POST TIME: 23 May, 2019 12:00:46 AM
Bloomberg on Bangladesh and India: The future of textiles, manufacturing and services
Should Bangladesh shift into services led growth now, or later? The key issue is how productivity is to be increased as the service sectors inevitably expand

Bloomberg on Bangladesh and India: The future of textiles, manufacturing and services

In an opinion piece in Bloomberg on 24 February 2019 (Bangladesh and India pursue different economic models for growth) the columnist Noah Smith asks if Bangladesh can sustain its high growth rate of recent years, based as it is on the manufacturing sector led by low-cost textiles.

He suggests that India’s experience, in which it shifted early to a services-led economy might be of relevance. He makes three points in particular: Bangladesh’s exports are overly concentrated in textiles at more than 80 percent of total exports by value; the looming threat from robotics and automation to the textiles industry; and the benefits of a shift to a services focus for economic growth, as in India -  “if Bangladesh falters and India sustains its growth, it will imply that poor countries should look to services first.”

The last of the points above, the “deindustrialization” debate, has been researched by Professor Dani Rodrik of Harvard University, along with his co-authors. A key finding with broader implications is the contrast between China and India. Like many fast-growing emerging markets China has pursued the traditional path of industrial growth. This has garnered for it rapid economic growth, strong employment generation, significant increase in productivity, and robust structural transformation of the economy; unlike in India where structural transformation, employment generation and the manufacturing sector have all lagged despite high growth, even as the service sector surged.

Hence the conclusion that the best strategy for a low income developing country is to concentrate on manufacturing-led growth for as long as possible. Has Bangladesh reached a point where it needs to shift out of this strategy into services-led growth?

The question is important in illuminating the policy options facing both low-income and middle-income countries.

One such middle-income country is Malaysia, which has benefitted from the traditional path of industry-led economic growth but, according to some observers, may have “deindustrialised” too early. The country now finds itself with a large services sector, similar to a high income economy, but has yet to garner the strong R&D outcomes that high income economies, and China, have achieved.   With both its growth rate and its productivity declining, and R&D expenditures of about 1.3 percent of GDP, Malaysia has a considerable path to travel to catch-up with China’s R&D expenditure ratio of 2 percent of GDP, or South Korea which spends 4 percent of its GDP on R&D. But India also has a long way to go, with R&D expenditures at less than one percent of GDP (R&D data are from UNESCO).

Bangladesh (like Malaysia) will need robust policies to sustain growth and rising living standards. In particular, it will benefit from prioritizing reforms that improve productivity and strengthen its competitiveness in both textiles and manufacturing.  

Turning to the textiles sector, the International Labour Organisation’s (ILO) well known 2016 study identifies the scope of the potential threats being faced by the countries of the Association of Southeast Asian Nations (ASEAN) from robotics and automation. (ASEAN in Transformation: How Technology is Changing Jobs and Enterprises, ILO, 2016). Notably, the ILO points to deficiencies in the textiles sector, namely low labor productivity due primarily to the use of outdated technology. It is noteworthy that in Cambodia, where labour productivity is lowest in ASEAN, it is considerably higher than in Bangladesh, while Cambodia’s average nominal wage in the textiles sector is significantly lower.

The ILO’s most recent publication suggests that the threat from automation may extend even to the lowest-cost section of garments, to T-shirts, which it estimates will require only $0.33 to produce per unit in an automated plant in the United States.(The future of work in textiles, leather, footwear;  Working Paper 326, ILO 2019). If so, it would seem to undermine confidence that Bangladesh can remain competitive even in this market segment where low labour costs have given it an edge.  

However, the ILO balances its stance on the scope of the threat and when and how it will materialize. Thus it states: “while the potential exists for certain tasks to be automated or digitalized, TCLF work might not necessarily be taken over by robots or algorithms: while certain tasks in an occupation might be automated, others might remain or evolve, rather than become obsolete.” (ILO, 2019)

This more measured message is underscored by a forthcoming study, also from the ILO, which leads it to state that “a likely scenario”  for the future is one in which the adoption of automated production processes in middle and high income countries will coexist for some time to come with textiles production in low income countries enjoying low-labour costs. (ILO, 2019 above).

