Unearthing Bangladesh’s Comparative Advantages

Selim Raihan and Md. Jillur Rahman

The analysis of comparative advantage is important from the policy perspective. Trade policies of a country should be tuned to promote export items where the country has comparative advantage.  The Revealed Comparative Advantage (RCA) analysis, suggested by Bela Balassa in 1965, is an ex post analysis of comparative advantage and has been used in many studies. RCA index is used to calculate the relative advantage, disadvantage and trade potential of a certain product in a country.

The RCA index is measured as the ratio of a product’s share in the country’s total export relative to its share in the world’s total export. The formula for the RCA is equal to (Xij/Xit)/(Xwj/Xwt) where, Xij and Xwj are country i’s export and world export of product j respectively, while Xit and Xwt are country i’s total export and world total export respectively. If RCA is greater than unity, the country is said to have comparative advantage in that product; and if RCA is less than unity, the country has comparative disadvantage in that product. The RCA index is popular because of its simplicity, availability of data and for cross-country comparisons. The index is consistent with country’s factor endowment and productivity.

In this article, we are interested to know in which products Bangladesh has comparative advantage, and the dynamic changes of its comparative advantage. We have calculated RCA at 6-digit level of the harmonized system (HS) of classification for the periods between 2001 and 2013. RCA indices for Bangladesh are calculated using the data of export volumes of Bangladesh and the world from the Trade Map database.

Before going into the RCA analysis, let’s first explore how many products Bangladesh exports. At the 6-digit HS code level, there are approximately 5300 products. Figure 1 shows that in 2001, Bangladesh exported 896 products, which, by 2013, increased to a number of 2038. In 2012, Bangladesh exported 2126 products which was the highest among the years under consideration. This suggests that, not only in terms of volume but also in terms of number of products, Bangladesh’s export capacity increased by more than double during 2001 and 2013. On a year-to-year basis, some new products were added to the export basket and some were ceased to be exported. However, there were 375 common products which Bangladesh exported all the years under consideration.

Fig1-RCA

Figure 2 presents the numbers of products at 6-digit HS code where Bangladesh had comparative advantage during 2001 and 2013. In 2001, the number of products with RCA>1 was 316, which, with some year-to-year fluctuations, increased to 382 by 2013. The highest number of RCA>1 was observed in 2007 consisting 483 products. Figure 2 also suggests that the percentage share of RCA>1 products in total number of products declined over time: from 35% in 2001 to 19% in 2013. However, as a percentage of total exports, throughout those years, Bangladesh enjoyed comparative advantage in more than 97% of its total export. Furthermore, over those years, comparative advantage had been consistent for 130 products at the 6-digit level among which 115 products were from readymade garment industries. All these suggest that although Bangladesh was able to expand its export basket during 2001 and 2013, the number of products it had comparative advantage didn’t increase proportionately, which indicates escalated concentration of RCA in certain products.

Fig2-RCA

The escalated concentration of RCA in certain products during the period under consideration is manifested by the fact that Bangladesh’s RCAs had been concentrated around the products in the HS codes 03 (fish and shrimp), 41 (raw hides and skins and leather), 52 (cotton yarn), 53 (raw jute), 61 (knitted readymade garments), 62 (woven readymade garments) and 63 (home textile and jute hessian bags). However, a close look at Figure 3 suggests that Bangladesh’s comparative advantage has been highly concentrated around the readymade garments sector. In 2013, number of products with RCA>1 under the HS codes 61, 62 and 63 accounted for 57% of the total number of products with RCA>1. In 2007, such number was 43%. It should also be mentioned here that, readymade garments account for more than 80% of total export earnings of Bangladesh in recent years.

Fig3-RCA

Although RCA had been concentrated around the readymade garments sector, the average value of RCA declined. The maximum value of RCA in the readymade garments was 495 in 2001, which declined to 184 by 2013. Bangladesh had also been losing the very high comparative advantage it had in garments exports. Figure 4 suggests that, in 2001, Bangladesh enjoyed very high RCA (RCA>100) in 18 garments products, which declined to only 3 in 2013. In contrast, the number of products with RCA less than or equal to 30 increased over time: from 142 in 2001 to 181 in 2013.

