Increased flow of FDI and optimal productivity needed for export diversification
Saturday, 2 October 2010
People in the developed countries may have difficulty in understanding why we cannot diversify our products. But this is precisely what transitional economies mean. Here, lack of necessary infrastructure, energy, skilled labour contribute to poor productivity which together with lean inflow of FDI ( Foreign Direct Investment) adversely affect rapid industrialization process. That's why it is not that easy to overnight diversify our exports horizontally though the rhetoric of "export diversification" abounds in various seminars and workshops these days.
Of course, Bangladesh can cite quite a few achievements since independence and these are not too small to celebrate. These include growing per capita income, lower rate of poverty, better forex remittance, and better human development indicators. The remittances from our migrant workers have grown at an average rate of 17% since 2001, which surged to 32% and reached a record high of nearly $10.72 billion in 2009. Remittance earning last year stood at Tk. 780 billion (78,000 crore), while the total budget of the country was around Tk. 1000 billion (100,000 crore). Remittances by our migrant workers contribute to 12% of the GDP, which is six times higher than the foreign development assistance and eleven times more than foreign direct investment. The country's foreign exchange reserve crossed $11.02 billion mark on July 8 for the first time, thanks to a robust growth of inward remittance as well as gradual development in our exportable products. Nevertheless, moving forward with the development agenda is daunting. Some 59 million people (40 per cent of the total population) are officially classified as poor. Per capita income has now grown to about $700 (estimated for 2010), which is still substantially lower than the South Asian average and 55 per cent lower than that in India. These concerns are well known to the policy makers and a long way has to be traversed to reach a sustainable export-oriented economy.
It is quite heartening to note that the country's export earnings are steadily coming out of a negative trend as the export earnings in March 2010 marked 18.38 per cent growth compared to the same month of the previous fiscal year. According to the statistics available at the Export Promotion Bureau, the actual export earnings for the period were $10.02 billion against the target of $11.29 billion. Besides our valued foreign remittance, Bangladesh's export trade is largely centred on readymade garments or RMG products. While the US and Canada are the largest importing nations for Bangladesh, our export is extremely concentrated on a few items. RMG alone occupied 90.4% of total export and if we include other textile exports like caps, vegetable fibre and woven fabrics its share increases to 94%.
This indicates we need immediate diversification of our exports. After RMG, the only other mentionable exported items are very limited. It has been reported "We export 171 items to189 countries. But only four items dominate the 81 per cent of the export." The very narrow product range of the country's export cargoes and their large concentration on a few markets, in terms of export destination, mean that its export flow is vulnerable to any downturn in the external environment including price fluctuation, reduced demand and other unfavourable developments in a few countries and also of a very few items can expose the country's overall earnings to serious crises.
However "export diversification" does not happen all on a sudden for it depends heavily upon certain core factors, namely, massive investment in the productive sectors, efficient management, optimal labour productivity, and, above all, an effective planning and policy support. Development economists generally concur that the inflow of foreign direct investment (FDI) can play a vital role in the growth dynamics of developing economies and thus augment export diversification to a great extent. The United Nations Conference on Trade and Development (UNCTAD) prepared a report titled "Investing in a low-carbon economy". In 2009, the total investment inflow into Bangladesh was $700.16 million, which was $1,086.33 million in 2008. The flow of FDI fell worldwide due to the global meltdown and Bangladesh also felt its impact. However, BoI Executive Chairman SA Samad says, "When foreign investors meet me, the point at bureaucracy as the biggest hurdle to investment in Bangladesh." If that is so, the Executive Chairman should better attend to his own problem and ask the relevant other organs of the government to do the same.
However, the general perception is that FDI has become remarkably slow due mainly to power and gas crunch in the country. The BoI officials at a recent press meet said FDI has marginally increased in Bangladesh in the current year. In Bangladesh, the sector-wise FDI inflow in textiles and wearing increased by 8 per cent and stood at $136 million, which was $126 million in 2008. In the banking sector, FDI inflow was $142 million, which was $141million last year.
As for labour productivity, the striking finding is that only 22 per cent of the employed labour force is engaged in the formal sector. Some 11 per cent of employed labour is in manufacturing and another 11 per cent is in organised services. The remainder are still engaged in informal activities. A second striking finding is that the responsiveness of employment to growth in manufacturing is rather low (measured by employment elasticity). Thus, between 1980 and 2009, value added in manufacturing grew by 6.4 per cent annually whereas employment increased by 3.9 per cent, suggesting a long-term manufacturing employment elasticity of 0.61, which is on the low side. The average labour productivity has not increased much -- by only 0.9 per cent between 1980 and 2009. As compared to this, average productivity in manufacturing has grown by 2.9 per cent and by 1.1 per cent in services. Since services are an aggregation of both formal and informal services, average productivity and its growth are constrained by the large share of informal activities -- as much as 82 per cent. Low initial average labour productivity in agriculture, estimated at about only 48 per cent of the average productivity in manufacturing in 1980, combined with sharply lower productivity growth, has further expanded the productivity gap between agriculture and manufacturing. Thus, in 2009, the average labour productivity in agriculture fell to only 27 per cent of that in manufacturing. Agriculture's productivity gap with services is similarly large, despite the dominance of informal services component.
