Bangladesh has made some very remarkable strides in economic development over the last five decades enabling the country transiting from low income country to achieve the status of lower middle income country in 2015. The country is on track to leave the United Nations list of least developed countries in 2024. The Bangladesh government's vision 2041 stipulates to eliminate extreme poverty and secure upper middle-income country status by 2031 and achieve the high income country status by 2041. The Bangladesh economy is now the 37th largest economy in the world with nominal GDP standing at US$353 billion in 2020-21 with per capita income of US$2,122.
Bangladesh is now considered as one of the fasted growing economies in the world. Bangladesh has had an annual GDP growth rate of over 6 per cent since 2011. According to the International Monetary Fund (IMF) GDP growth rate remained positive at 3.8 per cent in 2020 despite the Covid-19 pandemic, and is expected to rise to 4.4 per cent in 2021 and 7.9 per cent in 2022. However, a recent report in the Wall Street Journal observes that while Bangladesh has achieved admirable economic growth, it lags behind that of much faster growing economies like Vietnam and Cambodia.
Much of Bangladesh's economic growth in large part continues to be driven by exports and continuing remittance inflows which now accounts for 6 per cent of GDP. Since the mid-1980s Bangladesh has initiated a wide range of economic policy reforms along the guidelines provided by the World Bank (WB) and the International Monetary Fund (IMF) including trade policy reform where the objective was to promote rapid export growth underpinned by export led industrialisation.
Exports from Bangladesh have recorded an annual average growth rate of about 11 per cent since 2001. Bangladesh exported US$40.5 billion in 2018-19 but that declined to US$33.7 billion in 2019-20, a decline of 16.8 per cent from the previous year due slowdown in global trade flows caused by the Covid-19 pandemic. According to the World Trade Organisation (WTO) world merchandise trade was set to plummet between 13 and 32 per cent in 2020. However, exports bounced back in 2020-21 to US$ 38.75 billion. The Bangladesh government has set a target for exports amounting to US$51 billion in the fiscal year 2021-22 (FE, 18 July).
Bangladesh heavily relies on ready-made garment (RMG) for fueling its exports growth accounting for about 84 per cent of merchandise exports. Country's export destinations are also highly concentrated-- the European Union (EU) where it currently enjoys duty free access and the United States (US) where the country does not enjoy duty free access anymore.
This export growth has been made possible by ample supply of cheap labour and duty free access to its major markets. Bangladesh has one of the lowest wage rates in the world which has helped to expand the RMG industry. Bangladesh as such is well positioned to diversify its exports and move up the value chain.
But for more than forty years Bangladesh has largely remained focused on a narrow range of relatively low value added RMG products. Bangladesh has failed to use RMG as a springboard to diversify into more complex products as many other East Asian economies did in the past. To understand why it is so needs a political economy perspective. It appears that trade policy along with industry policy have most likely been captured by interest groups associated with the RMG industry, in particular, by the captains of the industry.
Many economists, in particular Dani Rodrik expressed concerns over premature de-industrialisation of developing economies where a growing services sector bypassing manufacturing sector with industrialisation peaking at a relatively small share of GDP around 20 per cent or even below. In this regard Bangladesh is the only country so far that has bucked the trend in South Asia by continually increasing the manufacturing share of GDP as measured by the widely used measure of "share of value added by manufacturing" in GDP over the last two decades.
Despite such successful industrialisation, Bangladesh has experienced sharply deteriorating terms of trade (ToT). Between 1980 and 2019, the average value of ToT for Bangladesh with the base year 2000 stands at 99.91 per cent with a minimum of 57.47 per cent in 2011 and a maximum of 162.26 per cent in 1985. The latest value in 2019 was 65.4. Such deteriorating ToT are a mystery in the context of the Prebisch-Singer hypothesis which predicts that countries exporting manufacturing goods will experience ToT improvement. It is suggested that low quality of manufactured export goods has largely contributed to this falling ToT indicating Bangladesh focuses more on quantity exported rather than the quality.
Such a high dependency on one single product for exports (SITC 841-846) and a very limited number markets leave Bangladesh vulnerable to external shocks. Also, exports account for a very low share of GDP which fell to 15.32 per cent in 2019 from a peak of 20.16 per cent in 2012. It further fell to 12.18 per cent in 2020.
With such a low exports to GDP ratio, Bangladesh can be considered relatively a closed economy. Bangladesh indeed remains a relatively closed economy with tariff barriers that are above the already high South Asian average and twice the average of lower middle income countries, the group which Bangladesh will join in three years time. Such an inward looking trade policy only encourages rent seeking activities.
