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Next export diversification frontier for Bangladesh

Since its independence, Bangladesh’s economy has been experiencing a largely concentrated export basket firstly by the Jute sector and then by Readymade Garment. It has always been a concern for the policy ecosystem to diversify the export base as a diversified economy performs better than concentrated one through overcoming export instability and negative impact of terms of trade.[1]

Bangladesh high value-added RMG export
Figure 1: High value-added readymade garment and garment accessories will be the future export frontier.

The export basket can be diversified through product diversification, geographic diversification, bringing more value addition in existing products, vertically expanding from primary products to manufacturing, diversifying from goods to service and producing more intermediate goods as a backward linkage.[2]

In Bangladesh, policy narratives are rolling around two types of diversification efforts, product diversification and geographic diversification which are also given policy supports. Product diversification has been one of the major agenda of export policies but couldn’t produce the expected results.

In export policy 2018-21, 13 sectors were chosen as high priority sectors which are believed to be next growth drivers if adequate facilities are provided.

High value-added readymade garment and garment accessories, software and IT enabled services, pharmaceutical products, leather and footwear, jute products and agro & agro-processed products, etc. are some of the high priority sectors which are given a number of policy support to exploit their potentials.[3]

Bangladesh promising exporting sectors
Figure 2: Promising exporting sectors of Bangladesh.

Secondly, the government encouraged geographic diversification through policy incentives.

For example, cash incentives are given to the export to the non-traditional market beyond Europe and America[4] which constitutes 73% of total export.[5]

Though not expected level Bangladesh has seen modest progress in geographic diversification which helped gradually reducing vulnerability to cyclical shocks from the economic crisis of OECD countries.[6]

Now with these two frontiers, the 3rd frontier of diversification- quality diversification which commonly used as value addition is becoming a key concern for exporters remaining competitive in the international market.

Bangladesh Jute products export
Figure 3: Jute made high-end products can uplift the export.

Changing consumer behavior, increased awareness regarding sustainability are driving the companies across the world to go for the next level of manufacturing featured by increased investment in R&D and cost–efficiency to play in this frontier.

Generally, two instruments that contribute to raising value addition in product export are- increasing the use of local materials to export products and producing high-value products for selected markets.[7]

To remain competitive in the international market Bangladesh has to play in the quality diversification frontier strengthening the backward linkage, increasing investment in R&D, creating human resources with new skills and establishing institutions for testing quality standards.

Though the export of RMG sector increased by 7.66 percent per annum in the last 5 fiscal years, export declined by 7.74 percent in the first 5 months of current fiscal years. Reduced price and less order from buyers due to unsold stocks are causing the decline.

In the global market, Bangladesh has been branded as the source of low-cost basic products. Though a number of companies are exporting higher value-added products diversifying in quality, fashion, the fabric it hasn’t been an industry level practice yet as it needs more investment and upskilling of the human resource.

According to Bangladesh Bank, in FY2018-19, value addition in the RMG sector increased to 64.32 percent from 60.94 percent in FY2017-18. Backward linkage of the RMG industry is strengthened due to the expansion of the textile industry but limited with the overdependence on imported cotton with little attention to other raw materials like man-made fibers.

Bangladesh IT software export
Figure 4: software and lT enabled services saw an immense boom in recent years.

In the leather sector, Bangladesh is going for more value-added products slowly as featured by decreasing the export of basic leather and increasing export of leather footwear.

Bangladesh has a significant opportunity for value addition through increasing the use of local raw materials utilizing its abundance. However, due to lack of compliance infrastructure like Central Effluent Treatment Plant (CETP) environmentally compliant processing of leather has been a concern.

Local exporting manufacturers import leather for making exportable footwear following buyer’s pressure on responsible sourcing. In addition, Bangladesh is falling behind the competitors in complying with new fashion trends like athleisure featured by knitted footwear as it requires new skills and continuous product reengineering.

In the agro-processing sector, value addition is very high as the raw materials are locally sourced. Despite having huge potentials, Bangladesh can’t play well in the international market due to the lack of laboratory facilities for testing quality standards and food processing skills.

Exporters need to test and collect certification from other countries which causes more cost and time affecting competitiveness.[8]

In backward linkage of the agro-processing sector, for ensuring quality raw materials, bringing farmers under quality network in these pesticides and chemical fertilizer prone agriculture is also very challenging.

Bangladesh leather products export
Figure 5: Bangladesh leather sector need to manufacture value-added products to attract foreign buyers more.

In Jute sector, though there is a drive for diversification, traditional raw jute and jute bags and sacks constitute the major share of the jute export. Due to concerns for climate change, demand for diversified eco-friendly products made of natural fibers like jute and Kenaf increased globally.

Bangladesh’s government has taken the initiative of R&D to manufacturing eco-friendly jute poly bags which is waiting for commercialization.

Other diversified jute products are being manufactured and exported mostly through SMEs. The jute goods manufacturers and exporters are facing constraints in designing new products as there are no institutions or design centers which offer education or training on product design. Lack of market knowledge is also causing them to limit their diversification efforts.[9]

For producing more value-added products, companies across the world are increasingly investing in R&D. Governments are providing incentives for companies through tax holiday in R&D expenditure.

So, to remain competitive in the international market Bangladesh has to play in the quality diversification frontier strengthening the backward linkage, increasing investment in R&D, creating human resources with new skills and establishing institutions for testing quality standards.

In this context, for improving R&D culture and providing newly skilled people required for the industry, establishing research Universities can play a significant role as most of the universities of Bangladesh have been focusing on the teaching only.

Research Universities form research clusters in specialized knowledge arenas, create knowledge parks in collaboration with industry to create new product ideas for business. They also provide training for developing workforce required by relevant industries.[10]

In addition, innovative financing solutions need to be provided to companies who will go for R&D investment.

References:

[10]Syed SaadAndaleeb (2019), Why we must build specialized research universities, The Daily Star- https://www.thedailystar.net/opinion/education/news/why-we-must-build-specialised-research-universities-1734724

[9]Ibrahim Hossain Ovi (2019), Diversified jute goods entrepreneurs clueless about foreign buyers accessed from https://www.dhakatribune.com/business/2019/03/09/diversified-jute-goods-entrepreneurs-clueless-about-foreign-buyers

[8] Ibrahim Hossain Ovi (2019), Agro-processing industry: Bangladesh’s next export frontier; accessed from   https://www.dhakatribune.com/business/2019/02/24/agro-processing-industry-bangladesh-s-next-export-frontier

[7] Wasi Ahmed, (2018), High-value apparel, The Financial Express; accessed from https://www.thefinancialexpress.com.bd/views/high-value-apparels-1516725084

[6] Sattar, Zaidi & Ahmed, Sadik  ( 2012),  Reducing Vulnerability in Export Performance: The Export Diversification Challenge in Bangladesh, International Growth Centre.

[5]Export Statistics, Export Promotion Bureau, 2019

[4] Bangladesh Bank. Accessed from https://www.bb.org.bd/openpdf.php

[3] Export Policy 2018-21, Ministry of Commerce, GoB

[2]Sattar, Zaidi & Ahmed, Sadik  ( 2012),  Reducing Vulnerability in Export Performance: The Export Diversification Challenge in Bangladesh, International Growth Centre.

[1]Hesse, Heiko (2008), Export Diversification and Economic Growth, The International Bank for Reconstruction and Development / The World Bank.

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