Policy Research Institute - PRI Bangladesh

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Opening a New Chapter

Published: Thursday, Oct 02, 2008

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Opening a New Chapter

Ahsan Mansur
Published on October 2008

Time to move into the industrial age, argues Ahsan Mansur

The loss of competitiveness of Chinese, Vietnamese and Indian manufacturers, due to appreciation of their currencies and surging wages, has created opportunities for Bangladesh that were unimaginable only a few years back. The large surplus countries of Asia and Middle East are also seeking investment opportunities in potentially emerging economies like Bangladesh.

But are we ready for these opportunities or should we remain bogged down by political conflicts and with the century-old slogan-oriented policies for "dal bhat"? While the whole country is preoccupied with prices of essentials (rice, lentil, chili, etc.), distribution of fertilisers, and reactivation of loss-making jute and sugar mills --are we not going to miss the most important opportunity that has opened up for Bangladesh in the global market?

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The fastest poverty reduction in world history has been recorded in East Asia during our current generation, due to rapid industrialisation and employment generation. Foreign demand for manufactured goods and foreign direct investment (FDI) in labour-intensive manufacturing and service sectors have been keys to realising the East Asian miracle in terms of economic growth and poverty reduction.

It is beyond doubt that if Bangladesh wants to be a middle-income country in the next 10-12 years, it will require accelerated industrial sector growth and a rapid broadening of its manufacturing base. Prosperity of the 120 million people living in rural areas cannot be achieved by employing them in the agriculture sector, no matter how productive or hardworking our farmers may be.

The hard fact is that most of these people must find jobs in the non-farm sector if we want to increase labour productivity (and consequently income) in farm and non-farm sectors, a prerequisite for economic prosperity.

The industrial sector in Bangladesh has also been a fast growing sector, and its accelerating pace is the main reason for Bangladesh recording more than 6 percent growth rate in recent years.

Industrial sector growth averaged 8.25 percent during 2001-02 to 2006-07, compared with 2.1 percent growth in the agriculture sector over the same period. In the most recent 3-year period, industrial growth exceeded 10 percent in real terms. This impressive growth in manufacturing and related services has expanded the base for non-farming jobs and helped absorb the growing pool of rural surplus labour. Bangladesh's manufacturing sector growth rate, while significant, will need to be much higher if we want to accelerate the pace of poverty reduction and gainful migration of the rural labour force to industrial centres.

We certainly have positive signs that it may happen. Despite political uncertainties and weak infrastructure, industrial activity has regained momentum since January 2008, backed by foreign demand for Bangladeshi exports and a strong rebound in domestic demand. As foreign buyers of knitwear and garments are shifting to Bangladesh, exports of these products since January surged by 25-30 percent, and the outlook is very strong. Industry insiders believe that, with congenial political environment and infrastructure support, Bangladesh's garment and knitwear sector can sustain more than 20 percent growth over the medium term. If this outlook is realised, Bangladesh may earn about $30 billion from the garment and knitwear sector alone by 2013-14, triple from the 2007-8 level of $10.5 billion.

The shoe industry can also gain hugely from the expected industrial relocation out of China in the coming years. Most of the country's 47 footwear factories are expanding rapidly to cope with the growing export demand, and a record number of reputed footwear manufacturers have signed contracts with Bangladesh Export Processing Zone Authority (BEPZA) for setting up new factories.

As 6,000 factories in Dong Guan, the largest footwear hub in China, face closure due to rising domestic labour costs and anti-dumping duties in industrial countries, many investors and buyers are sure to focus on Bangladesh. If we succeed in attracting large investors to Bangladesh, coupled with the completion of new factories and expansion of existing ones, footwear exports may replicate the explosive (often three-digit) growth rates experienced by the garment sector in the 1990s. By capitalising on this boom, Bangladesh's footwear industry can become a $5-10 billion export sector within a decade.