Fig4-RCA

Similar analysis, with respect to the leather and leather goods, suggests that there had not been much variations in the number of products having RCA in this sector. And, as in readymade garments sector, Bangladesh had been losing very high comparative advantage it had in this sector. In contrast, Bangladesh had been enjoying consistently very high comparative advantage in jute and jute products, where, in all of 6 products, RCA ranged between 53 and 1068.

The aforementioned analysis shows that during the period under consideration, Bangladesh’s comparative advantage had been concentrated around low-skilled labor intensive readymade garments exports. However, in recent years, compared to early 2000s, there had been some products where Bangladesh gained comparative advantage. These include edible fruits, animal and vegetable fats and oil, preparations of cereals, flour, starch or milk and pastry cooks’ products, preparation of vegetable, fruits, nuts, residues from food industries, rubber and rubber products, copper and copper products, and furniture. However, Bangladesh lost comparative advantage in fertilizers, printing industry’s products, articles of iron and steel, and miscellaneous manufactured articles.

Finally, we are interested to know how tariff rates, both at home and partner country, affect Bangladesh’s revealed comparative advantage at the sectoral level. For this exercise, we have constructed a panel data at 6-digit HS code level for the period between 2001 and 2013. The dependent variable is the RCA which is a binary variable, where it takes a value of 1 if RCA is greater than unity and zero otherwise. The first explanatory variable is the domestic tariff rate at 6-digit HS code level, which is the effectively applied tariff rate and its data is taken from the WITS database. The second explanatory variable is the partner country’s tariff rate, which is calculated as the weighted average of simple tariff rates imposed by top export destination partners of Bangladesh namely USA, EU, Canada and India. Data of partner countries’ tariff rates are taken from the WITS and OECD-WTO database. The fixed effect panel logit regression results suggest that domestic tariff rate is negatively associated with RCA and the coefficient is statistically significant. This suggests that a cut in domestic tariff raises the likelihood of RCA greater than unity among the sectors. In contrast, the coefficient of the partner countries’ weighted tariff rate is not statistically significant. The reason behind the non-association between the RCA and partner countries’ tariff rate could be because of the fact that the large part of Bangladesh’s export to its major partner countries are under different preferences schemes; for example, Bangladesh’s exports enjoy the duty free and quota free market access in the EU market.

Published at the Thinking Aloud on 1 June 2016

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Why should Bangladesh integrate more with East and Southeast Asia?

Selim Raihan and Sunera Saba Khan

The Bangladesh economy over the past two and half decades has been experiencing steady rise in economic growth rate which has been accompanied by country’s increasing trade-GDP ratio. The economy has become more and more trade-oriented. However, when it comes to integrating with its neighboring countries, there are still large untapped potentials for Bangladesh to gain from such integration. Effective regional integration, through enhanced scope for larger economies of scale and pathway for integration with global and regional value chains, can be a critical tool for Bangladesh to boost its economic growth process. Over the past three decades, regional integration agenda for Bangladesh has focused primarily on integrating with its South Asian neighboring countries. However, there are reasons to believe that Bangladesh can also gain significantly by integrating more with the East Asian countries (China, Japan and South Korea) and Southeast Asian countries (10 ASEAN countries. i.e. Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam). Bangladesh government also wants to pursue the “Look East Policy”, and for this it is high time for Bangladesh to begin the quest for expanded trade and investment opportunities with these countries.

The Bangladesh economy is now at a cross-road. Further growth acceleration is essential to make a transition to a higher growth path in order to obtain the upper-middle income country status. The country needs to promote economic diversification, with a simultaneous diversification of the export basket, in order to boost its growth rate. When it comes to export diversification, in terms of both product and destination, integration with East and Southeast Asian countries is very important for Bangladesh. A major reason why integration with East and Southeast Asia will prove to be beneficial for Bangladesh is because East and Southeast Asia are essentially integrated with the Global Value Chains (GVCs) in a number of manufacturing products. Thus, such integration will pave the way for linking Bangladesh with wider GVCs and in diversifying its export basket. In addition, flows of Foreign Direct Investment (FDI) from these countries to Bangladesh will be beneficial for the economy. Among the Southeast Asian countries Indonesia, Malaysia and Vietnam are large exporters of electronics, machinery and leather goods, primarily driven by the leading multinational companies in the world. Therefore, integration will lead to a number of multinational companies specialized in electronics, machinery and leather goods investing in Bangladesh, thus generating large spill-over benefits to the domestic economy.

