Where's the Problem?

There is a saying, "If it ain't broke, don't fix it!" Do we as a nation suffer from the same mindset? I am talking about the total dependence of the country on one group of commodities for its exports. Over the last two decades, we have successfully realigned our focus from one primary exports, jute and jute goods, to another, readymade garments (RMG) which generates more than three-quarters of our export earnings. While experts recommend that we diversify and the government pays lip service to this desirable goal from time to time, nothing changes. Collectively, we seem to be following the age-old advice, "Let us make some hay while the sun is shining."

Now let me juxtapose our situation to that of a middle-eastern oil-rich sheikhdom of the seventies. They discover oil and become an oil-exporting country. But, do they need to worry about being over-dependent on oil revenues? You bet! In this context, I hardly need to bring into the discussion the roller coaster ride that the oil market is going through now, and how countries such as Russia, Venezuela, and Nigeria are coping with this external shock as investment funds dry up, joblessness skyrockets, and the economy goes through the shivers. We do not want Bangladesh to face this scenario with its "business as usual" mentality.

Admittedly, Bangladesh does have a fairly well-diversified portfolio of exports including garments, leather products, pharmaceuticals, agricultural products, IT support, etc. However, over the last ten years we have become more and more dependent on garments products. In other words our industrial base and exports are concentrated on four items: garments, jute, leather, and plastics. Using the data provided on Bangladesh Garment Manufacturers and Exporters Association (BGMEA) website, more than 81 percent of our export earnings come from RMG. According to the same website, a few items, most notably shirts, trousers, jackets, t-shirts, and sweaters account for more than 80 percent of RMG exports.

If we consider the trend over the last decade, export concentration has increased from 67.7 percent in 1990 to 81.9 percent in 2014, according to one study. If we compare Bangladesh with comparable Asian countries (India, Sri Lanka, and Vietnam), we have the highest level of export concentration.

What is wrong with this scenario? I've heard the argument, often at international conferences, that since we are doing so well in the RMG exports market, and may even reach the $50 billion level in the not too distant future, why do anything different? In other words, the system is not broken, and we are doing well in the exports market, so why try to change anything?

First of all, the overdependence, or lack of diversity, carries with it some very real risks for our GDP and employment growth. The phenomenal growth in the share of this industry is good news, but also carries some potential hazard. One doesn't have to be a rocket scientist to be aware of the dangers of over-reliance on RMG as our primary foreign exchange-earner. External shocks, be it in the form of reduced demand, higher price of cotton imports, or higher tariff in Europe, can have a major impact on the garments industry. Many of the strengths we currently enjoy are thinly based. Cheap labour cost and lax enforcement of fire, safety, and regulations mean that we can currently outbid most of our competitors, such as Vietnam, Sri Lanka, Pakistan, and India. However, as can be seen from the history of the last few years, wind directions can change and so can the sentiment and market conditions in the West.  Notwithstanding the oversight exercised by Accord and Alliance, Bangladesh may soon find itself losing market share as trade alliances and tariff preferences shift. The cost of labour is increasing, and will increase further as the living wage movement gains ground. Compliance with fire and safety codes also will raise the cost of production. Current trade negotiations, particularly the Trans Pacific Partnership (TPP) agreement has some strict guidelines on environmental and labour laws, which is likely to adversely affect us since Vietnam is joining TPP and will cut into our market share in the USA, Japan, and Canada.

Secondly, trade relations can be a source of growth but data shows that our current export-import mix leaves us at a disadvantageous position with our trading partners. Our terms of trade, i.e. the value of our exports relative to our imports, are declining. There are many factors that might be causing this decline, our export of low value, labour-intensive products and import of highly priced items such as petroleum, cotton, machinery, and iron and steel, is a major driver of the measured adverse terms of trade. 

Finally, recent economic research based on empirical evidence shows that export diversification promotes economic growth. The experiences of China, Thailand, Malaysia and Vietnam show that as countries transition from labour-intensive mono-culture to an economy based on capital and high-skilled industries, the investment rate and employment growth takes off.  One study by Harvard economist Dani Rodrik found that export concentration, similar to what we notice in Bangladesh, is detrimental to growth in per capita income. 

Therefore, as we look into the future, our leaders both in the political and business sectors need to pay more serious attention to an alternative development strategy that encourages and supports diversification of exports, both in terms of products and destination. Recent initiatives to promote thrust sectors including agro-products, plastics, leather, pharmaceuticals, software and ICT, home textiles, ocean-going shipbuilding, furniture, terry towel, and tourism are moving in the right direction. Our efforts to solve infrastructure, power, and institutional bottlenecks need to be followed through. And finally, a comprehensive policy package which provides improved climate for foreign investment, supportive governmental policies and incentives, during the process of "cost discovery" as new entrepreneurs find their footing, and retool foreign technology for domestic adoption, will help in creating a new dynamic tier of export industries.

The writer is an economist and writes on policy issues.