The above analysis provides a simple answer to addressing Bangladesh's growth and employment challenges. A faster rate of GDP growth will require commensurate increase in the average labour productivity. International experience shows that high-paying jobs are best created in manufacturing and formal services, and Bangladesh is no exception. Other South Asian countries are striving to go through a similar transformation with varying degrees of success. However, India, Pakistan and Sri Lanka have done better in increasing both the share of manufacturing in GDP as well as its share of employment. These are also higher per capita income countries.
How can manufacturing grow faster than in the past? How can it absorb labour at a faster pace? Rapidly growing East Asian countries have relied on exports to develop their manufacturing sector with a great deal of success. Bangladesh too can concentrate its development efforts on promoting labour-intensive manufacturing exports based on the rationale that it has a relatively abundant labour endowment that gives it a cost advantage in labour-intensive products.
In order to encourage vertical diversification of our exports, first and foremost, the readymade garment (RMG) industry should introduce modern machineries to improve quality and productivity to face global competition. RMG sector employs 2.2 million people, 80 per cent of whom are women. The growth in the sector has also fostered various multiplier linkages in the economy, including forward and backward linkages. Sectors such as cloth, yarn, professional services, housing, banking, insurance, storage, machinery, and cotton cultivation are closely related to the RMG sector. The skills development fund, worth Tk 700 million (70 crore), in the national budget 2009-10 towards training and enhancing efficiency of the garments workers may be increased to Tk 1.4 billion (140 crore) in the upcoming budget. In addition, a national comprehensive plan for effective utilisation of existing technical, vocational and diploma training institutes for the benefit of the export-oriented RMG sector is necessary.
The changing global market has increased demand for value-added knitwear garments. Factories that have backward linkages are getting more orders from buyers in America, Europe, Australia and Japan. Buyers are now very concerned about the quality of the fabrics, environmentally hazardous chemicals, capacity and quality of the machines. Also, there is dearth of skilled labour in the industry. The introduction of automated machines is now essential to increasing productivity and efficiency, so that quick delivery of products is possible.
On the quality front, much will depend on the quality of labour and adoption of better technology. As LFS data show, some progress has been made in upgrading labour skills through improvements in education and training, but there is a long, long way to go. Indeed, the 78 per cent informal labour force cannot be converted overnight into quality labour for manufacturing and formal services without long-term massive enhancement effort in education and training. This is a huge challenge and requires a long-term strategy for public investment in human development and improvement in service delivery. On the technology front, the experience of the RMG sector clearly demonstrates the importance of diffusion of technology through partnership with foreign investors.
Concerning cost, the most obvious place to look for improvement is in infrastructure. Both power and transport are key determinants of cost competitiveness. In electricity, the inadequacy of supply is well known. While efforts are underway to mobilise new investments in power, innovative ways must be found to address the power crisis. The solutions include better demand management and more aggressive efforts for energy trade with neighbours. In transport, Bangladesh faces trade logistic costs that are much higher than in East Asian countries or in India. Trade logistic cost has to be brought down substantially through new investment in transport network, including sea-ports, improvements in performance of existing facilities, and much better traffic management.
Finally, some global regimes such as International Labour Organization (ILO), Trade Related Aspects of Intellectual Property (TRIPS), and World Trade Organization (WTO) have a role to play. Some of the issues are addressed in the global regimes. In that sense, some investment issues are being addressed either under intellectual property or WTO and so on. The government set a 6.7 per cent GDP growth target for fiscal 2010-11, which is a must if we want become a middle income country by 2015. We have to set higher targets and take big leaps to our goal. At present, we have a gap of 8 per cent between public savings and the investment ratio, which is not healthy for an economy. A lot of investments are needed to reach the GDP growth target. To take these investments, it is essential for favourable environment and proper negotiation at the WTO and bilateral level.
Needless to say, we need massive investments to turn up considerable diversification of exportable commodities. It is imperative to exploit export opportunities for the highly prospective agro-products, leather industries, pharmaceutical industries, ceramic industries, ship-building and light engineering industries, computer software, electric and electronic products and products of horticulture and floriculture. Success in these ventures will require ensuring quality and safety of products and even maintaining an edge over the competing exporters from other countries.
