Economic development refers to progress in an economy, or the qualitative measure of this. Economic development usually refers to the adoption of new technologies, transition from agriculture-based to industry-based economy, and general improvement in living standards.
It is also the development of economic wealth of countries, regions or communities for the well-being of their inhabitants. From a policy perspective, economic development can be defined as efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base.
The government of Bangladesh had taken experience from various countries on how they became self-sustained. A number of countries had developed their economy with massive initiatives on trade and commerce particularly exports promotion through diversifying products. It is notable to mention here that Japan had started development initiatives in 1950’s, Taiwan and South Korea in 1960’s and 1970’s, Malaysia, Thailand, and Singapore in the 1970’s, China in the 1980’s, and eventually India in the 1990’s focusing on industrialization and business promotion. Trade and commerce of those countries had played lead role in supporting rapid growth, boosting the emergence of a modern manufacturing and service sector, providing employment, and reducing poverty. Robust empirical evidence has been provided by many researchers that export and growth is correlated to pursue economic development (Sachs and Warner, 1995; Srinivasan and Bhagwati, 1999). Hausmann and Rodrik (2003) showed that growth is the result of transferring resources from lower productivity activities to the higher-productivity goods identified by the entrepreneurial cost-discovery process-i.e. export activity. Surveying the evidence, economists conclude that rapid and sustained GDP growth is closely associated with a fast pace of export growth (Brenton and New farmer, 2007). More generally, Nobel Laureate economist Michael Spence (2007) argued that sustained high growth of economies in the post Second World War period has been achieved by leveraging the demand and resources of the world economy through trade.
Export trend of Bangladesh since independence
After independence in 1971 Bangladesh had no industry, no foreign reserve, no infrastructure; the economy of the country was fully dependent on a few products, namely, tea, jute and paper. Export income was worth 348.42 million US$ in the fiscal year 1972-73. Three export sectors: raw jute, tea and crust leather were the major export earners and 97% of total export earning used to come from these three sectors. The export volume raised a significant amount which is stood 34.24 billion US$ in 2015-16.
The average export growth of Bangladesh stands at 13.29%. Bangladesh enters into the billion dollar US$ export figure in the fiscal year 1986-87 and it achieved two digit billion US$ export performance in the fiscal year 2005-06. Bangladesh received highest positive export growth in the fiscal year 2010-11 and the positive export income growth is still continuing. Turning point of Export sector of Bangladesh was after 1980s.The contribution of the traditional exportable to the export income declined and that of the non-traditional items rose. The Labor intensive traditional export sector (jute & jute goods, leather and tea) is lagging behind and other labor intensive textile sector (knit, woven and home textile) is showing excellent performance and has become the number one export earning sector of Bangladesh. More than 84% of export earning comes from the textile sector.
Similar to few exportable products, Bangladesh export destinations are also limited to a few countries. Bangladesh exported 25 products to 68 destinations in the fiscal year 1972-73. In the fiscal year 2014-15, it exported 729 products to 196 destinations; to consider major export destinations, still USA and the European Union are the major export markets, while Russian and CIS countries, African region, Latin American countries are still potential to export Bangladesh goods.
Bangladesh exported 729 products to 196 destinations the world in 4 digit HS code level in the fiscal year 2014-15.Major seven products contributed 92.48% to our national export earnings. These products include Woven Garments, Knitwear, Jute & Jute Goods, Home Textile, Frozen Food, Footwear and Leather & Leather Goods.
It is a common and customary for every nation to take on Export. For many decades prior to the emergence of RMG exports, jute and jute goods dominated the export sector making up 70 percent of exports in 1981. With development practitioners advising the need to diversify exports, developing non-traditional exports became the dominant mantra of export policy. Non-traditional exports implied a shift into manufactures. This shift materialized for the Bangladesh economy thanks largely due to an external event – the multi-fiber arrangement of 1974 – that offered a lifeline for the emergence and rapid expansion of the RMG industry. Meanwhile, policy errors domestically and the emergence of jute substitutes globally soon led to a rapid decline in the export of jute and jute goods. The pendulum swung to the other extreme. By 1990, RMG exports had overtaken Bangladesh’s traditional exports and, by the close of the 1990s, export concentration emerged afresh, with RMG exports reaching a share of 81 percent in 2014.
