Include service-led growth

IN this era of globalization, when a poor harvest of corn in Mexico or wheat in Ukraine can potentially result in economic turbulence in Bangladesh, preparing a long-term plan is a very daunting task. It is always easy to plan something when things are in order and potential risks are predictable. With growing integration with the rest of the world, most of the risks that a domestic economy may face are unanticipated. This makes the implementation even harder.

Despite these predicaments, the Planning Commission of Bangladesh has prepared the Sixth Five Year Plan which became effective from 2010. This will come to an end in 2015. The world economy has experienced a number of unanticipated shocks since 2007. Bangladesh economy could not fully insulate itself from these shocks, which made the implementation of the plan as originally envisaged difficult. The mid-term review of the 6th Five Year Plan, conducted by the Planning Commission shows that the performance has been a mixed-bag, with more success than failure.  

The Commission has already started working to prepare the 7th Five Year Plan. Again, the task to draft a realistic plan, that can be implemented even withstanding the unforeseen uncertainty originated elsewhere and transmitted into our own economy, is a very difficult one. However, as a small developing economy, Bangladesh has to accept it as an exogenous factor, and should focus on internal strength to identify the sources of growth. Given the external factors, how fast Bangladesh economy can grow in the coming years depends on whether we have rightly identified the growth potentials and taken appropriate measures to realize those potentials. The road taken to foster growth would determine the future trajectory of growth.

A conventional wisdom about development, popularly known as 'iron law' says that growth and development of a country must come to a transition from agrarian production structure to manufacturing and industrialization. This view was at the core of development thinking for almost 200 years since the start of the Industrial Revolution. But there are now growing evidence that rapid growth is possible by service sector as well. While China is an example of manufacturing-led growth, India is an example of service-led growth.

From planning point of view, there are now choices to make. A country now can either take the road of only manufacturing-led growth or it can chose to complement the manufacturing-led growth with service-led growth as well. In the Sixth Five Year Plan, Bangladesh mainly took the manufacturing-led growth albeit some peripheral focus on the service sector. A number of issues have been identified for in-depth study to prepare the 7th Five Year Plan. They were shared in a recent workshop by the Planning Commission. The selected issues indicate that the 7th Five Year Plan is also likely to predominantly emphasize on the manufacturing-led growth. In that case, country's scope to grow faster by exploiting the potential of the service sector will go unutilized again.

The service sector in Bangladesh has two extreme images. Some of them are thought of as menial, unorganized and poorly paid. On the other extreme, the technology, especially information and communication technology (ICT), based services are thought of highly technical and knowledge-intensive. But somewhere in the middle of this spectrum, there is a niche where Bangladesh, even with its current level of human capital, can chip in. Once the 7th Five Year Plan decides in principle to promote service-led growth as well, this issue can be studied further. But first, Bangladesh should in principle decide not to rely only on manufacturing-led growth.

There are several reasons why the service sector will be the main driver of growth of modern world, and developing countries like Bangladesh can grow faster by being a service provider. A recent book published by the World Bank identified two reasons why services will continue to be a strong source of growth. First, services account for more than 70 per cent of global GDP, more than double in size compared to the manufacturing sector. So there is a tremendous scope for the globalization of services. Second, the cost differential in the production of services across world is enormous. In the past, the only option to narrowing such cost differentials was through migration. Now that service providers can sell services without crossing national borders with the help of technology, the scope for exploiting cost differential is much higher.

However, Bangladesh needs to know its competitive and comparative advantage within the service sector. Definitely, the country should not plan to become a giant service provider like India. There is a misconception about India's service-led growth in our country. Many people think India's service sector was well-integrated with the Silicon Valley from the very beginning. This is not correct. In the first stage, India's focus was on information technology enabled services (ITES), mainly involving outsourcing and call centers.

Even within the outsourcing, there is wide range skill-intensity, depending on whether it is customer relationship management, back office operations, revenue accounting, finance and accounting services, transcription/translation services, content development, animation and engineering services, equity research or knowledge management. Initially India started with simple and low-skill intensive outsourcing. As a global giant in ITES and ICT related other services, India is now subcontracting other service providers located in other countries like Egypt, Nigeria etc. Bangladesh, despite being its next door neighbor, failed to get any share of this.

According to recent study, one of the reasons for this is that the common perception among Indian firms about Bangladesh is ITEs sector does not really exist in Bangladesh. While the country is well-known for its RMG sector and cheap labor, the development policy is seen 'not-focused' on service sector. There is no reason to believe that the rest of the world sees Bangladesh differently. The exclusive focus on manufacturing-led growth in our five-year plans will not help to change this image. This is the main reason why the service-led growth should have more focus in the 7th Five Year Plan.  

The size of the global IT/ITES market was about 1.03 trillion US dollar in 2010, which has definitely grown bigger by now. If Bangladesh can capture just 1% of this market, it will add more than 10 billion US dollar in Bangladesh's foreign exchange reserve. Bangladesh is uniquely positioned to be able to do that with some focused initiatives. According to a recent study of KPMG, Bangladesh has one of the most attractive population demography in the world – relatively high young population base as over 34% are in age group of 15-34 years, which is favorable for IT-BPO industry. Analyst projections reveal that this number is further slated to go up. This corresponds to a young working population of over 53 million people1 – large enough to man the fledging IT/ITeS industry for years while keeping the costs low. Large number of high school dropouts or graduates can be trained easily to work in ITES sector. The issue of ITES is discussed just as an example.

There are other services as well which can contribute to the growth of the country. Another example could be the tourism sector of the country. According to media report, about 2 lakh people went abroad to celebrate last Eid. Assuming that on average each of them spent 1000 US dollar on foreign airlines and destination, the country faced an outflow of 2 billion US dollar. According to the local tour operators, such a high number of people went abroad as local tourism sector is not well developed yet to meet the domestic demand. Had half of this people celebrated their Eid in domestic tourist spots, the country could save about 1 billion US dollar with huge multiplying effect in the economy. This is another example of a service sector that can promote growth in Bangladesh.

There could be so many other examples. But to identify and develop them, first of all we have to recognize the potential and importance of service-led growth in our plan. Once we do so, then the follow-up course of action is to analyze such potential and identify the actions plan for next five years. This has not been done in the past. Hopefully, the 7th Five Year Plan will do this.         

The writer is Researcher at Bangladesh Institute of Development Studies (BIDS), former  economist, World Bank, and former faculty, Willamette University, USA. Email: cccg67@yahoo.com