is that parents do not have the knowledge of when or how to apply it even though they know how to make it (Mustafa 2014). This shows that communicable knowledge is not being utilised efficiently. A solution to the problem has been found, yet the knowledge has not been successfully spread. Attempts have been made to spread the information through school teachers who can communicate directly with parents (Mustafa 2014). This can be seen as a form of tacit knowledge, knowledge gained from a template, which if sustained could lead to further institutional change. Such a change would influence the communicable knowledge that is passed from family to family and in turn help to reduce the prevalence of diarrhoea as parents would gain the appropriate skills to deal with the issue. This example shows that the way in which knowledge is used can impact on the development of the social sphere.

Conflict of Interests

Health is an important issue for the urban poor. This is because urban poor are, “viewed as ‘ illegal residents ’ (and thus) urban slum settlements are generally excluded from public sector resources, severely limiting residents ’ access to health care services ” (Rashid 2013, 53). However it is not only the access to healthcare that is the only issue but also the quality of healthcare once accessed that is also proving problematic. Lower levels of health can force individuals to be absent from either their education institutions or their place of employment. Unfortunately for the urban poor they have less access to health centres than poor living in rural areas (Shelia 2011). Furthermore the current urbanisation trend is placing more pressure on the already imperfectly functioning health system (IRIN: Humanitarian News and Analysis 2012). Furthermore in places such as Dhaka City the urban poor have no access to health insurance and/or safety health cover (S. Hossain 2011, 90). However it would seem that the key issue is the healthcare itself. Most slum dwellers cannot afford to go to private hospitals should they fall ill. Yet in the public system there is often talk of neglect, arrogance and impotence on behalf of the doctors and staff (IRIN: Humanitarian News and Analysis 2012). Here one can see the conflict of interests becoming apparent. On the one hand there is a need for a formal change in the system. The urban poor need better healthcare in order to live a healthier life. Through this individuals have a higher chance of gaining consistent employment or completing an education. This in turn helps with the over-all development of the sphere because the labour force is healthier. However the informal sector or ideology does not want to change. There has been little input form the government (IRIN:

Humanitarian News and Analysis 2012), and it would seem that the doctors, in general, in the current system are not functioning as they arguably should be. This portrays the conflict between the two parties and is a situation that needs to be solved to enable further development.

These examples show the shortages within the social sphere. In order to reduce poverty these issues will need to be overcome, not only in order to create a well functioning social sphere but also to ensure that it is able to develop simultaneously with the other spheres in order to help with over all poverty reduction.

Economic Pillar

Formal and Informal Constraints

In D. North’s Theory of Institutional Change, next to the social pillar there is also the economic sphere. With in the economic sector, formal and informal constraints have affected progression. One of the formal constraints is the low level of human capital, especially in terms of education. As alluded to previously there is a high level of primary education, (UNICEF 2013), however, most people stay in the schooling system for only approximately ten years (CIA Factbook 2013). This lack of education has placed constraints on the economy and its ability to expand (Yusuf and Rahman 2010, 3). Furthermore the government is not investing as heavily as it could in education, which means the issue cannot be overcome as quickly as could potential be possible (Yusuf and Rahman 2010, 15). The lack of education has therefore had an impact on the economy and can be seen as a formal constraint on the economy.

Corruption also plays an important role in the economy. Corruption is a two-sided phenomena, on the one hand it can be said that it can help avoid inefficient bureaucracies (Mo 2001, 66). “From this perspective, corruption acts as a lubricant that smoothes operations and, hence, raises the efficiency of an economy.” (Mo 2001, 66). However on the other hand it is governments that provide important goods and services as well as protection, which is also central to economic growth (Mo 2001, 66). Furthermore corruption can lead to rent seeking behaviour which can be detrimental for the economy as it moves people away from focussing on creative initiatives (Mo 2001, 66-67). From this perspective the Bangladeshi economy is effected by the presence of corruption due to the patronage networks and bribery, which disrupt the system thus making it less efficient. This in turn has an impact upon the slum dwellers due to their level of poverty. If they have to spend most of their money merely on bribing others in order to gain access to goods and services or even jobs, then there is obviously less money left over for them to spend on other important necessities such as nutritious foods. Thus one can see how corruption, as an informal constraint effects the economy and the livelihoods off slum dwellers.

