Bangladesh�s
garments sector has delivered huge benefits to the country and taken it along a more southeast Asian
development path, with human development statistics to show for it. But this can only continue if other sectors and higher value-added industries succeed
Bangladesh: infrastructure, corruption and the struggle to diversify
Joseph Allchin
Anyone reading about Bangladesh would be forgiven for thinking its a one-industry country. And when it comes to exports, they wouldnt be far wrong. More than three quarters of Bangladeshs exports are of ready-made garments. The anniversary of the Rana Plaza disaster, in which more than 1,100 people died, has focussed attention on the industrys dangers. But what is being done to move the economy away from sweat shop factories?
Export concentration is getting worse, says Zaidi Sattar of the Dhaka-based Policy Research Institute, a think tank. Unless something radical happens we are going to face more and more concentration.
Before 1981, 70 per cent of Bangladeshs exports were of jute. Synthetic fibres soon put paid to that. But the Multi Fibre Arrangement, a multinational trade deal designed to protect flagging western garments sectors from East Asian competition, put Bangladesh in a prime spot to pick up market share with Korean help. By 2000, ready-made garments or RMG were the overwhelmingly dominant force in Bangladeshs exports and they continue to grow, at a rate of 16.5 per cent a year, compared with 10 per cent for other export sectors.
There are several problems with this. Reliance on RMG exports leaves the country vulnerable to external shocks. Very few things are exported from Bangladesh that do not contain a significant input from imports. A shock to the price of, say, cotton would be catastrophic, as would any change in regulatory heart from the EU, where the country enjoys full duty free access.
Bangladeshs currency has been appreciating in relation to those of its neighbours. While this is a sign of economic strength, it is also a threat to export competitiveness. This has been further undermined by rising wages. The minimum wage, at $68 a month, is equal to 109 per cent of GDP per capita (of $747.3 in 2012), compared with about half that rate for neighbouring India, where the domestic market is able to keep prices lower.
Diversifying is easier said than done. Sattar puts much of the blame on trade policy. Domestic sales of footwear, for example, are growing at about 25 per cent a year, yet export growth is sluggish because imported inputs are taxed at 125 per cent. In the RMG sector, imported inputs used for export are duty free; no such treatment is offered to footwear manufacturers.
The country has one of the smallest tax to GDP ratios in the world, at about 10 per cent. The results are visible in the countrys infrastructure. To get a product from the countrys capital, Dhaka, to its main port and second city in Chittagong can take about 24 hours, even though it is only 150 miles away. This is a major constraint to diversification growth in east Asian trade is being driven by intermediate goods, where goods are assembled in one country using parts from another.
To become part of this supply chain you need not only roads and other infrastructure but also multinational companies pumping investment and know-how into joint ventures. This Bangladesh does not have. It receiving FDI worth only about $1bn in 2010, compared with Vietnams $11bn.
Samsung had been looking at assembling electronic goods in Chittagong. Its partner was to have been one of countrys largest manufacturers, also of Korean origin, called Young One. It acquired the necessary land but the multi billion-dollar factory never transpired.
Corruption and rent seeking is at such an extent that FDI is not happening, says Sultan Hafeez Rahman, country director of the International Growth Centre, a development research institute that works with the London School of Economics and the University of Oxford. You need the political will to claw back these vested interests No foreign investor will come and invest, its completely unpredictable, all because a few powerful people want a piece of the cake.
Sharif Choudhury of TCM, a consultancy active in the countrys promising yet corruption dogged pharmaceutical sector, agrees: If youre a criminal, its good fishing. If youre not, your protection is minimal, he says.
This also hints at another problem driving the concentration of exports. Around a third of Bangladeshi MPs are involved with the RMG sector. RMG has differential tax rates, cash subsidies, bonded warehouses; there has to be a time limit on any preferential treatment, says Mirza Azizul Islam, an adviser to Bangladeshs former caretaker government.
This helps to foster a situation akin to a resource curse, where policy and the state become beholden to one dominant sector of the economy. After the Rana Plaza disaster, foreign brands and international labour groups established a pact known as the Accord, with international inspections designed to ensure that primarily European buyers were not sourcing from dangerous buildings. They inevitably found buildings that were structurally unsound and declared them unsafe to source from. Owners have attempted to sue the pact and have been agitating workers against it, even though the Accord obliges brands to help fund upgrades for their suppliers factories.
Bangladeshs garments sector has delivered huge benefits to the country and taken it along a more southeast Asian development path, with human development statistics to show for it. But this can only continue if other sectors and higher value-added industries succeed. For this, ultimately, government must prioritise projects and insulate greater value-added sectors, even if rent seeking is endemic elsewhere.
For a company like Samsung to be looking at assembly operations in Bangladesh it should be immediately received and embraced but we are giving up those sort of opportunities, says Sattar.
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