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Export growth: Emerging issues and sustainability

Monday, April 03, 2017 > 11:08:16
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www.thefinancialexpress-bd.com

Apparently, Bangladesh achieved remarkable success in the labour-intensive manufacturing sector as displayed by the country's ready-made garment (RMG) industry. For the last two decades, mass manufacturing has been the largest single contributor to Bangladesh's growth - total GDP share of manufacturing increased from 9.8 per cent in FY 1980 to 18.7 per cent in FY 2014. However, such growth could not create labour-intensive clusters as RMG is the only dominant variable in Bangladeshi exports. Therefore, sustainability and volatility of export growth are innate concerns. Amidst a steady growth, the role of trade in the country's economy remains low despite having a substantial role in GDP boosting and poverty alleviation. 

Higher trade volume increases the efficiency of domestic production as well as the economy's labour intensity. In low-income economies, a positive current account for most years indicates fewer investment opportunities. Since FY 2006, Bangladesh's current account has been positive. Thus, a collaborative policy effort is necessary to hasten export growth while demanding upward investments. A careful application of monetary and fiscal policies has contributed to Bangladesh's stable economy - institutional weaknesses and vulnerabilities still exist though. Uncertainty in the country's politics has reduced investments, created energy and infrastructure deficits, and poses a threat to the sustainable growth rate of 6.0 per cent, let alone raising it to 7.0 per cent in future. Fundamental weaknesses in institutional capacity also underpin the need for speedy implementation of critical infrastructure projects. 

Moreover, Bangladesh's interim macroeconomic view is subject to numerous vulnerabilities like political instability and corruption. Recession in the European Union (EU) might hurt exports like RMG alongside the appreciation of the taka. If preferential access to the EU is withdrawn for insufficient progress in the improvement of labour and factory safety standards, situation would worsen! Due to possible implications of fiscal and financial stability, legitimate concerns for state-owned and few private banks also exist. Nevertheless, Bangladesh's vulnerability to the volatility of global finance is small despite growing financial links. 

Likewise, energy shortages disrupt economic activities. In fact, Bangladesh ranks almost last among Asian countries in the prevalence of power cuts. Power outages decrease manufacturing productivity in Bangladesh. The use of captive generation to compensate for outages increases costs.

Arguably, Bangladesh's solution may involve the economy's reorientation from anti-export bias to improvements in trade infrastructure to shorten lead times. In addition, Bangladesh must focus on skill development. Despite a growth in the countrywide access to education, 96 per cent of the workforce lack secondary education and 66 per cent have no primary education. Just one-third of primary students are able to acquire the basic numerical and literacy skills, and only 0.17 per cent of workforce has professional education like engineering. Skill is a major disadvantage for economic entities outside Dhaka. Higher skills are in constant demand in innovative sectors like shipbuilding, pharmaceuticals and ICT. Actually, the low rate of literacy and prolonged years of non-practical schooling delay skill acquisition. At present, 37.6 per cent of Bangladeshis are beyond realm of literacy. In 2010, average duration of schooling among the workforce was 4.8 years. Unlike its RMG-based competitors, Bangladesh's average duration of schooling is quite low. Based on advanced skills, Sri Lanka has provided incentives allowing RMG companies to grow swiftly. However, Bangladeshi companies have restricted their choice to primary school graduates and high school dropouts.

Meanwhile, labour issues such as wage, workplace safety, and compliance with labour standards can generate major reputational risk for Bangladesh's overall RMG exports, and hence these require careful policymaking. Concerns have been heightened following a series of fatal incidents - resulted in condemnations and diplomatic pressures from multinational buyers and foreign governments on Bangladesh to take measures for ensuring workplace safety. In 2013, US government suspended Generalised System of Preferences (GSP) for Bangladesh in the wake of these concerns. Legal enforcement and commitment to ensure ideal workplaces would secure the country's labour goals regardless of conflicting narratives.

Continued betterment of workplace conditions in the RMG sector along with coordination between domestic and foreign stakeholders is crucial. Product diversification may encounter higher fixed costs and eventually require overcoming potential resistance. Policy moves in this space is likely to be gradual. 

On the periphery of product space, Bangladesh is yet to build a product cluster aside from garments and footwear with diversified exports being relatively low. The development of another major cluster is lengthy and needs more investment. Rationalising trade policy and improving the environment for foreign investment are critical inputs for product diversification as they face potential resistance from domestic producer interests. Policy changes should be gradual to pave the way for timely adjustments. In this circumstance, few policy measures stated below may deserve consideration:

BREAKING INTO NEW MARKETS AND FACILITATION OF IMPROVISED TRADE:

It incorporates the improvement of trade logistics, increases the competitiveness of exports as well as cuts down import costs. Plans may include launching of a National Logistics Strategy, establishing an inland railway container depot at Tongi, developing the inland water transportation, improving Dhaka-Chittagong road connectivity with an enhanced railway facility for carrying export cargo, improvement of the efficiency of land ports and border outposts. 

PROMOTING ECONOMIC INTEGRATION WITH THE REST OF ASIA:

Bangladesh's geographical location between two economic superpowers --India and China --gives the country an advantage in terms of export potential. Road transport agreements with Bhutan, India, Myanmar, and Nepal will facilitate cross-border movement of goods. 

CREATION OF AN INVESTMENT-FRIENDLY ENVIRONMENT:

Attracting foreign direct investments (FDI) is a must to develop marginalised sectors via IT and market links. More serviceable land can be allocated for business use. Enforcing standards for companies and developing sustainable solutions to provide unsubsidised cheap power is also needed. 

IMPROVING WORKER AND CONSUMER WELFARE IMPROVING SKILLS AND LITERACY:

Skill development is crucial to raise the productivity of workers, increase their wages, reduce the level of waste and enhance the quality of goods. It can be attained by articulating a comprehensive vision for skill development of the current labour force through greater access to training and improving the quality of foundational education.

IMPLEMENTING WORKPLACE SAFETY GUIDELINES:

This has become a precondition for exports, and will minimise the chances of further tragedies like Rana Plaza.  

MAKING SAFETY NETS MORE EFFECTIVE:

This is done by developing a safety net and labour strategy, and investing in appropriate skills development to meet global and domestic demand. This has the potential to harness substantial gains from globalization, whereas training and retraining of workers will help to ensure their resilience to trade shocks. 

BUILDING A SUPPORTIVE ENVIRONMENT &  SUSTAINING SOUND MACRO-ECONOMIC FUNDAMENTALS:

It encapsulates maintaining a stable inflation. Moreover, stabilising the political turmoil is a must for a supportive environment as this would otherwise cause massive disruption in the productivity of firms and workers.  Building institutions for trade policy coherence and implementation is crucial. The National Board of Revenue and the Ministry of Commerce should jointly formulate tariff policy. Moreover, making the Export Promotion Bureau more effective, enabling greater private sector participation, targeting market diversification in key markets, and allowing private sector providers to provide quality services will facilitate this. 

While Bangladesh has been impressive in demonstrating its economic performance in the recent years, the risks of hurting that growth are real. Increasing the competitiveness of garments exports, creating another major export cluster, along with development of the workforce and the supportive environment are sine qua non to speed up the growth of Bangladesh into prosperity.


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