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Industrialising Bangladesh- Are we going the right way?
By-Momtaz Uddin Ahmed
The Financial Express, 31 December 2012
The need to industrialise Bangladesh at a rapid pace is undeniable. The urgency is greater in
Bangladesh than elsewhere for at least two reasons. First is the compulsion to achieve GDP
growth at an accelerated pace, in the range of 7.0-8.0 per cent per annum, during the Sixth Fiveyear Plan (SFyP) period and beyond on a sustained basis to be able to achieve the much
proclaimed Middle Income Status (MIC) by 2021. Second, to reach middle income threshold by
2021 industrial expansion at a high rate (at a projected average annual growth rate of 10 per cent
during SFyP and reaching 11 per cent in 2021) must be ensured for a sufficiently long time to
achieve structural transformation of the economy from an agrarian to a manufacturing base.
While a broad industrial sector has to account for a larger share (30-35 per cent) of GDP
compensating for the gradual decline in the share of the agricultural sector, this dynamism of the
industrial sector has to be driven by a burgeoning manufacturing sector. The modern
manufacturing sector must grow at double digits on a sustained basis over a long time as
experienced by the countries of East and Southeast Asia during 1970s and 1980s.
In the Bangladesh context, the strategy for achieving the high GDP growth target, based on
continued industrial deepening, has to be supported simultaneously by a highly productive
agricultural sector as well as a dynamic non-crop sector to diversify the economy rapidly.
Against this backdrop, let us now look at the ground reality relating to industrialization efforts in
Bangladesh and the results obtained so far.
Current state of the industrial sector: Policies and impacts
Accelerated rate of industrial growth premised on a dynamic and globally competitive
manufacturing sector has been an avowed objective of the development strategies pursued by
successive governments ever since post-liberation periods. Indeed, an avalanche of
industrialization policies (i.e. as many as eight) is seen to have been designed and implemented
in quick interludes in between 1972 and 2010. However, the impact of such policies on
industrial growth has been only modest. The average annual compound rate of growth of the
manufacturing sector has varied between slightly above 6 to 8 per cent over the last two decades
reaching double digit figures of 10.77 per cent and 10.24 per cent for only two years during
2005/2006 and 2006/2007, but plummeted again to 8.40 per cent in 2008/2009.
As expected, there has been a moderate shift in the structure of the economy from an agrarian
base to a more organized manufacturing base. While this indicates a slow industrial deepening,
the record appears to be dismal when compared with the performance of some of the East and
Southeast Asian economies in this regard which came to be recognized as emulative models of
successful industrialization and super exporters. For example, compared to Bangladesh's share
of manufacturing in GDP rising from 12 per cent in 1990 to 17.8 per cent in 2010 (and 18.2 per
cent in 2011/2012), Vietnam increased its share of manufacturing in GDP from 12.3 per cent in
1990 to 21 per cent in 2008 and Malaysia from 24 per cent to 28 per cent during the same
period. Over the same period, China's share of manufacturing in GDP has been steady at 32-38
per cent and Thailand's manufacturing sector also recorded notable growth in manufacturing
since 1990s with its share in GDP rising from 27 per cent to 35 per cent. In all these countries,
the basic tenet of industrialization has been private sector driven growth powered by trade
liberalization policies and continued inflow of foreign direct investment. The economies of all
the above countries including South Korea, Singapore, Taiwan and Hong Kong had dynamic
manufacturing sectors displaying three common characteristics: (i) high-growth manufacturing
sector growing at double digits, (ii) high share of the manufacturing sector in GDP, typically
being in the range of 30% and above, and (iii) simultaneous rapid growth of manufactured
exports and the manufacturing industries sectors.
As noted before, Bangladesh is yet to achieve the transition to a modern and vibrant
manufacturing and services oriented economy. Not only that Bangladesh has still a narrow
industrial base, the development of the sector is also dependent on the value added contributions
of a few industries (i.e. over 50 per cent by wearing apparels and food manufacturing and more
than 70 per cent by five manufacturing industries) indicating lack of diversification and
concentration in limited activities. Other than wearing apparels and manufacturing of textiles
most industries so far recorded lacklustre performance in terms of growth in output as well as
employment. The readymade garments (RMG), the national flagship industry of the country is
the only industry which has emerged as the dynamic export-oriented industry registering robust
growth and export performance over the last two decades and reaching a share of 79 per cent of
Bangladesh's total export earnings. This export concentration in a single product group exposes
the export sector to great vulnerability which makes creation of a diversified export basket an
immediate priority. Other than RMGs, a few industries such as jute goods, leather goods, frozen
foods, engineering products, shipbuilding and pharmaceuticals are currently exhibiting notable
export potentials which are important for driving the manufacturing sector towards higher
growth. The Government is aware of this and extending export incentives of various types
selectively (i.e. shipbuilding, leather goods, agro-processing products) to exports that show high
potential.
