Trade regime: Rhetoric and reality
THE trade regime of Bangladesh immediately after independence was targeted to induce import-substituting industrialisation (ISI) in the country. It reflects the Prebisch-Singer approach towards industrial development that took place in Pakistan and India.
Such trade and industrial regimes are marked by high tariffs, pervasive bans and quantitative restrictions on imports, overvalued exchange rate, and dominance of public sector in ownership and management of manufacturing units and in trade and business.
During the Pakistani period, the beneficiaries of this protectionist and inward looking policy were the large industrial houses in former West Pakistan that owned and operated many of the manufacturing units. Consumers in East Pakistan had to pay higher than world prices for domestically produced commodities. This resulted in a significant transfer of monopoly rents to West Pakistani entrepreneurs.
In continuation of that strategy, the first decade of Bangladesh saw a positive list of importable items to (a) protect the infant industries, and (b) ration use of scarce foreign exchange. Public sector participation was pervasive in manufacturing through state owned enterprises (SOE). The financial sector and investment were subject to strong regulations.
The impacts of ISI strategy became obvious with economic growth rate reeling below 4%, population growth rate outpacing food output, SOEs soaking public revenues as subsidies, a group of rich people emerging due to rent-seeking from license raj, farmers facing problems with timely delivery of inputs and regulated prices, smuggling, etc.
The economy showed no sign of coming out of that strategy. In fact, in the late 1970s, a number of influential researches by J. Bhagwati and A. Krueger revealed harmful effects of ISI in other countries also, and recommended an outward looking strategy. Sri Lanka took the lead in dismantling the barricades and opened up at the end of 1970s.
Better late than never, by 1990, Bangladeshi policy makers realised that an inward-looking ISI -- supported by interventionist domestic public policy -- deprived Bangladesh of its growth dividends. Hence, the country opted for a liberalised trade regime with tariff cuts, tariff rationalisation, exchange rate liberalisation, and drastic downsizing of quantitative restrictions.
For example, during the 1990s, Customs Duty (CD) rates came down from 160% in 1990 to 25% in 2008. The average (unweighted) CD declined to 16% in FY2008 from 57% in FY1992, and 100% in FY1985. Customs revenues grew at 15% per annum despite sharp reduction in tariffs. The elimination of bans and restrictions on imports, followed by import responsiveness, led to more imports. This also helped to bring domestic prices close to world prices.
However, the march towards liberalisation weakened as resistance from vested interest groups developed, and the pace of policy persuasion had to be slowed down. Although CD went down para-tariffs under the aegis of say development surcharges, supplementary duty, VAT etc., were invoked to compensate for the reduction of revenues through CDs.
Bangladesh economy is poised to be more open now than before as reflected by the trade-GDP ratio, which is now at 40% as against 33% few years back and 20% in the pre-liberalisation era. But the presence of para-tariffs and the absolute level of CD still make it relatively less open. Further, Bangladesh also lagged far behind competitors in terms of attracting FDI due to various constraints.
The moot question is: has trade liberalization benefited Bangladesh? Econometric exercises are necessary to establish a causal link between liberalisation and socio-economic uplift. However, in its absence, a comparison of the key socio-economic indicators between pre and post-liberalisation periods will shed some light.
It seems that trade liberalisation and the associated domestic reforms programs have benefited Bangladesh. Bangladesh's per capita GDP more than doubled since 1975, life expectancy has risen from 50 to 63 years, and population growth rate has halved.
Among the South Asian countries, only Bangladesh has had a steady increase in average annual GDP growth in each successive five-year period, from 3.7% in the latter half of the 1980s to 5.5% during 2001-2005. Till FY2009, economic growth rate averaged almost 6% per year.
Out of 100 rural households, 40-45 now have mobile phones to bring remittance boon, 8-10 have shallow pumps, and 3-5 have threshing machines. The price of STW has gone down from $730 in pre-reform period to less than $150 in the post-reform period. Access to computers and internet, food, and other technologies is growing fast, although digital divide is there. The growth of the manufacturing, especially in RMG, shows the positive side of trade liberalisation.
The impact of openness on poverty is very difficult to determine. It is because the poor are not a homogeneous group. We can hypothesise that economic integration of Bangladesh with the world had differential impacts.
For example, the extreme poor group, roughly 18% of rural households, is not affected by globalisation. Their main problems are access to food and clothes, a hut to live in, and some non-traded goods and services, which can be supplied by the state. Even then, the share of this group has declined from about 34% in the pre-liberalisation period.
Other poor people work for the RMG and processed food sectors. Obviously, the more open the economy, the better they are. That is possibly why we have been lobbying for years for developed countries to give access to our exports. We also demand such access to the latest technology and employment opportunities available in other countries. This implies that access to foreign markets is pro-poor at times. In this case, more, not less, liberalisation or integration is desirable.
The last category of the poor becomes a victim of import liberalisation, in consequence of which there is de-industrialisation. Netting out the "sun rise" and "sun set," we can argue that trade liberalisation might increase poverty level. To arrest that, we need protection to some selected thrust sectors, rising beyond political or vested wisdom, and working on purely economic consideration. (For example, we can protect our dairy and agro- processing activities, displaying high value addition and pro-poor nature by shutting the door to foreign products).
We also need to improve the technology, human capital stock, infrastructural facilities and management efficiency of the industrial units threatened by imports. Besides, imports of capital machinery and raw materials should be allowed either duty free or with least duty. We need also to remember that trade liberalisation per se does very little to the desired outcomes. It needs complementary reforms on the domestic front as well.
What is the use of duty free raw materials if the boiler cools off due to erratic energy supply? What is utility of export incentives if shipment is delayed due to adverse factors? What is value of political commitment to the prevailing energy crisis if, say, decisions are left pending for years?
Openness for Bangladesh is also desirable on another count, and we have occasionally referred to that in this column. It is for Foreign Direct Investment (FDI). Bangladesh could easily seize upon the opportunities lost by its trading competitors on account of rising wages in labour-intensive manufacturing.
Bangladesh could also turn out to be a Switzerland of Asia permitting, neighbours to transport goods and services through our ports in exchange for fees. All these development needs political commitment, economic appraisal and judicious but quick decisions. The world market willprovide us with earnings that we can spend in expanding our own domestic market.
We cannot be silent observers when openness could help labour-intensive manufacturing and technologically developed service sector activities to flourish . Openness could help generate employment for the vast pool of unemployed and disguised unemployed persons. We are for more economic integration without adhering to the free trade principles.