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Is Bangladesh Dreaming Too Big?

The country next aims to achieve an upper-middle-income status by 2021 for which favorable economic conditions are much needed. The conditions may require the country to have an annual GDP rate of about 7.5% to 8% and entail overcoming significant obstacles to seize new opportunities brought by the changing global circumstances.
However, the current scenario of the RMG export at its lowest growth of 0.20% in last 15 years depicts an entirely different story. The Export Promotion Bureau shows the total exports in the 12 months (ended June 30, 2017) to be $34.8 billion, or 5.85% below the target of $37 billion. The annual percentage gain was also the smallest since FY 2001-02 year when exports reduced as a result of the global economic downturn. This is a matter of concern as Bangladesh’s export mostly depends on the RMG sector.
It is worth mentioning here that our government has set overall export target at $41 billion, with a growth target of 7.87%, riding on apparel products, for the FY2017-18. The government wants to earn $30.16 billion from the RMG sector with an 8.12% growth. A very significant question that arises at the moment is that whether the goals set have a proper analysis behind them or not. Also, addressing the root of our export growth failure is very necessary before such targets are set.
With USA being the number one destination for the RMG sector, Bangladesh’s export to the USA has declined drastically over the past few years.
The RMG leaders state that factors such as compliance, investment, strong currency, and lower global demand are behind such export rate failures and strongly propose government’s devaluation of the currency, more incentives, and reduction of the source at tax which is currently 0.7% while corporate tax is 15%.
However, how realistic is it for the government to do so?
Bangladesh is heavily dependent on imports, so devaluating the currency will have a catastrophic impact on the economy. 93% of our required cotton is imported whereas all types of machinery, chemicals, and yarn are imported. The knit has a strong backward linkage; however, the woven sector does not. The sector is solely dependent on the import of fabrics which makes the demands of the RMG leaders quite irrelevant.

Source: EPB

As international trade is a competitive market where many different factors come into play, the government cannot solely focus on the RMG sector. The buyers are always on the lookout for attractive opportunities to do business. Thus, the country requires new ways to attract them to stop exports from declining gradually. The industry essentially needs to shift its focus towards differentiation as providing the very basics will not do much to attract new opportunities. Including higher value-added products to the portfolio such as lingerie, sportswear, jackets, business suits, fashionable tops, etc. along with the basic T-shirts, shirts, and pants might result in a significant growth in exports.
According to a 2017 Fashion Industry Benchmarking Study by the United States Fashion Industry Association, Bangladesh was termed as the riskiest destination even though it offers the best competitive price. The report further explains the factors that have the most significant impact on US companies’ sourcing decisions, such as:

• The speed of outsourcing: It isn’t much surprising, that the United States, Mexico and members of the Dominican Republic of Central America Free Trade Agreement (CAFTA-DR), have been outperforming other Asian suppliers because of their geographic location. The respondents of the study mention that shorter lead time while sourcing from China and Vietnam was behind this success.
• The cost of outsourcing: The responses followed by members of the African Growth and Opportunity Act (AGOA) and several other Asian suppliers, state that Bangladesh offers the most competitive price in comparison, to that of the United States, Mexico, and CAFTA-DR.
Should Bangladesh follow Vietnam?
Recently a number of claims have been made that Vietnam offers more incentives to its RMG Sector in different forms such as the no tax policy for businesses during the first five years and 10% tax imposed for the next nine years. However, such benefits are only enjoyed by investors from abroad, and not by the local manufacturers. Here’s how Vietnam doesn’t qualify as a typical example in the context of Bangladesh.