The majority of the manufacturing industries (except the export-oriented ones) of Bangladesh
produce primarily basic consumer goods and cater to the domestic market. Due to lack of
adequate investment, infrastructural bottlenecks, policy induced constraints (discriminatory
incentives structure and resulting anti-export bias etc), lack of skills and improved technology,
inadequate access to craft, and an overall weak investment climate added with insignificant
inflow of foreign direct investment, the manufacturing sector as a whole has not yet been able to
unleash its true growth potentials. The Government in it's SFyP strategies, Industrial Policy 2010
and recent trade policies sets detailed strategic support programmes including various stimulus
and incentive packages to address the impacts of global economic crisis facing the industrial
sector and boost up sustained growth of the export-oriented as well domestic import substituting
industries. However, some changes and revisions are warranted in the design and
implementation of policies and strategies directed towards paving the way for emergence of a
vibrant and competitive world class manufacturing industries sector as a prerequisite for
attaining the status of MIC by Bangladesh.
Some new directions
* An effective industrial policy making process requires strategic collaboration between the
public and the private sectors to identify and determine the industrial activities in which the
country has comparative advantage. While the entrepreneurs may not have all information (due
to lack of comprehensive industrial data base) about where the comparative advantage lies, the
Government also does not have enough knowledge to "pick the winners" through policy
interventions. This dictates the need for existence of an appropriate institutional infrastructure
developed on the basis of the following principles:
(a) Targeting activities rather than sectors while designing public support packages. In this
process, the emphasis should be on providing promotional incentives to the new activities (i.e.
softwares), backed by strategic enterprise planning process.
(b) Activities receiving concessional facilities and subsidies must have potentials for providing
spillovers and positive demonstration effects so that a virtuous cycle sets in to stimulate growth
of other activities.
(c) Promotion of activities should be an on-going process allowing renewal and revisions
through a cycle of discovery.
(d) Coordination and deliberation council should be set up to review progress and introduce
policy revisions needed to fast track the industrial growth process.
(e) Implementation of policy must be closely monitored through agencies having highest
authority, accompanied the transparency and accountability. These agencies should have
channels of effective communications with the private sectors to obtain necessary feedbacks
from both sides.
* It is crucially important that the manufacturing industries must undergo modern technological
transformations and shift their outputs to more technology and scale-intensive activities. This
underlined the enviable success of the Asian countries such as South Korea, Malaysia,
Singapore, and Taiwan in their structural transformation process. The upward shift in the more
sophisticated manufactured products (i.e. from wearing apparels and leather products to plastics
and rubber products, iron and steel and non-mineral products, and finally to electrical and
nonelectrical machineries, industrial chemicals, and precision instruments etc) led to higher
productivity and faster growth enlarging and strengthening the role of industries as engines of
economic growth.
* The transition to the regime of high technology and high scale economies has to be
accompanied by the availability of labour with high skills, flexible labour markets, labour laws
and labour contacts, increased flows of FDI and overall high absorption capacity of the domestic
economy.
* Some of the nagging problems peculiar to Bangladesh such as infrastructure deficits, high cost
and deficiency of industrial financing, sticky legal and over-bureaucratic regulatory framework,
quick succession of industrial policies without proper pacing and sequencing which create
instability and uncertaining among the private investors, and dearth of adequate and reliable
industrial statistics must be resolved in no time.
* While the above bottlenecks tend to slow down our progress in industrialization, keep our
industries operating much behind the technological and productivity frontier and limited to lowproductivity regime, the "coordination failure" leading to inability of the Governments and other
agencies prohibit harmonizing decisions and other necessary actions (i.e. technological up
gradation, inter-sectoral linkages, bureaucratic efficiencies etc.) required to achieve faster
economic growth and greater public welfare.
* Last but not the least, our divisive and confrontational politics, currently dampening
investment climate, and rampant corruption at every nook and corner of the society etc. which
badly damage the country's image are keeping the potential foreign investors at bay when huge
FDI flows are urgently required to meet the estimated investment requirements of $25 to 30
billion by 2021 to achieve the much desired GDP growth of 8.0 per cent per annum over a long
time. But we must think and try hard to lift our face up realizing the danger that like in the 1990s
we may again fail to attract FDI in large amount which moved to Vietnam bypassing
Bangladesh. This apprehension should add to our worries with Bangladesh being ranked 182
among 185 countries by the IFC report titled "Doing Business", a standing that reflects the level
of difficulties potential investors face in the country.
Dr. Momtaz Uddin Ahmed is professor of Economics at Dhaka University. He can be reached
at: [email protected]