What about the concern that the industry could shift from Southeast Asia to Africa, where labour costs are lower and there is a plentiful supply of cotton (amongst other factors). On this the ILO states: “Africa comes with its share of challenges, such as poor infrastructure, corruption and red tape. If movements to Africa gathers pace, through government policy to attract investment, build regional value chains and continent-wide free trade agreements, ASEAN could lose its competitiveness and its TCF (textiles, clothing and footwear) industry would diminish.”  (ILO, 2016).

This statement is of relevance to Bangladesh where a concerted and sustained effort to attract investment, both domestic and foreign,  through reforms similar to those outlined above, would contribute towards sustaining the textiles industry in the face of the twin challenges of automation and competition from lower-cost labour. Moreover, improvements to physical infrastructure and logistics, and a reduction in red-tape and in corruption through measures addressed at the regulatory environment would also help to diversify the industrial and manufacturing sector.

The other points made by the ILO can be put in context. Emerging markets cannot sustain forever their strategy of reliance on low cost labor-intensive manufacturing. Automated technology will displace jobs in textiles, although less from robotics and more from digital printers, computer aided design and body scanning sensors.

But, as the new technology displaces lower-skilled labour, it will also create opportunities for workers with new skills, requiring a set of changes to economic policies and business practices geared towards raising labour productivity and encouraging innovation and adoption of modern technologies.  Educational and training programmes provided by both the public and private sectors are needed in this evolving scenario, and will help to endow the economy with greater flexibility.“Job creation, job losses, job transformation” is the phrase through whichthe ILO captures the potential threats and benefits of the future.

What about the flourishing of services in India, in particular in financial services, health care, tourism and all the others mentioned in Bloomberg? Leaving aside software development and business outsourcing, which require considerable investment in human capital, many of these activities have developed in response to rising consumer incomes and living standards. A similar process is also likely in Bangladesh as living standards rise, provided there is a commensurate opening of the policy space and increased public expenditures on education and on infrastructure.

At issue is the kind of economy Bangladesh has in mind for the year 2041: will the textiles or garments sector still account for the largest share of exports? Or will it be a vibrant, competitive industry, one of many in a well diversified economic structure in which resources flow quickly to newly emerging opportunities?  If the latter vision guides us, we willnot worry unduly about the need to shift, prematurely perhaps, to a services-led growth model just yet. This will happen in any case as living standards improve and consumption expenditures rise.  

The key issue is this: “As countries develop, manufacturing becomes more capital intensive and economies more services-based. But with services generally tending to be less productive than manufacturing, the growing importance of the sector… in the absence of productivity-enhancing measures, could be a drag on potential growth.”(Anchoring Growth: The Importance of Productivity Enhancing Reforms in Emerging Markets and Developing Economies: Staff Discussion Note 8, IMF, 2013.)

The process of building up institutional capabilities for productivity enhancement, and for greater integration into the international economy and global value chains takes time. The ASEAN experience demonstrates the value of sequenced reform strategies linked to national policy and institutional capabilities and experience.

Low income countries like Cambodia and Myanmar that lack a strong research base and robust mechanisms for cooperation between academia and the private sector will  benefit most by focusing,  initially,  on liberalising the enabling environment that will allow the business sector, and SMEs, to flourish.

This provides the pre-conditions for more targeted policies for building industrial and SME clusters, and innovation centres and other facilities for strengthening R&D capabilities. These reforms are more readily addressed by middle income countries, or those that have strengthened their reform capabilities through experience.  

The writer is the former Secretary General of the Islamic Financial Services Board. 

He has been a member of the Consultative Committee of the Basel Committee for

Banking Supervision, as well as other international advisory bodies

for global regulatory and ethical standards for the financial sector