Leather goods: Bangladesh’s next cash cow

The first part of this article discussed how Bangladesh can take advantage of the expanding global market for leather and leather goods (LLGs), and the significant returns that will accrue to Bangladesh if we invest more in the LLG industry. The second part discusses the challenges and how to overcome them so as to achieve and sustain greater export competitiveness in the global LLG market.

The challenges

In the World Bank Doing Business surveys, Bangladesh is typically outperformed by most other competitors because of a variety of factors, all of which combine to severely compromise the ease and cost of doing business in Bangladesh. The resulting loss in efficiency translates to a loss in international competitiveness. Infrastructural bottlenecks are a major problem affecting Bangladesh’s overall export sector including the leather industry. Inland transportation, port infrastructure, trade logistics -- in all these areas there are major issues affecting export competitiveness. Despite making impressive strides in tackling the supply shortage in electricity over the past few years, per capita electricity consumption in Bangladesh remains among the lowest in the world, and is just one-third and one-fifth of the consumption levels in India and Vietnam, respectively.

Higher costs of doing business, an appreciated real exchange rate, and policy-induced disincentives tend to undermine external competitiveness, resulting in weak export response

Confirming the findings from the Doing Business ranking, Bangladesh also scores poorly in the World Economic Forum’s Global Competitiveness Index (GCI), which compares countries on factors related to institutions, infrastructure, market size and efficiency, business sophistication and innovation. The impact of the excessive cost of doing business gets amplified in the presence of weak competitiveness fundamentals measured by the GCI. Red tape and bad policy: Procedures and formalities involving trading across borders are much more involved and costlier in Bangladesh. Facilities such as private container freight stations (CFS) or inland container depot (ICDs) are extremely limited. There are other major policy-induced problems as well. One such issue is the real exchange rate, which has appreciated by 60% since 2012. There seems to be an in-built anti-export bias within the trade policy regime as reflected in relatively weak incentives for exports vis-à-vis import competing production. That is, we have protectionist policies in place to discourage imports and thereby allow domestic industries to mature, but we don’t have the corresponding policies to encourage exports. Higher costs of doing business, an appreciated real exchange rate, and policy-induced disincentives tend to undermine external competitiveness, resulting in weak export response.

Steps to take: Policy measures

We currently have tariffs in place to allow for import-substitution but tariffs don’t protect exporting firms in foreign markets. To develop our export sector, the government should offer various incentive schemes, ranging from legal to monetary incentives and assistance. The cash assistance for the leather sector is currently in the range of 10-15% of freight-on-board (FOB) value of exports. The scope for deepening this policy support needs serious consideration.

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Also Read- Leather goods: Bangladesh’s next cash cow

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Bangladesh will soon graduate out of the LDC group, after which some of the existing policy flexibilities and trade preferences will either be lost or significantly reduced. Therefore, it is high time for policymakers to start preparing for the inevitable changes and do whatever they can, in terms of policy support, to rapidly expand our export base. It is worth pointing out that the world economy witnessed an unprecedented slowdown in global trade during 2015 and 2016 with total global exports declining by more than $3.1 trillion. This has led many countries, including our competitors in leather and leather goods sector, to consider proactive export promotional measures. Consequently, Bangladesh’s exports are likely to come under severe competitive pressure in the near future. There is a need for reviewing the policies related to providing adequate support to firms to help them maintain their export relationships. Accessing markets on a preferential basis particularly in the USA has been a major problem. If Bangladesh had obtained duty-free market access, exports of LLGs would have increased by $24.2 million, an increase of 15.3% of the same exports to the USA. Engagements with the USA for securing improved markets access should therefore continue. Lack of access to finance and financial services needs to be addressed immediately. Successful leather and footwear exporting countries like Vietnam and India have rolled out generous financial support for technology upgradation of their export-oriented firms. If introduced, such a scheme can also benefit the leather industry in Bangladesh. Renewed measures and efforts must be undertaken to attract more foreign direct investment (FDI) in the country. Increased FDI flows into the LLGs industry can help technological upgradation, move up on the quality ladder, and strengthen the country position within the global leather value chains. A very high proportion of Vietnam’s exports of leather and leather goods was made possible by FDI.

Improvements within the industry

Improvements in product quality, sophistication, and standards are important for export expansion. There is a need for developing domestic capacity in designing, market, and product research and development, brand and fashion development, etc and at the same time, set up training centres for workers’ skill development. In LLGs, Bangladesh needs to expand export markets and export products. Effective operation of the Tannery Estate Dhaka (TED) is one of the most critical needs for the leather sector. Any relocation can be costly and disruptive, and thus a smooth transition has to be planned and executed with the utmost attention and efficiency. According to some reports, the TED housed only 155 tanneries whereas more than 240 tanneries were in operation at Hazaribagh. Hazaribagh tannery owners usually provided accommodation to their workers, while the issue of workers’ housing facilities, according to many observers, has not been given due consideration in the relocation plan. Ensuring well-functioning infrastructural facilities for firms within the estate is vital for an uninterrupted export supply response. Over the medium to long-term Bangladesh should aim for establishing other well-designed leather clusters in different regions. A severe scarcity of skilled manpower is proving a major problem in Bangladesh. The leather industry faces an acute skilled-manpower crisis, specifically at the technical and upper-end managerial positions. The future growth in the leather sector will certainly require more skilled engineers, technicians and managers.

Conclusion

To conclude, given the current performance of the leather sector along with its solid manufacturing base accompanied by a strong backward linkage, exploiting the full potential of the leather sector should be considered as a high-priority for expanding exports and promoting export diversification.  Dr Mohammad A Razzaque is an economist. This article is an outgrowth of a project of the Bangladesh Enterprise Institute (BEI).