Diversifying value chains for LDCs: The case of Bangladesh—I

Global value chains (GVCs) are a principal means by which international business is presently conducted, and cannot be ignored by policymakers seeking to improve their countries' economic performance. This paper seeks to reveal the nature of GVCs in least developed countries (LDCs) in Asia and the Pacific, with a particular focus on Bangladesh, and advise how these can be utilised to strengthen a country's economy. Select LDC export structures are reviewed, and Bangladesh's net imports/exports and GVC participation rates are compared to peer countries. The analysis of these indicators shows a heavy concentration of exports in the apparel and garment industry in Bangladesh. The paper examines the implications and potential pitfalls of this concentration and makes the case for diversification of exports in Bangladesh, through GVCs. Trade and investment facilitation measures are shown to be the key way such diversification can be achieved. Finally, the paper provides a set of specific policy recommendations, focusing on trade, investment and business environment, to achieve this end.
In the past decades, GVCs have played a prominent role in the global economy in general and in the international trading system in particular.  GVCs have developed steadily although there was a slowdown at the end of the 2000s due to the global financial crisis.  Currently, around 80 per cent of global trade is conducted through GVCs (APEC, 2014), and a number of developing countries, including least developed countries (LDCs), have been successful in integrating their enterprises into selected GVCs to different degrees.  GVCs have facilitated the expansion and consolidation of cross-border supply and production networks, typically led by transnational corporations (TNCs) (ESCAP, 2007).  
A GVC refers to the full range of cross-border value-added business activities that are required to bring a product or service from conception, design, sourcing raw materials and intermediate inputs stages to production, marketing, distribution and supplying the final consumer (ESCAP, 2007).  Although large TNCs typically control GVCs, some local businesses in developing countries have also participated in GVCs and provided goods and services based on their expertise as suppliers, distributors and business service providers (e.g., third-party logistic providers, financial institutions and market research firms) (Figure 1).  The development of GVCs has been observed in a variety of industrial sectors in Asia and the Pacific, such as the apparels/garments, automobile, electronics, food and high-tech industries.  Figure 2 presents an example of apparel GVCs which covers a number of developing countries.  

First, this paper discusses the development of GVCs in the LDCs of Asia and the Pacific with a particular focus on the case of Bangladesh, which has intensively participated in the apparel and garment GVCs.  Then, it presents the major drivers of the development of GVCs in LDCs, followed by reviews of LDCs' opportunities and challenges that emerge from export diversification through the development of GVCs.  Finally, some GVC-related policies are recommended to LDCs in Asia and the Pacific.   
GVC DEVELOPMENT IN LDCS IN ASIA AND THE PACIFIC: Table 1 presents information on the top 10 export goods of six LDCs in Asia and the Pacific, namely, Bangladesh, Cambodia, Lao PDR, Myanmar, Nepal and Vanuatu.  This information indicates two major GVC portfolios in the LDCs based on their different levels of development and supply-side capacity.  These two types are (a) natural resource endowment driven value chains (e.g., agro-products and minerals) and (b) light manufacturing value chains (e.g., textiles, garments and footwear).  Within this classification, Lao PDR, Myanmar and Nepal belong to the natural resource endowment- driven value chains while Bangladesh, Cambodia and Vanuatu are countries linked to light manufacturing value chains.  It is noteworthy, however, that Cambodia has started exporting high value-added manufacturing goods, such as vehicles as well as electronic equipment, indicating that it is undergoing a transition to exporting advanced manufacturing goods.

 Figure 3 illustrates Bangladesh's participation in GVCs in comparison to other developing countries with high levels of exports.  GVC participation rate, as defined by UNCTAD (2013), combines two components: (1) the upstream component, which is the share of foreign value added, or foreign inputs, in Bangladesh's exports; and (2) the downstream component, which is the share of Bangladesh's domestic value added in its exports that are used as intermediate goods in another country's exports.  The upstream component added to the downstream component forms the total GVC participation rate.  Among the 25 countries depicted, Bangladesh is the second-lowest, with just a 36 per cent GVC participation rate.  A comparison of the upstream and downstream components highlights the fact that while its downstream participation is on par with the peer countries, the upstream component is quite small.  Part of the reason for this is Bangladesh's export of simple, low value added goods, dominated by apparels/garments and agri-products whose production does not require many foreign inputs while Bangladesh supplies a relatively large amount of intermediate goods for other countries' export operations.  This shows that Bangladesh has specialised in select GVCs for products with large domestic value added.  While its present GVC strategy has been successful, in particular, in the apparel and garment sector, Bangladesh should be able to, and should strive to, increase its GVC participation in a variety of GVCs to be more in line with the major exporters in the developing world.  

While it is difficult to precisely lay out the major GVCs Bangladesh is involved in, examining Bangladesh's international trade by comparing its main net exports and imports (Figure 4) can provide some insight.  Net exports are exclusively dominated by apparel and garments, while cotton is its largest net import, with staple fibres and plastic articles as significant net imports.  Those imports are used for the production of ready-made garments (RMGs), Bangladesh's leading export (ESCAP, 2011).  While Bangladesh's major imports also include a number of industrial goods, such as machinery, fuels, electronic equipment and steel, the figure illustrates the value chains involved in Bangladesh's main export industry-it imports raw materials, which are then processed into a finished product for export, i.e., apparels and garments.  Such an arrangement is reflected in the upstream component of Bangladesh's GVC participation in Figure 3.  However, the apparel and garment sector is the only GVC that can be observed in its net exports and imports.  Section D of this article will explain why and how Bangladesh should seek to diversify its exports, and, in so doing, its pattern of GVC involvement.  

Masato Abe, Ph.D. is Economic Affairs Officer, Business and Development Section, Trade and Investment Division, United Nations Economic and Social Commission for Asia and the Pacific Bangkok, Thailand. E-mail: [email protected]. David Abonyi is Consultant, Business and Development Section, Trade and Investment Division, United Nations Economic and Social Commission for Asia and the Pacific, Bangkok, Thailand. E-mail: [email protected])