One of the key formal constraints that has effected the Bangladeshi economy is the involvement of the IMF and World bank. The government has had alliances with such Western development agencies and it is often felt that this is imperialist (Mujibul 2003, 3-5). Furthermore the policies which are funded by these institutions are not perceived as being transparent or involving local actors (Mujibul 2003, 4). Furthermore they press for capitalistic solutions and only use GDP and GNP as examples of growth (Mujibul 2003, 6-7). This gives a clear example of a formal constraint placed on the Bangladeshi economy.

Bangladesh is also a highly religious country and therefore religion does play an important role within the economic sphere, as well as in the other spheres. Religion is also a highly diverse, complicated and intricate phenomena that people have an extremely strong emotional connection or attachment to. It can be seen as both an informal and formal factor. It has guided civilisations as well as changed individuals lives. In light of this, this section will only briefly analyse the way in which religion can effect the economy when looking at the urban poor and takes into account the fact that the issue is much broader than what can be discussed here. What is important to note, however, is the notion that Soren Schmidt mentions in his text on the role of Shia-Islam in Iraq (Schmidt 2009). Here he talks about the fact that poor people seem to be more influenced by religion (Schmidt 2009, 126). This becomes even more important when one looks at the work of Barro and McCleary who posit that the intensity of belief has a positive effect on the income per capita growth (Barro and McCleary in: Noland, 2005, 1216). Thus one could further argue that for urban poor living in Bangladesh, having a strong religious belief may be a way to create economic growth and help with the progression towards development. However, though Barro and Mcleary may see religious intensity as a positive, others see religion as having a negative impact upon the economy. Some argue that a dominant, hierarchical religion can create inefficient bureaucracies and lead to inflation (Guiso, Sapienza, and Zingales in: Noland, 2005, 1216). Therefore it is difficult to ascertain the exact effect of religion upon the economy and due to the sensitivity of the subject it will always be a difficult. However it could be argued that, given the connection between the urban poor and religion, in the case of this project religion does effect the economy in some way. This shows how an informal constraint, such as religion, does effect the economy, especially concerning the poor, and in turn plays a role in the overall functioning of the economic sphere. Furthermore, for the economic sphere to function efficiently and thus help with the overall progression towards poverty alleviation, religion and the role it plays would need to be taken into account, especially in the case of Bangladesh.


Enforcement can be seen from two angles. Firstly, there is the need to have economic enforcement of contracts in order to guarantee a working business sector, which can lift people out of poverty. Furthermore, there has to be enforcement to guarantee the rights and safety of workers.

The first is closely connected to the overall business environment and thus the ‘Doing Business Report’ issued by the World Bank provides a valuable starting point to examine the current position of Bangladesh. The general environment determines the level of stability, reliability and security for companies and thus the employment opportunities for the urban poor. However, only with the necessary means to enforce these regulations can companies be convinced to invest in the region or entrepreneurs can be convinced to found start-up companies. Thus quick rulings (e.g. via courts) and efficient enforcement (via e.g. police) are the ideal situation for economic enforcement. In the case of Bangladesh enforcement is a big problem, the country ranks 185 out of 189 and has considerable costs (average of 66% of the claimed value and 4 years of negotiation) connected to the enforcement process (The International Bank for Reconstruction and Development 2013, 82-83). The general lack of willingness to improve this situation can be seen as there have not been reforms over the last 5 years (The International Bank for Reconstruction and Development 2013, 86). For the urban poor the enforcement of internal regulation is more important, but Bangladesh performs badly on this scale as well. In the last years there have been several cases in which health and emergency regulations have not been enforced. This resulted in deaths of slum dwellers working in factories. As the factory management values profit more than the security of workers, and the government does not enforce safety regulations, many slum dwellers work in hazardous environments. In both cases there is a clear gap between the ideal enforcement situation described by North and the current Bangladeshi situation. The group which suffers the most from this institutional inefficiency are the urban poor. While wealthy Bangladeshis can exploit other opportunities, especially the slum dwellers are reliant on work in factory and thus on a better enforcement of regulations.