1. The applicable Corporate Income Tax (CIT) in Vietnam is 25%. However, a preferential tax treatment of 10% and 20%, including tax exemption, tax reduction, and preferential tax rates is available for investments in encouraged sectors such as health, education, high-tech, infrastructure development, and software. Encouraged economic zones or areas with difficult socio-economic conditions also made it to the list. As a part of the same policy, investments attract a corporate income tax exemption for the first four years of operations. Moreover, the income tax in Vietnam is charged at 50% of the preferential rate for the nine subsequent years, and at the preferential rate for two consecutive years whereas the corporate income tax rate remains at 25% throughout. Also, as a part of the same tax regime, losses are allowed to be carried forward for five years.
(http://www.vietnamdpep.com/about-vietnam-whyinvest.asp?lk=vaitnam3)
2. Vietnam fixed its export target at $188 billion followed by a highly diversified export basket, whereas, Bangladesh is only aiming for $50 billion.
3. Foreign Direct Investment (FDI) dominates most of the Vietnam’s RMG sector, where FDI driven firms account for 60% of Vietnam’s total garment and textile export revenue. According to the Vietnam Textile and Apparel Association, there are 3,000 garment and textile firms in the country, 25% of which are FDI funded. Whereas as a matter of fact, Bangladesh has just approved of FDI in its RMG sector outside the Economic Processing Zone (EPZ) area.
4. The Vietnam Textile and Apparel Association (VITAS) is making full-fledged efforts to coerce the government into enabling more foreign direct investment in the textile sector with a view of revising the development plan for the year 2020. They have also charted out a futuristic vision document for the progress of the sector by 2030.
5. Despite being a developing country member of WTO, the Vietnamese government is prohibited from providing any subsidies or incentives, neither directly or indirectly to the textile and garment manufacturers. Similarly, no special low-cost financing scheme is available for the garments and textile industries.

PRODUCTIVITY
Across the region, productivity gaps remain considerable, reflecting the low-value nature of the industry (figure above). In Bangladesh, garment sector productivity is defined as the gross value added to current prices per employed person which were less than $1,000. In Cambodia, India, Pakistan, and Vietnam, productivity levels in garments, textiles, and footwear ranging from $1,700 to $2,300. In contrast, Thailand’s labor productivity exceeded $8,000 and was more than $4,000 in Indonesia and the Philippines. Therefore, Bangladesh has the lowest productivity in this region comparatively. (Source: ILO report)

FIGURE 6. LABOUR PRODUCTIVITY IN SELECTED INDUSTRIES (CURRENT $), LATEST AVAILABLE YEAR

Source: Estimates based on official data from national accounts and national labour force surveys (various years); World Bank, op. cit.

Note: Labour Productivity is defined as gross value added in current prices per employed person, with official nominal exchange rates applied; ‘p’ = projections; GTF = garments, textiles and footwear.

SKILL DEVELOPMENT
As per a report called “Lack of expertise in Bangladesh’s laborer market” by Bangladesh Institute of Development Studies (BIDS) only 8% of RMG workers are trained while the rest of the 92% remain unskilled. The report also stated that the RMG sector is short of 119,479 skilled workers, 48,130 semi-skilled and 8,577 unskilled laborers.
With very few institutions for skill development and no long-term plans for building more the country still remains devoid of skilled human resources in spite of being, in the RMG business for 30 years. Furthermore, no steps have been taken in this regard by the private sector. Thus, the government shouldn’t be held solely responsible for this.

LONG TERM VS. SHORT TERM STRATEGY

Bangladesh never played the long term strategy goal and is good at defensive strategy. As export to Europe is doing good, we should really concentrate on EU market. This means organizing trade delegation to Europe, attending all exhibitions held in Europe would be of commendable significance. Just like many other RMG experts, I also think it is high time to host a sustainability or Made in Bangladesh conference either in China or Europe. We should definitely focus on China as Chinese companies are relocating. Chinese companies are used to working in environments similar to our country so they are more suited to set up factories in Bangladesh. Finance Asia (Haymarket) has a done a good job for the last five years organizing “Investment Bangladesh” events in Singapore and Hong Kong. Professional organizations should be hired to promote Bangladesh. We have proven that we are not good at marketing and branding so let the professionals do it and get rid of that problem.

RATIONALITY OF THE AIMED TARGET
In the end, alongside the general blame being placed on strong currency, investment in the safety of factories and Accord Alliance, the rationality of Bangladesh’s aim remains questionable. Having the lowest wage rate in Asia, lowest productivity among the competitors, low percentage of skilled workers, and the worst safety records make the country more prone to criticism for setting such high targets.

Sources:
* www.vietnamdpep.com/about-vietnam-whyinvest.asp?lk=vaitnam3
* www.textileexcellence.com/news/details/1736/sun-shines-on-vietnam%27s-textile-and-garment-industry- despite-rece…
* www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/documents/publication/wcms_534289.pdf
* www.ids.trade/files/actif_report_on_vietnam_textile_and_garment_industry.pdf

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