Export Diversification in Bangladesh: Rhetoric versus Reality POLICY RESEARCH INSTITUTE Paper presented to the Third BDI Conference, University of Berkeley,

Export Diversification in Bangladesh: Rhetoric versus Reality

POLICY RESEARCH INSTITUTE

Paper presented to the Third BDI Conference, University of Berkeley, California, November 06

Dr Zaidi SattarChairman, Policy Research Institute of

Bangladesh

Topics covered by this presentation• EXPORT CONCENTRATION AND VULNERABILITY IN BANGLADESH

• CONSTRAINTS TO TRADE DIVERSIFICATION IN BANGLADESH

• TRADE POLICY AND EXPORT DIVERSIFICATION

• EXPLOITING GLOBAL VALUE CHAIN FOR EXPORT DIVERSIFICATION

• ROLE OF FOREIGN DIRECT INVESTMENT (FDI) IN EXPORT DIVERSIFICATION

• POTENTIAL FOR SERVICE EXPORTS

• POLICY AND INSTITUTIONS FOR EXPORT DIVERSIFICATION


OBJECTIVES

Objective: • To look at the major constraints to export

diversification in Bangladesh and provide some relevant policy options to address those constraints.

• The paper draws on relevant literature and for the first time provides a framework for analysis and pulls together the various concepts of diversification and the constraints to diversification.


EXPORT CONCENTRATION AND VULNERABILITY IN BANGLADESH

•Before RMG, jute and jute goods dominated the export sector making up 70 percent of exports in 1981 (Figure 1). • Bangladesh experienced vertical diversification of its exports (from primary to manufactures). By 2000, it became a unique LDC exporting predominantly manufactures (over 90%).•Bangladesh is a small open economy in international trade, a price taker in the world market, for its exports as well as imports. It faces the consequence of adverse movements in its terms of trade (TOT), stemming from exogenous price shocks in its imports or exports. Figure.1 Export Concentration Trends (FY80-FY15)


RMG growing @12% annually.Non-RMG clocking 6% annually. What does the arithmetic say?

FY80

FY82

FY84

FY86

FY88

FY90

FY92

FY94

FY96

FY98

FY00

FY02

FY04

FY06

FY08

FY10

FY12

FY14

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Jute and Jute Goods (% of total exports) RMG (% of total exports)

Manufactured Goods (% of total exports)

Export Shares (in % )

Number of Products Exported


Products exported at HS-4 and HS-6 Digit codes – All exports

FY92 FY95 FY00 FY05 FY10 FY11 FY12 FY13 FY14 FY150

200

400

600

800

1000

1200

1400

1600

1800

233

663411

1575

HS 4 digit HS 6 digit

Num

ber o

f Pro

duct

s

Source: ASYCUDA, NBR

Number of Products Exported


Figure.6 Number of Exports> US$500,000 HS-4 and HS-6


100

200

300

400

500

600

75

243145

520


Num

ber o

f Pro

duct

s

Source: ASYCUDA, NBR; BBS

Number of RMG Products Exported


Number of RMG Products Exported at HS-4 and HS-6

Number of HS 6 digit codes for RMG: Knitwear and Woven Products


50

100

150

200

250

2634

125

214

HS 4 digitHS 6 digit

Num

ber o

f Pro

duct

s



20

40

60

80

100

120

72

112

53

102

Woven Products KnitwearN

umbe

r of P

rodu

cts


EXPORT CONCENTRATION AND VULNERABILITY(?)

What is disconcerting is that when one studies export concentration trend in Bangladesh exports for the past two decades, there is no discernible improvement in the situation. There is a substantial increase in the concentration index measured by HHI (Figure 2 & 3).


FY92 FY95 FY00 FY01 FY05 FY10 FY11 FY12 FY13 FY14 FY150

200

400

600

800

1000

1200

669

1015

407

735


HHI


Fig. 2 Export Concentration Trends by HHI at HS-4 and HS-6 Digit codes – All exports


200

400

600

800

1000

1200

1400

1600

1800 1684

1465

795

1064


HHI


Fig. 3 Export Concentration Trends by HHI at HS-4 and HS-6 Digit codes – RMG exports

EXPORT CONCENTRATION AND VULNERABILITY(?)