However, Bangladesh’s level of integration with East and Southeast Asian countries is mixed. Table 1 clearly depicts that Bangladesh’s imports from East and Southeast Asia are significantly higher compared to exports to these regions. With a share of around 30% of total import, China in 2014 was the major source of import for Bangladesh. Singapore also had more than 8% share. Except Philippines, Thailand and Vietnam, all other countries accounted for more than 1 billion US$ import for Bangladesh. In contrast, Bangladesh’s exports to most of these countries were very low. The largest export was to Japan, which was close to 1 billion US$, followed by export to China by 760 million US$. The lowest export was to the Philippines with an amount of only 21.4 million US$.

Figure 1_east asia

The current scenario clearly portrays that Bangladesh’s exports to East and Southeast Asia are significantly low and immediate initiatives need to be adopted in order to raise export levels. Product diversification followed by market and need assessments in those countries will help Bangladesh accelerate the desired integration process. Bangladesh’s exports to these countries can be improved if Bangladesh engages in exports of non-traditional goods. Bangladesh should actively pursue the agenda of free trade agreements (FTAs) with these countries, either bilaterally or with the region as a whole (i.e. with ASEAN). In this context, it is important to mention that four Southeast Asian countries (Brunei Darussalam, Malaysia, Singapore and Vietnam) are part of the recently signed Trans-Pacific Partnership Agreement (TPP), which is a free trade agreement among nine countries. The other countries are the United States, Australia, Chile, New Zealand and Peru. Furthermore, all 10 ASEAN countries are part of the proposed Regional Comprehensive Economic Partnership (RCEP), which is a free trade agreement (FTA) between these ten countries and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, South Korea and New Zealand). With the emergence of these mega FTAs, where a large number of East and Southeast Asian countries are involved, there are risks of negative impacts on Bangladesh as Bangladesh is not part of these FTAs. Therefore, it is imperative for Bangladesh to proactively take up the FTA agenda with the East and Southeast Asian countries. At this moment, Bangladesh is part of BIMSTEC, where two of the Southeast Asian countries (Thailand and Myanmar) are members. However, the BIMSTEC FTA is yet to be implemented.

Table 2 presents the results from simulations using the GTAP model, where we have explored hypothetical scenarios of FTAs between Bangladesh and East and Southeast Asian countries. Under certain assumptions, Bangladesh stands to gain from these FTAs. The largest gain seems to appear from the FTA with both East and Southeast Asian countries.

Figure 2_east asia

As far as Bangladesh’s imports from these countries are concerned a major chunk of the imports are used as raw materials and capital machineries in the export industry as well as in the domestic industrial sector. Being the dominant export sector, until now the benefits from such imports have largely been enjoyed by the RMG sector in Bangladesh. However, the non-RMG export sectors and domestic manufacturing sectors have not been able to benefit much from such imports. In addition, there are a number of policy-induced and supply-side constraints for these non-RMG sectors which constrict their expansion. Sector specific infrastructural problems, poor overall physical infrastructure, lack of investment fund and working capital, high interest rate, shortage of skilled workers, invisible costs of doing business, etc. are major impediments to export prospects and export diversification. Therefore, while pursuing the deeper integration agenda, it is also imperative to address these supply side constraints; otherwise the country will not be able to make much progress towards export diversification and will fail to reap the benefit from such integration.

