50 Years of Bangladesh: Accelerating export-led industrialisation
Bangladesh's economy has experienced significant structural transformation during the last five decades. At the time of its independence, the country used to be characterised as an agrarian rural economy. In the early 1970s, the share of agriculture in the Gross Domestic Product (GDP) was around 60 percent, and the industry and services sector had only a small share. The share of agriculture in Bangladeshi economy has now declined to 13.6 percent, while that of industry and services sectors stands at 34.6 percent and 51.8 percent, respectively. Within the industry sector, the manufacturing sector plays a dominant role with a share of 23.3 percent in the GDP. This has increased from only four percent in 1972. Along with structural change, the composition of employment generation by the sectors has also changed. Though agriculture still employs about 40 percent of the total labour force, industry has become an important source of employment generation.
The rise of the export-led industrialisation is one Bangladesh's success stories
Among the export-oriented industries, that of readymade garments (RMG) has been a forerunner which flourished in the mid-1980s thanks to enabling global and domestic policies. Since the early 2000s, a number of other potential industries were also identified by the government as thrust sectors with export potentials. These include software and information and communication technology, pharmaceuticals, leather products and footwear, and shipbuilding, among others. Export-led industries have generated employment and helped in reducing poverty. The RMG sector has also supported women's empowerment. The newly adopted Eighth Five-Year Plan of Bangladesh for the period 2021-25 has put emphasis on export-oriented industrial development.
Industrial policies have changed focus over time
However, the industrialisation process in Bangladesh has been built on a very weak ground. In the 1970s, the country followed an import-substituting industrialisation strategy. Specifically, Bangladesh followed a public sector-led industrial development plan during 1971-1975. This was largely attributed to the existence of a number of industrial units abandoned by non-Bangladeshis after independence. Small and cottage industries and foreign enterprises were kept outside the public sector. The revised industrial policy of 1975 allowed both foreign and local private investors to set up industries in collaboration with public sector corporations, so that public enterprises would keep the major share. Following a change in government in 1975, a process of de-nationalisation was implemented. The major objective of industrial policy during this period was the development of private sector-led growth. So, private investment was encouraged through liberal credit policies. The Industrial Policy of 1978 allowed the public sector to participate in joint investment with the private sector as a minority shareholder. The private sector could be bestowed with the responsibility of management of the investment in cases where the public sector corporations had the major share in such investments.
The denationalistion of industries gained further momentum in the following decades under structural adjustment policies. The New Industrial Policy 1982 and the Revised Industrial Policy of 1986, and also Industrial Policies during the trade liberalisation phase from 1991 onwards, were crafted on the philosophy of a market-based competitive economy that emphasised export- oriented growth. The role of the public sector was downsized significantly, except for keeping its existence in a limited number of restricted areas.
The industrial policies of 1999, 2005, and 2010 devised action programmes for stimulating the involvement of the private sector, both domestic and international. Privatisation of state-owned enterprises continued to be a major focus in these policies. In addition, export orientation of the industrial sector, improved competitiveness of industries, and effective utilisation of resources for industrial development were emphasised, so that the contribution of the manufacturing sector to overall GDP could be raised substantially. The Industrial Policy of 2016 had a number of specific targets. Notably, it aims to increase the share of the industry sector in GDP to 35 percent by 2021. The policy also targeted to employ 25 percent of the total labor force by 2021.
Industrial policies during the post-1990s introduced a set of action programmes to raise the productivity of the industrial sector. The list of the thrust sectors that would be promoted through policy measures and foreign investment were expanded. These sectors, in turn, were encouraged through special incentives. The agro-based and agro-processing industries, the small and medium enterprises, and cottage industries received attention. As a continuation of earlier policies, the Industrial Policy 2016 also aimed to establish import substitution industries to cater to the local demand and promote export-oriented industries.
Industrial policies have been complemented with trade policies
Successful industrialisation is not possible without an effective trade policy. Bangladesh's trade policy has dramatically changed since 1985. Several trade policy reforms were implemented which included trade, exchange rate, monetary, and fiscal policy incentives. The export promotion measures were designed to diversify the export market, improving the quality of exports, stimulating higher value-added exports, and developing industries for backward linkages in the country. Such reforms were beneficial to a number of sectors, including the RMG sector. These reforms provided exporters with unrestricted and duty-free access to imported inputs, financial incentives in the form of easy access to credit and credit subsidies, and various forms of fiscal incentives such as rebates on income taxes and concessionary duties on imported capital machinery.
Trade liberalisation since the 1980s reduced the nominal tariff rate, the import-weighted average tariff rate, the implicit nominal tariff rate, and the effective rate of protection. Non-tariff barriers such as quantitative restrictions on imports were also removed by a large extent. Both the import penetration ratio and the export orientation ratio rose significantly during this period.
21st century industrialisation needs to take emerging realities
The progress towards industrialisation has been significant in terms of its share in the GDP, export income and employment generation. However, the sector has to move to the next phase, which will be characterised by high value-added RMG and non-RMG manufacturing. In order to make this transformation happen, a number of measures have to be taken by policymakers.
First, in terms of policies, there is a need for a second-generation industrial policy which will be based on the emerging realities of the 21st century. Hence, the industrial policy should be coordinated with other relevant polices such as financial, trade, and investment policies. Since Bangladesh will graduate from the least developed country (LDC) category by 2026, these policies will need to be revisited and made more strategic and consistent with global policy regimes, particularly in the context of the World Trade Organisation (WTO).
Second, in line with the changing global demand, Bangladesh has to diversify its manufactured products. This requires large investments in the more modern sectors. Unfortunately, both domestic and foreign private investments have not seen much of a surge in the recent past despite investment-friendly policies being in place. This reiterates the fact that only policies are not enough to attract investment. The overall investment climate has to be improved. One of the important pre-conditions is the removal of the supply side's constraints, including inadequate infrastructure, and the existence of red-tape and corruption which increase the cost of doing business. In an attempt to reduce infrastructural deficiency, the government has undertaken several large projects. The Padma multipurpose bridge is one of these initiatives, which is expected to enhance the efficiency of our economy in many ways. The improvement in the power and energy sector is also noteworthy. The government's efforts towards setting up 100 Special Economic Zones (SEZs) are expected to remove investment-related shortcomings in a significant way. Speedy completion of the SEZs is what is needed now to attract foreign investment.
Third, supply of skilled and smart human resources who can do the job on the ground is urgently needed. Modern industrialisation depends on the quality of human resources. Investment comes where there is a skilled set of people. Despite having a large youth population, Bangladesh suffers from lack of qualified people for industries. As a result, private companies are increasingly relying on human resources from neighbouring countries, while there is a large number of unemployed youth in the country. Higher investment on education and capacity development is required by both the government and the private sector.
Finally, due to increasing interface with technology, the entire production and marketing environment is going through a dynamic change. Additionally, the overall supply chain has gone through a change during the ongoing COVID-19 pandemic, which may continue beyond the pandemic. These will disrupt the labour market. The need for human labour is shrinking in several jobs. Therefore, human resources have to be reskilled and upskilled so that they can benefit from large-scale industrialisation. At the same time, they should also be provided with financial, technologica,l and other related support for self-employment through investing in small-scale industrialisation. This will create new jobs and eventually help eradicate poverty.
Dr Fahmida Khatun is the Executive Director of the Centre for Policy Dialogue.