POLICY RESEARCH INSTITUTE Export Diversification in Bangladesh Rhetoric

POLICY RESEARCH INSTITUTE Export Diversification in Bangladesh: Rhetoric versus Reality Paper presented to the Third BDI Conference, University of Berkeley, California, November 06 Dr Zaidi Sattar Chairman, Policy Research Institute of Bangladesh

POLICY RESEARCH INSTITUTE Topics covered by this presentation • EXPORT CONCENTRATION AND VULNERABILITY IN BANGLADESH • CONSTRAINTS TO TRADE DIVERSIFICATION IN BANGLADESH • TRADE POLICY AND EXPORT DIVERSIFICATION • EXPLOITING GLOBAL VALUE CHAIN FOR EXPORT DIVERSIFICATION • ROLE OF FOREIGN DIRECT INVESTMENT (FDI) IN EXPORT DIVERSIFICATION • POTENTIAL FOR SERVICE EXPORTS • POLICY AND INSTITUTIONS FOR EXPORT DIVERSIFICATION

POLICY RESEARCH INSTITUTE OBJECTIVES Objective: • To look at the major constraints to export diversification in Bangladesh and provide some relevant policy options to address those constraints. • The paper draws on relevant literature and for the first time provides a framework for analysis and pulls together the various concepts of diversification and the constraints to diversification.

POLICY RESEARCH INSTITUTE EXPORT CONCENTRATION AND VULNERABILITY IN BANGLADESH • Before RMG, jute and jute goods dominated the export sector making up 70 percent of exports in 1981 (Figure 1). • Bangladesh experienced vertical diversification of its exports (from primary to manufactures). By 2000, it became a unique LDC exporting predominantly manufactures (over 90%). • Bangladesh is a small open economy in international trade, a price taker in the world market, for its exports as well as imports. It faces the consequence of adverse movements in its terms of trade (TOT), stemming from exogenous price shocks in its imports or exports. Figure. 1 Export Concentration Trends (FY 80 -FY 15) Export Shares (in % ) 120. 0 100. 0 80. 0 60. 0 40. 0 20. 0 FY 80 FY 85 FY 90 FY 95 FY 00 Jute and Jute Goods (% of total exports) RMG (% of total exports) Manufactured Goods (% of total exports) FY 05 FY 10 FY 15 RMG growing @12% annually. Non-RMG clocking 6% annually. What does the arithmetic say?

POLICY RESEARCH INSTITUTE Number of Products Exported Products exported at HS-4 and HS-6 Digit codes – All exports 1800 1575 1600 Number of Products 1400 1200 1000 663 800 600 400 200 411 233 0 FY 92 Source: ASYCUDA, NBR FY 95 FY 00 FY 05 HS 4 digit FY 10 FY 11 FY 12 HS 6 digit FY 13 FY 14 FY 15

POLICY RESEARCH INSTITUTE Number of Products Exported Figure. 6 Number of Exports> US$500, 000 HS-4 and HS-6 600 520 Number of Products 500 400 300 243 145 100 75 0 FY 92 FY 95 FY 00 FY 05 HS 4 digit Source: ASYCUDA, NBR; BBS FY 10 FY 11 FY 12 HS 6 digit FY 13 FY 14 FY 15

POLICY RESEARCH INSTITUTE Number of RMG Products Exported Number of RMG Products Exported at HS-4 and HS-6 120 214 200 100 50 125 34 26 Number of Products 250 150 Number of HS 6 digit codes for RMG: Knitwear and Woven Products 112 100 80 60 72 53 40 20 0 FY 92 FY 95 FY 00 FY 05 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 Source: ASYCUDA, NBR HS 4 digit HS 6 digit Woven Products Source: ASYCUDA, NBR Knitwear

POLICY RESEARCH INSTITUTE EXPORT CONCENTRATION AND VULNERABILITY(? ) Ø What is disconcerting is that when one studies export concentration trend in Bangladesh exports for the past two decades, there is no discernible improvement in the situation. There is a substantial increase in the concentration index measured by HHI (Figure 2 & 3). Fig. 2 Export Concentration Trends by HHI at HS-4 and HS-6 Digit codes – All exports 1200 1800 1015 1000 1684 1465 1400 1200 735 669 600 400 1600 HHI 800 Fig. 3 Export Concentration Trends by HHI at HS-4 and HS-6 Digit codes – RMG exports 1064 1000 800 795 600 407 400 200 0 FY 92 FY 95 FY 00 FY 05 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 0 FY 92 FY 95 FY 00 FY 01 FY 05 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 Source: ASYCUDA, NBR HS 4 digit HS 6 digit HS 4 digit Source: ASYCUDA, NBR HS 6 digit

POLICY RESEARCH INSTITUTE EXPORT CONCENTRATION AND VULNERABILITY(? ) Ø Figure. 4 Export Concentration Ratio of Top 15 Items (%) at HS-4 and HS-6 100 % Share 80 60 83. 3 80. 4 66. 7 67. 2 40 20 0 FY 92 FY 95 FY 00 Source: ASYCUDA, NBR FY 05 FY 10 HS 4 digit FY 11 FY 12 HS 6 digit FY 13 FY 14 FY 15

POLICY RESEARCH INSTITUTE TYPOLOGY OF EXPORT DIVERSIFICATION Ø Product diversification. Ø Geographical diversification. Ø Intermediate goods diversification Ø Vertical diversification. Ø Quality diversification. Ø Goods to Services diversification.