Bargaining Power

North’s ideal state of bargaining power, is a status in which rather low differences in the economic bargaining power results in a fast and efficient exchange of goods. On the other hand a high bargaining power difference results in additional costs for one party and thus prevents the country from a quick development (North 1990, 99-101). Bangladesh is a country with a high power distance according to Hofstede.12 This signifies that Bangladesh employees accept that they are in a relatively low position compared to their superiors. It is socially accepted that the power is distributed unequally and the existing hierarchy in a company does not have to be justified anymore (Hofstede Centre 2010). For the urban poor it can be difficult to state their opinions and demand changes in e.g. working conditions, as the decisions are taken only at the highest level. Furthermore, Bangladeshis prefer to deal with people mainly after a trustworthy person introduced both business partners. This makes it de facto impossible for slum dwellers to talk directly to their employers (UK Trade and Investment 2013, 14).

In North’s theory such middlemen add additional and unnecessary costs to the whole process and are therefore undesirable for smooth progress (North 1990, 16).

Applied on the urban poverty the high difference in bargaining power can be seen especially with children from slums. As mentioned in the social section as well, children are seen as economic resource and forced to work at a young age. Furthermore their employers regard them as easy to discipline by using physical punishment towards children. The statement from one tea shop owner supports this common perception clearly: “I pay him. Therefore I have every right to punish him ” (Basak 2014). Even though the there are legal restrictions against the abuse of children, the informal constraints and the lack of enforcement result in a major bargain power difference between the slum dweller children and potential employers.

Economics conclusion

The analysis of the economic sector has shown that there are several shortages in the current performance. Nevertheless, the economic sector is responsible for the major part of the urban poverty reduction. This contradiction can be explained by the low labour costs. Many jobs are currently created in the urban Bangladeshi centres as companies move to these low cost areas (Anbarasan 2012). In terms of the Theory of Institutional Change, this creates a major boom for the economic sector, which the sector of society is currently not able to follow in the same pace.

Political Pillar

Formal, Informal Constraints and Bargaining Power

The final sphere North uses in his theory is that of politics. David Lewis refers to the Bangladeshi political system as a network of patronage relations. In his study on Bangladeshi politics, economy and civil society he describes the hierarchic web of political actors and civil servants. The ‘patron-client relations’, is a complex network of interpersonal relationships that can influence the employment opportunities, political protection, access to health care and education or credit opportunities. The practice of informal favours and kinship-based benefits undermines the horizontal relationships in the society. This leads to a relatively low level of trust among people and in politics as well (Lewis 2011, 99-100). According to D. North the overlap between formal and informal constrains is one of the key factors for successful institutional operation. In this aspect the Bangladeshi political sector is highly informal (North 1990, 89-92). The informal practices of the patron-client relationships overrule the formal rules of the institutional framework. The hierarchy of informal networks follows a top down approach from the leading political elite down to the poorest clients of the society (Lewis 2011, 100-102). The relative power of bargaining strengths of participants is reflected in the established formal rules. Those participants with large political and economical influence can form informal rules for their own benefits. The change of the bargaining strength can lead to a different institutional framework. According to D. North if the formal rules can shrivel the informal constrains, the political structure can be changed (North 1990, 47, 101). In the Bangladeshi political system the political elite has overwhelming bargaining strength therefore the “( … ) the policy goals easily become captured by individuals. ” (Lewis 2011, 106). Public sector loans are often used as grants to family members and politically loyal members of the patron-client network. Therefore the public sector lacks transparency while the chosen few are enjoying exceptional privileges.

The extreme level of corruption can also be connected to the uneven distribution of bargaining power where the informal constrains are maintaining an unaccountable public sector where most of the society is excluded from any kind of political participation and self-expression (Lewis 2011, 102-107). Access to health care is one of the emblematic examples related to urban poverty. As it is widely known the Bangladeshi slums are suffering from the horrible health care conditions, meanwhile the access to public health care services is just as corrupt as most of the public sector. “(P)atients visiting a government clinic in Bangladesh, although nominally free, must pay intermediaries to help them access medical professionals, and a whole range of informal costs are incurred at every stage of the process of accessing a service ” (Lewis 2011, 105). This example shows how vulnerable the poorest are to informal constrains. The formal institutional framework fails to meet the needs with the poorest layer of the society (Lewis 2011, 103-105).