A number of other industrial products are also showing promising signs. Important among them are pharmaceuticals, home textiles, ship-building, light engineering, cut-flowers, processed food, and other agricultural products. Bangladesh enjoys comparative advantage in all of these labour-intensive products, which are growing at a robust pace and have the potential to become multi-billion dollar export industries over the next 5-7 years.

Diversification of our export base through a rapid expansion of these activities will be the key to sustaining the pace of export growth and making it less dependent on a few products and cyclical fluctuations in their demand and prices abroad. If properly fostered and managed, together with garments and textiles, Bangladesh's total export exports may increase to a respectable level of $40-50 billion over the medium-term, somewhat like what Vietnam has achieved over the last decade. If this target appears too ambitious, we need to recall that Bangladesh's export proceeds have increased 14-fold since they crossed $1 billion-mark in 1987-88 for the first time.

Do we see any concerted efforts to realise this ambitious but achievable target? The few important factors that would make this happen include zones for setting up large industries in clusters; uninterrupted power supply, even if it entails charging the full economic cost; and much improved transport infrastructure, including smooth customs and port facilities. The Board of Investment (BOI) or the Bangladesh Export Processing Zone Authority (BEPZA) needs to guarantee all essential facilities, including land and utilities, to local and foreign investors within days.

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In contrast, we observe that the ongoing efforts to acquire and develop land for EPZs and industrial parks are bogged down in legal proceedings, face shortages of funds, or are embroiled in disputes between conflicting pressure groups. At the same time, although we have thousands of acres of developed land occupied by closed or loss-making public sector mills in Khulna and in other parts of Bangladesh, we cannot take bold steps to transform them into modern industrial parks.

Certainly, the power sector does not provide any confidence to investors. We have suddenly discovered that Bangladesh does not have much gas, although only a few years back we were actively considering gas exports. Despite chronic electricity shortage, we can't yet formulate a comprehensive energy policy encompassing the use of proven coal reserves. The draft coal policy is still being debated after more than one and half years.

We must admit that the policy of supplying subsidised electricity, generated and distributed through government agencies, will never succeed in meeting the fast-growing demand of the economy. While our demand for electricity is projected to grow to 12-15,000 megawatts, we are struggling to maintain current production of less than 4,000 megawatts. By using captive power plants and small generators, the private sector is trying to cope with the crippling supply situation at a very high cost.

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This must change. Private entrepreneurs are willing to pay the full economic cost for power, so why have we been so hesitant in allowing the private producers to set up power plants without the government's power purchase agreements and regulated tariff? The private sector should be allowed to set up generation plants without government involvement, and generation companies should be allowed to sell to any commercial entity through distribution companies at prices that cover their cost of production and return on investment. Let the private sector take charge. If it can supply everything else for the economy, including telecommunications, it will be able to supply power as well. The public sector should help in establishing the proper regulatory environment.

When we look at transportation, we only see growing congestion and no freeway or rapid transit system. The Strategic Transportation Plan (STP) announced by the government last week is the right response, although we are very late in announcing the plan and the 20-year horizon is too far.

If properly formulated and executed with Public-Private Participation (PPP), such a plan can be implemented in half the time. We should learn from the Chinese and Middle-Eastern experience on implementing PPP-based infrastructure projects and shortening the implementation period. If executed through our Annual Development Plans, implementation of the STP will probably not be completed in 40 years.

Bangladesh will definitely achieve middle-income status. But the issue is how soon. We have to focus our attention on creating a better environment for the industrial sector. Whatever we do, the agriculture sector can't be the mainstay of our economic growth, and the policy ofdal-bhat is irrelevant for enhancing welfare for the masses.

Old policies and politics must give way to modern economic management focusing on the industrial and services sectors. Instead of micro-managing the industrial strategy and markets, the government needs to focus on the broad approach outlined above and leave the rest to the private sector.

Ahsan Mansur is a former Division Chief, IMF.

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