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Lesson from development progression: Urgency of changing the growth model

M Rokonuzzaman | November 10, 2022 00:00:00

Workers at a re-rolling mill in Dhaka — FE Photo

In the 1970s, Malaysia was richer than Taiwan and South Korea. But it is now far poorer than both. After achieving high-middle-income status, Sri Lanka has fallen deep into economic crisis. Unlike Taiwan, why could not Malaysia keep growing instead of getting caught in the middle-income trap? Coming round to the home front, a moot question can be asked as to why after having surplus power-generation capacity Bangladesh cannot fully utilize it to drive economic output instead of paying hefty capacity charge for idle plants. Similarly, when more than 80 per cent of Indian engineering graduates fail to get engineering jobs, how India can become a high-income country by investing in education deserves a close look. Data indicate that economic growth does not equally sustain in all countries. And there has not been a natural correlation between conventional indicators and sustained economic growth. Hence, it's time to draw a lesson and figure out what changes ought to be made to sustain the growth over decades-reaching high-income status.

Borrowing and spending for sustainable growth: Public spending contributes to GDP growth. As GDP is considered barometer of economic growth, there could be attempt at borrowing and spending for reporting economic growth. But if the marginal economic value does not outweigh the borrowing, long-run growth will suffer from negative implications. Hence, fueling sustainable growth out of value-creation-capacity development should be a critical consideration for supporting borrowing and spending.

Infrastructure for economic growth: There is no denying that infrastructure facilitates the production, distribution and consumption of goods and services. Hence, countries like Bangladesh have been borrowing and investing in developing infrastructure. But if the contribution of developed infrastructure is far less than the spending, will it positively contribute to economic growth? Yes, during the construction phase, GDP will gain. But what will happen during the loan- repayment period needs to be taken into account. Furthermore, there is operating cost.

As technological progression left only innate abilities for the human workers to supply in replicating many consumer goods, the low-skilled labour pool of Bangladesh and a few other countries got qualified for export-oriented manufacturing jobs. Such growth reached the limit of the existing infrastructure very quickly. Hence, investment in infrastructure opened proportionate economic-growth opportunities. Therefore, to scale it up, there has been a surge in borrowing and investing or offering guaranteed revenue of private investment in infrastructure. But countries like Bangladesh have already learned that there is an end to such scalability. Hence, Bangladesh has been pumping capacity fees for idle power plants.

Furthermore, as automation keeps progressing, the role of labour, whether low- or high-skilled, has been changing. Therefore, instead of sticking to the past, the focus should be on predicting the future and better synchronizing the economic capacity of value creation and infrastructure development. Otherwise, the loan-repayment implication of infrastructure financing could be overpowering enough to block development progression.

Incentives for export: There has been a strong belief that exports bring foreign currencies. Hence, there has been a tendency to give all kinds of incentives for expanding export. But what is the value being added to exported goods and services? If labour is the only local value and its role is less than five per cent of the cost of production, it tends to weaken the foreign-currency reserves. Such export expansion runs the risk of weakening the long-term growth prospect of nations.

For example, although we cite Vietnam as a wonderful success story of the rapid growth of export, what is the local value addition in its assembling of electronic products? According to the United Nations COMTRADE database on international trade, Vietnam's Imports of electrical and electronic equipment were worth US$95.44 billion in 2020,for producing export revenue of US$111 billion. Such data indicate that local value addition out of labour is extremely low. In some instances, countries like Bangladesh are offering cash incentives to expand the export market, as shallow local value addition out of labour is not profitable for the producers.

As local value addition out of labour has reached the floor, incentive-driven export expansion is no longer a viable option for driving economic growth. Instead, the focus should be on leveraging locally produced knowledge and ideas. It's time to graduate from idea importer to exporter to drive economic growth.

IMPORT SUBSTITUTION: As domestic consumption has been growing due to remittance flow, some policymakers are in favour of import substitution for driving growth. The same question: what is the source of local value addition? Import substitution out of imported capital machinery, design, and intermediary products leave as low as five percent value addition out of local labour in many products. Furthermore, we must import fuel, power plants, and infrastructure to support import substitution. Hence, with the given shallow local value addition out of labour, import substitution does not look like a viable option for driving economic growth-let alone reaching high-income status. Hence, additional windows of local value addition must be opened.

Scaling up development by investing in education: Based on data from a few advanced countries, we make a case that there is a strong correlation between education and income levels. Does it naturally exist? Should we ask about the role of education in creating economic value? If true, why are we witnessing hollowing out middle effects in advanced countries? In less developed countries, why are we encountering the reality of the highest unemployment among university graduates? Often, we raise the quality issue. But how will quality advancement increase the employment of the graduates? The bottom line is about the capacity of the economy to create economic value out of knowledge and ideas, which could be produced by employing graduates.

Hence, we need to bring a change in import substitution and export policies. Incentives should be destined to create demand and capacity for producers to produce knowledge and ideas, by engaging graduates, and add them to products and processes.

Leveraging industrial revolutions: Yes, industrial revolutions (IRs) have been the underpinning of the rise of Britain, Europe, the USA, Japan, Taiwan, and South Korea. But the question remains why and how. Lessons should be drawn about the changing value-addition scope and means to figure out how to leverage IRs instead of borrowing and spending for education, training, high-tech parks, and infrastructure. If the fourth industrial revolution makes the role of human labour, knowledge and ideas on the production floor irrelevant, what is the merit of upskilling for replication economies like Bangladesh? It's time to understand the likely unfolding task transformation affecting value addition out of labour, knowledge, and ideas. Instead of believing in buzzwords, time to focus on understanding the dynamics for developing economic value-creation capacity.

Changing gear of economic value creation: Countries like Bangladesh have already exhausted natural resources to drive economic growth. For sure, they got significant benefits from the commercialization of low-skilled labour. What has been the driving force for the later success? Is it due to the investment made in education, training, and infrastructure they succeeded in creating jobs for the low-skilled workforce? Unfortunately, mostly no. Due to technological progression, humans are provided only with role of innate abilities to replicate products. But due to continued technological advancement, those abilities will be getting automated. On the other hand, due to software-centric automation, codified knowledge and skill that we deliver through education and training are rapidly losing market value.

Whether in export or import substitution, our ability to create economic value out of labour and codified knowledge and skills has been suffering from erosion. Such reality is leaving only option-embarking on an idea economy for opening endless frontier of growth. In retrospect, the western European countries, the USA, Japan, and Taiwan have reached high-income status because of the production, consumption, and export of ideas. It's time Bangladesh followed the idea economy for dealing with the impending debt burden and middle-income trap, and ensuring sustained growth.

M Rokonuzzaman, Ph.D is Academic, and Researcher: Technology, Innovation and Policy.

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