Path Dependency

According to D. North to understand the economic change we always have to consider the historical evolution behind each country’s development. The path dependency determines the long run economic development in the case of Bangladesh as well. The theory of path dependency can explain why certain parties have stronger bargaining power than others (North 1990, 98-99). In Bangladesh the political leadership is very precious. According to Lewis the political party structure is very factional therefore usually there is no cooperation from the opposition side. This can be understood as a zero-sum game where the winner takes it all. After the elections the victorious political party tend to fall apart internally since there are a wide range of patron-client relationships around them, which are typically based on individual economic interests. This paradox of success can be understood as path dependency. The lack of interest and the cyclic rivalry of the Bangladeshi political elite undermine the chance of a sustainable institutional change (Lewis 2011, 102-106). Bangladesh experienced several political changes in the recent past. The long practice of patronage hampers the “ ( … ) development of an independent professional bureaucracy with the capacity to devise and implement policy ” (Lewis 2011, 107). This strong political bargaining power determines the political evolution of Bangladesh in the a long run.


According to D. North the enforcement of the formal rules and the institutional framework is crucial. There is no perfect prescription for an effective enforcement body, however, there are examples for bad practice. One of the reasons why enforcement is typically imperfect is the rational individual behaviour. The opportunity of cheating the system for personal gains at the cost of the society is beneficial to individual, but on the other hand it obviously increases the transactional costs for the society. Therefore, if the state entities use their coercive force in their own interest, the cost is paid by the whole society (North 1990, 54-60). Bangladesh is an extreme case, also in this aspect. The main enforcement institution in the country is the national police which is widely known as one of the most corrupt state institutions (Asian Human Rights Commission 2012).

According to the Asian Human Rights Commission, people in Bangladesh pay more bribery to the police officers directly than tax money to the state itself. The underpaid police officers represent the chain of command in local urban and rural areas where they establish bribery networks and prevent any kind of possible remedies. This practice meets with the interest of the ruling class because they need the police when it comes to dealing with political opponents. In urban setting the everyday life of poor people is completely vulnerable to police officials and the obligation to pay bribes. These areas are highly criminalised parts, where the urban dwellers have to pay the police for arresting criminals and also for finding “evidence”. Police investigations have high bribery costs without any guarantee for justice. Local businesses are threatened by police “investigations”, if they cannot pay monthly bribes, which discredits the local business owners. This everyday practice maintains the poverty in the highly criminalised urban areas, while burdening the system with high transactional costs. As long as the political elite is interested in the present form of enforcement the institutional efficiency remains very low. This is unfortunately specially the case of the poorest areas where the inhabitants are the most vulnerable the local institutional enforcement bodies (Asian Human Rights Commission 2012).

The political sector is the one that stands most in the way of a significant reduction in urban poverty. While it may be the government that has been the key implementer in large scale poverty reduction methods based on the findings above it would seem that the individual politicians are benefiting excessively from the current gap between the richest and the poorest. This could potentially point to a lack of interest on their behalf in changing the system. The key issues that stand in the way of further poverty reduction are the bribery and patronage networks which stand in the way of possible poverty reduction projects because they add to many extra costs. Furthermore for a poverty reduction project to be completed it needs some form of enforcement and again these channels of enforcement are inhibited by the current need for bribery. Finally the government is very factional and so any policies that may be created by one parliament may be thrown out should the opposition party gain power. Therefore it is within this sector that most changes need to be made in order to further reduce poverty.


The Theory of Institutional Change posits that institutional change can lead to economic growth, we have then taken the liberty to assume that such an institutional change and the accompanying economic growth will help with poverty reduction and development. This notion is one that has played a dominant role within development projects. Organisations such as the British Department for Development have posited that, “Economic growth is the most powerful instrument for reducing poverty and improving the quality of life in developing countries ” (Department for International Development 2008, 2). This assumption is corroborated by the example of the successful economic development of China in recent decades. The Chinese reforms created not only substantial economic growth but also had a very positive effect on poverty reduction (Fan and Chan-Kang 2005, vii). According to M. Ravallion13 the progress of poverty reduction in China can be explained by the following factors. “China ’ s high pace of poverty reduction reflects both growth- promoting policy reforms — to undo the damage left by past policy failures — and the advantageous initial conditions left by the pre-reform regime — notably the relatively low inequality in access to productive inputs (land and human capital), which meant that the poor were able to share more fully in the gains from growth. ” (Ravallion 2009, 91). The process of poverty reduction was uneven from the beginning of the reforms. The reduced inequality between rural and urban areas played a key role in the Chinese economic success. The rapid economic growth of China resulted in the rise of inequality in the Chinese society, however, the overall economic progress had a huge impact on the country’s poverty alleviation. Even though this process should not be seen as universally valid, the case of China shows the potential benefits of economic growth in terms of poverty alleviation (Ravallion 2009, 79-83). This is an excellent example of how institutional change has led to economic growth and this has helped in drastically reducing poverty. While initial success can be achieved via an economic dominated reform policy, North suggests in the long-term a joint development of the social, economic and political sphere is the only sustainable success path.