Figure 3_east asia

Bangladesh should also invite much larger FDIs from East and Southeast Asian countries. The current level of total FDI in Bangladesh is very low, and Table 3 shows that FDI inflows from East and Southeast Asia are also low. Bangladesh can immensely benefit from higher FDI inflows from these countries in terms of export diversification and large employment generation. The government’s initiative of setting up special economic zones should give priorities to the leading investors from East and Southeast Asian countries targeting electronics, leather and different processing industries. Finally, enhanced connectivity with China and other Southeast Asian countries through BCIM, Asian highway and Trans-Asian Railway network should be accentuated.

Published at the Thinking Aloud on 1 April 2016

Published at The Financial Express on 10 April, 2016

How to tackle ‘entitlement failure’ in infrastructure?

In the discourse on infrastructure and economic growth the dominant area of discussion is on the quantity and quality of infrastructure and how countries differ in these respects. While most of the countries emphasize a lot on investing in raising the quantity (and quality) of infrastructure, there is a fundamental concern whether rising supply of infrastructure ensures the access to infrastructure. This problem is manifested through the fact that due to a variety of reasons enhanced supply of infrastructure may not solve the problem of ‘entitlement failure’ in terms of effective access to infrastructure, as the people/sectors in dire need of improved infrastructure may not have the access even with an increased supply.

There appears to be a consensus among researchers and policy makers that infrastructure is a key contributing factor to economic growth. The importance of infrastructure for economic development originates from the fact that it provides both final consumption services to households and key intermediate consumption items in the production process. The deficiency of some of the most basic infrastructure services is an important dimension of poverty; and therefore, increasing level of infrastructure stock has a direct bearing on poverty reduction. Furthermore, while it is generally accepted that economic diversification is a necessary condition for a sustained and long term growth of the economy and job creation, infrastructure development is a prerequisite for economic diversification.

What is the significance of economic diversification as far as ‘inclusive growth’ is concerned?  If inclusive growth is defined as the inclusiveness in economic opportunities, economic diversification can help attain inclusive growth. However, several supply-side constraints related to weak infrastructure can restrict economic diversification. Some of these constraints are broadly ‘general’ in nature and some are critically ‘sector-specific’. Interconnection and complementarities between general and sector-specific infrastructures are key elements for increasing service efficiency, supporting the adoption of innovative technologies, promotion of economic diversification and supporting inclusive growth.

“Yet, policymakers in the developing countries are so inclined to improvement in the broad general infrastructure, i.e., enhanced supply of electricity, improvement in roads, improvement in port facilities, etc. that the developments of critical sector-specific infrastructure are largely overlooked.”

Yet, policymakers in the developing countries are so inclined to improvement in the broad general infrastructure, i.e., enhanced supply of electricity, improvement in roads, improvement in port facilities, etc. that the developments of critical sector-specific infrastructure are largely overlooked. Embarking on developing broad general infrastructure are relatively easy, whereas solving sector-specific infrastructure problems involves identifying priorities in the policy making process and addressing a number of political economic issues. Failure to deal with sector-specific infrastructure problems leads to a scenario where a large number of potential inclusive-growth enhancing sectors fail to enjoy the benefit from the improvement in broad general infrastructure, and thus end up with ‘entitlement failure’.

One such example is the leather industry in Bangladesh which accounts for around one billion US$ in exports and which has huge potentials in generating employment and growth by increasing export of higher value added products. However, this sector has not yet reached its full potential primarily due to operating constraints stemming from its production base in Hazaribagh of Dhaka city where there are minimal waste management systems and inadequate industrial layout planning. The Hazaribagh-centric tannery industry is now legally bound to relocate all the factories to a new environmentally compliant tannery estate (under construction) on the outskirts of Dhaka city. However, such relocation has been stuck for many years with unresolved decisions on cost sharing of various components of the new industrial estate. Yet, there is no denying the fact that unless this relocation is effectively done, the leather sector will continue to suffer from ‘entitlement failure’ despite significant improvements in broad general infrastructure.

“..the major critical factor behind the failure to address sector-specific infrastructure problems is the inability of the political system to deliver a political consensus around strategic plans for such sector-specific infrastructure and stable policy frameworks to support their implementation.”

