Bangladesh transitioning to developing country

Mustafizur Rahman | Friday, 26 March 2021

Graduation from least developed country (LDC) to developing country status is both a reflection of Bangladesh's commendable success in terms of key socio-economic indicators of development, and also an international recognition of this success. As may be recalled, Bangladesh was included in the LDC sub-strata among the developing countries in December, 1975. In this year of the jubilee celebration of our independence, a timeline has finally been set for moving out of the group of LDCs, in 2026, after five decades as an LDC. Also to note that the country has been able to reach this point by meeting all the three graduation criteria at the two successive reviews by the UN Committee for Development Policy (CDP), in 2018 and 2021. This is indeed a most impressive achievement and an important milestone in our country's post-independence journey.
Graduation to developing country status should be seen as both an opportunity and a challenge, and Bangladesh will need to take adequate preparation to reap the benefits and address the challenges that this transition will entail. Graduation from the LDC group is, no doubt, a manifestation of the strong foundation of the Bangladesh economy in important areas which the country will be able to take advantage of in going forward. LDC graduation is expected to generate dividends in the form of global branding and image (positive changes), risk perception (lowered), and credit rating (improved, which should be helpful in raising funds through the issuance of a sovereign bond on the part of the government and getting loans in international financial market on the part of private sector) and as investment destination (more attractive). No doubt, the ongoing pandemic has left its mark on the Bangladesh economy, and on the various graduation criteria indices and sub-indices. Recognising these unexpected and additional challenges, Bangladesh, in its meeting with the CDP in February, 2020, had requested an extension of the graduation time, earlier scheduled to take place in 2024, by two years. Projections indicate that Bangladesh should be able to make the transition to a developing country with a significant comfort zone in terms of all three criteria. However, in view of Bangladesh's request and the emergent pandemic induced additional difficulties and the vulnerability profile conducted by the UNCTAD, the CDP in its meeting held in February, 2021, has recommended Bangladesh's graduation to take place in 2026 to the UN-ECOSOC.
PREPARATION FOR GRADUATION WITH MOMENTUM: Graduation will entail addressing and overcoming challenges in a number of key areas. Indeed, Bangladesh will need to graduate with momentum if the graduation is to be sustainable. As may be recalled, the respective values of HAI and EVI, which used to be moving averages, were fixed at the 2012 level (at 66 and above and 32 and below respectively). Also, HAI and EVI indices and associated sub-indices do not include many elements of competitiveness and structural changes which are key to sustainable graduation. For example, HAI includes literacy rate and school enrolment but does not include quality of education and human resources and skills composition of the labour force. Many structural factors are not captured by these criteria such as productivity of labour and capital, level of technology penetration and preparedness for the opportunities of the new economy as against the traditional economy. LDC graduation criteria refer to only average numbers and not distribution aspects. The GNI per capita criteria is a pertinent example in this connection. In spite of the rise in the average income, the distribution scenario has worsened in Bangladesh over the past years as indicated by the gini-coefficient of income distribution. Indeed, gini-coefficient has risen from 0.33 in the 1990s to 0.46 in 2010 to 0.48 in 2016. In the context of the Covid, this is likely to have worsened further in 2020. In order to ensure sustainable development, we will need to go beyond the average values of the graduation indices. Bangladesh should aspire to be not just a 'developing country' but a 'developing country with high economic growth, social inclusiveness and environmental sustainability,' aspirations that are embedded in the Sustainable Development Goals (SDGs) and reflected in the Vision 2041 document. The government is committed to these aspirations which should inform Bangladesh's LDC graduation strategy.
Accordingly, Bangladesh should make the best use of the next five years to ensure the continuation of current positive trends (smooth graduation), garner strengths to ensure acceleration of growth (graduation with momentum) and make graduation robust and an irreversible process (sustainable graduation). A road map with a timeline, actions, and responsible actors will need to be designed and implemented keeping these challenging tasks in the perspective.
IMPLICATIONS OF LDC GRADUATION: The impact of LDC graduation will be felt, broadly speaking, in four areas: (a) changes in market access scenario;(b) in dealings with trade and development partners; (c) policy flexibilities and (d) compliance enforcement. The first two primarily concern regional and global space and interface, while the last two concern domestic space and policymaking.
In view of the above, four transitions will be called for towards sustainable LDC graduation of Bangladesh: (a) transition from preferential market access-driven competitive strengths to productivity and skills-driven competitive strengths; (b) transition from non-reciprocity to reciprocity in dealings with external partners; (c) transition from flexibility-driven policy space to obligation-driven policy space; and (d) transition from weak compliance enforcement to more stringent enforcement of compliances.