However, there is a lot of debate as to whether or not economic growth can effectively reduce poverty. Therefore we would like to emphasise that the theory of institutional change takes this notion of economic growth one step further. It explains that while the economic growth is very important in terms of poverty reduction, there are two other aspects, political and social, which also play an important role in poverty reduction. However, there is a need for the sake of this project, given Bangladesh's growth rate and economy, to reinforce the idea that economic growth can lead to poverty reduction under the right conditions.

Our research question targeted the relationship between institutional change and poverty reduction. The application of D. North’s theory proved that institutional change could lead to economic growth. The Chinese example shows that economic growth could lead to poverty reduction. Therefore with the combination of the two findings, we logically concluded that institutional change could lead to poverty reduction.

As the analysis shows there are certain deficiencies within the three spheres that are hampering the alleviation of urban poverty in Bangladesh. According to the theory a combined development between the three spheres is emblematic for institutional change and thus a reduction in urban poverty. Currently the three spheres are developing at different rates with the economics growing rapidly, while the politics seem to be stagnating in a world of corruption, patronage and faction, while the social sphere is struggling through bargaining power and enforcement issues.

To begin with the economic sphere is growing rapidly due to the cheap labor. This, however, off-sets major underlying problems, which can be seen through the lack of enforcement of business to business contracts and employer to employee contracts. The lack of enforcement of these contracts leads to many issues for both individuals and businesses. Individual workers face employment insecurity, while international businesses also face institutional insecurity, which may stop them investing in the country.

While the economic sector needs improvements, the issues and challenges within the social and the political sphere seems to be more relevant in the case of Bangladesh. The combination of the distance between highly corrupt political elite and the urban poor results in a situation where the policies that are created do not meet the requirements of the mass of poor people. There is a distinct lack of interest on behalf of the political elite in changing the system because they benefit so highly from the current bribery and patronage networks. Therefore the urban poor and their situation become even more desperate. Furthermore the framework does not allow the poor any voice or influence. The interest of the political elite is enforced through individuals and organisations such as the police as they benefit significantly from the current framework.

Therefore certain changes need to be made to the political and to the social sphere as well to allow for equal growth and thus institutional change. One way in which to solve the political shortages would be to use the ideas of Planners and Searchers that William Easterly spoke of in his book the ‘White Man’s Burden’(Easterly 2007). Easterly attempts to portray some of the key dilemmas within the aid and development sector. He proposes that future attempts to reduce poverty need to move away from the large-scale big plan and big push, utopian visions and to focus more on the local levels. He calls the big plan, big push group the planners and the local group the searchers (Easterly 2007, 3-29). For the Bangladeshi context the key point is that the planners have had the most say in policies regarding development. By using the searcher approach, corruption could be reduced by redistributing financial aid on a local or regional level instead of via the federal government of Bangladesh. By eliminating the middlemen - high ranking politicians, who support rather personal relations than the overall public - the money is more likely to reach its intended destination, instead of ending up in corrupt pockets. If corruption can be reduces significantly via the searcher approach the urban poor would have increased purchasing power and agency over their own financial funds. Such a change would have wide scale consequences. One example of this would be that urban poor could use their entire income for everyday expenses instead of wasting their money on bribes.

