Taming political environment for domestic and foreign investment

Uncertainty is a threat to investment. This is why, hartals and blockades unnerve the potential local and foreign investors who stay away from investing until their confidence about the future is restored. In estimating the economic cost of hartal and blockade, one should not only look at how many buses and trucks stayed away from the road, how many of them were burnt, how much of productivity was forgone, but also how much investment was lost and how many machines could not be operated. Bangladesh with its resource constraints is reliant, to a large extent, on the export sector as well as on foreign direct investment. Hartals and blockades are thus highly instrumental to slowing down of the economy. And that is one situation no sane person in the country can accept.
An investor invests on the basis of expected profitability. While taking a decision whether to invest or not, one not only evaluates the situation of today but also how things are likely to turn out tomorrow. Hartal and blockade are an outcome of conflicting politics. Conflicting politics does not lend signs of stable and robust economic environment of a country, rather it is a grim pointer to a very uncertain future.
FDI has persistently represented a tiny fraction of the GDP and private investment in Bangladesh. FDI inflows into the country reached around $1 billion in 2012, but overall FDI stocks remained below 7 per cent of the GDP. Average FDI stock as a percentage of GDP was 25 per cent in the least developed countries (LDCs) as a whole. It was also higher in comparable countries such as Vietnam (51.6 per cent of GDP), or 11.5 per cent in Pakistan (despite difficult conditions there), almost 12 per cent in South Asia as a whole, and 32 per cent in Sub-Saharan Africa.
To reach East Asian growth rates of 7-8 per cent, private investment levels in Bangladesh need to rise to at least 33 per cent of the GDP. FDI can help augment both the quality and quantity of investments. Foreign-owned firms are a source of innovation and perform significantly better than domestic firms in terms of labour productivity and profit margins. They can also help improve the overall private investment scenario by accessing their own savings as well as international financial markets, thereby easing the limitations in Bangladesh's financial sector.
FDI in Bangladesh has mostly flowed into the services sector. The telecommunications industries and banking sector have attracted the most FDI, followed by the garment, gas, and petroleum sectors. Bangladesh has attracted three totally foreign-owned mobile telephone providers. The banking sector also includes a number of globally renowned banks. The textile and clothing industry has received less FDI, which is partially due to obstacles in this sector.
Moreover, Bangladesh has attracted investment from a diverse set of countries. Egypt was the largest foreign investor during 2005-11, with investment concentrated in telecommunications. The next largest foreign investors are the United Kingdom, the United States, and Singapore. An important share of foreign direct investment in Bangladesh takes place in Export Processing Zones (EPZs). EPZs are export oriented industrial enclaves which provide the infrastructure, facilities, and administrative and support services for a wide variety of enterprises. Bangladesh's successful EPZs in Dhaka and Chittagong are now complemented by new EPZ developments around the country. According to World Bank report, as of March 2012, about 280,000 jobs were created in EPZs, mostly in Chittagong and Dhaka, although these cannot be attributed to foreign firms alone, since some domestic firms are also located in EPZs.
An unfavorable business environment deprives Bangladesh of the full benefits of using FDI as a source for export growth and diversification, technology transfer and quality up-gradation. Capacity constraints make access to scarce energy and infrastructure resources a zero-sum game, with the consequence that local incumbents sometimes view FDI (and new entry in general) as game spoilers rather than as sources of technology transfers and overall dynamism. The result is a general lack of competition, diversification and growth opportunities for smaller firms, as entrenched incumbent positions make entry difficult for both local and foreign entrants.
While the FDI regime does not seem to be overly restrictive, in practice, the regime could be considered unfriendly for foreign investors, in part, due to its asymmetric impact on foreign firms. Moreover, the government does not appear to be particularly pursuing an aggressive policy to attract FDI in any sector, neither to properly value the benefits of FDI in terms of technology transfer, quality up-gradation, product and market diversification, integration into regional and global supply chains, and employment generation (the ultimate objective of the government).
Thus, opposition to FDI by many domestic firms, a strong business presence in Parliament, lax product standards' enforcement and uneven governance standards, in particular, affect foreign firms' incentives to invest. In addition, inadequate land for business purposes and lack of pro-active FDI promotion campaign owing to a rather weak Board of Investment with multiple mandates, are other major factors. The asymmetry faced by foreign firms vis-à-vis local firms in Bangladesh is a more serious issue than might appear at first sight. This is a kind of 'regulatory arbitrage' that local firms enjoy, and it will be a deterrent to attracting sustained FDI.
Bangladesh has the potential to attract significantly higher levels of FDI in spite of the challenges it faces, but it has much work to do to turn that potential into reality. It can position itself as a competitive centre for labour-intensive manufacturing and efficiency-seeking FDI. Its attractions include abundant labour supply, large-scale labour-intensive manufacturing in garments and, to some extent, footwear, a favourable location between two large and dynamic economies -- India and China, as well as wide understanding of the English language. Preferential access to key consumer markets in developed countries makes it an attractive platform for export-seeking FDI. Its entrepreneurial private sector is another important asset that could be exploited further with a business-enabling regulatory framework in place. In addition, if Bangladesh is able to stay on its current growth path, its market size could increase quickly and attract a wave of market-seeking FDI.
Sector studies point to the important role FDI can play in terms of export diversification and technology transfer in Bangladesh. The Republic of Korea has led investment in the garment industry. FDI was critical in the emergence of bicycle exports. Malaysian investors seized an opportunity in the EU market by establishing the first bicycle exporting firm in Bangladesh in 1995. They invested $2 million in a new plant named Alita in Chittagong. FDI in the shipbuilding sector is close to zero at the moment; however, FDI and joint ventures could help gradually improve Bangladesh's capacity and reputation in shipbuilding, and FDI could especially help the linkage industries through technological advancement, improvement of processes as well as worker's skills. Korean and Chinese investors, in particular, seek to capture some of the growth in Bangladesh's textiles and services sectors.
It is evident that political instability has contributed to the stagnating situation. Investment has been insufficient for the projected growth as it is struggling to go beyond 30 per cent of the GDP. Though public investment has increased, private, domestic and foreign investments continue to be disappointingly low. Infrastructural bottlenecks, slow decision making, corruption and low-skilled manpower are some factors that discourage higher investment in the country. Prolonged political crisis could only make it worse. Credit to the private sector is lower than the target and banks are sitting with excess liquidity as investment demand has been slowing. This is also reflected through industrial loan, which was negative during July-September 2013. Low investment implies less employment generation and low income, which in turn has poverty implications.
So, what the government should do is make the political environment tranquil and favourable that can spur domestic and foreign investment. Let's hope to return to a situation that will assure domestic and foreign investors in doing business here to stimulate the wheel of the economy.

The writer is Assistant Secretary, BKMEA.
rajonbkmea@gmail.com