Factors responsible for such entitlement failure include the lack of resources to undertake sector-specific infrastructure development, lack of reliable data to determine finance and manpower requirements of projects, lack of infrastructure development framework that adequately delineate links between general and sector specific infrastructure requirements, inadequate planning, inadequate supporting institutions, and unstable political environments. However, on top of all these, the major critical factor behind the failure to address sector-specific infrastructure problems is the inability of the political system to deliver a political consensus around strategic plans for such sector-specific infrastructure and stable policy frameworks to support their implementation.

How to deal with this entitlement failure? A major part of the sector-specific infrastructure problems needs to be solved through public investment. The priorities in the industrial and related policies need to be realigned to the country’s long term economic growth strategy in the changing world economy. There is a need for generating political capital for such realignment. However, the task of developing such infrastructure facilities cannot be left to the government alone. It is binding on policy makers to come forward with strategies and mechanisms to encourage private sector participation in such sector-specific infrastructure developments. Such mechanisms should not only provide strategies that are rarely implemented, but practical ways of turning them into tangible projects through the provision of adequate finance.

Published at the Thinking Aloud on 1 February 2016

Published at The Daily Star on 3 February 2016

Export diversification – Myths and realities

Export diversification has been an important policy agenda in many of the developing countries. It is commonly viewed that export diversification is a necessary condition for sustained and long-term growth of the economy and job creation. The current discourse of ‘global value chain’ also highlights the importance of diversification of export portfolio for effective integration with the global value chain.

Among the developing countries, the problem of export concentration is more acute for most of the Least Developed Countries (LDCs). Many of the LDCs are still the exporters of primary products, mainly agricultural, which are not only susceptible to large volatility in the international market, but also provide limited opportunity for value addition. Few LDCs like Bangladesh and Cambodia have been able to move from agricultural exports to manufacturing exports, but still their export baskets remain highly concentrated around few low value-added manufacturing products. For many of these economies, export diversification is said to play an important role in structural transformation of their economies from producing low value-added products to high value-added products.

One strong view related to the policy for diversification of exports is its heavy emphasis on extensive tariff liberalisation with the aim of reduction in anti-export bias. The policy conclusion that emerges from this stance is for low and uniform tariffs and a seamless export-import regime that facilitates least-cost transactions at the border. Tariff liberalisation, under this view, is seen as a kind of ‘auto’ driver of export expansion and diversification of the export basket.

While the importance of tariff liberalisation for export promotion and diversification can’t be undermined, tariff liberalisation alone isn’t sufficient to trigger ‘auto’ large supply responses in terms of expanding export volumes and diversifying the export basket. A number of supply side constraints can prevent local producers from expanding exports, and the lack of an enabling environment can strangle entrepreneurship and innovation. Studies have indicated that most of the LDCs and a large number of other developing countries face several supply side constraints. High lead-time is an important challenge in many LDCs. Inefficiencies at ports and related internal road transportation further aggravate the problem. Amongst others, lack of investment fund and working capital, high interest rate, poor physical infrastructure, shortage of skilled workers, technological bottlenecks, lack of entrepreneurship and management skills, poor law and order situation, lack of information, invisible costs of doing business, etc. are major impediments to export prospects and export diversification. Therefore, the policy options and support measures for exports are much more difficult and involved than mere reduction of tariffs.

It is also essential to keep in mind that comparative advantage doesn’t necessarily translate into competitive advantage. While many of the developing countries have comparative advantages in producing and exporting several agricultural and manufacturing products, given a domestic environment of high cost of doing business, such comparative advantages are seized to be realised. Therefore, while many of the LDCs are provided with significant market access opportunities in most of the developed countries’ markets through different trade agreements and generalised system of preferences (GSP), the single major reason for their inability to take advantage of such opportunities is their supply side constraints, which undermine their competitive ability to supply to the global markets.

It is important to note that in the discourse of policy reforms for export diversification the political economy perspective is generally ignored and reform of institutions is largely overlooked. A favourable overall incentive structure through the management and distribution of ‘rent’ is important for the diversification of the export basket. Experiences from many developing countries show that the dominant export sector becomes the main beneficiary of different export incentives (both formal and informal) while for other sectors, such schemes appear to be less effective primarily due to various structural bottlenecks as mentioned before. In this process, the dominant export sector grabs the lion’s share of the ‘rent’ being generated through such incentives.

