Dr. Sadiq Ahmed, Vice Chairman of Policy Research Institute, illuminates the kind of institute policy and institutional reforms that will help diversify Bangladesh’s export base and boost the rate of growth of exports.
With a long-standing career in policy analysis, and negotiation and mobilizing international financing for development support, can you tell us briefly, how has your expanding wealth of knowledge and experience shaped the last 11-years of PRI?
The idea of establishing the Policy Research Institute of Bangladesh (PRI) originated in Washington DC back in 2006. My friend, colleague and fellow founding Director of PRI, Dr. Ahsan Mansur, and I discussed this venture while thinking about our future endeavors. I was then the Director of Economic Management for the South Asia Region at the World Bank in Washington DC. Dr Mansur was Division Chief of the Middle East Department for the IMF. We both felt that we have had a long career with the two respective Bretton Woods Institutions and it was time to go back to Bangladesh to pay our debts to the nation. Subsequently, we also roped in Dr. Zaidi Sattar, our third founding Director of the PRI.
The PRI was established in 2009 and over the 12 years since we started, I believe, we have come a long way. The PRI is now a leading policy-based think tank in Bangladesh and many staff have contributed to this growth including the three founding directors. Right from the start, we made PRI’s core mission to provide non-partisan, unbiased policy analysis of development issues facing Bangladesh. We are committed to providing evidence-based policy analysis using the best-possible analytical tools, cross-country knowledge and evidence using Bangladesh and international data.
My experience of 30 years with the World Bank that involved interactions with senior policy makers in a diverse group of countries including Bosnia-Herzegovina, Thailand, Egypt, Indonesia, Papua New Guinea, Afghanistan, Bhutan, Bangladesh, India, Nepal, Pakistan and Sri Lanka, combined with policy-based research on wide-ranging subjects prepared me well to make effective contributions to the PRI agenda. Over the past 11 years I have contributed substantially to policy analysis and policy dialogue in national planning, national strategies relating to economic growth, employment, trade, macroeconomic management, tax reforms, infrastructure development, poverty analysis, social protection, human development and climate change.
The PRI website contains a sample of my work that shows this diversity. My contributions to national strategies like the Perspective Plans of Bangladesh, the 5-year plans, the Delta Plan, the National Social Security and the LDC Graduation stands out in particular. These are areas where the PRI worked closely with the General Economics Division (GED) of the Planning Commission.
How have you managed to translate your learning to inform policy discourse in the context of Bangladesh?
Absolutely. Much of the work that I was involved with was demand-driven, meaning these were done mostly at the request of the government of Bangladesh. Where a PRI project that I worked on was funded by donor agencies, this usually involved a government sponsoring ministry as the counterpart. In a few cases I did research that was in the nature of public goods aimed at creating wider public ownership. But the target audience was public policy making. Actual adoption and implementation of a policy reform of course involves political economy considerations and government ownership. Outside agencies including national research institutions like the PRI cannot take control or responsibility for this. But we have sought to facilitate policy making by providing evidence-based policy analysis, bringing the best available global experiences to the door-steps of the policy makers, and informing the public policy debate through workshops, seminars, op-eds and TV talk shows. I have never been involved in any public dissemination event that was not backed by proper research and analysis. As a development economist I have taken care to avoid all kinds of populist statements that may appear appealing to the media but not grounded in proper analysis and evidence. I feel that I have a moral responsibility to guide the people to constructive debate and discussion by bringing out open policy issues supported by proper analysis and data.
Despite making an EPZ in 1996, Bangladesh is yet to make a final agreement with YoungOne. Can you briefly explain the gaps in our policy when it comes to governance that could be causing a hindrance?
On Friday September 17, I made a public webinar on my latest research dealing with Vietnam’s superb export performance. Vietnam and Bangladesh both started with some $5 billion of exports in 1995. In 2019, Vietnam’s export earnings reached $280 billion while Bangladesh earned only $40 billion. What explains this huge gap in export performance? My research paper has a more detailed analysis that I will be happy to share with your readers upon request, but a major determinant of Vietnam’s outstanding export performance was the substantive role of Foreign Direct Investment (FDI). Vietnam courted FDI with all kinds of supporting policies and never allowed investment disputes to cloud Vietnam’s FDI commitment. Today Vietnam attracts about $16 billion of FDI, mostly targeted to the export enterprises in both manufacturing and agriculture. Bangladesh is still struggling with $2-3 billion FDI inflows. The research paper has detailed analysis of the underlying reasons for Vietnam’s success and by implication brings out the missed opportunities in Bangladesh. Importantly, Vietnam’s experience shows that the government commitment to support FDI must be unwavering and not subject to conflicting policy or implementation signals. All commitments must be honored unless there is clear evidence of wrong-doing. Conflict with foreign investors must be avoided unless it becomes inevitable and if so, these must be resolved amicably with proper negotiation and sensitivity. The solution must be fair and transparent. Conflict resolution is an art and not a science and the end-result must be kept in mind. FDI is sensitive to political signals and that must be preserved on the right side of FDI encouragement.
Bangladesh needs to learn from the experiences of high-performing export countries like Vietnam, China and Korea and institute policy and institutional reforms that will help diversify its export base and boost the rate of growth of exports.