A former civil servant, the writer can be reached at e-mail: hafeej2002@yahoo.com
Of course, Bangladesh can cite quite a few achievements since independence and these are not too small to celebrate. These include growing per capita income, lower rate of poverty, better forex remittance, and better human development indicators. The remittances from our migrant workers have grown at an average rate of 17% since 2001, which surged to 32% and reached a record high of nearly $10.72 billion in 2009. Remittance earning last year stood at Tk. 780 billion (78,000 crore), while the total budget of the country was around Tk. 1000 billion (100,000 crore). Remittances by our migrant workers contribute to 12% of the GDP, which is six times higher than the foreign development assistance and eleven times more than foreign direct investment. The country's foreign exchange reserve crossed $11.02 billion mark on July 8 for the first time, thanks to a robust growth of inward remittance as well as gradual development in our exportable products. Nevertheless, moving forward with the development agenda is daunting. Some 59 million people (40 per cent of the total population) are officially classified as poor. Per capita income has now grown to about $700 (estimated for 2010), which is still substantially lower than the South Asian average and 55 per cent lower than that in India. These concerns are well known to the policy makers and a long way has to be traversed to reach a sustainable export-oriented economy.
It is quite heartening to note that the country's export earnings are steadily coming out of a negative trend as the export earnings in March 2010 marked 18.38 per cent growth compared to the same month of the previous fiscal year. According to the statistics available at the Export Promotion Bureau, the actual export earnings for the period were $10.02 billion against the target of $11.29 billion. Besides our valued foreign remittance, Bangladesh's export trade is largely centred on readymade garments or RMG products. While the US and Canada are the largest importing nations for Bangladesh, our export is extremely concentrated on a few items. RMG alone occupied 90.4% of total export and if we include other textile exports like caps, vegetable fibre and woven fabrics its share increases to 94%.
This indicates we need immediate diversification of our exports. After RMG, the only other mentionable exported items are very limited. It has been reported "We export 171 items to189 countries. But only four items dominate the 81 per cent of the export." The very narrow product range of the country's export cargoes and their large concentration on a few markets, in terms of export destination, mean that its export flow is vulnerable to any downturn in the external environment including price fluctuation, reduced demand and other unfavourable developments in a few countries and also of a very few items can expose the country's overall earnings to serious crises.
However "export diversification" does not happen all on a sudden for it depends heavily upon certain core factors, namely, massive investment in the productive sectors, efficient management, optimal labour productivity, and, above all, an effective planning and policy support. Development economists generally concur that the inflow of foreign direct investment (FDI) can play a vital role in the growth dynamics of developing economies and thus augment export diversification to a great extent. The United Nations Conference on Trade and Development (UNCTAD) prepared a report titled "Investing in a low-carbon economy". In 2009, the total investment inflow into Bangladesh was $700.16 million, which was $1,086.33 million in 2008. The flow of FDI fell worldwide due to the global meltdown and Bangladesh also felt its impact. However, BoI Executive Chairman SA Samad says, "When foreign investors meet me, the point at bureaucracy as the biggest hurdle to investment in Bangladesh." If that is so, the Executive Chairman should better attend to his own problem and ask the relevant other organs of the government to do the same.
However, the general perception is that FDI has become remarkably slow due mainly to power and gas crunch in the country. The BoI officials at a recent press meet said FDI has marginally increased in Bangladesh in the current year. In Bangladesh, the sector-wise FDI inflow in textiles and wearing increased by 8 per cent and stood at $136 million, which was $126 million in 2008. In the banking sector, FDI inflow was $142 million, which was $141million last year.
As for labour productivity, the striking finding is that only 22 per cent of the employed labour force is engaged in the formal sector. Some 11 per cent of employed labour is in manufacturing and another 11 per cent is in organised services. The remainder are still engaged in informal activities. A second striking finding is that the responsiveness of employment to growth in manufacturing is rather low (measured by employment elasticity). Thus, between 1980 and 2009, value added in manufacturing grew by 6.4 per cent annually whereas employment increased by 3.9 per cent, suggesting a long-term manufacturing employment elasticity of 0.61, which is on the low side. The average labour productivity has not increased much -- by only 0.9 per cent between 1980 and 2009. As compared to this, average productivity in manufacturing has grown by 2.9 per cent and by 1.1 per cent in services. Since services are an aggregation of both formal and informal services, average productivity and its growth are constrained by the large share of informal activities -- as much as 82 per cent. Low initial average labour productivity in agriculture, estimated at about only 48 per cent of the average productivity in manufacturing in 1980, combined with sharply lower productivity growth, has further expanded the productivity gap between agriculture and manufacturing. Thus, in 2009, the average labour productivity in agriculture fell to only 27 per cent of that in manufacturing. Agriculture's productivity gap with services is similarly large, despite the dominance of informal services component.