Figure.4 Export Concentration Ratio of Top 15 Items (%) at HS-4 and HS-6



20

40

60

80

100

80.4 83.3

66.7 67.2


% S

hare


TYPOLOGY OF EXPORT DIVERSIFICATION

Product diversification. Geographical diversification. Intermediate goods

diversification Vertical diversification. Quality diversification. Goods to Services diversification.


CONSTRAINTS TO EXPORT DIVERSIFICATION IN BANGLADESH

Incentive system: Exchange rate management: RMG exports are partly

shielded from exchange rate movements because of the special import credit system (back-to-back LC) that covers import costs from export proceeds. Non-RMG exports could be hurt by appreciation of REER. ER management has to be right for them.

Trade Policy: For export diversification to happen, anti-export bias of the tariff regime must be eliminated for non-RMG exports to pick up steam.

Trade Logistics. Ports, Transport, Customs, etc.

Export competitiveness: 4 dimensions: cost, quality, time, reliability. RMG is ahead of the others in all these factors.



The Trade Environment: Globally, two commonly used indicators are the WEF’s Enabling Trade Index (ETI) and WB’s Trade Logistics Performance Index (LPI). Bangladesh does poorly on most of the indicators included in these indices, but scores especially low on transport and power which have emerged as serious constraints to manufacturing sector and its exports. UNDERMINES EXPORT COMPETITIVENESS IN GENERAL.


Rank *

Score (1-7)

BORDER ADMINISTRATION 123 3.2Efficiency and Transparency of border administration

123 3.2

INFRASTRUCTURE 119 2.8Availability and quality of transport infrastructure

120 2.3

Availability and quality of transport services

103 3.6

Availability and use of ICTs 118 2.4MARKET ACCESS 57 3.8Domestic Market Access 126 3.4Foreign Market Access 7 4.2OPERATING ENVIRONMENT 99 3.7

Physical security 90 4.9

(*) out of 138 countries

Source: Global Enabling Trade Report 2014, World Economic Forum

Country

LPI ranking(out of 139 countries)

LPI score Customs Infrastructure

International shipments

Germany 1 4.12 4.1 4.32 3.74

Singapore 5 4 4.01 4.28 3.7Malaysia 25 3.59 3.37 3.56 3.64China 28 3.53 3.21 3.67 3.5Thailand 35 3.43 3.21 3.4 3.3Vietnam 48 3.15 2.81 3.11 3.22

Indonesia 53 3.08 2.87 2.92 2.87India 54 3.08 2.72 2.88 3.2Pakistan 72 2.83 2.84 2.67 3.08

Bangladesh 108 2.56 2.09 2.11 2.82Source: Logistics Performance Index 2014, The World Bank

Table.1 The Enabling Trade Index 2014, Bangladesh Table.2 The Trade Logistics Performance Index (LPI) 2014


Ease of Doing Business . In terms of specific regulatory constraints in doing business, investors in Bangladesh face a particularly difficult challenge in getting electricity; in registering property; and in enforcing contracts. Bangladesh, however, does a good job in protecting investors.

Skills: Bangladesh is a beneficiary of the demographic dividend. But skills mismatch is serious and constraints productivity.

Lack of FDI. Poor FDI inflows are a constraint to export diversification.


Tariff Regime is unfriendly to exports

• Tariff regime is unfriendly to exports…High protection, para-tariffs, rising wedge between output-input tariffs, creates anti-export bias of incentives (explain) , particularly for non-RMG production.


Tariffs (%) FY01 FY05 FY10 FY13 FY14 FY15 FY16

Avg. CD 21.1 16.3 13.7 13.9 13.2 13.2 13.1

Avg. para-tariffs 7.1 10.2 10.2 15.1 14.9 13.7 12.7

Avg.Nominal Protection

28.2 26.5 23.9 28.9 28.1 26.7 25.8

Avg Import Taxes (All) 51.8 47.4 47.4 53.2 52.2 50.6 51.2

Top NPR* 59 60 79 117 108 108 108

(*) excludes tariffs on cars, alcoholic beverages, and cigarettes

Table.3 Tariff Structure and Trend

Source: NBR

EXPLOITING EMERGING TRADE PATTERNS FOR EXPORT DIVERSIFICATION

In last 2 decades, trade in intermediate goods formed the most dynamic sector of international trade, changing the character of export-led growth.

Made possible by fragmentation of production processes across countries (in line with their comparative advantage), with assembly operations moving to lower wage economies while higher-value added components headed to more developed economies.