Export diversification is one of the mandates of the Seventh-Five year Plan and the Government has given emphasis on labor intensive sector to reduce poverty and employment. The export policy 2015-18 has declared the following sectors as highest priority and thrust sectors:
a) Highest priority sector
w Value added readymade garments and garment accessories;
w Software & IT enabled Services, ICT products;
w Pharmaceutical Products;
w Ocean going Ship & fishing trawlers;
w Shoes & Leather Products;
w Jute goods;
w Plastic products;
w Agro-products and Agro-processed products;
w Furniture Industry;
w Home textiles;
w Terry Towel; and
b) Special development sector
Products which have export potentials but do not have a strong production & supply base have been included in the list of special development sector. The products are:
w Diversified jute products;
w Electric and Electronic products;
w Ceramic products;
w Light engineering products including auto-parts & bicycles;
w Value added Frozen fish;
w Printing & Packaging;
w Rough Diamond & jewelry;
w Paper & paper products;
w Silk products;
w Handloom products including Lungi; and
w Coconut coir.
c) Special development Service Sector
w Tourism; and
w Architecture, Engineering and Consultancy Services.
The export earning of readymade garment (both woven and knit) sector worth 25.49 billion US$ contributed 81.67% to the total export earnings of the country. Only 10% of export earning is being contributed by other six major sectors. The major drawbacks of the Bangladesh export sector are:
w Limited exportable products;
w Limited export destinations;
w Dhaka & Chittagong production base;
w Labour-intensive production plants;
w Insufficient investment in potential exportable products;
w Lack of aggressive marketing strategy;
w Lack of information on potential product and market;
w Lack of infrastructure facilities;
w Compliance issues to be fulfilled;
w Contract farming production process not getting popular in agricultural sector;
w Lack of logistic support of warehousing specially for agricultural products;
w Lack of global standard testing facilities;
w Absence of long term national plan;
w Tariff and non-tariff barriers in potential export market;
w Limitation of using of low-cost funds;
w Ambiguities and complex procedures for availing of the low-cost fund;
w Lack of Good Agricultural Practice;
In order to achieve rapid economic growth, Bangladesh needs to take aggressive program for product and market diversification. Capital is one of the most important constraints on the development of these two areas. Diversification strategy is closely related with highest level of risk management. Risk and diversification are parallel activities that enhance the following factors in a broader way:
w Increase the number of products as well as markets;
w Diversify the domestic industry;
w Capture the share of the new market;
w Employment generation;
w Increase domestic consumption;
w Increase both local and foreign investment flows;
For many developing countries, export diversification is conceived as the progression from traditional to non-traditional exports.By providing a broader base of exports, diversification can lower instability in export earnings, expand export revenues, and enhance value addition.Export diversification can also assist development in many areas, such as –
Improved technological capabilities in trade & commerce, via broad scientific and technical exercise as well as learning by doing;
Facilitation of forward and backward linkages within output of some activities which then become input of some other activities;
Increased sophistication in the markets,
Substitution of commodities with positive price trends for those with declining price trends andScaling up Economies.
Types of Export Diversification
Export diversification initiatives undertaken by various countries are usually distinguished into two broad forms:
(i) Product Diversification
It involves efforts from a particular country to diversify its export base by incorporating new products into its export basket.
(ii) Market Diversification
It involves efforts from a particular country to diversify its sources of exports by gaining market access to new countries.
However, both these forms are categorized into three main types. These include- (a) Horizontal diversification, (b) Vertical diversification and (c) Diagonal diversification.
Export diversification can also be analyzed at many levels (farm, plant, country, or regional level). At each level, a focus can be put on different types of diversifications (horizontal, vertical, or diagonal).
Horizontal diversificationtakes place within the same sector (primary, secondary or tertiary), and entails adjustment in the country’s export mix by adding new products on existing export baskets within the same sector.
Vertical diversification is the processing of domestic manufactured goods involves a shift from the primary to the secondary or tertiary sector.It entails contriving further uses for existing products by means of increased value added activities, such as processing, marketing or other services. Vertical diversification can expand market opportunities for raw material.
