Dr Nazneen Ahmed, Senior Research Fellow, Bangladesh Institute of Development Studies (BIDS) explains the implications of LDC graduation on Bangladesh economy, the challenges and the opportunities that lie ahead as the country reaches another milestone in its success story.
How will LDC graduation benefit Bangladesh from an economic perspective?
Our graduation from the list of LDC (s) is a strong indication that we have achieved a certain level of development. The identification of LDCs is currently based on three criteria: per capita gross national income (GNI), human assets and economic vulnerability to external shocks. The path towards graduation is paved by remarkable socio-economic growth over the past decade. Bangladesh would have been eligible to graduate even if we managed to improve upon two of these indices, however, our improvement in all the departments speaks volume. It is important to understand our economic growth has been robust and promises to sustain impressive growth levels in the coming years. Graduating from the list of LDCs is a lengthy process, our journey was set in motion back in 2018 and is officially set to materialise in 2026. Therefore, the sustainability of our growth process has been key to ensure eligibility for graduation.
Bangladesh is set to maintain or even outpace the rate of current growth due to LDC graduation. It will create more opportunities by attracting more FDI in the country. Also, graduation will help us to improve our credit rating leading to more access to funds for development projects. Hopefully, higher FDI and better credit ratings will lead to better employment opportunities for our growing young population. Subsequently, it will facilitate further progress of our already improving human capital. In summary, graduating from the list of LDC (s) will allow us more opportunities to improve upon the development Bangladesh has been making over the decades. However, whether we will be able to utilise them to create meaningful opportunities remains to be seen.
What steps are required to ensure a robust LDC transition for Bangladesh?
After graduating, Bangladesh will no longer be eligible to gain various special and differential treatments in international trade and various WTO (World Trade Organization) facilities. Therefore we will face some challenges in terms of customs duties on trade and cost of funds for our development projects. However, Bangladesh can better prepare for the impending hurdles by taking proactive measures. Currently, we do not have a GSP (Generalized System of Preferences) facility in the USA, yet it is the single largest export destination for the RMG sector. Conversely, we will face higher tariff rates when entering the EU market which will significantly affect the price of products in the region. Interestingly, it will also have adverse effects on the European consumers as clothes will get costlier. It is the right time for Bangladesh to negotiate with the European market and secure preferential access or a free trade agreement with the region as it can also be beneficial for their (European) consumers. Despite officially graduating from the list of LDCs in 2026, we will still be able to enjoy reduced tariff access in the market for three more years. Therefore, we almost have a decade on our hands to negotiate a free trade agreement that will help our exports to grow even faster than it has in the past. Special trade arrangements that will greatly enhance our trade capabilities are possible despite LDC graduation but, it will require the stakeholders (government, businesses, researchers) to work together towards materialising the possibilities.
At home, we have to improve our business environment and complete the large-scale infrastructural projects that would enhance our trade capabilities. Infrastructures such as seaports, connecting rounds and better port facilities would be crucial in strengthening our logistical capabilities.
Subsequently, there has been a lot of discussion about the higher rate of interest we will have to pay to international financial organisations after graduation and might impede our infrastructural development. I just want to point out that Bangladesh already pays an interest rate higher than the least developed countries after it was identified as a lower middle-income country in 2015 under the World Bank criteria. Therefore, graduating from the list of LDC(s) will not drastically increase the rate of interest we are already paying.
However, as has been mentioned above, I expect some shocks in international trade especially in the European market and that is why we need to strategize our trade policies to better prepare for the new ramifications and focus on finding new avenues to capitalise. Even if we fail to negotiate a free trade agreement, the chances of reduction of different non-tariff barriers, licence payments requirements, renewal fees through mediation remains high.
Our pharmaceutical industry is set to face some challenges due to graduation. It’s of some concern, then, it’ll no longer have access to a special World Trade Organisation (WTO) waiver which exempts the industry from the Agreement on Trade-Related Aspects of International Property Rights (TRIPS). The exemption has allowed us to pursue a dedicated industrial policy that’s spurred growth until now. On the bright side, the patents for pharmaceutical products we already have will be exempted from new policy implications. Our pharmaceutical industry is very advanced and already owns the patents for most essential drugs. Even though there are some drugs for which we have to pay higher license renewal fees, I do not see any immediate threat to the sector. We need to build API (Active Pharmaceutical Ingredient), to further strengthen the industry to reduce our patent fee payments in the long run. Bangladesh is in the process of having its API park which will help take the industry forward over the next decade. Therefore, I see a lot of challenges ahead, however; they can be efficiently handled through coordinated efforts by all the stakeholders.
When Bangladesh will no longer be a least developed country (LDC), a shirt made in a Dhaka factory would be 20-25% pricier in Montreal or Sidney than the one shipped from Vietnam. 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 to 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. As has been noted above, Bangladesh will continue to enjoy preferential access for three more years after graduation from the list of LDCs in 2026 (which was 2024 previously). Therefore, we have time till 2029 to prepare for the shift in market dynamics, which includes efforts from both the entrepreneurs and the government. Our RMG sector’s sustainability depends on how we innovate and adapt to the competitive global market demands, successfully enhance skills among the workers and improve 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 the 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 for 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.
Despite considerable economic growth, widening economic inequality is a major concern for our country. How can we address this problem more efficiently?
Our economy has been one of the fastest-growing in the world over the past decade. Amidst many positive achievements, an important area of concern for Bangladesh economy is the rise in inequality in income distribution. The growth has disproportionately benefited a small percentage of people in the country. I believe the most effective way to reduce inequality is through creating employment opportunities for the impoverished section of society. It will enable people to get out of poverty and allow them to seek better opportunities.
The necessity to have more skill-training programs remains as the poor segment of the population has varying educational qualifications. Additionally, we also need to ensure they have access to better healthcare as poor health will reduce their productivity. The strategic development of infrastructure will be the most important factor in ensuring employment for the improvised sector of the population. The proposed economic zones will create a significant amount of employment opportunities for people in different parts of the country. Therefore, better healthcare and employment opportunities will be crucial to reducing inequality in Bangladesh.
Even though the government has funded several education programs which allows young people to earn degrees free of cost, the quality of such programs have long been disputed and for good reasons. Consequently, the unemployment rate among educated youth is the highest in the country. Therefore, we need to prioritise skills training to increase the employability of our youth. Also, the university education system needs to be assessed and have changes made according to the requirement of the modern workplace. So, creating better opportunities for everyone is the most effective way to reduce inequality rather than having more social protection programs. And better education, health and training facilities will help create those opportunities.