The massive presence of readymade garments (RMG) in Bangladesh’s export portfolio is known to all – with RMG comprising 80% of the export basket. As exports are said to be a key determinant of economic growth in the country, it can be worrying to know that it has only grown by 1.7% in fiscal 2017 compared to 9.8% a year earlier. Exports in fiscal 2017 stood at $35 billion while the 7th Five Year Plan envisions it to reach $54 billion by fiscal 2020 – a formidable goal that requires exports to grow by more than 15% each year. Being reliant on the RMG sector alone to augment exports may not be the best strategy and a diversification of products in the export basket may work in the country’s favor in the future.
Readymade garments, constituting 80% of the export earnings – had a lackluster performance in fiscal 2017. There has been virtually no growth in RMG export earnings between fiscal 2016 and 2017. Moreover, export of woven garments declined by 2.3% in fiscal 2017. RMG exports to the USA has declined by more than 7 percent in FY17 as seen in figure 1. The decline can be explained by the fact that garment sector faced a 15% price cut in the last two years; moreover, many American buyers have reportedly stopped placing orders in shared buildings.
So far, relatively lower wage rates have been one of the key advantages of the RMG sector in Bangladesh; this, however, may not be a sustainable point of advantage. Any hike in wages can make the product relatively less competitive and the impact of such hikes can only be negated if there is a proportional rise in productivity. A McKinsey report shows comparative productivities across countries which depict that Bangladesh operates at a productivity rate that is 77% of China’s, whereas India and Pakistan operate at 92% and 88% of China’s productivity respectively. Standard economic theory portrays that wages should be dependent on the productivity of labor, however, in Bangladesh, increments primarily took place after pressures mounted by workers and the international community following tragic incidents like the Rana Plaza collapse.
The RMG industry’s massive influence on exports inevitably means any adverse impact on the sector would send jolts throughout the economy; Diversification of export products can greatly help to mitigate such problems and shelter the economy from any adverse scenario impacting the RMG industry while increasing total exports as well. The top constituents in total exports besides RMG in Fiscal 2017 were leather and leather products, jute, home textiles and engineering products. Although sectors such as leather and engineering products exhibited double-digit growth rates annually in the last five years, the current trade policy regime inhibits the ability of the nation-RMG sectors to thrive to its full potential. Even though the average customs duty has declined from 70.6 to 13.2 between 1992 and 2015, supplementary and regulatory duties have proliferated that provides protection to domestic import-substituting industries. This encourages producers to cater to the domestic market instead of exporting as that would require the firms to be more competitive than it is now. High border protection also makes foreign inputs more expensive. In an era of globalization characterized by cut-throat competition, expensive inputs inevitably raise the cost of production and make the product relatively uncompetitive in the world market. RMG sector has been able to overcome this problem with the help of specially bonded warehouses (SBW) which enables a firm to import inputs duty-free. Although export promotion policies should entail extending the SBW facility to all exporters, in reality, only a few enjoy it.
An efficient logistics system plays a vital role in facilitating trade in countries by reducing cost and time needed to export and import. So far, Bangladesh’s low wage in the RMG industry has been able to partly compensate for the poor logistics system; but to attain higher growth of exports, logistics system inevitably needs to improve and public-private partnerships can help immensely in this area. Improving trade logistics can enhance a country’s competitiveness by reducing lags in delivery. It can also help Bangladesh in export diversification with shorter lead times and gain better access to new emerging markets. The Logistics Performance Index in 2016 shows that Bangladesh ranked 87 out of 160 countries. Other Asian countries like China, Malaysia, India, and Vietnam have fared much better rankings than Bangladesh. Selected indicators on logistics performance are shown in table 2, where variables are scored on a scale of five. Improvement in trade logistics will not only lead to an increase in exports but also pave the way to an environment that is conducive to higher foreign and domestic investment. The ease of doing business is a crucial factor in increasing private investment. Doing Business Report 2018 shows that Bangladesh’s ranking was 177 out of 190 countries. The most binding constraints to doing business in Bangladesh are enforcing contracts, getting electricity, registering property and trading across borders.
Bangladesh aspires to reach the 8% growth trajectory by 2020 and a deeper engagement with international trade will be crucial in reaching this target. Diversification of exports is necessary to reduce risks, enhance export earnings and incomes. Improving trade logistics will help in shorter lead times and attaining new markets for exports. Enhancing the ease of doing business will create an environment that is conducive to increasing private investment.
The writer completed MSc in Economics from SOAS, University of London and can be reached at faaria.tasin@gmail.com
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