Bangladesh Faces the Challenge of Globalization

DHAKA: Bangladesh faces the challenge of achieving accelerated economic growth and alleviating the massive poverty that afflicts nearly two-fifths of its 135 million people. To meet this challenge, market-oriented liberalizing policy reforms were initiated in the mid-1980s and were pursued much more vigorously in the 1990s. These reforms were particularly aimed at moving towards an open economic regime and integrating with the global economy.

During the 1990s, notable progress was made in economic performance. Along with maintaining economic stabilization with a significantly reduced and declining dependence on foreign aid, the economy appeared to begin a transition from stabilization to growth. The average annual growth in per capita income had steadily accelerated from about 1.6 per cent per annum in the first half of the 1980s to 3.6 percent by the latter half of the 1990s. This improved performance owed itself both to a slowdown in population growth and a sustained increase in the rate of GDP growth, which averaged 5.2 percent annually during the second half of the 1990s. During this time, progress in the human development indicators was even more impressive. Bangladesh was in fact among the top performing countries in the 1990s, when measured by its improvement in the Human Development Index (HDI) as estimated by the United Nations Development Project (UNDP). In terms of the increase in the value of HDI between 1990 and 2001, Bangladesh is surpassed only by China and Cape Verde.

While most low-income countries depend largely on the export of primary commodities, Bangladesh has made the transition from being primarily a jute-exporting country to a garment-exporting one. This transition has been dictated by the country's resource endowment, characterized by extreme land scarcity and a very high population density, making economic growth dependent on the export of labor-intensive manufactures.

Although Bangladesh still does not rank among the most globally integrated developing economies, the pace of integration has been quite rapid. Until hit by the global recession in 2001, there had been robust and sustained growth of export earnings, averaging about 15 percent per year in the 1990s. As a result, the ratio of export earnings to GDP had nearly doubled to about 14 percent by the end of the decade. In 2001-02, however, export earnings declined in US dollar terms for the first time in nearly 15 years. Although there was a recovery in the following year, the medium term outlook indicates that it will be difficult to regain the export momentum of the 1990s.

A greater integration with the global economy seems to fit well with the kind of pro-poor growth envisaged by Bangladesh's development efforts. The export-oriented garment industry presently employs around 1.8 million workers - mostly women from low-income, rural backgrounds. The second dominant export-oriented activity, shrimp farming, is also very labor intensive, presently employing nearly half a million rural poor. More generally, import liberalization is likely to have contributed to the creation of productive employment for the poor through the strengthening of many small-scale and informal sector activities that have benefited from improved access to imported inputs.

The relatively strong growth of the Bangladeshi economy in the 1990s was underpinned by the even stronger export growth. Unfortunately, the removal of the Multi-Fiber Arrangements (MFA) quotas now threatens to increase competition in the global garment industry and thus limit Bangladesh's growth. The strength of the industry depends on the export quotas dictated by the MFA and preferential access in the major Western markets. Moreover, other export industries are unlikely to take its place if the garment industry shrinks; excluding the garment industry, the growth of the large-scale manufacturing industries was a meager 4 percent annually in the 1990s. That may partly reflect the overall poor investment climate, but also partly the effect of increased competition from imports on industries catering to the domestic market. In such a situation, the desirability of further import liberalization may be put to question. Since the country depends heavily on imported raw materials, machinery and components, cutting back on imports would hurt prospects for creating jobs by adversely affecting production and investment activities.

It is not easy for a Least Developed Country (LDC) like Bangladesh to specialize in manufactured exports. Having low wage costs can hardly compensate for its lack of marketing skills and infrastructure and poor overall investment climate. Moreover, the high degree of dependence of domestic industries on imported raw materials and industrial inputs makes it difficult for Bangladesh to satisfy the so-called "rules of origin" in getting preferential access for its exports in the markets of the developed countries. Thus, most of Bangladesh's garment exports are not eligible for the tariff concessions given under the Generalized System of Preferences (GSP) in the EU market. This problem has not received adequate attention, since the other major players in textile trade among developing countries are hardly affected by it.

Bangladesh can hopefully benefit from the European Union's decision to allow duty-free import of "everything but arms" from the LDCs, and it would like to see the replication of such trade concessions in other industrialized countries. Unfortunately, the same rules of origin as under GSP apply here as well. The GSP rules were devised decades ago to help developing countries promote export-oriented industrialization. But, in effect, the rules proved discriminatory against LDCs like Bangladesh that count on low value-addition processing activities. On top of these rules, Bangladesh also has to worry about non-tariff barriers such as those relating to environmental or labor standards. Anti-dumping actions are already under way against exports from Bangladesh, and they are an important latent threat when the MFA is dismantled. The tough sanitary and phytosanitary regulations of the developed countries are also an impediment for diversifying into agro-processed export items for Bangladesh and other countries that lack product standards and certification facilities.

Another issue of great importance to Bangladesh is that the free movement of temporary workers across borders be expanded, for workers' remittances play an important role in its economy. Indeed, a redeeming feature in the face of the export slowdown in Bangladesh is the continued increase in the inflow of migrant workers' remittances, which grew from about 2.5 percent of GDP in the beginning of the 1990s to above 5 percent in 2001-02 (amounting to about US$2.5 billion). Migrant workers are mostly unskilled or semi-skilled, and most of them come from poor rural families, making their remitted savings an important means for their families to escape poverty. There is, however, considerable uncertainty about the continuation of these remittance inflows, which depend on the economic fortunes of the host countries and their changing policies and attitudes towards guest workers. Most of Bangladesh's temporary migrant workers are in the Middle East, but increasingly they are going to more diverse destinations in East Asia and Europe, though often illegally.

In the wake of the 2001 global recession, Bangladesh's reliance on foreign countries as a market for exports and as a source of remittances has become obvious. If Bangladesh is to become less vulnerable to the economic fortunes of others, it will need to strengthen its domestic economy, creating jobs and markets at home. A strong domestic sector and an improved overall investment environment will provide a more stable source of income - like what the garment industry has provided so far - and will rekindle and sustain Bangladesh's economic growth.