Diagonal diversificationentails a shift from imported input into secondary and tertiary sector. It is also often called intermediate goods diversification.
Requirements for successful horizontal, vertical or diagonal diversification can vary considerably in terms of skills and capital investments, technology, managerial competences and marketing skills. Sustainable long term export growth requires both horizontal (e.g. adding new products on existing ones), and vertical (e.g. move from commodity to higher value added manufactures) diversification.
(i) Product Diversification
Throughout the world, product diversification has been most spectacular in the area of intermediate goods in recent years.E.g. during the last three decades a number of products have been exporting in various countries.Rise in trade in intermediate goods changed the character of export-led growth. Such global intermediate goods diversification was made possible by fragmentation of production processes across countries (in line with their comparative advantage).Under this, assembly operations moved to lower wage economies, and higher-value added components headed to more developed economies.Global Value Chain (GVC) resulted from this fragmentation of production processes. GVCs created opportunities for intra-industry trade globally and between economies within a region. Bangladesh is increasingly contributing in the development of such Global Value Chains(GVCs).
It is notable to mention here that the composition of top 5 exportable items in Bangladesh are generally as follows: (i) RMG above 80%, (ii) Raw Jute & Jute Goods (about 4 – 5%, (iii) Frozen Foods basically shrimps about 3.5 – 4%, (iv) Leather, leather goods and footwear about 3 – 4% and (v) Light Engineering products about 1.5 – 2% (source: WTO TPR 2012). Bangladeshi black tiger prawn has a good brand name.It has a niche market in the developed countries.Agro-processed products also have high export potential. Light engineering products, mainly bicycle and agricultural machineries, have good export potential. Ship-building Pharmaceutical products, medicinal plants and herbal medicine also have better export potential.Ship building and related sectors are also a promising sector for increase export volume of the country.
- Challenges in Product Diversification
(a) Limited concentration in export product
At present, Bangladeshi export relies heavily on the RMG industry, making up over 80% of exports. Before RMG jute and jute goods dominated our export, making up 70% of exports in 1981.
Bangladesh experienced vertical diversification of its exports (from primary to manufactures). Heavy dependence on a small number of products exposes a country to the negative effects of unfavorable characteristics of world demand and negative supply side features of these products. As Bangladesh depends excessively on RMG for export earnings and about half of its industrial employment originates in RMG, it is potentially vulnerable to any adverse outcome due to possible changes in the current market structure.
(b). Limited concentration even within RMG
Goods within the RMG category are not widely diversified, and are mainly constrained within Shirts, T-shirts, trousers, jackets, and sweaters. This heavy dependence on a limited range of RMG products enlarges Bangladesh’s economic vulnerability.
(c) Terms of Trade challenge
Bangladesh is a small open economy in international trade, and therefore, faces the consequence of adverse movements in its terms of trade (TOT) stemming from exogenous price shocks in its imports or exports.
(d) Economic and political risks
As discussed before, such risks arise from the problem of export concentration.
Economic risks are both short term and long term. Short term risks are volatility and instability in foreign exchange earning which have adverse macroeconomic effects. For example, on growth, employment, investment planning, import and export capacity, foreign exchange cash flow, inflation, capital flight by risk adverse investors, debt repayment).Long term risks are secular and unpredictable declining terms of trade trends.
Political risks include- worsened governance (it is related to primary commodities, and therefore not applicable in the case of Bangladesh); and Risk of civil war in fragile states or economic sanctions against states.Jute exports to Libya, Syria and Iran, traditional strongholds for such exports, were affected in recent years.
(ii) Market Diversification or Market Access
The main instrument for achieving market diversification is market access.All countries, big or small, constantly look for better market access in other countries. Tariff and non-tariff barriers obstruct market access, and no country is prepared to allow the import of products from other countries if it can afford to do so.Therefore, market access is to be secured through negotiation.
The GSPs and DFQFs available for LDCs, and the RTAs to which Bangladesh is a party allows the country to have better market access than many of its non-LDC competitors.The main focus of Bangladesh’s market diversification is to reduce dependence upon one or a limited number of geographical destinations for our exports.
