At present emerging issues in export growth and its Sustainability Bangladesh seems to have attained mastery in labor-intensive mass manufacturing as displayed by its garments industry. The manufacturing sector has been the largest single contributor to growth in the past two decades. As a result, the share of manufacturing in total GDP increased from 9.8% in FY 1980 to 18.7% in FY 2014.
However, it did not lead to the creation of other large, labor-intensive clusters; garments are the only dominant variable in the country's exports. This raises concerns about the sustainability and volatility of export growth. Despite growing over time, the role of trade in the economy is still low.
Trade has a substantial role to play in boosting GDP growth and poverty alleviation. Imports and exports contribute 21% and 17.4% respectively to the GDP in FY 2014, whereas the figure is 90% in case of Indonesia, Thailand, and Vietnam. Higher trade volumes can increase the efficiency of domestic production and contribute to higher labor intensity in the economy.
The positive current account in most years in a low-income economy indicates a lack of investment opportunities. Such is the case for Bangladesh, where the current account has been positive in most years since FY 2006. This means a collaborative policy effort is required to accelerate export growth, which will demand a significant rise in overall investment.
In spite of maintaining a stable economy, thanks to prudent monetary and fiscal policy, institutional weaknesses and vulnerabilities exist. The ongoing political uncertainty, often with general strikes and violence, reduced investment by creating energy and infrastructure deficits.
This poses a threat to sustaining the growth rate of 6%, let alone raising it to 7% in the near future. Additionally, fundamental weaknesses in institutional capacity, which are not easily addressed, underpin the fastening of implementation of the most important infrastructure projects.
Bangladesh's short-term and medium-term macroeconomic view is subject to several vulnerabilities, mainly the lengthening and escalation of ongoing political chaos. An extensive slowdown in the European Union could hurt exports (garments in particular) along with the appreciation of the taka.
This could be worsened if preferential access to the EU is withdrawn for lack of progress in improving labor and factory safety standards. There are also concerns in state-owned banks and some private banks, as these have potential fiscal and financial stability implications. However, Bangladesh's vulnerability to global finance volatility is small despite growing international financial linkages. The energy shortages are a constraint to all segments of the economy.
Bangladesh ranks nearly last among its Asian competitors in prevalence of power outages. Power outages are a key reason why manufacturing productivity in Bangladesh is lower than in China and Vietnam. The use of captive generation to compensate for outages adds to the costs.
Bangladesh is yet to reap benefits out of its demographic dividend. Out of 103.3 million working age population, only 58.1 million were employed in 2013, reflecting a low 33.5% female participation. Additionally, 2.1 million people will enter the prime working-age population annually over the next decade. Increasing employment rate and providing jobs for the growing labor force will be a major challenge.
The solution will involve a re-orientation of the economy away from its anti-export bias and improvements in trade infrastructure to shorten lead times, among other initiatives. Skills are emerging as the obstacle in the garments sector and more in skill-intensive sectors - Bangladesh is in dire need to address skill development.
Despite growing access to education nationwide, 96% of the workforce has less than secondary education and 66% has less than primary education. Of them, only one-third of primary graduates acquire the numerical and literacy skills they are expected to master.
Furthermore, in the labor force, the percentage of people having professional education, such as engineering, is very small (0.17% of the workforce). Skills are a major disadvantage of firms located outside Dhaka. In sectors such as ITES, shipbuilding, and pharmaceuticals, higher skills are in constant demand.
The low level of literacy and years of schooling of the labor force make skill acquisition more difficult. About 37.6% of the population remains illiterate; the average years of schooling among the labor force was 4.8 years in 2010. The average years of schooling is also low compared with countries that are currently competing with Bangladesh's garment sector. In contrast, Sri Lanka has provided a skills environment that allows garment firms to move up the value chain quickly.
Bangladeshi firms' choice is restricted to only primary school graduates and high school dropouts. Labor issues, such as wages, workplace safety, and compliance with labor standards, can generate major reputational risk for Bangladesh's overall garment exports and will need to be carefully managed. Concerns have been heightened following a series of fatal incidents, and the government has been pressured to take measures to improve workers' safety. International buyers and governments have reacted strongly to these events.