The above analysis provides a simple answer to addressing Bangladesh's growth and employment challenges. A faster rate of GDP growth will require commensurate increase in the average labour productivity. International experience shows that high-paying jobs are best created in manufacturing and formal services, and Bangladesh is no exception. Other South Asian countries are striving to go through a similar transformation with varying degrees of success. However, India, Pakistan and Sri Lanka have done better in increasing both the share of manufacturing in GDP as well as its share of employment. These are also higher per capita income countries.
How can manufacturing grow faster than in the past? How can it absorb labour at a faster pace? Rapidly growing East Asian countries have relied on exports to develop their manufacturing sector with a great deal of success. Bangladesh too can concentrate its development efforts on promoting labour-intensive manufacturing exports based on the rationale that it has a relatively abundant labour endowment that gives it a cost advantage in labour-intensive products.
In order to encourage vertical diversification of our exports, first and foremost, the readymade garment (RMG) industry should introduce modern machineries to improve quality and productivity to face global competition. RMG sector employs 2.2 million people, 80 per cent of whom are women. The growth in the sector has also fostered various multiplier linkages in the economy, including forward and backward linkages. Sectors such as cloth, yarn, professional services, housing, banking, insurance, storage, machinery, and cotton cultivation are closely related to the RMG sector. The skills development fund, worth Tk 700 million (70 crore), in the national budget 2009-10 towards training and enhancing efficiency of the garments workers may be increased to Tk 1.4 billion (140 crore) in the upcoming budget. In addition, a national comprehensive plan for effective utilisation of existing technical, vocational and diploma training institutes for the benefit of the export-oriented RMG sector is necessary.
The changing global market has increased demand for value-added knitwear garments. Factories that have backward linkages are getting more orders from buyers in America, Europe, Australia and Japan. Buyers are now very concerned about the quality of the fabrics, environmentally hazardous chemicals, capacity and quality of the machines. Also, there is dearth of skilled labour in the industry. The introduction of automated machines is now essential to increasing productivity and efficiency, so that quick delivery of products is possible.
On the quality front, much will depend on the quality of labour and adoption of better technology. As LFS data show, some progress has been made in upgrading labour skills through improvements in education and training, but there is a long, long way to go. Indeed, the 78 per cent informal labour force cannot be converted overnight into quality labour for manufacturing and formal services without long-term massive enhancement effort in education and training. This is a huge challenge and requires a long-term strategy for public investment in human development and improvement in service delivery. On the technology front, the experience of the RMG sector clearly demonstrates the importance of diffusion of technology through partnership with foreign investors.
Concerning cost, the most obvious place to look for improvement is in infrastructure. Both power and transport are key determinants of cost competitiveness. In electricity, the inadequacy of supply is well known. While efforts are underway to mobilise new investments in power, innovative ways must be found to address the power crisis. The solutions include better demand management and more aggressive efforts for energy trade with neighbours. In transport, Bangladesh faces trade logistic costs that are much higher than in East Asian countries or in India. Trade logistic cost has to be brought down substantially through new investment in transport network, including sea-ports, improvements in performance of existing facilities, and much better traffic management.
Finally, some global regimes such as International Labour Organization (ILO), Trade Related Aspects of Intellectual Property (TRIPS), and World Trade Organization (WTO) have a role to play. Some of the issues are addressed in the global regimes. In that sense, some investment issues are being addressed either under intellectual property or WTO and so on. The government set a 6.7 per cent GDP growth target for fiscal 2010-11, which is a must if we want become a middle income country by 2015. We have to set higher targets and take big leaps to our goal. At present, we have a gap of 8 per cent between public savings and the investment ratio, which is not healthy for an economy. A lot of investments are needed to reach the GDP growth target. To take these investments, it is essential for favourable environment and proper negotiation at the WTO and bilateral level.
Needless to say, we need massive investments to turn up considerable diversification of exportable commodities. It is imperative to exploit export opportunities for the highly prospective agro-products, leather industries, pharmaceutical industries, ceramic industries, ship-building and light engineering industries, computer software, electric and electronic products and products of horticulture and floriculture. Success in these ventures will require ensuring quality and safety of products and even maintaining an edge over the competing exporters from other countries.
A former civil servant, the writer can be reached at e-mail: hafeej2002@yahoo.com