One way in which to solve the social shortages would be to change the general publics’ perception of the urban poor in Bangladesh. This is exemplified through the way in which urban poor are viewed. Since most of the poor urban population live in slums, these areas are seen as a major problem and most political elite would like to see them eradicated. However, according to Glaeser14 they can actually be seen as a positive and useful tool that can help develop urban areas. Poor people who choose to move to cities are often highly motivated, work extremely hard and are more willing to take bigger risks in order to be successful. This motivation is based on the fact that many of these people have nothing to lose. Because there are limited opportunities for poor people, not making the most of the opportunities that arise would lead to starvation or further deprivation. If a city can tap this potential it gains an important element contributing to its development. Therefore Glaeser suggests that slums should be seen as a poverty reduction catalyst, consequently a slum should provide basic public goods to people. In the Bangladeshi case with the already high and increasing number of urban poor such a change would impact development positively (Glaeser 2011, 69-91). The Bangladeshi society has already demonstrated its ability to adopt new perceptions regarding poverty alleviation. One of the already existing practices is the microfinance15 movement, which has been developed in Bangladesh.

Even if a change of mindset regarding slums occurred, the fact that the politicians are so corrupt, any substantial change will need to include an overhaul of the political sphere. This leads to a very interesting discussion as to which sphere is more important for development. There are many highly influential theories such as realism, neo-classical and the critical school that would argue for the importance of either the institutional framework, the economic or the social development as being the catalyst for further development. However, the theory of institutional change argues that all are needed in combination. In this sense it is taking the middle ground, as such, and allows us to show the importance of all the development issues that Bangladesh faces. At the moment Bangladesh is benefiting from the economic growth which can lead to poverty alleviation as the Chinese example shows. However, for a long term sustainable development the society has to focus more on the political and social sphere as well. As the Chinese example shows the economic reforms were initially successful in alleviating poverty. But the social inequality which grew out of the rapid economic growth slowed further poverty reduction processes (Ravallion 2009, 79-84). This example explains why D. North argues for a joint development of the three sectors.

While in general it is difficult to argue which aspect is more important, within the specific case of Bangladesh it seems that the emphasis should be placed on the political sphere. This, however, should not overshadow the issues that the other spheres face and any changes within these spheres will also help with overall development.

As a concluding remark one could argue that the Theory of Institutional Change is useful when attempting to analyse a specific situation or society. It is helpful in terms of finding shortages within the three pillars and their relationship to each other. Thus the theory can only be extended so far. It can point out the areas of deficiency, however it cannot provide specific solution to overcome those deficits. In order to apply the theory on a specific problem such as poverty reduction amongst Bangladeshi urban poor, we felt the need to make use of additional theories, which are focused on the development of the specific pillars.


As it was mentioned in the introduction extensive changes have happened in the Bangladeshi economy in the last decades. For instance the huge pool of cheap labour has attracted a large number of foreign investments. While the economy experienced rapid growth, the social and the political sphere couldn’t follow this level of progression. This uneven development has maintained the extremely high level of poverty in urban Bangladesh. In the Chinese example economic growth played a major role in poverty alleviation. Even though Bangladesh has experienced a similar economic growth it has not been able to increase living standards to the same extent as China. Based on this fact we assumed that economic development is only suitable as a poverty reduction method if the social and political situation is beneficial for the overall process. In the case of Bangladesh this development friendly environment, where the political and the social sphere are capable of supporting the economic growth, is currently not given. D. North’s Theory of Institutional Change also concludes that a joint development of the political, economical and social pillars results in smooth development process of a society. Therefore we propose that institutional change is the key factor in further reducing poverty, in urban Bangladesh. While applying the Theory of Institutional Change we found many shortages in the social and especially within the political sphere. Among others these included the extremely high levels of corruption, bribery, the client-patronage networks, the lack of formal enforcement and the vulnerability of the urban poor to informal constraints. Furthermore the individual interests of many politicians maintains the power gap between the rich and the poor.

Because of these key deficiencies within the political sector, changes within the current politics would have the most effect on urban poverty reduction. It would enable the creation of a new framework which could encourage a development friendly environment. Therefore in our opinion, any poverty reduction approach in urban Bangladesh that does not place a strong emphasis on changing the political sphere is destined to fail in the long-term. Though there is hope due to the positive changes that are occurring within the Bangladeshi society. This can be seen through the empowerment of women and the reduction of poverty that has already been achieved and this bodes well for the future. In our opinion should Bangladesh be able to continue with such approaches then this could create a demand for change in the political realm. Such small changes may be the first drop in the ocean that could create a wave of demands which could break the self-perpetuating cycle of the current political situation and create a friendlier overall environment. Such an environment will have a positive effect on the urban poor as well.