This situation also raises a critical question as to whether ‘rents’ are needed for the promotion of other sectors. Experiences from successful countries highlight the importance of providing effective incentives to other sectors and removing structural bottlenecks in order to generate some ‘rents’ in those sectors. However, it should be kept in mind that while generating such ‘rent’ there is a need for a well-designed and effective industrial policy wherein monetary (interest rate subsidies) and fiscal incentives (reduced taxes or tax holidays) for the emerging dynamic export sectors are transparent and time-bound. In addition, industrial policy needs to address issues of education and skill development for facilitating higher capabilities for export diversification, attracting FDI and integrating with the global value chain.

Experiences from different countries that have been successful in diversifying their export portfolios also suggest that institutional reforms should be considered key to overall policy reforms targeting larger export response and export diversification. Improving the bureaucracy quality, ensuring property rights, managing corruption, ensuring contract viability through reduction of the risk of contract modification or cancellation are examples of such institutional reforms. Furthermore, reducing political uncertainties or establishing political stability and generating political capital for a diversified export basket are critically important.

Published at the Thinking Aloud on 1 January 2016

Published at The Daily Star on 7 November 2015

 

Why do countries differ in export diversification?

Selim Raihan and Mahtab Uddin

In the literature of export-growth linkages, the issue of export diversification draws a considerable interest for reducing risks associated with adverse and volatile terms of trade, slow productivity growth or relatively low value addition in the global value chain. Diversification of exports can lead to reducing the dependence on fluctuating commodity prices as well as can encourage other technology intensive sectors through triggering the knowledge spillovers, which could be attained from the exposure to international markets, business practices, and production processes. A number of empirical studies have shown strong relationships between economic growth and export diversification. While previous studies tried to correlate export diversification with investment, economic structure and development, the objective of our current article is to find out major factors that influence differences in export diversification across countries and time.

For constructing the model, index of export diversification is considered as the dependant variable while the explanatory variables of the model are log of per capita GDP, gross fixed capital formation (as % of GDP), domestic credit to the private sector (as % of GDP), tariff rates (both average MFN and weighted mean applied for all products in %), doing business indicators and institutional variables. Taking into consideration of the individualistic effect, a fixed effect panel regression is used over the period of 1962 to 2010 for 182 countries. In another set of regressions, LDC, Land Locked and Island dummies are used for desegregating the impacts of these variables over the export diversification. In this respect an LSDV model is applied.

The export diversification index is taken from the Export Diversification and Quality Databases (an IMF-DFID collaboration). From the database, data of 182 countries are considered for the period of 1962-2010. The higher value of the index indicates lower diversification; and therefore, for a better understating, we term this index as export concentration index. The data of per capita GDP, investment, tariff rates, and credit to private sector are taken from the World Bank World Development Indicator database. The doing business indicators are taken from the Doing Business database. Institutional variables are adopted from the International Country Risk Guide (ICRG) database. The LDC country dummy variable is created using the UNCTAD’s list of LDC countries while the dummy variables for landlocked countries and island countries are created using Wikipedia.

In the first set of regressions, we have used log of per capita GDP, domestic credit to the private sector and investment. The regression result shows a strong negative association between economic development and export concentration index which means that, with economic development a country’s export basket tends to be more diversified. With the rise of per capita GDP by 10%, the export concentration index will decline by 0.01 points. Analogously, investment and domestic credit to the private sector (as % of GDP) are negatively associated with export concentration. Although the associated coefficients of these explanatory variables are small in magnitude, the strong significance resembles two facts: (i) a strong backbone of financial institutions which promotes smooth flows of credit to the private sector can lead a country towards greater diversification of exports; and (ii) a higher level of investment leads towards greater level of diversifications. On the contrary, despite the existence of a common belief that tariff liberalization leads to greater export diversification, the current study found no significant association between these two variables. Both MFN tariff and weighted applied tariff rates are found to be insignificant. Moreover, the time invariant dummies, namely, LDC, land lock and island dummies are found strongly significant and associated positively to export concentration index. On an average, for a country of LDC the export concentration index is higher than that of a non-LDC by 1.48 points, which shows that LDCs’ export baskets are more concentrated than those of non-LDCs. The result also shows that, export baskets of land-locked economies are more concentrated than those of non-landlocked economies. A reason behind this could be the high cost of exports and dependence on other countries by the landlocked countries for shipment procedures. Analogous to the previous dummies, export baskets of Island economies are appeared to be more concentrated than those of non-island economies.

