No economy should rely on one commodity | The Daily Star
12:00 AM, March 04, 2020 / LAST MODIFIED: 12:45 AM, March 04, 2020

No economy should rely on one commodity

Diversification of the export basket a must for Bangladesh

Bangladesh has been experiencing robust growth in global integration over recent years. The factors which have contributed to this include both domestic policy changes (in the forms of trade liberalisation, market-oriented reforms, removal of an anti-export bias and the pursuance of an export-oriented development strategy) and a demonstrated capacity to take advantage of emerging global market opportunities. As Bangladesh graduates into a developing country with one of the highest GDP growth rates in the world at 7.9 percent (2018), the real challenge for the government is to maintain growth and tackle external shocks by taking up precautionary measurements, different development strategies and policies.

The main drivers for economic growth for Bangladesh are export and remittance. Export is the lifeline of the economy as the highest contributing sector to GDP. However, our economy enjoys a concentrated export basket in comparison to other Asian markets. In recent times, roughly 84 percent of Bangladesh's total exports depend on the ready-made garments (RMG) sector. Fiscal and financial incentives and strengthening of institutional support services contributed significantly to the removal of an anti-export bias and provided a favourable environment for the growth of export-oriented industries. However, as the global market becomes increasingly competitive, searching the markets for other products should be given the highest priority.

Bangladesh faces strong competition from established producers in countries like China, Turkey, Vietnam, Myanmar and India, in addition to emerging manufacturing hubs in countries like Ethiopia and Cambodia. Diversifying exports beyond garments may be a solution to Bangladesh's employment problem. Broadening comparative advantage in the global export market has not only generated economic growth but also ensured structural transformations, as seen in many Asian developing economies like Taiwan, South Korea and China. Bangladesh, like other developing economies, has made substantial progress as an exporter, but it has yet to diversify its export basket due to limited comparative advantage. There is a huge prospect for RMG exports to increase many folds given the expected growth of global apparel demand in the future. This however, raises some potential issues about the sustainability and volatility of export growth.

No economy should rely on one commodity. To sustain economic growth within the current global landscape, we need to improve competitiveness of various other promising sectors to diversify the export basket. According to the private industry and investment adviser to the Prime Minister, Salman F Rahman, exports of non-apparel items will see an increase if the government gives the same level of attention and incentives it provides to the garment sector. But before entering a new market or a new country, or exporting new products, it is important to analyse which of the export items enjoy a comparative advantage as well as the price offered, the levels of demand and consumption, and political stability.

Export concentration is the real issue for Bangladesh. For many decades before the emergence of RMG exports, jute and jute goods dominated the export sector, making up 70 percent in 1981. According to practitioners, in order to improve economic growth, they advised the development of non-traditional exports, which became the ultimate solution of export policy.

Increasing the portfolio for both product and market diversification is crucial. Nonetheless, export diversification has proven to be a challenging task for Bangladesh. In fact, export concentration of RMG has increased even further. Bangladesh's export base is four times more concentrated in a few individual product lines than the average of a developing country. China, India, Indonesia, Malaysia, Sri Lanka, Thailand and Vietnam are Asian competitors for Bangladesh, all of whom have more expanded export structures.

Many believe that non-RMG exports cannot grow because of policy support given to this specific sector. However, a strategy of export diversification is to be complemented by a policy of maximising overall exports instead of ceasing the policy assistance provided to the RMG sector.

In an optimistic scenario, if RMG exports expand at a rate of 10 percent per annum for the next 10 years or so and the non-RMG sector also moves at the same pace, Bangladesh's total exports in 2030 will be USD 100 billion. On the other hand, if RMG export growth is going to be five percent per annum, overall export performance is going to be less impressive. Therefore, RMG will have to play a pivotal role in rapid export expansion. It is also important to identify whether promising opportunities exist for generating exports in new products within the RMG sector. Strategies need to be constructed for export expansion with diversification to alleviate the adverse consequences faced by exporters due to poor performances in institutions, poor infrastructure, lack of technological readiness, financial market developments, and so on.

If a country specialises in only one or two commodities, any external shock such as a sudden decline in either world demand or domestic supply, will have a huge effect on export revenue, and eventually on the balance of payments, which in turn could cause undesirable macroeconomic consequences. However, if the export basket contains various commodities, then the probability of suffering an adverse shock will be minimised, thus reducing the impact on export revenue and balance of payments. Export diversification will not only reduce export instability but also move the country to a higher growth trajectory.

The recent US-China trade war could have helped Bangladesh to expand its product diversification, yet we could not benefit from it due to various reasons—bulk investments on only five items, the Bangladesh taka being strong against US dollars and inefficiency in product development and marketing.

Bangladesh has grabbed a large share in RMG exports but according to experts, the government has to add more products to the country's export basket. Focusing on non-RMG sectors and expanding RMG product lines would ensure that not only export volume, but also the number of export items, increase. Although the government has been providing cash incentive for different products to encourage traders to boost the export earnings of the country, this is inadequate to support local businesses in fighting global competitors.

Industries such as pharmaceuticals, leather, ICT, petroleum bi-products and chemical products are emerging as prospective sectors and have led to a surge in exports, but on a small scale. However, further local and foreign investment can improve the situation. Other prospective sectors that the government can tap for export potential include the plastic industry, flower industry, tourism sector, cement industry, manpower industry and so on.

As a least developed country, Bangladesh enjoys duty-free access to the European Union and some other countries. However, once Bangladesh gets established as a developing nation, it will lose this preferential market access. To tackle the situation, diversification of the export basket is essential, as well as identify potential sectors for exports along with value addition to products. Enhancing efficiency, a skilled workforce and government support will ensure the sustainability of economic growth of the country, regardless of any external shocks.

 

Nabila Noshin is a student of Economics at North South University.

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