The government has announced a set of fiscal measures to encourage the production of electronic products in Bangladesh. The "Made in Bangladesh" idea is appealing but needs to be pursued with caution.
It is not a good idea for countries to try to produce everything. Rather they should focus on making things that they are, or could become, good at while importing other things. There is ample evidence demonstrating the benefits of international trade.
It is said that domestic manufacturers of electronics should be encouraged because they can supply the products at a cheaper price to the local consumers.
But there is a fallacy in this argument. Domestic manufacturers are supplying at a lower price than imports because there are high tariffs on imports, not necessarily because they are lower-cost producers.
At the same time, I have myself argued for diversification of our manufacturing base, in particular a shift from simple products such as garments to complex products such as electronics. So, how can we reconcile these two views?
The answer lies in ensuring that any fiscal support given to domestic electronic manufacturers comes with tough performance conditions, such as increasing the amount of value-addition in Bangladesh, increasing the share of output that is exported, and increasing efficiency of production thereby lowering production costs.
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The manufacturers should be required to supply relevant data to the government so that an independent assessment can be made of whether they are meeting the specified performance targets.
Failure to achieve the targets (or even to produce such data) should result in withdrawal of such benefits unless it can be established that factors beyond their control prevented them from fulfilling such targets.
If such performance conditions are not imposed, the fiscal support will end up merely increasing profits of the local companies without bringing meaningful benefit to consumers and the country in general.
The government has, over the years, provided various kinds of fiscal support to local industries, whether in the form of tax breaks, cash subsidies or tariffs on competing imports.
But I am not sure if it has ever done a rigorous study of the effectiveness of such support in terms of achieving the desired results, such as increased investment or productivity growth.
It is high time that the government started a practice of linking strict performance conditions to any fiscal support provided to local industry and periodically assessing whether the conditions are met.
The author is an economist, previously with an international development agency
