"Bangladeshi industry needs good governance, not protection"
-- Prof. Wahiduddin Mahmud at  Washington DC discussion

On November 16, during a brief visit to Washington DC, Professor Wahiduddin Mahmud, the eminent Bangladeshi economist and professor of Dhaka University, met with a small group of Bangladeshi economists to share his views on a number of critical issues related to Bangladesh’s economy. Prof. Mahmud’s teacher and the doyen of Bangladeshi economists, Prof. Nurul Islam, moderated the discussion. Most of the participants were former students of  Prof. Mahmud at Dhaka University. While Prof. Mahmud covered a wide ground in his comments, the bulk of the discussion was on Bangladesh’s industrial growth. Here is a summary of the main points made by Prof. Mahmud on this subject..

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'Popular Economics: Unpopular Essays"

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Growth has accelerated in Bangladesh in the 1990s. Much of this acceleration in growth took place in the context of rapidly declining external aid. External aid has fallen from 12% of GDP in the early 1980s to only about 2% of GDP now. There have not been any compensating private flows during this time. This enhanced growth performance occurred during a period of policy reforms. However, it does not necessarily mean that policy reforms were alone responsible for the acceleration. Some increase in total factor productivity was responsible as was some increase in the savings rate, due largely to an increase in public sector savings.

Much of the growth in large-scale industry has been driven by ready-made garments (RMG). Growth in the non-RMG large-scale industry has been slow – about 4% in the 1990s. This is less than that in the 1980s. Why is it that so few industries have managed to duplicate the performance of the RMG sector? One question worth exploring is whether the RMG sector, by absorbing the domestic savings, crowded out the other industries.
 

The RMG sector has had phenomenal growth. Growth rates of earnings, in real dollar terms, jumped from about 6% during the 1980s to 15% during the 1990s. For the first time in FY01-02, there was a 10% drop is export earnings. But, even in this bad year, the volume of exports actually went up by 10%, albeit not by enough to compensate for the 20% drop in average prices.

There are some fronts, however, where the industry has not been very successful. One such area is marketing. The industry has not yet developed good marketing skills of its own and continues to rely heavily on foreign buying houses, notably those from India and Sri Lanka. These intermediaries capture a large part of the margin. The scope for the industry to benefit from devaluations is limited in such a situation. The industry should have used the last 20 years to go deeper into the marketing channel. The fact that foreign direct investment had not been allowed in the industry is one possible reason for our failure to do so. The Bangladesh Garments Manufacturers and Exporters Association (BGMEA) is now thinking of setting up marketing centers abroad. This is an area where public-private sector collaboration may be required.
 

Prof. Nurul Islam discusses a point with
Prof. Mahmud

The only import-substituting industry that grew significantly, reflecting somewhat the East Asian pattern, is pharmaceuticals. It first grew under protection alongside imported pharmaceuticals. It then out-competed the imported products and has now started exporting. It is possible that some parts of the industry are not very efficient but are surviving due to protection while other parts are efficient and competing in world markets.

The shrimp processing industry is an interesting case. A few years ago, the industry faced serious reputational problems due to the fraudulent practices of a few producers. The malpractices of a few jeopardized the entire industry indicating that reputation is a public good. In other words, the industry as a whole needed to take remedial actions. The industry is now finally realizing this and has started taking steps at self-regulation. Having concluded that the government’s standards institute is inefficient, it has adopted measures to impose standards on their own and monitor compliance.

The capital goods industry has declined, e.g., textile machinery industry has virtually disappeared. It is important to have a capital goods industry. Adaptation of technology is important for industrial growth. For this to happen, one needs a domestic capital goods industry.

Small scale industries have done quite well in recent years and have largely benefited from liberalization. On the one hand, they are not much affected on the output side (do not compete with imports) but benefit from the liberalization of imports of inputs. They expanded at the expense of inefficient large-scale industries as well as cottage industries. Poverty reduction will require further growth in such small scale enterprises. The contribution of export industries and large-scale industries to poverty reduction will be less direct. Their main contribution will be through generating capacity to import by earning foreign exchange. This will help small-scale enterprises who need imported inputs and this, in turn, will help reduce poverty.
 

Cash subsidies are currently given to various activities, such as agro-processing, leather goods and light engineering. The practice of providing cash subsidies started with Grameen check. It was meant to compensate for duties paid on imports and amounted to 25% of total sales value, a high amount by any standard. The rationale for providing cash subsidies, especially at the current scale, is weak. Import duties have gone down due to import liberalization. If compensation is to be provided, the amount required for various products will have to be re-calculated, taking into account the changes in duty rates.

Many people fear that the RMG industry will be hard hit after 2005 when quota privileges are withdrawn. However, the fears may be exaggerated. The European market is already open and Bangladeshi exporters are doing reasonably well there. The key is to improve productivity and go deeper into the marketing chain.

Dispersed, non-farm growth in rural areas and in and around small towns is probably the way to go. There is some potential in micro-level enterprises but not much. Self-employment in low-productivity activities does not hold much promise. Wage rates will increase through small-scale activity, not much through micro-enterprises.

Industrial development will require improvements in governance. Bangladeshi industry can do quite well without much protection if there is better governance, e.g., if there is no toll collection and if utilities can be provided efficiently. A recent study has shown that the costs of giving tolls, as percentage of turnover, is greatest for small-scale industry, and lower for micro and large enterprises.

Prof. Mahmud speaking