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9 November, 2017 10:36:30 AM

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Export led growth in Bangladesh

The RMG sector will be the core of the manufacturing sector for the next 25 years and support for its growth and competitiveness is essential. The arithmetic is simple
Forrest Cookson
Export led growth in Bangladesh

Writing about Export Led Growth (ELG) in Bangladesh sounds a worn out topic.  On the contrary the economy has reached a point where this is one of the two most critical issues before the policy makers.  For years there has been a satisfactory growth of exports.  This has been concentrated in the garment sector and there has been very little diversification.  The expansion of garment exports measured in domestic contribution is even greater than the nominal dollar value of exports as the backward linkages industries have provided important inputs.  These have roughly moved the domestic contribution in RMG exports from 25 per cent in 2000 to 50 per cent in 2017.  Hence the impact on the domestic economy has been much greater than the nominal increase in dollar value.  Furthermore in real terms the production of garments has been growing faster than the value of exports as the price of exports has been declining.  This powerful expansion force lies behind the growth rate increasing from 3-4 per cent to 6-7 per cent.  Export led growth has worked.
But the ratio of the value of gross exports to the GDP remains modest at about 16 per cent.  Countries with strong ELG policies drive the exports up to 40-45 per cent of GDP.  If Bangladesh is to raise its growth rate up to the 8-10 per cent range then the export growth must be accelerated and diversified.Achieving such change in export growth is very urgent.
1. It is not feasible to achieve rapid economic growth by shifting demand on to domestic production.  There are no examples of rapid growth based on domestic oriented production.  Of course a large percent of production will be for the domestic market but these demands will not increase rapidly enough to support rapid growth.

2.

The RMG sector’s expansionary effect is slowing.  First the increase in domestic contribution has more or less come to an end.  There is room for further progress but the weaving factories are still limited in providing cloth of required quality for export.  Second, the prospects for growth in production capacity are slowing with difficult infrastructure problems and shifting demands from traditional markets.  Third, rapidly changing technology will result in shifting some production back towards the countries where purchase takes place.

3. There are large markets for RMG products in India and China.  India is uncooperative, trying to build up its own RMG sector and blocking entry of garments from Bangladesh.  China is a much more promising market.  To serve this market it is probably necessary to have investment by Chinese manufacturers in Bangladesh to open the doors and insure smooth procedures.  So far limited progress has been made.  Promise of large numbers of Chinese investors, development of a SEZ for Chinese investors, and a garment village jointly with BGMEA have all failed to materialize. Compliance issues for Chinese buyers will be very limited and they will be unhappy to pay the costs arising from compliance for European and North American markets.

4. Nevertheless the RMG sector will be the core of the manufacturing sector for the next 25 years and support for its growth and competitiveness is essential.  The arithmetic is simple:  To achieve 8 per cent real growth for 25 years; ratio of RMG to other exports equal to 50 per cent after 25 years; exports to GDP ration reaches 40 per cent after 25 years.  All of this means that exports grow at 12 per cent; RMG exports grow at 10 per cent and other exports at 17 per cent.  To achieve such results requires a strong program that is outlined in the following points.  What does this mean for Bangladesh citizens?  The real per capita income corrected for prices would rise to $23,500  slightly below the level of Malaysia now.  This would be a spectacular achievement.  To reach and maintain 8 per cent growth will require tremendous growth of exports to provide the foreign exchange and the high level of industrial productivity required.

What is needed:

1. A national strategy oriented towards export promotion.  Initially there may be limited increases in household income and consumption but after five years things will begin to improve.  The first and key requirement is a quiet political environment so that businessmen and workers can get on with their work of producing and selling stuff.  Political disputes are off the table.  The Chinese viewpoint is critical, there cannot be political disruption if one is going to achieve rapid economic growth.  

2. An undervalued exchange rate is necessary to maintain competitiveness and support export diversification.  Export subsidies must be removed.  The prevalent under and over invoicing must end.  Tariff levels must be low with limited protection effects. [ The point is to encourage investment in exports not import substitution except for strategic industries that will grow into exporting.]  Trade policy must push hard for access to foreign markets.

3. Foreign Direct Investment must be encouraged to initiate new manufactured exports; policy reviews are needed for existing major non-garment exports to resolve some of the problems that have accumulated over the years. FDI is needed to bring new industrial technologies.  

4. The financial sector needs to undertake major reforms.  I do not dwell on this here.  Suffice it to say that at present there are extremely serious issues in the financial sector which if not solved will prevent any hope of sustained economic growth.  We simply assume here that this is going to be achieved.

5. Energy: Low cost, reliable, high quality electricity is needed.  This contrasts with rather high cost, reliable, low quality electricity now available for the manufacturing sector.  Natural gas supply must be reliable, cheap and available for manufacturers to generate their own electricity either base load or to cover outages.  The production and distribution of electricity and gas should be provided by private companies.  The Government’s efforts to manage production and distribution of electricity and gas have failed.  

6. Transport:  A realistic view of transportation in Bangladesh concludes that it is road transport that is the lowest cost for the haul lengths that cover most movement.  The road system should be the primary focus of transport investment and the railway be put in a distant second place. [Railway transport of goods is only effective for trade with India; given India’s blocking of Bangladesh exports there seems no reason to invest much in the railway system.]  The issues in the road transport system are two-fold:  Improved land acquisition procedures to enable the Government to obtain the necessary land for expansion of the highways; improved governance of the movement of vehicles, driver training, and control of weight limits.  

All of these are blocked by widespread corruption.  If there is going to be a transport system able to manage the movement of goods and people consistent with an export led, high income society then there has to be the will to stop the corruption.

7. An education system must emerge that provides three outcomes:  A sound primary education enabling citizens to read, handle computers and smart phones, and do arithmetic; a flow of workers for the industrial sector with technical training appropriate for the tasks; finally university graduates in engineering, biotechnology, computer science, and business able to run the large industrial establishments that are going to be needed.

8. The Government must not run a large deficit.  A good target is 1 per cent of GDP.  However, revenue rates must be kept low.  The current VAT rate is 15 per cent is probably too high.  Customs duties are certainly too high for many goods.  Government expenditure should expand slowly, not more than 5 per cent per annum.  Production and investment for the economy must be largely left to the private sector.  Government should get out of business; it has only demonstrated incompetence.  

None of these ideas is new.  But lined up together we can see that this is going to require the society make peace with itself, and concentrate on making the changes needed for getting a better life.  Each of these steps is very difficult and requires overcoming attitudes and beliefs that are deeply rooted but have imposed terrible costs on the welfare of the citizens.

The writer is an economist

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Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
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Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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