MARKET ACCESS: Following the LDC graduation, Bangladesh's market access scenario will change quite significantly. At present, the country enjoys duty free-quota free (DFQF) market access for almost all items in most developed countries including the EU, Canada, Japan, and the US (excepting for apparels) as also in a number of developing countries including India, Japan and South Korea and many others. On graduation, in 2026, Bangladesh will no longer be eligible for DF-QF market access. In the EU, however, market access under the EU's Everything But arms (EBA) initiative for the LDCs will continue for an additional three years, till 2029. True, Bangladesh will be eligible for preferential market access under the various GSP schemes applicable for the developing countries. But, the preferences in terms of reduced tariff under these schemes are not as deep and as wide-ranging as those for the LDCs. Also, the rules of origin (RoO) will be much more stringent.
Estimates indicate that the impact of loss of preferential access will be quite significant for Bangladesh. Over these past years, Bangladesh has been able to make a crucial transition from a predominantly aid receiving country to a trading nation. Bangladesh has been among the very few LDCs which were able to reap most benefits originating from preferential market access offered to the LDCs by the developed and developing countries. Consequently, it also has the most to lose. 70 per cent of the country's global exports are covered by preferential access, the highest among the LDCs.
On graduation, Bangladesh is going to face the highest rise in tariffs among the twelve LDCs that were earmarked for graduation in 2018, as can be seen from Figure 1. It is to be noted here that while for Bhutan and Nepal the tariff rise will be significantly high, effective tariff rise will indeed be much lower as these countries have bilateral free trade agreements (FTAs) with India, their key trading partner. According to estimates made by the WTO Secretariat almost 90 per cent of all likely export losses of the twelve graduating LDCs will be on account of Bangladesh. It was projected that the export reduction would be to the tune of about 14.3 per cent of Bangladesh's global export. In view of the post-LDC competitiveness scenario, developing countries with bilateral and regional FTAs and those that are members of mega-regional trading blocs will be at an advantageous situation vis-à-vis Bangladesh which is not a member of such blocs. There may be a situation where importers of Bangladeshi apparels will be required to pay customs duties while Vietnam will be able to enjoy duty-free market access thanks to its membership in various trading blocs: in Canada (thanks to the CPTPP), in the EU (thanks to the EU-Vietnam bilateral FTA) and in China, Japan and Australia (thanks to the RCEP). The difference in price terms could be as high as 20-25 per cent tariff equivalent since average tariffs on apparel tend to be high compared to most other items in most developed countries (ranging between 10-15 per cent).
REQUIRED STEPS: What should be the strategy for us in this backdrop? For the importer, price offered by the exporter and import duties are major considerations. The strategy for the exporter will need to be to raise price-competitiveness through reduction in costs of production to compensate for the loss of tariff preferences. Cost structure includes three elements: within enterprises (labour cost, productivity and efficiency, management quality etc.), outside enterprises (financial costs, transport cost, logistics, trade facilitation) and macroeconomic policy and macroeconomic management-induced costs (exchange rate, doing business environment, regulatory regime, taxes and duties, incentive structure). In order to reduce these cost elements to compensate for the additional costs due to duties imposed, Bangladesh will need to take targeted steps. Export and market diversification has to be ensured by translating comparative advantage into competitive advantages through up-gradation of process and products and by way of improving labour and capital productivity. A Technology Up-gradation Fund may be created to support entrepreneurs in this regard. A supportive environment will be required where Bangladesh's investors feel stimulated, encouraged and incentivised to invest, keeping in the purview opportunities in domestic and global markets, and the emerging global demand scenario. Attracting FDI through triangulation of investment, transport logistics and trade connectivity will be key to product and market diversification. Development of regional value chains and production networks will be called for. Transport corridors will need to be transformed into economic corridors by establishing industrial parks and by taking advantage of the special economic zones (SEZs) that are being built at present. Trade and tariff policies will need to be reformed and revised to make these WTO-compatible. With the help of policies and carefully crafted incentives, Bangladesh will need to promote product and market diversification. Bangladesh will be required to aggressively pursue the Comprehensive Economic Partnership Agreement (CEPA) type of negotiations with partners who matter.
There are significant export potentials that can be tapped with targeted efforts, both in terms of products and markets, as seen from Figure 2 and Figure 3. However, the actualisation of these potentials will hinge on Bangladesh's remaining competitive following the transition to the developing country status.
A proposition for support measures favouring the graduating LDCs has already been floated in the WTO. The proposal urges for the continuation of international support measures (ISMs) to graduated LDCs for additional twelve years (following graduation). As may be recalled, the Bangladesh Mission in Geneva has played an important role in giving shape to this proposal which was placed by Chad on behalf of the LDC group at the WTO General Council meeting held in December 2020. The UN Resolution in support of graduation should be reminded in this context where it was mentioned that graduation is a milestone and not a destination.