- Challenges in Market Diversi-fication or Market Access
(a). Non-availability of GSP in the USA
In the USA, Bangladesh RMG exports do not get any Generalized System of Preference (GSP) benefits. Moreover, these exports are subject to high tariffs. In value terms, about 46 percent of Bangladesh’s exports of clothing products are subject to an ad-valorem duty of 15.1% to 20%. Another 13 percent faces tariffs higher than 25 percent. High tariffs considerably reduce Bangladesh’s competitive strength in the US market since as many as 72 African and Caribbean countries get zero-tariff access in the US market under African Growth and Opportunity Act (AGOA), 2000.Mexico gets the same under North American Free Trade Area (NAFTA). Plurilaterals/ Mega-regionals, such as TPP, whereby our competitors, e.g. Vietnam, will get duty free access in the US market will erode the competitive advantage that Bangladesh currently enjoys over its competitors.If Bangladesh were to get zero-tariff access (GSP or DFQF) into the US market for its RMG products, estimates suggest that its exports could receive a significant boost.
(b) Limited concentration in export destination
Bangladeshi exports rely heavily on the export to EU and the USA.The exporting destinations are so concentrated that about 75 – 80% of our RMG exports go to the US and EU.Such heavy dependence on a limited number of trade partners widens Bangladesh economic vulnerability against increased competition from other Asian countries such as China, India, Vietnam and Indonesia.Exploring non-traditional markets is therefore of strategic importance to ensure sustainable growth in exports, especially RMG.Of the new destinations, Australia, Japan, South Korea, Russia, Brazil, Chile, China, India, Turkey, Mexico and South Africa are among the most promising.
(c) Compliance Issues
Tazreen Fashions and Rana Plaza Incidents affected on garments export and also affected image of the country. US suspension of GSP benefits for Bangladesh but main Bangladeshi products are not affected by the suspension, for example, RMG was never included the USA GSP scheme.Shrimp has MFN rate of 0% in the US market.The EU has also raised concerns on the issues of compliance.
Outcome: Sustainability Compact
Activities by Accord & Alliance: Remediation needed for 2% of RMG factories in Bangladesh
- Preference erosion by FTAs/ Plurilaterals
The special preference that Bangladesh enjoys in developed country markets are being eroded by various RTAs/FTAs.
(i) The EU is entering into FTAs with many countries, such as India, Vietnam. This erodes the effect of GSP benefits that Bangladesh gets in the EU market.
- Deterioration in terms of trade
w Our terms of trade indicates negative trend for the last eight years, mainly due to highly imbalance imports from India and China.
w This is further compounded by continued devaluation in our currency exchange rate. Bangladesh Taka has been depreciating against US Dollar over the past 13 years.Although the government role in such depreciation assists our RMG exporters, it ultimately dampens our efforts to improve the terms of trade.
- Constraints to Export Diversification
Constraints to export diversification are multifarious. These can normally be grouped into three different types, such as –
(a) Constraints at the borders:Constraints at the borders include a number of barriers to imports and exports: which comprises- Tariff barriers; and Non-tariff barriers (NTBs) including non-tariff measures. NTBs also include lack of trade facilitation.
(b) Constraints behind the borders:Constraints behind the borders are commonly known as supply side constraints. These include-(i) Trade related infrastructure and institutions; (ii) Policy constraints, including business regulatory framework, and investment policy regime; and (iii) Competiti-veness constraints, such as standards, packaging, quality, and delivery in time.
(c) Constraints beyond the borders:Constraints beyond the borders include market access barriers to export growth (discussed in market diversification/access challenges).
4.1 Supply Side Constraints
- Inadequate Infrastructure
Efficient infrastructure is a pre-condition for good export performance.Inadequate infrastructure hampers production activities, delays movement of goods and passengers, leading to delay in the delivery of goods.It adds to business uncertainty and risk, and imposes additional costs.Delay in delivery may result in the cancellation of export orders and the loss of markets.Lack of adequate infrastructure in Bangladesh is perhaps the main bottleneck to expansion of exports.Despite government efforts, infrastructural problems continue to remain in a number of sectors; which are-
(i) Inadequate telecommunication services are still a major impediment.There are frequent cut-offs in submarine cables that occasionally disrupt internet connectivity.Slow internet speed occasionally hampers customs and other trade processing and clearance.
