The conventional textbook approach of export-led growth models rooted in export-oriented manufacturing and climbing up the value chain has been the canonical models for growth for the East Asian countries (e.g., Japan, S. Korea, Taiwan, and China). This model is widely advocated for other developing countries for both enhancing growth and reduction of poverty.
Bangladesh is also not an exception. Riding on the back of apparel exports, the country has managed to grow at about a 7 per cent rate for the last decade. However, eminent economists such as Joseph Stiglitz and Dany Rodrik cast doubt on the effectiveness of such models for the countries outside East Asia.
The fear is that pre-mature deindustrialisation may occur where developing countries will experience the contraction of the industrial labour force well before the point that the currently industrialised countries experienced much later about a century ago.
While the manufacturing sector generally follows an inverted U-shaped path over the course of development, the turning points seem to have arrived much sooner at lower levels of income for a large number of middle-income countries, particularly the Latin American countries.
Rapid globalisation, the emergence of China as the global manufacturing hub, and the wholesale automation of the production process are argued to dent the comparative advantage in manufacturing and be responsible for such a deindustrialisation process. More labours are being absorbed in the low productive service sector than in the highly productive manufacturing sector from agriculture and this has slowed down the overall growth of the economy in the developing countries.
Hence, the effectiveness of the strategies relying solely on export-led growth has been questioned, particularly for an economy with a large consumer base. The thrust of the growth strategies should lie in both export-oriented strategies and domestic demand-led growth for a country like Bangladesh.
While the export-oriented large industries remain the main engine for growth, industries serving the local burgeoning market will also play an instrumental role in growth as well as poverty reduction. In fact, this two-pronged approach has been the underlying mantra for growth in Bangladesh for the last decade or so, knowingly or unknowingly. The emergence of Walton-RFL is a testament to such strategies.
Bangladesh experienced a slow emergence but the rapid growth of the consumer durable sector targeted the local market in just one decade. Unlike RMG, these industries have some unique characteristics worth noting.
First, these industries have emerged and thrived in a very competitive environment when China remained omnipresent in the global manufacturing market.
Second, it seems they have defied the natural competitive advantage which is the cheap unskilled labour and invested in discovering the ‘latent’ comparative advantages.
Third, these industries grew through step by step transformation from retailers, to importers/wholesalers to the assembler to the manufacturer, unlike RMGs which were “born to export”.
However, the growth of the domestic demand catering manufacturing sector can be stymied due to two major reasons. First, the size of the domestic market of a product may not be large enough to take the advantage of economies of scale and hence can’t compete with the imports. Second, these industries can be subject to high protection and this may lead to the product quality being below the global standard due to high inefficiencies.
In order overcome such challenges, it requires industrial policies with carrots and sticks. Performance-based incentives instead of wholesale benefits across the board will help ensure competition among the local industries and facilitate the transformation from the domestic demand catering manufacturing to export-oriented manufacturing.
While it is argued that local competition can also result in product quality closer to the international level, it is important to sustain the threat of international competition with a specific sunset clause.
This transformation from local to global can take place in two major ways. First, foreign direct investment in such industries, which are ready to enter the global market, can take them to the technological frontier and help them achieve the global standard.
Second, incentives and targeted policies for the potential non-RMG industries can help upgrade technology and up-skill the labour force to attain similar goals.
Both paths can reinforce each other – the spillover effect of FDI can help other sectors through the diffusion of technology and knowledge. The high local capacity of the industries can also attract FDI and build large joint ventures.
But how will it take place?
It is evident that the only apparel exports can’t lead us to a higher growth trajectory to the extent that we can achieve high-income status by 2041. There is no doubt that we have to diversify our exports to a high-value basket. But the million-dollar question is: diversify to what? Should we let only the market to pick the industry?
History suggests that the government has an important role to play. Prof Justin Lin, a former chief economist of the World Bank, suggests identifying the role model. There is ample historical evidence of such emulation.
Currently, many rich countries in their catching up phases emulated the industries of the then leading countries which has similar endowment structure. For example, Britain targeted the Netherlands’ industries in the 16th and 17th centuries; Germany, France, and the US targeted Britain’s industries in the late 19th century; Japan followed US’s path; and Korea, Taiwan, Hong Kong, and Singapore targeted Japan.
Which country will Bangladesh follow?
This can be a combination of countries in different time periods. For example, South Korea in the 1970s and 1980s, China in the 1980s and 1990s and Vietnam in the 2000s.
Korean success in industrialisation is intertwined with their success in education and skill development policies – mass-scale industrialisation will only take place when a country has a large pool of engineers and technicians of the global standard.
China’s Township and Village Enterprises (TVEs) and Special Economic Zones (SEZs) are worth emulating. Vietnam’s strategies in attracting FDIs and diversifying exports through a series of bilateral and multilateral trade agreements are something we can learn from.
The author is a senior research fellow of the Bangladesh Institute of Development Studies.