POLICY RESEARCH INSTITUTE CONSTRAINTS TO EXPORT DIVERSIFICATION IN BANGLADESH Incentive system: § Exchange rate management: RMG exports are partly shielded from exchange rate movements because of the special import credit system (back-to-back LC) that covers import costs from export proceeds. Non-RMG exports could be hurt by appreciation of REER. ER management has to be right for them. § Trade Policy: For export diversification to happen, antiexport bias of the tariff regime must be eliminated for non-RMG exports to pick up steam. § Trade Logistics. Ports, Transport, Customs, etc. Export competitiveness: 4 dimensions: cost, quality, time, reliability. RMG is ahead of the others in all these factors.

POLICY RESEARCH INSTITUTE CONSTRAINTS TO EXPORT DIVERSIFICATION IN BANGLADESH The Trade Environment: Globally, two commonly used indicators are the WEF’s Enabling Trade Index (ETI) and WB’s Trade Logistics Performance Index (LPI). Bangladesh does poorly on most of the indicators included in these indices, but scores especially low on transport and power which have emerged as serious constraints to manufacturing sector and its exports. UNDERMINES EXPORT COMPETITIVENESS IN GENERAL. Table. 1 The Enabling Trade Index 2014, Bangladesh Rank * 123 BORDER ADMINISTRATION Efficiency and Transparency of border administration INFRASTRUCTURE 119 Availability and quality of transport 120 infrastructure Availability and quality of transport 103 services Availability and use of ICTs 118 MARKET ACCESS 57 Domestic Market Access 126 Foreign Market Access 7 OPERATING ENVIRONMENT 99 Physical security 90 (*) out of 138 countries Source: Global Enabling Trade Report 2014, World Economic Forum Score (17) 3. 2 2. 8 2. 3 3. 6 2. 4 3. 8 3. 4 4. 2 3. 7 4. 9 Table. 2 The Trade Logistics Performance Index (LPI) 2014 Country LPI ranking (out of 139 countries) LPI score Customs Infrastructure International shipments Germany 1 4. 12 4. 1 4. 32 3. 74 Singapore Malaysia China Thailand Vietnam 5 25 28 35 48 4 3. 59 3. 53 3. 43 3. 15 4. 01 3. 37 3. 21 2. 81 4. 28 3. 56 3. 67 3. 4 3. 11 3. 7 3. 64 3. 5 3. 3 3. 22 Indonesia India Pakistan 53 54 72 3. 08 2. 83 2. 87 2. 72 2. 84 2. 92 2. 88 2. 67 2. 87 3. 2 3. 08 Bangladesh 108 2. 56 2. 09 2. 11 Source: Logistics Performance Index 2014, The World Bank 2. 82

POLICY RESEARCH INSTITUTE CONSTRAINTS TO EXPORT DIVERSIFICATION IN BANGLADESH § Ease of Doing Business. In terms of specific regulatory constraints in doing business, investors in Bangladesh face a particularly difficult challenge in getting electricity; in registering property; and in enforcing contracts. Bangladesh, however, does a good job in protecting investors. § Skills: Bangladesh is a beneficiary of the demographic dividend. But skills mismatch is serious and constraints productivity. § Lack of FDI. Poor FDI inflows are a constraint to export diversification.

POLICY RESEARCH INSTITUTE Tariff Regime is unfriendly to exports • Tariff regime is unfriendly to exports…High protection, para-tariffs, rising wedge between output-input tariffs, creates anti-export bias of incentives (explain) , particularly for non-RMG production. Table. 3 Tariff Structure and Trend Tariffs (%) FY 01 FY 05 FY 10 FY 13 FY 14 FY 15 FY 16 Avg. CD 21. 1 16. 3 13. 7 13. 9 13. 2 13. 1 Avg. para-tariffs 7. 1 10. 2 15. 1 14. 9 13. 7 12. 7 Avg. Nominal Protection Avg Import Taxes (All) 28. 2 26. 5 23. 9 28. 1 26. 7 25. 8 51. 8 47. 4 53. 2 52. 2 50. 6 51. 2 59 60 79 117 108 108 Top NPR* (*) excludes tariffs on cars, alcoholic beverages, and cigarettes Source: NBR

POLICY RESEARCH INSTITUTE EXPLOITING EMERGING TRADE PATTERNS FOR EXPORT DIVERSIFICATION Ø In last 2 decades, trade in intermediate goods formed the most dynamic sector of international trade, changing the character of export-led growth. Ø Made possible by fragmentation of production processes across countries (in line with their comparative advantage), with assembly operations moving to lower wage economies while higher-value added components headed to more developed economies. Ø Fragmentation of production processes gave rise to global value chains (GVCs) creating opportunities for intra-industry trade globally & also between economies within a region.

