A high-profile investment and policy summit was recently held in Dhaka. The opening session heard a call from the prime minister for increased foreign investment. Quoting from a famous Bengali song, she harped on the uniqueness of Bangladesh and, lest any investor was concerned about past problems, she reassured everyone that the country has changed. Her ministers and officials did their bit to declare Bangladesh open for business. At first glance, it appears that investors were impressed.
But investment for what? That is the key question. As we double our efforts to attract foreign investment, it is important to be clear about our strategy. How exactly will such investment flows contribute to our development goals?
For Bangladesh, a key agenda is industrialisation where, building upon past successes, much more is needed to create good quality jobs that may absorb the huge labour force. How will future industrialisation proceed? Here, it is useful to think about future scenarios, agree on a desired scenario, and then identify actions to make that vision a reality.
Three such scenarios are presented below. These are not mutually exclusive, but may be combined in various ways.
Scenario 1: Garment-dominated, volume-centric, labour-intensive growth
The garment industry grows rapidly to become a $50 billion industry by 2021, benefiting from the relocation of industry from higher-cost producers, such as China. It further consolidates its position as a major driver of the economy. The change in industry is largely quantitative.
The product composition remains more or less the same, dominated by low-value added products requiring large amounts of semi-skilled workers. Productivity increases at the historical modest rates. This means that the industry continues to be labour-intensive and the doubling of exports leads to an equivalent growth in employment, which rises to 10 million from the current five million.
Since productivity growth is modest, Bangladesh continues to compete on the basis of low wages. There is significant spillover impact, both positive and negative. Ancillary industries continue to grow, largely dominated by small enterprises, facilitating inclusive growth.
At the same time, the growth in apparel production implies a significant growth in textile production which, in a business-as-usual scenario, leads to serious depletion of water tables due to heavy and inefficient water use in the industry and serious decline in water quality due to high pollution discharge into water bodies.
The continuing, perhaps increasing, attraction of the industry triggers resource flow into it at the expense of other promising activities such as pharmaceuticals, ship-building, ICT-based services, and light engineering. Diversification prospects are diluted as garments become even more important in both absolute and relative terms. The industry continues to be largely domestic-owned. FDI remains low both in this industry as well as overall in the economy.
Scenario 2: Diversified, volume-centric, labour-intensive growth
The garment industry becomes a $40bn industry by 2021, ie, it continues to grow but less rapidly than in scenario 1. Its relative importance in the economy drops as a number of other labour-intensive industries, such as light engineering, agro-business and leather, and services such as ICT and ICT-enabled services, grow faster than before.
The growth in garments as well as in these other industries/services is basically volume-driven, with no substantial increase in productivity.
As in scenario 1, low value-added products dominate the product composition in garments, and productivity increases at the historical modest rates.
The RMG growth is accompanied by a growth in textile production. While the growth is not as high as in scenario 1, the resource use efficiency and environmental issues remain serious.
The growth in other labour-intensive activities makes the economy more diversified. However, while there are pockets of high productivity in these sectors, overall productivity-growth remains modest with no significant increase in the sophistication of product composition.
Nonetheless, the volume-driven growth in garments and in these industries creates millions of jobs and many entrepreneurial opportunities, including for the bottom 40% of the population.
Scenario 3: Diversified, productivity-driven, labour-intensive growth
The garments industry grows at a respectable rate with exports reaching $35bn to $40bn by 2021. The industry undergoes consolidation with a smaller number of more efficient firms. The industry produces a substantially higher proportion of value-added products but remains labour-intensive, and thus a major employer with six to seven million people earning livelihoods through it.
The textile industry significantly improves its resource-use efficiency and environmental performance. Much of the new capacity created in garments is located within economic zones, which also house several existing factories that are relocated from other locations in the country. Some of the productivity increases and change in product-mix is catalysed by foreign investors whose importance in the industry increases.
This growth in garments is accompanied by substantial diversification in economic activities, especially in industry and services. Substantial amounts of investment flow into agro-business, pharmaceuticals, light engineering, footwear, ICT, and ICT-enabled services, increasing production volumes, changing product composition, and improving productivity.
Pharmaceutical exports increase substantially and make an entry in the developed world as well. There is a paradigm shift in the ICT and ICT-enabled services sector which experience the highest rate of export growth (30% to 50% annually) with exports rising from $100m now to $3bn by 2021. The sector also becomes a major source of jobs, especially for young people.
The use of ICT-enabled services in the domestic economy grows significantly, creating a huge domestic market for the sector, in addition to increasing productivity and quality of service delivery in the activities that use ICT.
Agro-business grows impressively, creating substantial income opportunities for the bottom 40%.
The light engineering sector develops along two tracks. On the first track, ie, the modern segment, a small number of firms producing a select set of products (such as bicycles, spare parts, electronic goods) makes a major breakthrough in export markets, while also serving the domestic market. Productivity increase accompanies this growth.
On the second track, ie, the traditional segment, there is partial consolidation. One part of this segment, currently accounting for 20% of its output, consolidates (including through acquisition of some of the smaller firms), moves out of its currently congested locations to well-equipped economic zones, acquires modern technology, focuses its product offerings so that each firm manufactures a small range of sophisticated products (instead of the current practice of spreading thin) with increasing productivity.
By 2021, these account for 50% of the traditional segment’s production. The other part of the traditional segment continues on the current path with thousands of firms making hundreds of products at low levels of productivity. Their main role in the economy is as a source of mass -- albeit low-paying -- employment, and easy entry for small entrepreneurs.
The leather sector has a similar evolution with substantial consolidation, productivity increases, and much improved working conditions and environmental performance. The relocation to the Savar leather park is complete and facilitates the above changes. Exports rise substantially.
These sectors grow faster than garments, especially with regard to exports. As a result, their share of total exports rise while that of garments falls, even though there is a very substantial absolute increase in garment exports. The most important development, though, is that the economy moves to a productivity-driven trajectory.
The concluding part of this long form will be published tomorrow.