Fragmentation of production processes gave rise to global value chains (GVCs) creating opportunities for intra-industry trade globally & also between economies within a region.


EXPLOITING EMERGING TRADE PATTERNS FOR EXPORT DIVERSIFICATION (CONTD)

For Bangladesh to exploit GVCs to produce parts and components of final products, FDI and joint ventures are absolutely essential:

Trade infrastructure needs upgrading: Efficient Containerization Efficient Land Ports Automation (with ICT) Export Processing Zones or Special Economic Zones

Other issues that also merit attention are: corporate tax regime with appropriate incentives, import liberalization, strong intellectual property rights, rule of law, and a developed financial system, including modernization of Foreign Exchange Regulation Act (FERA) 1947.


EXPLOITING EMERGING TRADE PATTERNS FOR EXPORT DIVERSIFICATION (CONTD)

Furthermore, in order to promote integration into GVC (and attract FDI with this objective), the following steps would be essential: Eliminating anti-export, and anti-intermediate goods bias

of the incentive regime. A liberalized investment policy regime, which offers

scope for international firms to have unlimited stake in the local firm.

Joint ventures with established actors within the GVC will allow the diffusion of technology, which ultimately boost the export potential of the local firm.

Availability of appropriately skilled labor at a competitive price, which motivates established foreign actors to participate in joint ventures with local players.


THE POTENTIAL FOR SERVICE EXPORTS

The potential for Bangladesh to penetrate the services exports market is large. With its huge and young labor force Bangladesh can be an important player in the global services exports beyond the guest worker initiative.

The potential for exports is particularly good in IT, education and tourism. This will require a special mindset for policy makers to think global rather than inward.


FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

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FY10

FY11

FY12

FY13

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FY15

0

2000

4000

6000

8000

10000

12000

14000

16000

18000 Figure.5 Trends in Remittance Inflows FY95-FY15

USD

Mill

ion

ROLE OF FOREIGN DIRECT INVESTMENT (FDI) IN EXPORT DIVERSIFICATION

The performance remained lack luster until 2004, around $400- 500 million. FDI inflows increased after this to the recent $1 billion mark, but unstable. Much of the FDIs were mainly outside the export-processing zone (EPZs ). Recent spurt in Telecom. This is in sharp contrast with the experience in China where much of the FDIs went into the free trade zones. In 2014, Vietnam was the star performer in 2014 receiving $24 billion of FDI after China’s $75 billion.

Figure. Trend of FDIs in Bangladesh 1996-2015


1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

*

0200400600800

100012001400160018002000

Total Non-EPZ EPZ

USD

Mill

ion

Source: Bangladesh Bank

POLICY AND INSTITUTIONS FOR EXPORT DIVERSIFICATION

Trade policy. Tariff structure and anti-export bias.

Efficiency of customs administration. All exports must be brought within the fold of priority clearance mechanism that is equipped with state of the art hardware and software.

Efficiency of import-export procedures. Modernization of import-export clearance by using better technology and IT softwares complements export diversification.

Transparency and efficiency of behind-the-border services. Industrial and investment policies need to be brought in line with those of trading partners and comparators for long term export sector sustainability. Furthermore, a friendly investment climate should foster FDI into GVCs linking Bangladesh with transnational companies elsewhere.


The following policy and institutional mechanisms need to be put in place if export diversification is to be attained within a reasonable period.

POLICY AND INSTITUTIONS FOR EXPORT DIVERSIFICATION

Availability and quality of transport infrastructure and services. Improving trade logistics will definitely enhance competiveness of exports. First, land and sea ports must be equipped with state of the art facilities – container depots, gantry cranes, IT-enabled port clearance services, etc. -- for rapid clearance of import-export cargo.

Availability and use of IT- Export competitiveness and diversification demands state of the art IT equipment and software at the ports but also inland for handling activities. Regulatory environment- Export success and diversification requires moving into new markets with new products and is facilitated by a friendly regulatory environment, supported by ease of doing business. Upgrading skills -Public and private sector partnership to provide specialized and on the job training can play a major role in upgrading skills.


Thank You


Documents

Export Diversification in Bangladesh: Rhetoric versus Reality POLICY RESEARCH INSTITUTE Paper presented to the Third BDI Conference, University of Berkeley,