It's widely believed that export earns foreign currency. Hence, all possible measures, including cash incentives, are provided to expand it so that the foreign currency reserve keeps growing along with the export. Reportedly, the government of Bangladesh had allocated Tk 73.50 billion for cash incentives to exporters during the financial year 2020-21 (FY20-21). But is there a risk that export expansion could also be the cause of the erosion of foreign currency? Mainly, cash incentive-driven export expansion demands investigation. As there is a chance that cash incentive itself could be more than net local value addition, cash incentive-driven export growth runs the risk of depleting foreign currency.
For expanding export, in the fiscal year of 2021-2022, Bangladesh selected 42 sectors eligible for receiving the government's cash incentive against export earnings. As per the taken policy, the government offers1 per cent to 20 per cent of export revenue as a cash incentive. A condition of minimum 30 per cent local value addition has been added to qualify for receiving a cash incentive. This cash incentive has likely been one of the significant causes of Bangladesh's exports soaring more than 34 per cent to $52.08 billion in 2021-22. Ironically, during the same time, Bangladesh has witnessed a rapid decline in its foreign currency reserve. Hence, the likely question is: could cash incentive-driven export growth be one of the causes of foreign currency erosion?
EXAMPLE SECTORS ENJOYING EXPORT GROWTH THROUGH CASH INCENTIVES: Among many other industries, paper mills have experienced a boon in export, primarily due to cash incentives. According to the media report, Bangladesh's 110 paper mills in 2019 could use only half of their 1.5 million tons of paper and paper products' annual production capacity to meet the local demand. Among other factors, due to the 10 per cent cash incentive, almost 50 per cent overcapacity found the export opportunity. As a result, the export of paper and paper products soared 63 per cent to $16.24 million in 2018 from that a year ago. According to Export Promotion Bureau (EPB), the paper sector experienced further export growth reaching $53.3 million in the first seven months of 2021-2022, which is 34.56 per cent higher than the corresponding period. Like the paper sector, furniture and plastic sectors have been benefiting from cash incentives for export, receiving 15 and 10 per cent respectively. Consumer electronics and electrical home and kitchen appliances are other sectors receiving cash incentives (10 per cent).All these sectors are highly capital intensive. They import capital machinery, design, and intermediary products. Due to the growing role of automation, there has been decreasing scope of adding value from labour. In these and many other sectors, local value addition out of labour has reached less than 10 per cent.
LOCAL VALUE ADDITION: If local value addition is more than 30 per cent, even sectors receiving a maximum 20 per cent cash incentive are supposed to bring an additional 10 per cent foreign currency. But how we do the accounting of local value should be investigated. Local addition occurs through multiple sources such as energy, capital machinery, labour, natural resources, knowledge, ideas, and many more. In many products, such as electronics and paper, Bangladesh's value addition through local labour has reached as low as less than 5 per cent. Even in export-oriented modern furniture-making plants, the cost component of labour has reached as low as 6 per cent. Of course, exporters add value through capital machinery. But foreign currency is used to import them. Similarly, local value addition out of energy, whether electricity or gas, drains foreign currency. As Bangladesh pursues a technology import-driven industrial strategy, there has been little demand for local knowledge and ideas to produce most of the exportable items.
Hence, labour may be the only source of local value addition in many industries without draining foreign currency. Therefore, in the accounting of qualifying 30 per cent local value addition, in some sectors, as high as 25 per cent may have been due to imported capital machinery and energy. On the other hand, logistics for importing intermediary products and shipping finished products also incur foreign currency costs, as vehicles, fuel, and port machinery are all imported. Furthermore, those vehicles are damaging roads or rail networks which have also been imported.
CHALLENGES OF DRIVING BOTH EXPORT AND FOREIGN CURRENCY RESERVE WITH CASH INCENTIVE: Primarily, an exporter adds value through labour, knowledge, ideas, and natural resources. In the 1970s, countries like Bangladesh used to rely mostly on natural resources, like raw jute or hide, to generate export revenue. Over time, upon accumulating capital, they started pursuing the strategy of importing capital machinery and the design of products to add value through the operation of imported capital machinery out of labour. The supply of locally produced natural resources also contributed to local value addition. But the further export expansion dried up the role of locally supplied natural resources. Hence, over the decades, Bangladesh has reached a situation of adding value only through labour. But unfortunately, the value addition out of labour has been shrinking, coming down to less than 10 per cent in most export-orientated manufactured products. The situation is alarming in assembling mobile phones and other high-tech products, where labour adds as little as 2 per cent value. As a result, cash incentive for export expansion has reached a situation of depleting foreign currency.
The question could be: what is the alternative? As explained, the exploitation of natural resources to expand export has already reached its limit. Less than 10 per cent labour-based value addition is no longer justifiable to expand export in many sectors. Hence, we should focus on other means-knowledge, and ideas. Incentives should go for increasing producers' value addition capability through locally produced knowledge and ideas, whether in the form of advancement of products or processes.
Due to production out of imported capital machinery, energy, and logistics draining foreign currency, accounting of local value addition runs the risk of being misleading. As Bangladesh's labour-based value addition has reached as low as 2 per cent in certain cash incentive receiving sectors, growing export out of cash incentive runs the risk of drainage of foreign currency reserve along with export growth. Hence, the focus should be on increasing local value addition.
Therefore, instead of giving cash to producers as a percentage of export revenue, an incentive should be destined to facilitate value addition out of locally produced knowledge and ideas. Due to the high wage differential of workers and the growing role of ideas in products and processes, such a change in focus will likely find sustainable means of enhancing Bangladesh's competitiveness, leading to growing export and foreign currency reserve and creating high-paying jobs for graduates simultaneously.
M. Rokonuzzaman, Ph.D is academic and researcher on technology, innovation and policy.
