Identifying the Fault Lines

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In a conversation, Dr Nazneen Ahmed, Senior Research Fellow, Bangladesh Institute of Development Studies (BIDS) explicates the benefits of strengthening social infrastructure, the importance of LDC graduation and the challenges women entrepreneurs face in Bangladesh.

 

According to a recent ILO study, the minimum wage in Bangladesh is the lowest in the Asia Pacific and is below the international poverty line. What factors are responsible for the continued exploitation of our low skilled workforce? How can the situation be improved?

Bangladesh has experienced robust growth over the last decade leading to a significant increase in National Income and Per Capita Income. Unfortunately, the development has not been inclusive for all the economic segments leading to a rise in income inequality. Concurrently, our economy has failed to produce adequate employment for the growing young population. The official unemployment rate of 4% fails to depict the actual state of employment due to definitional error.
The enormous pressure on the job market has allowed employers to set employment terms in most cases. According to the ILO report, the monthly minimum wage level in Bangladesh was $48 or around Tk4,070 in 2019. It is well below the minimum living wage necessary for a person to survive. We have implemented a minimum wage of Tk8000 in the RMG industry and a few other export-oriented sectors but replicating it for the informal sector will be extremely challenging. We should approach this holistically and ensure that minimum wage is raised across the industries while preserving economic sustainability.

We have to consider the betterment of the society in aggregate. The government should focus on strengthening our necessary infrastructures like housing, healthcare, education and transportation, ensuring a better living standard despite living on a low wage. Raising the wage rate will not significantly change if they are forced to spend the money in healthcare and housing. Therefore, infrastructural development and expansion of social safety nets are imperative if we want to improve the livelihood of our workers.

Bangladesh is likely to lose US$7.0 billion worth of export earnings annually after graduation to a developing nation status in 2024, as per government report. What measures do you think are necessary to ensure robust exports growth over the next decade?

When we are assessing the LDC graduation, we have to consider all the implications in aggregate. There is a possibility of incurring some losses in export earnings due to preference erosion in the European Market. As an LDC nation, we currently have some preferential access into the European market under a system called “Everything But Arms” (EBA). The EBA allows any LDC nation tariff-free access into their market under some conditions. The EU is the biggest market for our RMG industry with total exports amounting to 57% of the aggregate. Despite the fears, I believe we can avoid any loss due to graduation by keeping our competitiveness. We should focus on innovation and improving our business environment to ensure our products remain competitive despite any tariff boundaries post-graduation.

It is imperative to strengthen our weak logistical infrastructure to ensure efficient connectivity with the global supply chain. The utility, communication and logistical constraints need to be assessed and improved accordingly. Bangladesh is set to graduate from the list of LDC in 2024; we will continue to enjoy preferential access for three more years after graduation. Therefore, we have more than seven years to prepare for the shift in market dynamics. Our RMG sector’s sustainability depends on how we innovate and adapt to the competitive global market demands and improve the workplace compliance further.. Concurrently, we also have to work towards diversifying our export basket. It includes capacity building in electronics, plastic, toy-making, ceramics and pharmaceuticals sectors. Our policies including corporate tax system should go in line with our aim of export diversification.

Interestingly, after graduating from the list of LDCs, multinational pharmaceutical companies (MNCs) will be entitled to manufacture drugs in Bangladesh. It will have new implications on our domestic market, which is 98% self-sufficient. To comply with the WTO rules, we will need to change several provisions of the National Drugs (control) Ordinance of 1982. We have to carefully devise our policies to cope with the new possible flow of foreign investment in the pharmaceutical sector. Most importantly, the effects of graduation should not exclusively be looked at from the export perspective. Bangladesh should use its improved position in the world economy to attract more foreign investment. Graduation will allow Bangladeshi industrialists to acquire loans from global financial institutions at greater ease because of higher credit ratings. Therefore, in aggregate, I expect that LDC graduation will be a positive development for our economy despite the inconveniences.

Bangladesh has signed its first PTA with Bhutan to allow preferential access to certain products to respective nations. How would you evaluate the agreement considering our economic and trade aspirations?