IMPLICATIONS OF LDC GRADUATION IN VIEW OF SELECTED WTO AGREEMENTS: There is an urgent need to identify the WTO Agreement specific impacts of LDC graduation and the flexibilities that Bangladesh can take advantage of as a developing country member of the WTO. It is pertinent to recall here that most WTO Agreements have flexibilities in place for the developing country members for which Bangladesh will be eligible on graduation.
In view of the Agreement on Agriculture Bangladesh will no more be able to provide export credit subsidy and will need to take a number of obligations to meet the requirements of the Agreement as a developing country member. However, if Bangladesh can convince WTO members that it is a net food importing developing country (NFIDC), which it is, it will be allowed to continue with many of the flexibilities which LDCs are eligible for.
As is known, the Trade Related Intellectual Property Rights (TRIPS) and Public Health decision of the WTO allows the LDCs flexibility in areas of patents and licensing requirements (effective till end-2032). Bangladesh has made good use of TRIPS flexibilities and associated waivers for the LDCs. 97 per cent of the US$ 3.0 billion domestic market of Bangladesh is catered to by local producers, mostly by local companies (these accounted for more than 90 per cent of domestic production as against the multinationals). About 20 per cent of the drugs produced in the country are generic versions of patented drugs that have particularly benefitted from the TRIPS flexibilities. Import restrictions and price regulations are also in place in Bangladesh at present in support of the pharma sector. On graduation, in 2026, Bangladesh will cease to enjoy these derogations from the TRIPS discipline (although the LDC flexibilities will continue to be in force till the end-2032). The adverse impacts will be felt on export-oriented as also domestic market-oriented pharma industry. For example, according to some studies, local insulin prices could rise by as high as eight times if patenting and licensing requirements are enforced. To make the relevant policies WTO compatible, Bangladesh will need to change its patent laws and license granting procedures that are currently in place. The API park must be put into full gear without delay in view of the challenging future scenario. At the same time, Bangladesh should actively pursue the proposal for extension of TRIPS flexibility for the graduated LDCs till end-2032 which was floated at the TRIPS Council meeting held in December 2020.
WTO's Trade-Related Investment Measures (TRIMS) do not allow local content requirements or ceilings in terms of value or volume on import content. LDCs were granted exemption from this till December 2020; they are thus no longer eligible for the TRIMS flexibilities. Relevant bodies such as BEZA and BEPZA will need to ensure compliance with the provisions of this Agreement. Bangladesh's Industrial Policy, Export Policy, and the National API and Laboratory Reagents Manufacturing and Export Policy will need to be made WTO-compliant in this regard.
In the context of the LDC services waiver, WTO members agreed to provide preferential treatment to services and service providers from the LDCs including through preferential market access. The waiver is currently valid till the end of 2030. In view of request lists (by LDCs) and offer lists (by provider-members) 24 WTO members have already come up with waiver notification that covers a wide range of areas and all four modes of services. However, these are yet to be operationlised. Bangladesh's graduation (in 2026) is to take place earlier than the timeline of the waiver (2030). On graduation Bangladesh will cease to enjoy the benefits under the GATS and the operationalisation of the waiver. Bangladesh has opened only a few sectors in services (e.g., five-star hotels; IT sector; foreign banks) but will be required to open more sectors once it graduates.
There is a dedicated fund for LDCs, LDC Fund (LDCF), for climate-related assistance. Support from this earmarked fund will no more be available. However, Bangladesh will continue to have access to Special Climate Fund (SCCF) and Green Climate Fund (GCF) since these are open to all vulnerable developing countries. These funds will need to be accessed in a more proactive manner. Also, during the interim period, Bangladesh should try to access more resources from the LDCF since projects negotiated earlier can continue to be implemented even after graduation.
There are a number of support measures in place for graduated LDCs which should be taken full advantage of by Bangladesh. Following graduation, graduated LDCs will continue to receive support from the Technology Bank for the LDCs, for an additional five years. Aid for trade under the Enhanced Integrated Framework (EIF), which is exclusively earmarked for the LDCs for institutional and capacity-building support, will be extended for an additional window of five years following graduation of concerned LDCs. However, the current phase of the EIF programme will run only till 2022 (with implementation of projects supported allowed till 2024). This state of affairs obviously limits the potential use of EIF by Bangladesh following graduation. To ensure the continuation of the support under the EIF, Bangladesh (and other graduating LDCs) should actively support initiatives at MC12 for additional funding for the EIF (which will allow the country to receive support from the EIF beyond 2026, for an additional five years as was stated above).
