Meeting the middle-income challenges

Shoriful Islam | Published: March 11, 2015 00:00:00 | Updated: November 30, 2024 06:01:00

Bangladesh aims at continuing its healthy growth and poverty reduction achievements, and accelerating economic growth in order to become a middle-income country by 2021. It seeks to continue its high pace of poverty reduction and share prosperity more equitably among its citizens. Â
One of the greatest development challenges for Bangladesh is to provide employment for over two million people who will be joining the labour force each year over the next decade. Moreover, only 51.5 million of its 90 million people of working age are employed. Bangladesh needs to use its labour endowment even more intensively to increase growth and, in turn, to absorb the increasing labour force.Â Â
The Growth Commission report (2008) suggests that all the 13 countries with sustained high growth over the post-war period were characterised by full exploitation of knowledge, resources and elastic demand that the global economy offered. Bangladesh will need to do the same and exploit the international market more intensively, building on the pivotal role that exports have already played in providing gainful employment and access to imports. Â
Bangladesh's exports have grown strongly and doubled their world market share between 1995 and 2012 owing to success in garments, catering largely to the demand of the European Union and the US markets. Since 2009, it became the world's second largest garment exporter, making it unique among the least developed countries (LDCs) in its high share of manufactures in total exports, which reached 90.1 per cent in 2012 compared to about 21.1 per cent for LDCs. Â
Garments can continue to grow in existing and newer markets. Newer products will emerge more slowly. Thus, more rapid export growth will initially rely on capturing higher market shares in Bangladesh's existing strengths, i.e., basic garments--both in current markets, and penetrating newer and dynamic markets such as Japan, China, the ASEAN countries and India. In addition, many firms are starting to produce higher value garments, and this will expand the target market for Bangladesh. Other products are also emerging, such as jute goods, footwear, sea food, information technology-enabled services (ITES), etc., and some of these may become part of a larger product cluster over time. Â
To achieve the above and sustain and accelerate export growth will require actions centred around four pillars. These are: (1) breaking into new markets through a) better exploitation of regional trading opportunities and b) better trade logistics to reduce delivery lags and become more competitive in nearby markets, especially Asia, as world markets are becoming more competitive and newer products demand shorter lead times to generate new sources of competitiveness and thereby enable market diversification; (2) breaking into new products through a) more neutral and rational trade policy and taxation and bonded warehouse schemes, and b) concerted efforts to attract foreign direct investment, to spur investment and export diversification; (3) improving worker and consumer welfare by a) improving skills and literacy, b) implementing labour and work safety guidelines, c) making safety nets more effective in dealing with trade shocks, and (4) building a supportive environment, including a) sustaining sound macroeconomic fundamentals, b) easing energy constraints, and c) strengthening the institutional capacity for strategic policymaking geared to the objective of international competitiveness to help bring focus and coherence to the government's reform efforts. Â
Detailed studies of a number of growing export sectors have confirmed the cross-cutting findings highlighted above and added other sector-specific issues. In shipbuilding, enforcement of standards for domestic ships would help bring domestic and export market segments closer and help exporting yards to achieve better scale economies. More credible enforcement of standards in pharmaceuticals would help people's health and also reduce disincentives of firms including foreign firms that practise self-enforcement. Training to upgrade skills is a critical need in many sectors, including shipbuilding, ITES, and bicycles. The FDI could play a much bigger role in many sectors, especially those with needs for technology upgradation, such as pharmaceuticals, bicycles, and shipbuilding. Improvements in access to finance and ease of the Bangladesh Bank-monitored current account transactions would relieve constraints across all sectors. Additional submarine cables would help enhance reliability of internet services for the ITES sector. Â
A neutral trade policy needs to be based on consumer interests and not just those of domestic producers and exporters. Currently, distortions affect critical areas that have a negative bearing on consumer welfare, such as medicines and consumer products and producer interests have tended to dominate over consumer interests. For example, allowing a due role for trade and FDI in drug supply will enhance choice and quality of medicines and enable a more effective health strategy.
In addition, societal demands for better regulation of imports to address an expanding array of issues like public safety, food safety and plant and animal health, will increase and this is to be done in a credible and efficient manner that respects the balance between safety and access to a variety of imports. Â
Trade regime signals are critical for defining domestic production structures and shaping the usage of labour and capital. Bangladesh needs to increase the share of labour-intensive manufacturing in its overall GDP and a stronger export-orientation will play a critical role here. Increasing basic skills will be critical-for Bangladesh to remain competitive in exports, improve worker productivity and enable sustainable wage increases. For skill flows, development of cognitive and non-cognitive skills through a focus on quality of primary and secondary education, along with industry-specific skills, will bring immense dividends. Â
An example of outward orientation will help. If Bangladesh were to capture 20 per cent of China's current garment exports, its own total exports would more than double, increasing by US$29 billion, and, based on current parametres, create 5.4 million new jobs and another 13.5 million new indirect jobs. These would be virtually enough to absorb all new entrants to the labour force over the next decade. Â
With the implementation of the four-pillar agenda, a virtuous circle of export-led growth can be put in place with multiple sources of strength. This will help improve overall competitiveness of the economy and provide sources of strength other than low wages. Â
The ultimate goal of export-led growth is poverty reduction and enhanced welfare of citizens. Rapidly growing exports and millions of new jobs accompanying them, along with skill up-gradation, will increase productivity and wages, which in the long-term is the only sustainable way to improve living standards. It will also begin a discourse to move beyond wage-based competitiveness.
Improving skills will also allow effective participation of people in growth. Improving labour standards and worker safety is also part of this agenda and, in the wake of recent tragic incidents in the garments sector, it has become a part of the preconditions for garment exports. Â
Bangladesh is well-placed to take on some of its strongest development challenges provided it displays the right leadership. Its track record on growth and employment is strong. To grow faster and absorb more labour and continue its pace of poverty reduction, it will need to build on that record and improve upon it. The good news is that a number of reforms may be implemented in the short to medium term and can bring large pay-offs. Â
The example of Vietnam illustrates that accelerated and export-oriented development is possible even in the context of the current global environment. Vietnam moved from being one of the poorest countries in the world to a lower middle income one in the space of 25 years with FDI and trade playing a dominant role in the economy. Its exports and imports each form 90 per cent of GDP and with 88 million people compared to Bangladesh's 150 million, it exports four times of the exports made by Bangladesh today. Â
In conclusion, Bangladesh will need strong leadership to support its multi-sector competitiveness agenda. In many cases, it will require taking on strong domestic interest that may not welcome competition either through imports or FDI. In other cases, it would require cohesion and coordination between different ministries/ departments, such as the National Board of Revenue, the Ministries of Commerce, Finance, Industry and Communication and so on. If the goals of the Sixth Plan and the Vision 2021 are to be achieved, leadership has a long protracted role to play.
The writer is a post graduate student, the Department of Economics, Jahangirnagar University.
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