It is a welcome move that was long overdue. It will help to strengthen our trade liberalization process that was undertaken long ago. During my involvement with the ministry of commerce back in 2003-4, initiatives were taken to sign PTAs with countries like Srilanka and Turkey, but they were not materialized. The latest PTA is a good start and will provide great insights for future trade agreements. For a long time, Bangladesh has been involved in trade liberalization and relation process under the World Trade Organisation (WTO), however, our objectives and goals are not in good shape due to numerous factors. Consequently, we are experiencing some sluggishness in the multilateral trading arrangement under the WTO. Therefore, PTA(s) are great alternatives to expand our global trade relations.

China and 14 other Asia-Pacific countries have recently signed the world’s largest trade agreement, the Regional Comprehensive Economic Partnership or RCEP. How will Bangladesh’s export to RCEP countries in the future?

The Regional Comprehensive Economic Partnership (RCEP) is now the largest trading bloc globally, covering a market of 2.2 billion people and $26.2 trillion of global output. That accounts for about 30% of the population worldwide, as well as the global economy.

The Bangladesh economy is not any immediate danger from the agreement as trade to these countries is about 10 percent of total exports. However, the protagonist of the agreement is one of our most important regional and strategic partners. Many fear that RCREP will leave Bangladesh out of favour with China but recent developments with the country suggest otherwise.
China has allowed preferential access to numerous Bangladeshi products. According to the announcement, 97% of Bangladeshi products will join this zero-tariff club, raising the number of Bangladeshi products with zero duty access to the Chinese market to 8256. China is also one of the largest stakeholders of our ongoing mega projects. Being a part of the Belt and Road Initiative (BRI), the Sino-Bangladesh relationship has been elevated to “strategic partnership”.

Therefore, our economic relations with China is now more vital than ever and is set to grow in the coming decade. There are no apparent ramifications of the RCREP on our trade with China. However, we have to further assess its implications and evaluate whether there can be any trade diversification due to the agreement. Subsequently, we might also lose some opportunities due to other countries in the RCEP. Despite minor implications of the agreement, I believe, there is merit in focusing on our ongoing projects and agreements with China and solidifying the win-win partnership.

The MSME enterprises are crucial for women entrepreneurs in our country; however, they receive less than 4% of the loan disbursed to the sector. Why are banks reluctant to provide loans to women entrepreneurs? What can be done to eliminate the obstacles that women entrepreneurs face?

There is often some wrong perception about women entrepreneurs among banks that operate under the assumption that they (women entrepreneurs) will not be able run business properly and hence they will be unable to make loan repayments in due time. One of the main reasons behind this misconception is ignorance; women entrepreneurs in the country have grown in numbers over the last two decades. Only 36% per cent working age women are in the labour force and among them only around 12 percent have emerged as entrepreneurs.

According to the latest economic census, only 7 per cent economic enterprises are owned by women. An overwhelming number of enterprises owned by women actually fall under the MSME category. It has become another obstacle in funding women entrepreneurs. Traditionally, banks have not been keen on funding MSME citing small loans are not cost-effective. They continuously lean towards big enterprises to provide large amounts of money.

Consequently, women entrepreneurs who mostly own small businesses are left without formal credit facilities. Also, banks are less confident about the competency of women entrepreneurs. Bangladesh Bank has incentivized funding female borrowers under its “Re-financing Scheme” designed to aid small and medium entrepreneurs. It allows commercial banks to repay stimulus funds at a preferential rate provided that they have advanced 15% of the credit to female borrowers. The incentive has worked in encouraging the commercial banks in providing loans to female entrepreneurs. However, banks have struggled to find enough eligible female borrowers to disburse the stimulus money.

On the other hand, women entrepreneurs must also work on capacity building and core competencies. Besides establishing the business, they need to understand business planning, taxation and financial proceedings. Organizations like the SME Foundation, Bangladesh Small and Cottage Industries Corporation (BSCIC), National Association of Small Cottage Industries of Bangladesh (NASCIB) and Bangladesh Investment Development Authority (BIDA) arrange more training programs for budding female entrepreneurs of the country. These programmes should focus on proposal writing, taxation and other necessary procedures to formalize a business under the appropriate legal framework. Moreover it is important to provide necessary information to the entrepreneurs regarding market opportunities nationally and internationally.

Bangladesh Bank has directed the commercial banks to open dedicated SME desks to incentivize funding, but the directive has been poorly executed by the banks. Finally, the government should work with various women organizations to formulate policies that incentivize women entrepreneurship; concurrently, female entrepreneurs should work professionally to win the stakeholders’ confidence.

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