A similar picture is also depicted in the Table, which shows the list of top 10 most diversified economies. All of the countries in the top 10 list are developed countries. Not only that, all of the top 40 most diversified countries are non-LDC developing/developed countries. We also see from the list of 10 least diversified countries that among them 4 are LDCs. The dominant presence of countries from Sub-Saharan Africa in the list is also noticeable. In 2010, among the South Asian countries, India tops the list being the most diversified economy in the region with a global position of 23rd while Bangladesh ranks the bottom with a global position of 155th among the 182 countries.

Untitled

It is important to explore the effects of different business environment and institutional variables on the cross-country and over time differences in export concentration index. In this regard, we have used doing business indicators from the World Bank’s Doing Business Survey, with a time period of 2004 to 2010 for 166 countries. For convenience, distance to frontier (DTF) of different indicators is considered as the representative variable. The DTF score benchmarks economies with respect to regulatory best practice, which shows the absolute distance to the best performance on each Doing Business indicator. An economy’s DTF is scored on a scale of 0 to 100, where zero represents the worst performance and 100 the frontier. Among the indicators, four indicators appear to have statistically significant negative effect on export concentration index. For example, an increase in the DTF of starting business by 1 unit would lead to a fall in the export concentration index by 0.005 units. If the DTF of getting credit increases by 1 unit the index of export concentration decreases by 0.002 units. Analogously, a rise in the DTF of enforcing contracts by 1 unit can reduce the export concentration index by 0.02 units. All of these results suggest a positive correlation between ease of doing business and export diversification.

In the case of institutional variables, we have considered 6 political risks variables from the ICRG database (for details see: http://www.prsgroup.com) for 126 countries over a time period of 1984 to 2010. These are bureaucracy quality, government stability, democratic accountability, investment profile, corruption, and law and order. The regression results show that all these institutional variables, except investment profile, have a negative and statistically significant effect on the export concentration index. It follows that, improvement in all these parameters would promote further export diversification. A point rise in bureaucratic quality (in a scale of 0-4) would reduce the index of export concentration by 0.03 points. A point rise in government stability (in a scale of 0-12) would lead to a decline in the export concentration index by 0.02 points. A point rise in democratic accountability (in a scale of 0-6) would lead to a fall in the export concentration index by 0.02 points. A point improvement in the control of corruption (in a scale of 0-6) would reduce the export concentration index by 0.03 points. A point improvement in law and order (in a scale of 0-6) would result in a 0.05 points decline in the export concentration index. Results found in this model suffice the reality: for promoting export diversification – improvement in institutional variables is very critical.

The analysis thus points out the necessity of addressing the supply side issues with economic and policy reforms. For promoting diversified and technology driven exports – greater access to credit along with increment of productive investment is a pre-condition. Institutional reforms should be undertaken with a view to reducing the cost of doing business.

Published at the Thinking Aloud on 1 November, 2015

Our garment industry at a crossroad

Manufacturing is now an overwhelmingly salient component of the Bangladesh’s export composition, thanks largely to the rapid expansion of the garment industry. From a small base of only around US$ 32 million in 1984, garment exports have grown to around US$ 25 billion by 2014, accounting for more than three-quarters of export earnings. Garment has been an important contributor to growth and employment generation in Bangladesh. Female participation in the formal labour market underwent a major shift with the rise of the garment industry in Bangladesh. It provides direct employment to over 4 million people, 70 per cent of whom are female. More than 50 per cent of the manufacturing labor force is now employed in this sector, and the sector accounts for 30 per cent of the investment in manufacturing. Therefore, the story of the growth of the manufacturing sector in Bangladesh over the past two decades has been the story of the success of the garment sector.