Bangladesh's middle-income graduation (from LIC to LMIC, which took place in 2015) entails more stringent conditionalities in view of receiving aid (lower grant element, higher interest rate; lower maturity period; lower grace period). Bangladesh will soon graduate from the category of a 'blend country' to a 'non-blend country'(according to the World Bank criteria).This will result in more stringent aid conditionalities at a time when it will need more foreign aid and resources to prepare for LDC graduation.
S&D TREATMENT FOR DEVELOPING COUNTRIES: There are more than 130 provisions under various Agreements in the WTO that provides flexibilities to developing countries in the form of (a) increased trade opportunities, (b) enhanced safeguards, (c) flexibilities in commitment, actions and policy instruments, (d) additional transitional time for ensuring compliance with obligations and (e) technical assistance. While designing a post-graduation strategy, Bangladesh should take note of these provisions in place for developing countries and try to make the best use of those.
As is known, GSP programmes are non-reciprocal. However, these schemes and provisions are less generous with more stringent terms, for example, concerning rules of origin for preferential treatment.
UPCOMING MC12: PREPARE STRATEGICALLY: The upcoming MC12 must be seen as an important opportunity for Bangladesh to advance the interests and concerns of the LDCs. In this regard. Bangladesh should take the lead to mobilise WTO members in favour of a package of international support measures earmarked for graduated LDCs. Bangladesh should pursue the proposal floated in the WTO (in December 2021) for the extension of ISMs for graduated LDCs (for twelve years) in a proactive manner. In the context of the TRIPS, Bangladesh should actively support the proposal in the WTO for current flexibilities offered under LDC waiver till 2032 to be taken advantage of by the graduated LDCs till the end-period. At the same time, Bangladesh should keep the interests of developing countries in the context of the ongoing negotiations. Harnessing support of G-77, Africa Group and other friendly members in this regard will be crucial and Bangladesh should provide leadership in view of the coalition building required in this connection.
BUILD NEGOTIATING CAPACITY: In trade related discussions countries get not what they deserve but what they negotiate. Bangladesh will need to give highest priority to build its negotiating capacity in view of the emerging post-LDC scenario. Going for comprehensive economic partnership type of Agreements, based on reciprocity (which would entail providing access to our own market as well) and dealing with complex trade issues (tariff and trade liberalisation; opening of sectors for foreign investment; labourand environment standards compliance; preparing offer lists and request lists) will entail adequate preparation and sound analytical work and wide ranging discussion with concerned stakeholders including business. As was pointed out earlier, India and China, ASEAN and RCEP are possible regional countries and groupings with most potential benefits, but also the most challenging from the point of negotiation. Our key strategy should be to attract investment to build value-chains and production networks to take advantage of preferential market access originating from BFTAs and CEPAs to be negotiated. Linking these negotiations to harness the potentialities of the SEZs currently being established in Bangladesh will be the key here, through triangulation of trade, transport and investment connectivities. To undertake the complex negotiations successfully, it is proposed that a Negotiation Cell, equipped with adequate human-analytical-technical resources and capacities, be established similar to the WTO Cell in the Ministry of Commerce.
LEVERAGE SDG IMPLEMENTATION FOR DUAL GRADUATION: Strategies to attain the goals and targets of the Sustainable Development Goals (SDGs) should be harnessed and leveraged to help Bangladesh graduate with momentum to a developing country, a developing country that is economically advanced, socially inclusive, and environmentally sustainable. The next five years will coincide with the second of the three-five year phases of the SDG implementation. In this backdrop, the Eighth Five Year Plan of Bangladesh (8FYP) must focus on the synergies involved in efforts to implement the plan, attain the SDGs aspirations and the preparatory works in anticipation of LDC graduation.
CONCLUDING REMARKS: Bangladesh will need to wear three hats in strategising for graduation with momentum: (a) as an LDC that makes best use of the ISMs available over the next five years; (b) as a graduating LDC that undertakes adequate preparation towards graduation with momentum and sustainable graduation and (c) as a future developing country. These multiple identifies should inform Bangladesh's approach and strategies in view of all future negotiations. To prepare the road map towards 2026, more consultations will be required with informed participation of representatives from various stakeholder groups to identify Bangladesh's offensive and defensive interests: policymakers and parliamentarians, government officials, private sector and business, non-state actors, and experts and academics.
Effective institutions and good governance will be the key to gearing the economy towards graduation with momentum in a way that is aligned with the spirit of Bangladesh Vision 2041. Bangladesh's graduation with momentum towards sustainable LDC graduation, implementation of the SDGs and transition to a developed country by 2041 will no doubt call for a whole of society and whole of country approach where all concerned stakeholders will need to play their part and contribute meaningfully to the realisation of these aspirations over the coming years.

Dr Mustafizur Rahma is, Distinguished Fellow, Centre for Policy Dialogue (CPD).
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