In summary, we found that using the Theory Institutional Change is very pertinent to understanding institutional constraints within a society, that stand in the way of progress. However it does not provide approaches which can help to overcome the shortages within each individual pillar in order to converge in a joint development. Thus each pillar needs it own approach to overcome its own shortages.


Informal& Constraints: Informal constraints are constraints that humans place on themselves in order “reduce the cost of human interaction (North 1990, 36),” as well as create order within a society. Constraints are for example, cultural trends and traditions, customs, codes of conduct and behaviour (North 1990, 4,6). These constraints are not written down and are susceptible to incremental change over a long period of time.

Formal& Constraints: Formal constraints are rules that humans devise. These can be for example political decision and constitutions. Formal rules make use of speci=ic wording and are written down. In comparison to the incremental change experienced in informal constraints, formal rules can change abruptly. Such changes require the creation of a new of=icial document for example a new law or constitution. (North 1990, 46-53)

Enforcement: In order to have a well functioning and ef=icient institutional framework one needs both the rules and the methods to enforce these rules. Enforcement is most closely related to formal rules as individuals only regard them as important if there is a threat of punishment should they not be adhered to. (North 1990, 54-60) !

Path&Dependency: Path dependency is an analytical tool that can be used to look at a countries history. The current institutional situation is in=luenced by historical events. Likewise the future situation will also be effected by the decisions and institutions that are created now. Therefore even if countries have similar contexts their future developments can differ depending on the institutional choices that they have made. Thus path dependency can be used to understand how a country or society has arrived at its current position based on the institutional decisions that were made. However it should not be used as a tool to predict future developments. (North 1990, 92-104)

Knowledge: According to North there are two ways of gaining knowledge. One is tacit knowledge which is where one learns from a framework. This knowledge is given to a group. The other is communicable knowledge. This is knowledge that is gained through doing, that can be passed from one person to another. (North 1990, 73-82)

Bargaining& Power: This is the power that actors have within a situation which they can use in order to change a situation to further suit their needs. There can also be problems when actors have a lack of bargaining power and thus cannot change a detrimental situation even though a change would be required. (North 1990, 16,48-49,84)


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1 This theory is described in D. North’s book, ‘Institutions, institutional Change and Economic Performance.’

2 The title of the chapter in Sachs’ book is ‘Clinical Economics’.

3 This term is not coined by North, but by the project team

4 The source of the CIA World Factbook has to be seen critical as there is no clear transparency and therefore the reader cannot understand entirely the origin of the data. Therefore the project team used additional secondary sources to guarantee a more solid source.

5 These five year plans culminate in the Vision 2021 project put forth by the Bangladeshi Government

6 Gross National Income; The sum of a nation’s gross domestic product (GDP) plus net income received from overseas (according to

7 As Bangladesh is seen as a member of the “Next Eleven” (mentioned in the Introduction) many investors see it as lucrative to invest in the national economy

8 Underemployment is the status in which labourer are not working at full capacity e.g. shorter hours than full employment (according to

9 Arsenic can cause various types of cancer. For example lung, bladder and skin.

10 Muslim spiritual leaders

11 This example of the caste system is relevant for the Hindu population. In the case oft he muslim population there is, however, a similar system

12 Hofstede analysed cultural differences between countries on a business level. His research can be criticised as he only focused on one company (IBM), however, it provides in general a good insight in the relative level of cultural differences. rag

13 Australian economist, The former director of the Research Department of the World Bank and the inaugural Edmond D. Villani Professor of Economics at Georgetown University.

14 As he speaks of in his book: Triumph of the City

15 The concept of micro credits is sometimes criticised, however, it shows that the Bangladeshi environment supporting the creation of new poverty reduction methods.

46 of 46 pages


Institutional Change and Urban Poverty Alleviation in Bangladesh
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Christian Henne (Author)Daniel Toro (Author)Thomas Gillmann (Author), 2014, Institutional Change and Urban Poverty Alleviation in Bangladesh, Munich, GRIN Verlag,


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