On June 27, 2013, the United States suspended Generalized System of Preferences (GSP) trade privileges for Bangladesh over concerns about safety problems and labor rights violations in the garment industry. Whatever measures the government will implement under domestic and international pressure, the important issue will be enforcement and commitment to ensure better and safer practices.
Continued improvement in labor conditions in the garment sector, in coordination with international business and development partners, will be important. Product diversification may encounter higher fixed costs and will require overcoming potential resistance, and policy moves in this space will likely be gradual.
Bangladesh has not yet built up a product cluster other than garments and footwear, with exports of other products being relatively low as well as on the periphery of the product space. Developing another major cluster like garments will take more time and involve more investments. Rationalizing trade policy and improving the environment for foreign investment are critical inputs for product diversification; they face potential resistance from domestic producer interests.
Policy changes are likely to be gradual to allow time for adjustment. Pillar 1. Breaking into New Markets Improving trade facilitation - It incorporates improving trade logistics, which will reduce lag times, increase the competitiveness of exports and most importantly, will cut down the costs of imports. Launching a National Logistics strategies, establishing a rail inland container depot at Tongi, developing the inland Water Transport sector, improving the efficiency of Dhaka-Chittagong road connectivity with enhanced rail use for freights, and working closely with India to improve the efficiency of common land border posts will serve good to the idea. Additionally, exploiting containerization both in inland and waterways systems will reduce transit times of products.
Promoting economic integration with Asia - Bangladesh's geographical location between two growing economies, India and China, gives it immense advantage in terms of export potential. Road transport agreements with Bhutan, India, Myanmar, and Nepal will facilitate cross-border movement of goods. Pillar 2. Breaking into New Products Rationalizing trade policy to level the playing field - Adoption of a neutral tariff regime for non-garments firms, improvisation of the efficiency of the import process to reduce the costs of imports can be done with high priority.
Improving the environment for domestic and foreign investment- Attracting FDI will lead to development of underperforming areas by upgrading technology and market linkages. This can be done by allocating more serviceable land for business use, using high-level missions promote to FDI sources such as China, India and Japan, enforcing standards for firms, and developing sustainable solutions to provide unsubsidized cheap power.
Pillar 3. Improving Worker and Consumer Welfare Improving skills and literacy - Skill development is crucial to raise the productivity of workers, increase their wages, reduce the level of waste, and enhance the quality of goods. It can be attained by articulating a comprehensive vision for skill development, reskilling the current labor force through greater access to nonformal training and skill building, and improving the quality of foundational education.
Implementing labor and work safety guidelines - This has become a precondition for exports, and will minimize the chances of further tragedies like Rana Plaza. Making safety nets more effective in dealing with trade shocks - This is done by developing a safety net and labor strategy and investing in appropriate skills development to meet global and domestic demand, which has the potential to harness substantial gains from globalization, whereas training and retraining of workers will help to ensure their resilience to trade shocks. Pillar 4. Building a Supportive Environment Sustaining sound macroeconomic fundamentals - It encapsulates maintaining the stable inflation. Moreover, stabilizing the political turmoil is a must for a supportive environment as this would otherwise cause massive disruption in the productivity of firms and workers.
Building institutions for trade policy coherence and implementation - The National Board of Revenue and the Ministry of Commerce should jointly formulate tariff policy. Moreover, making the Export Promotion Bureau more effective, enabling greater private sector participation, targeting market diversification in key markets, and allowing private sector providers to provide quality services in areas under government regulation will facilitate this.
While Bangladesh has been impressive in demonstrating its economic performance in recent years, the risks of hurting that growth are real. Increasing the competitiveness of the garments exports, creating another major export cluster, along with development of the workforce and the supportive environment are fundamentals to speed up the growth of Bangladesh into prosperity, and poverty alleviation.
Taslim Ahammad is an Assistant Professor of Management Studies, Bangabandhu Sheikh Mujibur Rahman Science and Technology University, Gopalgonj and Md. Julker Naim is a Central Banker and M.Phil Felow of Bangladesh University of Professionals