Countries must focus on where their comparative advantage is and import those products which other countries can produce more efficiently
In an earlier column, I had commented on the measures proposed in the recently announced budget to promote the “Made in Bangladesh” strategy. One of the industries targeted is the electronics industry.
The choice of electronics is justified as this is a complex product.
Going into complex products will allow us to acquire certain types of knowledge that will help us to diversify into additional complex products down the road.
I argued in that column that the fiscal support that the government is planning to provide to the electronics industry must be accompanied by tough performance conditions.
This will incentivize the industry to continuously strive to increase its productivity and sophistication. But what does increased sophistication mean?
I have tried to capture this notion of increased sophistication in the following chart. It shows two dimensions of sophistication, one on each axis.
The vertical axis depicts the share of components used in the industry that are locally made while the horizontal axis shows the proportion of the industry’s production that is exported abroad.
Bangladesh’s electronics industry is now near Point A where most components used in the industry come from abroad and most of the output is sold domestically.
From, here we may move in three directions: i) gradually starting to make the components ourselves while continuing to sell mostly in the domestic market (i.e., move towards point B); ii) continue to import most of the components but gradually expand into the export market with our electronics products (move towards C); or iii) do both (i.e., move towards D).
Going forward, we should monitor whether our electronics companies are making these moves, identify what is constraining them if they are not, and take actions to remove the constraints.
At the same time, any fiscal support that is given to them (tax breaks or subsidies) should be made contingent on the companies moving up the ladder of sophistication along the two dimensions shown in the chart.
If we provide subsidies, that should be to promote change, not maintain the status quo.
Let me clarify that we should not necessarily aim to manufacture all components ourselves.
Countries must focus on where their comparative advantage is and import those products which other countries can produce more efficiently.
That is the essential logic of international trade.
However, we may also note that comparative advantage is not a static concept.
Over time, countries acquire different capabilities, which they did not previously possess.
As new capabilities are acquired, countries develop comparative advantage in making certain products in which they previously lacked such advantage.
Thus, economists also talk about dynamic comparative advantage.
Nonetheless, it is likely that we may never reach a situation where it will make sense for us to make all electronics components ourselves.
But surely, we can manufacture a much higher proportion of the components than we are doing now.
Let us come to the other dimension, i.e., exports of electronics products.
We have not made much progress on this front since 1995, when our total electronics export earnings were around $22 million.
About a decade and a half later, this has come to around $75 million. The electronics export basket is not much diversified.
Defined at the HS 4-digit code level, the top five products accounted for 71% of electronics exports in 2018.
Top of the list was batteries, which alone accounted for a little more than a third (36%) of electronics exports.
The next four were electrical transformers, parts of radios, telephones, and TVs, microphones, and electrical machines.
One of the stars in electronics exports in recent years is Vietnam.
How do we compare with Vietnam in terms of composition of electronics exports?
The following charts show the top 10 electronics exports from Vietnam and Bangladesh respectively in 2018 (the latest year for which I have comparative data; the data are from the Harvard Growth Lab’s Atlas of Economic Complexity website).
We do not, of course, expect that Bangladesh’s electronics export profile will match that of Vietnam.
Countries have different comparative advantages and, moreover, Vietnam is now a mature exporter of electronics with an export value of $102 billion in 2018 compared to a paltry $72 million for Bangladesh.
Nonetheless, the current composition of electronics exports from Vietnam can perhaps serve as a guideline as to where we may want to be 10-15 years from now (it may be noted that Vietnam’s great breakthrough in electronics exports happened from around 2010, when electronics accounted for 10% of the country’s exports; by 2018, i.e., within 8 years, this proportion had rise to 36%).
From that perspective, it is interesting to note that five of the 10 top electronic export products of Vietnam (defined at the 4-digit level of the HS code) in 2018 also figured among the top 10 electronic products of Bangladesh in the same year.
These are transmission apparatus for radio, telephone and TV, parts of radios, telephones, and TVs, microphones, semiconductor devices and electrical transformers.
The absolute values of these exports are still very low compared to that of Vietnam (for example, in 2018, Bangladesh exported only $8 million of electrical transformers compared to $13billion from Vietnam).
But at least we have made some entry into world markets with such products.
Going forward we need to monitor closely what happens with these exports and, if they start stagnating, we will need to take a hard look and see what corrective actions are required to catalyze a momentum.
The announcement of expanded government support for a “Made in Bangladesh” strategy is just the beginning. The hard work lies ahead.
The author is an economist, previously with an international development agency