(ii) Port services-The Chittagong port, which handles nearly 85 percent of the country’s trade merchandise suffers from labor problems, poor management, and lack of equipment. Its container terminal handles only 100-105 lifts per berth a day, well below the UNCTAD productivity standard of 230 lifts a day. Ship turnaround time is 5-9 days, significantly above the 1 day standard of more efficient ports. In addition, handling charges for a 20-foot container are also quite high compared to those of comparator countries.
(iii) Road network – Despite a relatively high density of its road network, poor road conditions and lack of transportation seriously impair private activity, particularly on account of poor construction of roads and bridges; lack of maintenance of roads and waterways; and a lack of integration of different modes of transportation (which makes long-haul transport very difficult). Poor road conditions and lack of transportation are especially constraining for enterprises in far-flung rural areas. Public spending on road maintenance is seen to fall short of what is required. One of the major transport corridors for international trade is the road connecting Dhaka and Chittagong. This road is a combination of two lane and divided four-lane segments but, given the expanding volume of trade, what is needed is an 8 lane highway, albeit presently it is being gradually upgraded to 4 lanes.
(iv) Railway system- The container unit train operation between Chittagong and Dhaka has the potential to provide an important benefit to both importers and exporters in the Dhaka area. While there are some operational problems with the yard layout and operation in Chittagong and Kamalapur and with the availability of rolling stock, these are much less important than the failure to provide sufficient train frequency or to operate in a commercial manner.
(v) Air freight and Airport storage services – The unreliability and unavailability of the air freight services affects the ability of produce growers to make long-term arrangements with foreign buyers that enable both parties to ensure high quality and safe production. The problem is exacerbated by Biman’s monopoly control of air cargo facilities. Biman, the national airline, should improve its performance in providing forward-contract air cargo space, and the government should permit other carriers to compete against it. That is, open sky policy for regular air cargo movement needs to be put in place. Insufficient air cargo capacity in BIMAN leads to a quota system with small average quota sizes and a high rejection rates which compels exporters to sell their extra produce in domestic markets at a loss.
(vi) Power breakdown is experienced several times a day.It has recently been improved but crisis are not eroded yet. In order to maintain production during power failure, almost all exporters have to buy generators, but cost of generation is estimated to be two to three times higher.
- Bureaucracy & Trade Institutions
Government rules and regulations relating to exports are complicated and too much paper work is needed. Considerable amount of senior management’s valuable time is spent with government officials over interpretation and changes in laws and regulations. Firms engaged in export business have to appoint officers for sorting out matters with government agencies. Customs service has still remained aninefficient mannered. Governmental capacity in implementing export incentive regimes, such as duty drawback system, bonded warehouse facilities, is still weak.It is also mired with administrative problems. Challenges the exporters encounter in obtaining regulatory services include extra time and extra cost, making the exports less competitive.
- Access to Finance
Access to finance is a major constraint especially for the SME exporters.One of the main factors that have hampered flow of institutional finance into SMEs was the banks’ preoccupation with collateral-based lending. While judging credit-worthiness, banks have traditionally used fixed asset ownership particularly land ownership as the basis. This put SMEs at relative disadvantage as they often can’t put up such collateral for loan. Even if they do manage some, it gets used up in taking the term loan leaving them with no means to seek working capital loan from institutional sources. Other constraints to SMEs receiving institutional finance include -lengthy and cumbersome loan application process, transaction costs involved in loan processing, inability of many SMEs to formulate a proper project proposal, and lack of adequate capability of bank officials to evaluate project proposals. Besides, problem for all types of exporters’ lies in obtaining export finance, high rate of interest on bank capital, rate of interest is higher in Bangladesh as compared to other countries with whom Bangladesh has been competing.
4.2 Supplementary Constraints
(i) Labor productivity and availability of skills
Despite having an abundance in labor, Bangladesh lags behind its Asian neighbors and trade rivals in terms of quality of labor and, therefore, in labor productivity. Compared to many other Asian countries, Bangladesh has a low level of literacy and years of schooling of the labor force, which makes skill acquisition very difficult. The scheme of Technical and Vocational Education and Training (TVET) programs has failed to reduce skill shortages.
