Export growth of Bangladesh suffered a fairly dramatic deceleration in the fiscal year 2014-15 (FY 15). The growth rate plummeted to 3.3 per cent - the lowest since FY 02 when there was a negative growth. The deceleration is viewed as a matter of grave concern by various sections of society - businessmen, economists as well as politicians.
The concern is understandable because there are a number of convincing a priori arguments which lend support to the positive impact of exports on a country's growth of gross domestic product (GDP). Perhaps the most important rationale underlying such positive assessment is that exports are not constrained by domestic demand. This permits production at a scale way above what would be feasible if the production is intended only for domestic market which is often relatively small in many developing countries including Bangladesh. In consequence, producers can reap the benefits of economies of scale and adopt improved technologies which might be prohibitive at lower production levels. Among the other arguments supporting positive impact of exports on GDP growth are:
n Exports permit specialisation in accordance with comparative advantage leading to greater efficiency in the use and allocation of resources and thus higher output.
n Exporters face intense competition in the international market and are thus forced to constantly strive to achieve high standards of efficiency.
n The contact between exporters and importers in developed countries enables acquisition of knowledge of improved technologies.
n Export sectors generally attract more foreign direct investment (FDI) with its attendant beneficial impact on growth.
n By generating confidence in a country's capacity to service debt exports can promote inflow of non-FDI foreign capital.
n Exports earn foreign exchange vitally needed to finance imports of essential raw materials, intermediate goods and capital equipment without which GDP growth would be seriously constrained.
The experience of the earlier newly industrialising economies (Hong Kong, Republic of Korea, Singapore and Taiwan) in achieving laudable success in greatly accelerating GDP growth through exports provided empirical evidence in support of the a priori arguments. The experience of these countries was subsequently buttressed by the success of other developing countries which adopted export-oriented growth strategies. Cambodia, China, India, Laos and Vietnam are some outstanding examples in this regard.
The experience of Bangladesh also points to importance of exports. During the period 2000-2010 annual average growth of exports of Bangladesh was 13 per cent (sixth position) among a sample of 12 Asian countries (Bangladesh, Cambodia, china, India, Indonesia, Korea, Laos, Malaysia, Pakistan, Singapore, Sri Lanka and Vietnam) and during this period the country achieved GDP growth rate of 5.9 per cent (seventh position). However, as of 2010 export/GDP ratio of Bangladesh was only 18 per cent which was the second lowest among these countries. Only Pakistan had somewhat lower ratio (14 per cent). This points to the potential for significant increase of exports.
Now the question is how this ratio can be increased. Macroeconomics textbooks generally argue that a country's export performance is largely determined by foreign countries' income which increases their demand for imports (that is home country's exports) and the exchange rate depreciation. In order to verify this hypothesis I ran a small regression using data for the period 2000-2015. Annual percentage change in private consumer expenditure of advanced countries (most of our exports go to the advanced countries; moreover consumer expenditure growth should be a better predictor of demand, rather than overall GDP growth) and exchange rate of taka with US dollar (most of our export trade is denominated in US dollar) were used as explanatory variables for growth of exports. It was found that both of these variables were of the right sign indicating that these exerted an impact on export performance. However, none of co-efficients of these variables was statistically significant.
In light of the above analysis it is of crucial importance that policy makers, business people and economic analysts join together in identifying the determinants of export growth of Bangladesh and adopt appropriate remedial measures. Otherwise, the country's progress towards graduating from the recently achieved low middle-income status to upper middle-income country will be stunted. The analysis of determinants could, inter alia, consider disaggregation of exports by commodities and trading partners, bilateral exchange rates (both nominal and real), changes in the volume and unit price of exports (which could indicate the relative importance of demand and supply side influence) and various supply side constraints faced by producers of export commodities.
Dr. Mirza Azizul Islam, a former Advisor to the Caretaker Government, Ministries of Finance and Planning, is at present a Visiting Professor in BRAC University.
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