‘Switch From Replication To Innovation’

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For the next stage of growth, Professor Wahiduddin Mahmud recommends productivity increases, technological improvements and skill development

 

By Khawaza Main Uddin

 

Despite the resilience and success the economy has shown against all odds, the senior economist cautions, Bangladesh’s prospect of elevation to the middle income status may be hampered by institutional weaknesses which are now ‘reaching tipping point’.‘We shall need a more capable system of economic management that can respond to the needs of putting the economy firmly on a path of modernisation and global integration,’ he says. ‘For the next stage of growth, we need to switch from replication to innovation.’

 

In an exclusive interview with ICE Business Times on 24 April, the former finance and planning adviser to the caretaker government, said while relying on enclave-type arrangements to facilitate export growth in a specific activity, Bangladesh has virtually post posed the development of export-related infrastructure and institutional reforms for improving the investment climate.

 

Professor Wahiduddin Mahmud regretted the deterioration in the quality of education at all levels of the education system, leading to a learning crisis that may make it uncertain for the country to benefit from demographic dividend. ‘We certainly need to pay more attention to linking the education system to human capital development,’ he added.

 

Dwelling on the lack of success of the projects under public private partnership initiative, he observed that at the moment, the government does not have much capability for an analytical approach to project planning that can ensure ‘careful evaluation of economic priorities, resource availability and implementation modalities’.

 

The full text of the interview is given below:

 

Bangladesh is aspiring to achieve the status of a middle-income country through accelerated economic growth. How do you assess the prospect?

 

For more than two decades, Bangladesh has achieved steadily accelerating economic growth with increased prospect of elevation to the middle-income status. During this period, Bangladesh’s average annual growth in per capita income has been well above the average of the developing world as a whole. This success is all the more remarkable because it has been achieved against many odds: the initial low economic base, extreme land scarcity, the low rates of the government’s revenue mobilisation, a low-skilled labour force, vulnerability to natural disasters, and a record of political uncertainty and systemic governance failure. Clearly, the economy has shown its resilience and potential, but there are many challenges and risks ahead.

 

Could you elaborate further on that?

 

The economic growth in Bangladesh so far has been driven by a ‘replication’ approach in respect of the growth of an export-oriented low-productivity garments industry, export of low-skilled labour, and expansion of low-technology small and micro enterprises. For the next stage of growth, we need to switch from replication to innovation in terms of productivity increases, technological improvements and skill development. Also, these growth drivers have somehow been able to bypass or successfully negotiate with the constraints of a governance-challenged environment. But the institutional weaknesses may be reaching a tipping point. We shall need a more capable system of economic management that can respond to the needs of putting the economy firmly on a path of modernisation and global integration.

 

How do you evaluate the challenges facing Bangladeshi firms to be on that path of modernisation and global integration? And what about entrepreneurship development?

While most low-income countries depend largely on the export of primary or resource-based products, Bangladesh has made the transition from being primarily a jute-exporting country to a garment-exporting one. The transition has been dictated by the country’s resource endowment, characterised by extreme land scarcity and a very high population density, which makes economic growth dependent on the export of labor-intensive manufactures. Manufactured exports account for more than 90 per cent of the country’s export earnings – a unique feature among countries at a similar stage of development. But can a lesser-developed country like Bangladesh sustain rapid export growth by relying on manufactured exports? Having low wage costs can hardly compensate for its relative disadvantage in marketing skills and infrastructure including transport, ports, product standards, and certification facilities. Thus, Bangladesh’s export base remains narrow as the impressive success in garment export has yet to be replicated in other industries. Indeed, Bangladesh’s experience with the garment industry has demonstrated the limitation of relying on enclave-type arrangements to facilitate export growth in a specific activity, while postponing the development of export-related infrastructure and institutional reforms for improving the investment climate generally. Moreover, while a confluence of favourable factors helped the garment industry to get a foothold and flourish in Bangladesh, the managerial and work skills involved are very much industry-specific, so that the growth of the industry did not have much economy-wide positive spill-over effects in skill development.

 

Even the garments industry is also facing problems at this moment regarding labour and factory standards. What is your view on this?

