Over the last two decades, trade has become major driving force of a rapid economic growth in Bangladesh. It has not only expanded the overall economy but also worked as the engine of economic growth and development. The 7.11% GDP growth in 2016 could be mainly attributed to an increase in trade as a whole. The gradual reduction in poverty rate from 31.5% in 2010 to 23.6% in 2016 is partly due to the export-led-growth strategy of the country which led to creation of jobs for millions. Development in the trade arena has also led to a rise in investment, standard of living, improvement in gender equality etc. The holistic characteristics of international trade directly or indirectly have contributed positively to various social and economic indicators for Bangladesh.
A faster growth in international trade would have positive multiplier effect on the overall growth of Bangladesh. Bangladesh has set a vision to become a developing country in the near future. For achieving a smooth graduation and for a graduation with momentum, the country needs to develop strategies to overcome the challenges that would come on the way. After graduation, being a developing country, Bangladesh will lose most of the flexibilities it is presently enjoying as an LDC. Moreover, once graduated from the LDC status, Bangladesh would not be re-considered as an LDC, even if it fails to sustain the benchmarks. This is due to the criteria where it is mentioned that an LDC cannot have a population above 75 million. Since Bangladesh has a population of more than 160 million, there is no looking back. The growth in international trade, therefore, must be taken seriously.
The government has developed many strategies for expansion and facilitation of trade, especially international trade. Various challenges and constraints, however, stand in the way of achieving faster and sustainable growth in trade. The international trade arena is, somewhere, quite instable and volatile for Bangladesh. The trade GDP ratio is also quite low, despite several initiatives taken.
Similar to most of the Developing and Least Developed Countries, one of the major challenges that Bangladesh faces in terms of international trade is its export concentration both in products and markets. Limited product basket and concentrated export destinations are posing vulnerability and instability in Bangladesh's position in international trade. Any kind of economic shock in those markets may lead to unstable economic growth and investment as well as lower level of employment. Thus the combination of higher level of export and a diversified export base is a pre-requisite for a sustainable growth and development. Studies show that a diversified export base would lead to higher and inclusive growth, creating knowledge-spillover effects.
Bangladesh's exports are much more concentrated to limited items than any of its competitor countries. It is observed in the data that readymade garments (RMG) constitute 81.2% (FY 2016-17) of the total exports of the country. The European Union (EU) and the USA are again the major export destinations having share of 56% and 17% of the total export. Moreover, concentration exists within sectors as well. For example, within RMG, a handful of products like shirts, trousers, jackets, t-shirts, sweaters contain the major share of around 74% of total export of RMG. This shows the level of export concentration the country has in its export basket and reflects the degree of volatility in the total international trade. Such concentration in export is risky for attaining sustainable growth and development. Export growth rate of only 1.72% in the fiscal year 2016-17, with an export volume of US$34.66billion which was far below the target of US$ 37 billion, was quite alarming as well. The need for diversification is crucial at this moment if the country is to enjoy a steady trade and economic growth.
The government has taken export diversification as a strategy for the growth of trade. Several incentives are being provided and several schemes have been developed for diversifying export items as well as markets. The incentives include tax brackets, duty drawbacks, cash incentives etc. These incentives come in the form of special facilities provided to the Highest Priority and Special Development Sectors as indicated in the Triennial Export Policy and through some other policies as well. The Export Policy 2015-18 identified 12 Highest Priority and 16 Special Development Sectors, including two special development service sectors. Some other programmes of the government in this regard include development of products like chanacur, cookies, pickles, ator, papad, jam, jellies etc. Moreover, all the policies and strategies of the government and the 7th Five-Year Plan emphasis facilitating and diversifying export. If exports are actually to be diversified, some issues need to be addressed and more comprehensive efforts should be given.
It is observed that, despite receiving various incentives, most of the sectors are struggling to improve their share in the total export. The trends in share of major export sectors like leather, jute, engineering products etc. have been either fluctuating or static. Though some of the sectors have shown progress in volume, overall trend in growth and in terms of securing their share in the total export is observed to be dissatisfactory.
