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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]