 

I think the foothold of the industry in Bangladesh is strong enough to overcome setbacks. However, to remain competitive while repairing its global image, tarnished by some recent incidents, the industry will need some restructuring. The levels of efficiency and labour standards vary widely across the factories, so that there is a need to move towards a more uniform standard. The competitive edge of the industry should not continue to hinge only on the low wage rates. Experimental studies show that even simple innovations in production techniques can help to raise worker productivity substantially. However, the factory owners prefer paying for overtime work rather than investing in productivity improvements. There is a need for industry wide arrangements for training and skill development so that the cost of training need not be borne by individual factory owners.

 

Coming to skill development, you have recently spoken about a mismatch between the demand and supply of skills resulting from our prevailing education system.

 

We certainly need to pay more attention to linking the education system to human capital development. There are acute shortages of skills at all levels while at the same time we are experiencing increasing incidence of educated unemployment. The educational opportunities have expanded at the cost of quality. The quality of education has steadily deteriorated at all levels of the education system, leading to what may be called a ‘learning crisis’. This is unfortunate particularly since Bangladesh is poised to benefit from a ‘demographic dividend’ in terms of a youth bulge, so that the challenge for the education system is to leverage the advantage of a rapid growth in the labour force. This youth bulge, combined with the successful campaigns for universal primary education, is leading to huge increases in the supply of a semi-educated labour force. There is enormous potential for utilising this workforce productively by expanding appropriate training for the school leavers while creating commensurate employment opportunities. Similarly, planning for higher education needs to take into account the human capital needs of economic development. In short, education planning needs to be an integral part of the strategy for economic development.

 

Can you elaborate more on this point particularly in the light of experience of other developing countries?

 

Less developed countries with resource constraints may face a choice between emphasising universal basic education or by providing quality higher education for the most talented – the ‘universalist’ versus ‘elitist’ approach. In East Asia, the achievement of high economic growth driven by manufacturing exports and without the worsening of income distribution is attributed in part to a universal approach to education.  On the other hand, India’s ability to take advantage of the new possibilities in high-tech information services largely resulted from its long-standing investments in higher education. Our education system may have failed in both respects. We need to take advantage of whatever potential there may be for accelerating growth based on higher education, by promoting high-tech activities, especially IT-related service exports. But this should not take attention away from the fundamental objective of increasing the overall quality of the workforce through the expansion of more basic education and training. China and Vietnam, for example, expanded primary and higher education simultaneously, recognising that success required both universal literacy and a cadre of highly skilled individuals capable of absorbing advanced technology.

 

As infrastructure and energy deficiencies remain the key problems for the nation, what kind of development role of the government would you suggest in the near future? What are your recommendations for implementing big projects such as Padma Bridge, a deep seaport or power plants?

 

We undoubtedly need huge investments for infrastructure development. The challenges lie in mobilising the required resources and developing the government’s capacity to manage the implementation of such projects. There is a risk that the government goes for large ‘prestige’ projects in an ad hoc manner in order to demonstrate its developmental commitment or because there are powerful lobbies of contractors and suppliers driving the projects. Surely we need to undertake many large projects, but the decision should be based on a careful evaluation of economic priorities, resource availability and implementation modalities. This is true for projects to be implemented under public-private partnership as well. Global experience shows that successful PPP projects need careful planning based on a detailed analysis of the mode of financing, incentives against cost inflation and the mode of risk-sharing. At the moment, the government does not have much capability for such an analytical approach to project planning, which is one reason for our lack of success in PPP projects.

 

How do you look at the banking sector in the aftermath of the Hall-Mark and some other scams? What are the possible remedial measures that could save the sector and thus protect the interests of clients and businesspeople?

 

The banking sector, especially the state-owned banks, seems at the moment to be remaining virtually unguarded against various predatory elements. It should have been possible for the central bank, by careful scrutiny of records, to trace the transmission of the scam money through the banking system to see where the money has ended up. After all, the recently introduced anti-money laundering measures are intended precisely to perform such tasks. At stake is not just the recovery of money that has been plundered, but also the credibility of the banking system. The problem does not seem to lie as much in the regulatory capability of the central bank as in the government’s political resolve about whether the financial sector will be allowed to be a vehicle of patronage politics.

 

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