(ii) Exchange rate management
Even though Bangladesh currency is fully convertible against US Dollar, the government, through its central bank, frequently intervenes unofficially to keep the BDT overvalued.This was done by buying the excess foreign currency from the market.RMG exports are partly shielded by such management but it ultimately affects exports by making inputs more expensive than usual.
(iii) Anti-Export Bias
For export diversification to happen, anti-export bias of the tariff regime must be eliminated for non-RMG exports to pick up steam.
(iv) Inadequate of FDI
Meager FDI inflows are a constraint to export diversification.
(v) The so-called ‘Dutch Disease’
This is a situation where crowding in a promising sector by other entrepreneurs. This has been evident in Bangladesh with the phenomenal growth in the RMG sector. All entrepreneurs/resources rushed to the RMG sector, either abandoning or reducing their focus in non-RMG sectors.Labour also moved from other sectors to the RMG. However, due to the issue of relevant expertize, movement of skilled labour from other sectors to RMG has a big tricky.
Remedial Measures to address Constraints
(i) Improving service delivery of the government
Access to easy access to credit for exporting enterprises, especially SMEs is a key issue. Capacity building among the industries involved in exporting activities like; organizing workshops, seminars and awareness programs in terms of enhancing competitiveness, productivity and greater compliance.At the moment, Business Promotion Council has been doing this job. Moreover, improving trade related infrastructure and institutions, providing adequate business regulatory framework and investment policy regime are also essential for export promotion.Providing skill development programs to create semi-skilled and skilled workforce catering to skills requirements in different traditional and non-traditional export products is also a vital part. Delivering incentives, such as fiscal and credit incentives are needed to improve.
Combating Dutch Disease
The ‘Dutch Disease’ can be overcome by providing active support to entrepreneurs in other sectors with high export potential.One such strategy could be to work with the successful garment entrepreneurs and encourage them to diversify their business interests.The second strategy could be to provide various benefits, including easy credit, to entrepreneurs in those sectors.
(ii) Tapping Global Value Chain (GVC) Opportunities
Being a moderate domestic market, insufficient capital, and lack of capacity in meeting international standards, Global Value Chain (GVC) can provide a means to mitigate the development disadvantages arising from such constraints. Through participating in the international production networks, Bangladesh can benefit in terms of gaining access to the world market, employment creation, and technology transfer. However, like other Asia-Pacific LDCs, Bangladesh is participating only at the end stage of the process in international production networks. Where, activities are mainly concentrated in unskilled labor-intensive assembly of intermediate imports into final goods for either domestic consumption or exports. There is a scope for establishing and expanding export-led regional production networks in South Asia. For example, India and Pakistan each have a strong textile base, on the other hand, Bangladesh, Nepal and Sri Lanka are mainly apparel manufacturers. Therefore, India and Pakistan are sources of important raw materials for Bangladesh, Nepal and Sri Lanka.
(iii) Attracting FDI
Export diversification is often constrained by limited domestic capital, technology and market knowledge. FDI is likely to provide superior technology, higher productivity and better knowledge about international marketing conditions to the host countries.It will, in turn, improve domestic efficiency and productivity, thereby enabling export competitiveness.FDI can do this by creating certain positive externalities known as ‘spillovers’. Spillovers can take place when FDI improves the productive efficiencies of domestic firms, making their products efficient in price and quality in the international market and thus improving their export performance. Such spillovers may occur through two different ways;
(a) Horizontal spillovers: When domestic firms become capable of competing efficiently with foreign firms in the same industry group and
(b) Backward spillovers: When spillovers occur to firms in the upstream supply chain through buyer-supplier linkages. FDI can help channel capital and technology into industries that have the potential to competeinternationally, and the global linkages of multi-national corporations can facilitate their access to foreign markets. Besides, FDI can also promote exports of domestic firms through coaching of proper marketing strategies, methods, procedures, and channels of distribution.Most notable recent Bangladesh Established ‘Bangla-desh Economic Zones Authority (BEZA)’ to attract FDI by developing numerous Economic Zones. This will allow domestic and foreign firms to invest in the Zones, with tax holiday benefits, duty free imports of capital equipment and inputs, and a host of other benefits.