According to the Policy Research Institute in Dhaka the current trade regime is biased in favour of import substituting production with anti-export bias. It further adds, the ratio of output and inputs tariffs reveal high tariff escalation. Obviously, such anti-export bias undermines the potentials for export growth. Also, it must be added that import prohibition, restrictions and licensing also remain in place inter alia to protect public morals, human life and health. To further complicate the protection regime, tariffs vary substantially across and within sectors.
The general thrust of trade policy objective has remained unchanged with the tariff being the principal instrument of trade policy as well as a major source of tax revenue. In fact, small economies (a small economy means the country is a price taker in the international market. Therefore, the country's volume of exports and imports or even no imports will have no discernible effect on the world price) historically rarely embrace free trade ostensibly to redistribute income and garner increased marginal political support from factor owners using trade policy instruments such as the tariff.
In a seminal paper titled "The Symmetry Between Import and Export Taxes" by Abba Lerner published in Economica in 1936, he shows that import taxes are equivalent to export taxes as both have symmetric effects on resource allocation.
The protection provided by import tariffs causes increase in prices of non-tradable goods and nominal wages. As a consequence, the relative prices of exportable goods decline relative to those of import competing and non-tradable goods and their (exportable goods) output is reduced vis-à-vis those of free trade.
Furthermore, high tariffs restrict imports which in turn reduces demand for foreign exchange and appreciates the real exchange rate that shifts production away from exports to production of goods for the domestic market only. These are the channels through which tariffs cause anti-export bias.
The anti-export bias is not the only factor that works against Bangladesh achieving its full export potentials. While Bangladesh enjoys the advantage of lower wages, very little is gained from very poor productivity. In fact, cheap labour in many instances can turn out to be very expensive labour when adjusted for productivity. Total factor productivity (TFP) has remained below one per cent per annum since 2000. With such a low level of productivity, the long term growth of income will remain seriously constrained as well as the country's ability to gain increased competitive edge in the international market.
Furthermore, the current account balance as a percentage of GDP provides an indication on the level of international competitiveness. Between 1997-98 and 2019-20, the average value of current account balance as a percentage of GDP for Bangladesh stood at 0.6 per cent. This figure reached an all time high of 3.3 per cent in 2009-10 and a record low of -3.7 per cent in 2017-18. The data clearly indicates Bangladesh's lack of international competitiveness.
Between 1980 and 2020, Bangladesh achieved a current account surplus for 14 years and a deficit for 27 years. Usually, a country recording a current account surplus indicates its dependence on exports revenue, with high savings and weak domestic demand. On the other hand, a country recording a current account deficit is indicative of its dependence on imports, low savings and high personal consumption rates as a percentage of disposable income.
According to the World Economic Forum's Global Competitive Index for 2019, Bangladesh ranked 105th-- down two points from the previous year. The role of technology and human capital is well recognised in achieving economic growth and both are inter-related. According to the World Bank Human Capital Index (HCI) for 2020, Bangladesh slipped from 0.48 in 2017 to 0.46 in 2020. In terms of the quality of education, Bangladesh's global ranking was 84th while the neighbouring country India ranked 29th in 2017. These are not very encouraging signs for the country. What the WTO describes as "technology goods", their share in total exports from Bangladesh usually accounted for less than one per cent over the last several decades.
The exchange rate regime that is in place now in Bangladesh can be described as a managed floating exchange rate regime where the Taka is pegged to the US Dollar. Therefore, Bangladesh Bank has to regularly intervene in the foreign exchange market to keep the Taka/Dollar exchange rate at the target level. How that decision on the target level is reached by Bangladesh Bank remains a mystery. However, it is generally considered that the Taka remains overvalued when viewed in terms of the real effective exchange rate (REER). Therefore, the overvalued Taka makes Bangladeshi exports relatively more expensive.
The country also has a cumbersome business environment, it ranked 168th in 2020 out of 190 countries according to the World Bank's Ease of Doing Business Index. Infrastructural deficits cause long delays in the movement goods to and from the ports. Bangladesh is also an energy deficit country. This will seriously hinder the country's effort to achieve rapid industrialisation to diversify its manufacturing base. Also, bureaucratic delays and cumbersome bureaucratic processes cause increases in transaction costs for exporters and importers. Therefore, it is not surprising Bangladesh has not been much successful in attracting foreign direct investment (FDI) which has averaged only 1 per cent of GDP over the last two decades.
While Bangladesh also has pharmaceutical, footwear, processed food, jute goods and ship building industries, they are primarily domestic market focused and their contributions to exports remain fairly marginal. Research studies suggest that Bangladesh enjoys competitive advantage in RMG, jute goods, tea, sea food and leather, but only RMG has further enhanced its competitiveness over time while others stagnated. So Bangladesh will continue to rely on RMG to achieve its export success and likely to record strong export growth in RMG in the immediate future, but growth in the longer term will remain constrained. Therefore, the need for diversification of exports both in terms of the product composition and export destinations will become stronger in the future.