There is no denying the fact that the success story of the garment industry in Bangladesh lies in its comparative advantage generating from the country’s large pool of unskilled labor. Considering the fact that Bangladesh’s Asian neighbors and competitors such as India, Pakistan, Sri Lanka and China also have large pool of unskilled labour, it is certainly astounding how Bangladesh has been able to retain its comparative advantage till date and has enjoyed continued export growth. While cheap labor has been the single most important advantage of Bangladesh, the local industry has flourished in spite of numerous challenges, e.g., high cost of doing business, weak infrastructure, weak governance, and labour unrests.

There have been concerns with regard to the compliance issues and the work place safety in the garment industry in Bangladesh, and in the last couple of years these issues have become very critical for the future of this industry. There is strong international pressure, in the form of the threat of cancelling large preferences in the markets of Western countries, if labour conditions are not improved. Quality competitiveness is getting increased priorities over price competitiveness, and of course, quality of a product embodies the standard of living of labour being used in the production process. These concerns should be addressed in a positive way as an opportunity to build industry’s reputation in the global market. This calls for, among many other things, to deal with labor issues in the garment industry carefully. In this context issues like wage, workplace security, fringe benefits, workplace environment etc. need to be resolved on a priority basis. Current labor practices prevalent in the garment industry need to be improved in order to make the sector sustainable. Improvement of the labour condition is closely linked to the enhancement of the productivity of labour. There is equally a need to invest in training workers to move up to the higher value added garment products. The BGMEA and the government should collaborate with each other, with help from relevant international agencies, to be able to work effectively in this area.

The garment industry of Bangladesh is now at a crossroad. It is now time to focus on how Bangladesh could retain its comparative advantage and continue its success story. Reliance on only the mass pool of unskilled labour doing things in the old way would be not sufficient. Careful examination of Bangladesh’s comparative advantage in the garment industry reveals the fact that the nature of this advantage is primarily static in nature. This suggests, retaining the static comparative advantage will be highly challenging in the future given the increased competition from other countries, growing stringent compliance issues, and the fact that to what extent the country will be able to enhance its competitiveness in doing business. Therefore the sector should aim for generating dynamic comparative advantage which would ensure sustainability of this sector in the future. There is a critical need for enhancing labour productivity, moving up to the higher value-added products through introducing new technology along the production line spurring innovation, and enhancing Bangladesh’s competitiveness by reducing the cost of doing business.

It is also essential to keep in mind that comparative advantage doesn’t necessary translate into competitive advantage. Given an environment of high cost of doing business, in order to maintain the competitive advantage, there is a tendency of putting downward pressure on workers’ wages and benefits. In this context, for the workers’ welfare, there is a critical need for reducing the cost of doing business in Bangladesh. The garment industry is constrained by a host of such costs. High lead-time is an important challenge for this industry. Inefficiencies at ports and related internal road transportation further aggravate the problem. Amongst others, lack of investment fund and working capital, high interest rate, poor physical infrastructure, poor law and order situation, invisible costs of doing business, etc. are major impediments to export prospects. These factors will eventually determine the competitive advantage of Bangladesh’s garment industry and exports. Addressing these issues require strategic planning and its adroit implementation.

The future of the garment industry will be critical for Bangladesh’s socio-economic development. Although the evidence on trade-growth and trade-poverty relationships as found in academic studies is still far from being conclusive, the growth of garment exports has been associated with the overall economic growth of the country accompanied by a remarkable progress on poverty alleviation. Even without going deep into such hotly debated subjects as whether the export sector has been the ‘engine’ of growth and to what extent the growth has been equitable to reach the poorest groups, it can be said that the garment-led export growth process has established a direct link between trade and poverty in Bangladesh by creating massive employment opportunities. And the sustainability of this industry also depends on how carefully and properly the issues related to the welfare of the workers are addressed.

Published at The Daily Star on 27 June 2015