The role of exports in fuelling continued growth in Bangladesh

A recent report in the Wall Street Journal observes that Bangladesh's economic growth, while stellar of late, lags behind that of much faster growing economies like Cambodia and Vietnam. It highlights the overt reliance of Bangladesh on ready-made garments (RMG) in fuelling its export growth and the palpable absence of exposure to regional trading blocks such as the Association of South-East Asian Nations (ASEAN), Trans-Pacific Partnership (TPP) and the like. We aim to shed further light on the primacy of exports in fuelling continued growth of output per capita and the policy framework compatible with this goal.

One concern that growth economists have been grappling with recently relates to the spectre of premature de-industrialisation, focused on, among others, by economist Dani Rodrik in several writings. The export slump in India, Pakistan or Sri Lanka over the past decade may be presumed, at least in part, to be early signs of this phenomenon. The point that these economists make is that sustained high growth in per capita output may not be feasible by relying on a growing "service" sector and bypassing manufacturing. Awkwardly, many lower-middle income (LMI) countries appear to be headed that way, with industrialisation peaking at a relatively small share of GDP, say around 20 percent—and worse, at a relatively low level of per capita income than experienced by early industrialisers like South Korea.

Just by looking at South Asia, it appears that so far, Bangladesh, the lone outlier in its company, has bucked the apparent de-industrialisation trend over the past decade. Indeed, when measured by the widely used "share of value-added in manufacturing" standard, Bangladesh has steadily advanced since around 1996. 

What about Cambodia and Vietnam? Unlike the latter two, Bangladesh's manufacturing value-added share in GDP appears to have evaded any significant decline in the aftermath of the contagion fuelled by the US "sub-prime" financial crisis of 2007-8. Both Cambodia and Vietnam succeeded in steering themselves out of the impasse in short order, although still lagging behind Bangladesh on this front. Vietnam's debacle was sharper owing largely to its greater integration with its export destination countries. These three thus appear to offer a glimpse of the possibility that industrialisation may continue to grow, providing the necessary impetus to sustained stronger economic growth down the line.

While the above narrative holds out promise of further industrialisation and exports, and hence continued growth in per capita income, the issue of Bangladesh's narrow export basket has drawn a lot of attention. How can Bangladesh exploit its vast human resources to forge ahead in faster industrialisation in sectors where it can achieve strong comparative advantage vis-a-vis other LMI countries that are similarly endowed? Here, the contrast with Vietnam is stark indeed; "clothing" amounts to 84 percent of Bangladeshi exports, while for Vietnam, it is a mere 11.7 percent. Moreover, under the WTO rubric of "machinery and transport equipment" (MAMT: encompassing telecom equipment, integrated circuits and electronic equipment), or what can loosely be referenced as "technology goods", Bangladesh's share is less than one percent throughout the past several decades. In contrast, for Vietnam, MAMT has emerged as the mainstay of its export growth for many years now, reaching 43 percent of total merchandise exports in 2019. Even Cambodia, small as it is vis-a-vis Bangladesh, has seen its MAMT share rise to between 7-8 percent in 2020, even though it started from scratch in 2000. There are strong reasons to believe that most of these technology exports out of Cambodia and Vietnam are labour-intensive in nature.  

A recent study by Rakhal Sarker, published in Bangladesh Development Studies, finds that while Bangladesh continues to enjoy international competitiveness in all five of its principal export categories (namely RMG, jute/jute manufactures, tea, fish/seafood and leather), only in RMG has this pattern strengthened over time. Competitiveness in the remainder has stagnated or stayed stable. While these are important findings, it is cold comfort that Bangladesh may not see a major decline in its quantum of clothing exports over the immediate future. 

What is the way forward? How can competitiveness be innovated upon, say in "technology" sectors? Growth economists generally agree (although not necessarily on the order of precedence) on the role of technology, human capital, domestic institutions and logistics. While comparable high quality data is not available along some of these dimensions, a few remarks are in order. On the human capital front, the World Bank Human Capital Index (HCI) for 2020 shows Bangladesh slipping a little since 2017. The overall index fell from 0.48 in 2017 to 0.46 in 2020, the only country to fare this way among the South Asian countries referenced above. While the Cambodian experience was stable at 0.49, Vietnam, already placed much higher, had advanced steadily from 0.67 to 0.69 over the period. This is not an encouraging sign and calls for well thought out new investments in human capital. It would appear that Bangladesh's schooling effort over the past several decades has targeted "enrolment" and then "completion", but not what is learnt in the classroom. It does not participate in the OECD's Programme for International Student Assessment (PISA) targeted at 15-year-olds. Why not? India has just signed on.   

In the absence of significant research and development spending, productivity enhancing technological innovations are hard to come by. Access to trading blocks (regional or even bilateral), we believe, will open up major scope to facilitate technology transfer via foreign direct investment and joint ventures. Sadly, progress on the ground has not been much to go by. While Bangladesh is a founding member of the South Asian Free Trade Association (SAFTA), political tension within the bloc has rendered it dysfunctional, although Bangladesh and India have engaged in some bilateral initiatives of late. SAFTA intra-regional trade stands, according to World Bank sources, at a meagre five percent of its total trade, compared to 25 percent for ASEAN. Free trade within the entire South Asian region would have allowed these countries, largely exporting the same broader basket, to further entrench their own comparative advantage, perhaps along more disaggregated categories within the exportables, and compete more effectively on the world stage. However, the overall gain would still be modest due to the small magnitude of internal trade, its limited diversity, and therefore the limited potential.    

On institutions and logistics, a no-brainer, South Asians lag behind other, more dynamic regions. Improvements in domestic infrastructure, IT connectivity, rule of law and export procedures can all be important, some of which are captured—for example, by the World Bank's "ease of doing business" (EODB) measure—but have been painstakingly slow. While Vietnam's rank went up from about 100 to 70 over the past decade, Bangladesh still languishes in the bottom quartile of the 190 countries in the dataset (ranked 168 in 2019).       

Turning to the financing of trade, much more needs to be done to develop the capital market so that small and medium-sized firms have access to adequate credit, allowing firms to freely enter and exit the competitive domestic economy, which would provide an impetus to innovations. Firm heterogeneity within an industry would signal dynamism in the sector, yielding product diversity and quality by engaging in both process and product innovations.

In brief, short of major innovations along the lines delineated above, sustained growth of output per person cannot be predicated upon a bland routine of augmenting the physical capital stock and the labour force.

Syed M Ahsan is Professor of Economics at Concordia University in Montreal, Canada and S Quamrul Ahsan is Associate Professor of Economics at University of Bergen in Bergen, Norway.