POLICY RESEARCH INSTITUTE EXPLOITING EMERGING TRADE PATTERNS FOR EXPORT DIVERSIFICATION (CONTD) Ø For Bangladesh to exploit GVCs to produce parts and components of final products, FDI and joint ventures are absolutely essential: Ø Trade infrastructure needs upgrading: Ø Efficient Containerization Ø Efficient Land Ports Ø Automation (with ICT) Ø Export Processing Zones or Special Economic Zones Ø Other issues that also merit attention are: corporate tax regime with appropriate incentives, import liberalization, strong intellectual property rights, rule of law, and a developed financial system, including modernization of Foreign Exchange Regulation Act (FERA) 1947.

POLICY RESEARCH INSTITUTE EXPLOITING EMERGING TRADE PATTERNS FOR EXPORT DIVERSIFICATION (CONTD) Ø Furthermore, in order to promote integration into GVC (and attract FDI with this objective), the following steps would be essential: Ø Eliminating anti-export, and anti-intermediate goods bias of the incentive regime. Ø A liberalized investment policy regime, which offers scope for international firms to have unlimited stake in the local firm. Ø Joint ventures with established actors within the GVC will allow the diffusion of technology, which ultimately boost the export potential of the local firm. Ø Availability of appropriately skilled labor at a competitive price, which motivates established foreign actors to participate in joint ventures with local players.

POLICY RESEARCH INSTITUTE THE POTENTIAL FOR SERVICE EXPORTS Ø The potential for Bangladesh to penetrate the services exports market is large. With its huge and young labor force Bangladesh can be an important player in the global services exports beyond the guest worker initiative. Ø The potential for exports is particularly good in IT, education and tourism. This will require a special mindset for policy makers to think global rather than inward. Figure. 5 Trends in Remittance Inflows FY 95 -FY 15 18000 16000 12000 10000 8000 6000 4000 2000 FY 15 FY 14 FY 13 FY 12 FY 11 FY 10 FY 09 FY 08 FY 07 FY 06 FY 05 FY 04 FY 03 FY 02 FY 01 FY 00 FY 99 FY 98 FY 97 FY 96 0 FY 95 USD Million 14000

POLICY RESEARCH INSTITUTE ROLE OF FOREIGN DIRECT INVESTMENT (FDI) IN EXPORT DIVERSIFICATION Source: Bangladesh Bank 2015* 2014 2013 2012 2011 2010 2009 2008 EPZ 2007 2006 2005 Non-EPZ 2003 2002 2001 2000 1999 1998 1997 Total 2004 2000 1800 1600 1400 1200 1000 800 600 400 200 0 1996 USD Million The performance remained lack luster until 2004, around $400 - 500 million. FDI inflows increased after this to the recent $1 billion mark, but unstable. Much of the FDIs were mainly outside the export-processing zone (EPZs ). Recent spurt in Telecom. This is in sharp contrast with the experience in China where much of the FDIs went into the free trade zones. In 2014, Vietnam was the star performer in 2014 receiving $24 billion of FDI after China’s $75 billion. Figure. Trend of FDIs in Bangladesh 1996 -2015

POLICY RESEARCH INSTITUTE POLICY AND INSTITUTIONS FOR EXPORT DIVERSIFICATION The following policy and institutional mechanisms need to be put in place if export diversification is to be attained within a reasonable period. Trade policy. Tariff structure and anti-export bias. Efficiency of customs administration. All exports must be brought within the fold of priority clearance mechanism that is equipped with state of the art hardware and software. Efficiency of import-export procedures. Modernization of import-export clearance by using better technology and IT softwares complements export diversification. Transparency and efficiency of behind-the-border services. Industrial and investment policies need to be brought in line with those of trading partners and comparators for long term export sector sustainability. Furthermore, a friendly investment climate should foster FDI into GVCs linking Bangladesh with transnational companies elsewhere.

POLICY RESEARCH INSTITUTE POLICY AND INSTITUTIONS FOR EXPORT DIVERSIFICATION Availability and quality of transport infrastructure and services. Improving trade logistics will definitely enhance competiveness of exports. First, land sea ports must be equipped with state of the art facilities – container depots, gantry cranes, IT-enabled port clearance services, etc. -- for rapid clearance of import-export cargo. Availability and use of IT- Export competitiveness and diversification demands state of the art IT equipment and software at the ports but also inland for handling activities. Regulatory environment- Export success and diversification requires moving into new markets with new products and is facilitated by a friendly regulatory environment, supported by ease of doing business. Upgrading skills -Public and private sector partnership to provide specialized and on the job training can play a major role in upgrading skills.

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