Bangladesh is receiving duty free export facilities from various countries, even Europe, however Vietnam has a leg up over Bangladesh without this – in your opinion what do you think are the reasons behind this phenomenon?
As I mentioned above, my research paper answers this question in great detail with proper analysis and facts. The main point relevant to your question is that a successful export strategy depends upon simultaneous adoption of a whole host of policy reforms that affect both the demand side of exports and the supply side of exports. Getting duty free access to international markets is a great positive development that affects the demand side of the export strategy. But there are a whole host of policies that affect the supply side of the export strategy. These include sound macroeconomic management that keeps domestic inflation and interest rates low; proper exchange rate management that preserves the incentives for exports and avoids a sharp appreciation of the real effective exchange rate (REER); trade policy that lowers the anti-export bias by reducing protection for inefficient production aimed at the domestic market; attractiveness of the investment climate that allows low-cost way to establish and run a business including all clearances, land procurement, utility connections, tax payments, etc; trade facilitation and trade logistics reforms that lower transport cost and enhances the efficiency of international trading in terms of both rapid turn-around times and financially low cost for port clearances; adoption of modern technology; and supply of skilled workers. Vietnam has a huge edge over Bangladesh in all these areas that explains why trade concessions by destination country alone is not enough. Global competitiveness of the exporting country matters more, which is an area where Bangladesh has a large performance gap with competitors.
What is Bangladesh’s existing policy on boosting exports and attracting foreign direct investments (FDI)? How can they be improved to promote export diversification? How can strong, forward looking and effective economic diplomacy for attracting more foreign investments be established?
Bangladesh has travelled a long way in strengthening export performance that has substantially benefited the country in terms of GDP growth, private investment growth, employment and poverty reduction. Several policies contributed to this including sound macroeconomic management, reform of the exchange rate, trade and investment deregulation and special support policies for readymade garments (RMG). In recent years, two major concerns have emerged in the export area that need to be addressed comprehensively: First, the growth of exports has slowed considerably. This is not just a COVID-19 problem. The slowdown was visible before the onset of COVID-19. Second, Bangladesh has not been able to diversify its export base and reliance on RMG has further increased. While RMG has played a major development role that must be recognized and applauded, there is also a need to boost other export products. As illustrated by the experience of Vietnam, diversification of both the export products and destination of exports is a critical determinant of export dynamism. Bangladesh needs to learn from the experiences of high-performing export countries like Vietnam, China and Korea and institute policy and institutional reforms that will help diversify its export base and boost the rate of growth of exports.
Research shows that the past progress with export policies has stalled. As a result, exports in Bangladesh now face major constraints including a sharply appreciating REER, a heavy anti-export bias of trade policy reflected in large trade protection accorded to domestic producers, weak investment climate reflected in high cost of doing business that militates against FDI, high-cost trade logistics, inadequate technology and shortage of skills. These tend to raise the cost of production and lower the international competitiveness of Bangladeshi exports. These factors tend to divert investment to high-cost domestic production where the market is protected through tariff barriers. The RMG industry is able to export because they are provided many incentives in a near-enclave export environment. Reforming these policies will help attract more FDI, diversify the export base and boost the growth of exports.
Economic diplomacy really involves doing the right policies, actively promoting trade agreements, and participating pragmatically in the global value chain (GVC). Vietnam has important lessons for Bangladesh in all these areas. Actions are more important than talk. Just seeking to promote Bangladesh through foreign visits and talk shows without doing the proper policy reforms is a very risky strategy and could easily backfire. Promises made and not kept in terms of reforms will defeat the value of economic diplomacy and hurt the image of Bangladesh and must be avoided at all cost. However, proper dissemination of policy reforms to the external world is important. So, economic diplomacy must be based on proper analysis of the true socio-economic environment of Bangladesh based on facts and figures, and not just intentions and promises.
What are the challenges in Bangladesh’s trade logistics that lowers the ease of doing business and exports?
Global research shows that export competitiveness is intimately affected by the cost and efficiency of trade logistics. For example, the high cost of transport can often outweigh the advantage provided by access to markets with low tariffs. Similarly, the efficiency of port clearances and timely delivery of imported inputs and exports can substantially impact the competitiveness of exports. The World Bank’s International Logistic Performance Index (LPI) tracks the progress with trade logistics by ranking countries against the LPI. The LPI is a composite index calculated on the basis of six indicators: the efficiency of customs services; the efficiency and quality of transport infrastructure; the ease of arranging competitively priced shipments; the competence and quality of logistic services (trucking, forwarding, customs brokerage); the ease of tracking shipments; and the timeliness of shipment deliveries.
Despite past progress, latest available LPI data for 2018 ranks Bangladesh at a low score of 100 out of 160 countries. The Bangladesh LPI ranking is lagging in all important areas of trade logistics including transport and customs clearances. The reform agenda for improvement in trade logistics is comprehensive and requires progress in all 6 areas covered by the LPI index. Special attention needs to be given to lowering the transport cost from factory gate to port, and to sharply reduce the transaction cost associated with customs clearances. Speeding up factory gates to port transport connectivity, and finding technology solutions and governance improvements to speeding up customs clearances can play a major role in improving trade logistic performance and increasing exports.