Internal Markets and External Sectors

 

Population works as demand side for markets. Global business focuses populous countries. Demand prevails there. These countries are considered as destinations of foreign investment. Penetration for foreign investment by these countries is not necessary. Steady growth is observed in these countries.
Import substitution is better than import of finished goods which lessens imports. This creates opportunities for global investors to explore markets with huge population. As such, without promotional activities by home countries, host countries come forward to make investment in manufacturing sectors for domestic markets. Nothing is bad since the industries can ease import trade. It is true. But there is other side of the coin.

Industries producing for domestic markets are of different types - foreign owned, joint ventures between domestic and foreign, and local owned. Manufacturing industries producing outputs for domestic consumption operate with input contents sourced from external sectors. Manufacturing industries producing for meeting daily needs do not require high technologies. There are many services requiring no special skill such as transport operations, travels, wholesale operations, etc. Despite industries owned by foreign investment are found operating in home countries based on large markets.

With the establishment of manufacturing industries, economies move to upper levels by way of employment. Movement to upper stage creates purchasing power and so standard of living becomes developed. Economic stages turn to upper, to upper, and so one. An example can be cited with a simple case - transport. Bi-cycle is phased out by motor bike which is replaced by motor vehicle. Aero plane takes the place of motor vehicle. The changes take place with the increment in income level which creates demand. There is a supply side of this example. Mechanized transports need to be imported or assembled locally through the import of input contents. In both cases, imports are inevitable. At operational level, fuel is necessary. Without being fuel producing countries, dependency of imports cannot be avoided. Fuel becomes an operational cost for running transports. Regarding air transport, operations need aircrafts which are to be imported. Operations are in bracket of fuel consumption which depends on imports also.

Discussion of development stages with negative views of imports seems to be backward looking. It indicates that non-capacity of imports cannot lead economies to upper stages. But upper stages are needed for the upgrading of living standards.

Development needs to be sustainable. It is necessary. But how development becomes sustainable is a question. The challenging factor is import. Development for economies like ours depends on imports from capital goods to input contents. There are different windows for supporting imports. They are exports of goods and services, transfer income like remittances sent by people working abroad, foreign loans and investments.

Foreign investment is a source of foreign currency. But the problem is that a part of the funds is to be used for payments abroad of capital machines and different capital nature services. With commercial operations, income needs to be repatriated abroad in the form of dividends. Foreign investment creates recurring expenses if it is operated for domestic market. It can bring positive results if it focuses on export trade. Loan is a solution but it needs to be repaid with interest for which earnings in foreign currency are necessary. There are different types of loans. Concessional loans with long tenure can be useful provided that the loans are used to develop export sectors. Otherwise, external borrowing can create problems for an economy in the long run.

Remittance income is a one way traffic. No repayment is required. It is wage remittances sent by people working abroad. But people working abroad are not legally bound to remit income home. Migration is one of the tools of development. Rural people migrate to urban areas. Income at initial level is transmitted to rural areas. But after a certain period of time, migrated people stop sending money and start bringing money from rural areas by selling properties. In the same fashion, people living abroad start taking money from home country, by stopping to send remittances.

Exports of physical goods need inputs provided that products are not indigenous. Readymade garments comprise as one of the major items of export basket of Bangladesh. But inputs of this product depend on imports of input contents. A little portion is left on settlement of input payments. Except exports of readymade garments, the contribution of other items including services is very insignificant. Whatever the pie is left, this is the real contribution from external sectors which is of help to meet external payments on different accounts without limiting to imports.

Transactions with external sectors are depicted in the balance of payments statements prepared by the authority concerned. These are of differs parts - trade accounts which are accumulated position of export and imports. Along with trade accounts, current accounts are prepared in consideration of different transactions - services, factors, and transfer payments. This is the real economic transactions of an economy. The surplus positions represent resilience of an economy and opposite in case of deficit in current account transactions.

Financial accounts under balance of payments statements represent financing position of a country where it finances or borrows. As noted earlier, borrowing cannot sustain in the long run. Development in deficit under current accounts is possible provided that substantial fund is injected from external sources as loans and investment. Development will sustain when the economies will achieve the capacity to repay liabilities whatever the form is. How it is possible to achieve is an issue. 

Repayment of liabilities including payments for imports is possible if the economies have income from external sources. Such window for external income is export. Manufacturing industries pull an economy to move forward. If the economy is large in the context of population, these industries can help a lot. Without sufficient income from external sector, the industries are supported by borrowing and investment from external sources for payment needs. The situation can continue many years without facing adverse impacts. This time can be considered as a breathing space. The economy needs to be resilient during this time by way of export sector development.

Manufacturing industries are comfortable to operate in a market with large population. It is a ready market having no requirement for exploration. Despite these industries depend on external inputs, they do not bother the sources of foreign money. But authorities need to focus on it to make a balance for avoidance of external problems. Otherwise, mismatch between inflows and outflows may become unsustainable, leading to loss-loss situations in the long run.

It is not so easy to be upgraded without autonomous money. It is true. Borrowing is a path of such money. External borrowing is a part thereof. Prudence needs to be applied for management of external borrowing. It requires balancing in development path between internal sector and external sector.

For the economic development of the country, many economic zones are in operation and in development stages. Foreign investment is there also. But the industries are said to focus on domestic market. It means they are not export looking as industries are doing in export processing zones. There needs balancing mechanism so that imports for industries working for domestic market can be supported out of value added money from exports therefrom.

Let us move to basic example of transport from bi-cycle to aero plane. Definitely aero plane will reduce the use of other transport operations for saving time in case of long route-journey. This is a well indicator of economic development. But sustainability depends on the resilience of income from external sectors. Hence, there needs an equilibrium in growth path so that internal sector does not face problems due to imbalanced rise in comparison with external sector.


Mehdi Rahman works in the
development sector.