Export resilience continues to amaze

Despite heavy odds that confront exporters time and again in this country, they seem to come out with flying colours. The latest report of export performance is proof of that. For the July-March period (i.e. first nine months) of the fiscal year (FY) 2013-14, export figures show a growth of 13%, the target growth rate for the entire fiscal year -- a rather cautious target set by the Ministry of Commerce (MOC) and Export Promotion Bureau (EPB), in light of the ongoing and predictable political turmoil that was the preponderant factor clouding the economic horizon for the current fiscal year. There is a good chance that this target might be fulfilled, or even exceeded, if the present calm remains undisturbed, at least until end-June. If the target were to be missed for some unexpected event, it will not be by a whole lot. Thus we can expect an export performance for the current fiscal year that would be something to write home about.

That is because this comes on the back of two adverse developments last year that could have spelt disaster for the garment industry: the Rana Plaza tragedy, and the political turmoil that lasted for the better part of the year. The Rana Plaza tragedy, whose anniversary is this week, has been described by some as a "wake-up call" for the industry, sending a clear message that business as usual was no longer the option. On the other hand, it could become the "turning point', as others would have called it, if the message hit home to all concerned and something concrete and positive emerged out of the combined efforts of the retailers, the  government of Bangladesh (GoB), the International Labour Organisation (ILO), and the garment exporters, leading to safe and standardized working conditions for garment workers in Bangladesh's largest and most promising industry. To add to the Rana Plaza misery, the country experienced political strife of the worst kind - with disruptive hartals and aborodhs that clocked some 80 days of work stoppages, according to a World Bank count. The good news is that, by now, most of the doomsayers have been proved wrong. Predictably, there were some cancellations or diversion of orders, the effect of which might be reflected in falling growth rates during the third and fourth quarter of the current fiscal year. But buyers and leading retailers of the world did not leave in droves as some analysts surmised.

What is the secret of this resilience which prompts leading clothing retailers of the world to repose so much confidence in Bangladesh suppliers in the face of catastrophic events? First, of course, is the goodwill that Bangladeshi entrepreneurs have earned over the past three decades as dependable suppliers of garments at competitive prices with timely delivery. As first generation entrepreneurs, this is no ordinary feat. Business relationships built over several decades do not evaporate in days. The world's leading retailers need Bangladesh just as much as Bangladesh workers and entrepreneurs need them.

The most important reason is that it makes good business sense for global retailers to count on Bangladesh for the long-term, so as not to be deterred by short-term passing events. With China becoming too expensive, Bangladesh is the place to be for sourcing garments at the cheap for the foreseeable future. The pressure to keep world supplies of clothing coming at low prices has kept them looking for cheap sourcing that was once China's exclusive preserve. But not any more. What happened to price trends in the electronic goods sector has been replicated in the $400 billion clothing market? Price of clothing in rich countries have been falling for decades. According to US government statistics, in 1900, US households spent 15% of their income on clothing - suits, shirts, and pants cost significant amounts in those days. In 1950, they spent 12%. But by 2003, clothing expenses were only 4.0% of household income, falling to 2.6% in 2010. Cheap workers in China and other countries like Bangladesh made this possible.

With fast-changing fashion and low inventories, it is still the likes of China, Vietnam and Bangladesh that could keep the Wall Marts, Targets, and Primarks of the world adequately stocked with cheap clothing to quench the thirst of customers to buy more and more clothes, often fuelled by intimidating ad campaigns of brand leaders. It has made garment production a highly profitable business globally, creating opportunities for jobs and incomes for Bangladeshi workers and entrepreneurs. These are the factors that propelled Bangladesh readymade garment (RMG) industry to its present heights, and, if analysts like McKinsey LLC are right, there is still a long way to go until the clothing demands of people around the world can be satiated.

That said, let us return to making sense of the export growth trends as revealed by data from EPB. For the year as a whole, up to March 2014, annual growth is a respectable 13% year-on-year (Table 1). However, it masks a declining trend after November 2013. After the sharpest increase of 25.5% in November 2013, monthly exports declined sharply to 10.5% in December, and has been on a declining trend ever since (Fig.1). Some of the monthly fluctuations are seasonal in nature. However, if this is the lagged effect of export orders having been cancelled or diverted elsewhere due to a combination of Rana Plaza episode and political disruption, it could have a deleterious effect on exports for the last quarter of the fiscal year. That would result in a shortfall from this year's export target. In the event exports pick up on the back of summer orders, the next few months could then see an uptick in growth. That could result in exceeding EPB's export target. While both possibilities exist, Bangladesh Garment Manufacturers & Exporters Association (BGMEA) and Bangladesh Knitwear Manufacturers & Exporters Association (BKMEA) members are best placed to tell us what the more likely scenario is. Since the economy is in a way beholden to this one sector's performance, it would behoove these two institutions to start publishing "Export Outlook"  on a quarterly basis for the benefit of all stakeholders, including policymakers and researchers.

Now, a little dissection of the overall export growth performance reveals some notable weaknesses as well. The fact is that while all exports clocked 13% growth, RMG exports, which made up 80% of total exports, grew 15%, while non-RMG exports (20% of total) grew a mere 5.0%. So there is no respite from the continued preponderance of RMG in our export basket. If anything, our mono-product export concentration seems to be deepening as the share of RMG exports have gone up from 70% in FY2001 to 80% today. Whither export diversification? If Bangladesh can become a leading supplier of garments in the world market, what is preventing it from showing promise in other low-skill labor intensive manufactures, such as footwear and toys.

This writer has argued repeatedly in the past and submits here once again that one of the primary constraints is the prevalence of anti-export bias for non-RMG firms that are not 100% export-oriented and therefore do not have the facility of a free trade channel (i.e. duty-free import of inputs) within a high tariff regime. Anti-export bias of RMG exports is neutralized through the special bonded warehouse and back-to-back letter of credit (LC) facility. Not so for other exports. Firms that are not 100% export-oriented face incentives that typically discourage export production.

Why? Because while export production has zero effective protection in world markets, production for domestic sales enjoy effective tariff protection of 100-300% or more, in most cases, according to research done by Policy Research Institute (PRI) which confirms the predictions of effective protection theory. For example, given the high tariff protection to footwear production for domestic sales, there is a skewed incentive for catering to and expanding domestic sales (in a rapidly growing market) rather than waste time and effort to raise productivity and compete in world markets. This would be okay were it not for the fact that world markets have vast potential for job creation and domestic markets are relatively limited in comparison. The four million garment workers employed in an export industry is the best example. No domestic industry has even come close nor ever will.

So the good news is that our exports have been resilient in spite of heavy odds. The not so good news is that it comes on the back of a mono-product export basket. Diversification of our exports will remain a long shot as long as we do not seriously address the issue of anti-export bias hurting the emergence and growth of non-RMG exports. The forthcoming budget of FY2014-15 is a good opportunity to embark on new directions for unleashing non-RMG exports.

(Dr. Zaidi Sattar is Chairman, Policy Research Institute of Bangladesh. zaidisattar@gmail.com)