The government is providing cash incentives to different sectors which have the potential to earn more foreign currency through increased export. Government also provides cash incentives to the sectors which export to new markets other than the EU and the USA. This benefit, however, can be re-visited. Products like agriculture, light engineering, plastic, jute goods, various fibers etc. are getting cash incentives from 5.0% to 20%. For market diversification, cash incentives of around 3.0% have also been provided for exporting to non-traditional markets. Despite all these provisions, results are not up to the mark. Many of these sectors have failed to register significant growth rate. Moreover, many of the beneficiary sectors like agriculture, halal meat, frozen fish and shrimp and bicycle under the category of Light Engineering products etc. experienced negative growth of 22.34%, 49.19%, 6.43%, 5.57%, and 16.83% respectively, in the FY 2016-17. This clearly shows that the incentives are not meeting the objectives.
Another point of concern here is that almost same products are considered for cash incentives every year. But performance of those considered products are not very encouraging. In-depth analyses of these issues are necessary to figure out why the cash incentives are not showing desired results and what might be the other complementary mechanisms or supports that are necessary. The government may consider developing a monitoring mechanism for examining the utilization of preferences that are being rendered. Also, the selected products should be re-visited every year and revisions and adjustments should be made accordingly, based on their performances. A combination of monitoring and evaluation of policy incentives and their implementation is crucial here.
A large number of short-lived and discontinued products in the export basket pose another challenge for diversification. It is observed that each year a good number of products enter the export basket but fail to continue for a long time and exit the market within one or two years. This argument could be supported by data as well.
Anlaysing the total number of products exported by Bangladesh over the last five years, it is found that the total number of products have increased year on year (except for the fiscal year 2013-14). Though the total number is positive, analyzing the product basket reflects that some new products get included in the export basket every year but many disappear also. Analysis shows that several tariff lines under wood products, meat products, plastic products, chemicals etc. are not exported every year. Many products under these sectors have entered the basket in different years, earned value around USD 50-100 million or even more, and then discontinued. The number of disappearing or unstable products is around hundred per year.
Many reasons can cause this instability or short-living nature. One of the reasons could be their incapability of being competitive on the world market or their inability to comply with various rules of international trade. As in most of the cases the short-lived products are less in volume, it can be assumed those products are exported by SMEs. Due to lack of economies of scale or other technical reasons, those SMEs often fail to compete with their competitors in terms of quality and standards and therefore drop out from the export market. It should also be taken into account whether those products faced any tariff or non-tariff constraints while entering the export markets, which led to their exit. Shortcomings in production capacity or any other barriers faced by them should also be considered. Instruments should be developed to retain the products. Monitoring of the export basket is important in this regard to have an eye on these short-lived, discontinued and unstable products. The products that newly entered the basket each year should be provided with special benefits, and, if needed, technical supports, to sustain them. Those exporters could be facilitated for making them competitive on the world market and retaining them in export. In terms of removing market barriers, government can play a role by negotiating special terms with partner countries for getting easy access to markets for products which have potential, but not being able to continue in the export market due to the market-access conditions. Negotiating FTAs and PTAs with potential countries should also be considered to retain the market-access preferences that will be eroded after graduating from LDC status. The focus should be creating a win-win situation.
As discussed earlier, market concentration is another challenge facing the export trade of Bangladesh. For diversifying markets as well as products, demand-based diversification can be thought of. Some products, where Bangladesh has the production capacity, can be selected by analysing their demands in certain markets. For example, within the RMG or leather sector, there are many products that Bangladesh is not producing at a very high level, despite having capacity, but have demands in a certain markets. Those products can be produced and exported targeting those markets. Government and research organisationscan play a role here by investing in this kind of market research and afterwards could incentivise the producers and exporters. Forward and target marketing could be the appropriate strategy here, not only by the government, but also by the private sector.
Considering the fact that the trade-related challenges for Bangladesh in the near future would be more complex, building a strong base for international trade is vital. The diversification strategies should be comprehensive focusing on products, markets and global demands. The government not only should focus on incentivising the exporters for diversifying export, but also should monitor the usefulness and utilization of the incentives. The preference-availing criteria should be easy enough so that SME exporters can also take the advantages along with the large businesses. Though it is evident that there are other barriers that are hindering Bangladesh from enjoying many of the advantages it has, it is also true that the country must be pro-active in overcoming its supply-side constraints. A national effort for implementing the necessary strategies, combined with some other measures behind the border, at the border and at the policy level would lead to a stable and sustainable trade scenario and a long-run economic growth for Bangladesh.
The writer is Director of Bangladesh Foreign Trade Institute.
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