Export Diversification

8/11/2019 Export Diversification

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Promoting export diversification

Published : Monday, 27 May 2013

Zaidi Sattar

http://www.thefinancialexpress-bd.com/old/index.php?ref=MjBfMDVfMjdfMTNfMV85Ml8xNzA3NTQ =

This write-up primarily seeks to provide a diagnostic of the tariff-related constraints to export

diversification by examining existing incentive regimes in the manufacturing sector of the Bangladesh

economy, and identification of trade policy biases, besides taking note of the standard issues of cost-

competitiveness and inadequacies of trade infrastructure. While making a strong case for eliminating

anti-export bias for non-readymade garments (RMG) exports by rationalizing the tariff structure, some

critical barriers related to export diversification that were not raised or adequately discussed in the past,

are being highlighted here. The forthcoming budget for fiscal year (FY) 2013-14 might be a good

opportunity to take some of the recommendations for tariff adjustments on board.

Vulnerability from export concentration: Export concentration is not a new phenomenon for

Bangladesh. For many decades prior to the emergence of RMG exports, jute and jute goods dominated

the export sector making up 70 per cent of exports in 1981. In the post-1990 period, however, RMG

exports had overtaken Bangladesh's traditional exports and, by the close of the 1990s, export

concentration emerged afresh, with RMG exports reaching a share of 77-80 percent.

In terms of international trade, Bangladesh aptly fits the description of a small open economy that is a

price taker in the world market, for its exports as well as imports. Consequently, it must face the

consequence of adverse movements in its terms of trade (TOT), stemming from exogenous price shocks

in its imports or exports. Typically, such exogenous TOT shocks have originated in adverse movements in

the prices of imports such as petroleum, food grains, and raw materials, such as cotton - a major import

of Bangladesh's textile sector. Research shows that TOT shocks or variability have adverse impacts on

gross domestic product (GDP) growth.

For developing countries like Bangladesh, external demand (quantity) shocks appear as a more serious

threat. Such shocks are the outcome of cyclical movements in the economies of North America and theEuropean Union (EU), the destinations to which bulk of Bangladesh's exports are directed. The income

effect of these cyclical movements is to stimulate export revenues from trading partners in boom times

with its negative counterpart in contractionary periods. While a developing country cannot escape fully

from the adverse effects of a global crisis, a diversified export market can help soften the impact

considerably. If North America and Euro zone countries embark on austerity measures to resolve their

fiscal and debt problems, it could mean lower demand for developing country exports across the board.
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This is illustrated, for example from the 2012 experience when the export growth in nominal US dollars

dipped to only 6.0%, as compared with a target of 14% in the Sixth Five Year Plan, owing to the adverse

effects of the European Debt crisis. The saving grace, in such scenarios, might be demand from the

emerging market economies (Brazil, India, and China) and Japan. Together, these economies add up to a

market size that is roughly equal to that of the EU or North America. Geographical diversification - one

more characteristic of export diversification - into these potential and sizable export markets could help

stabilize export revenues in times of crises or cyclical movements in the traditional markets in developed

countries.

Trade policy bias as key constraint:

A wide range of constraints undermine Bangladesh's prospects to diversify its export base. These

constraints can be categorized into several themes like (a) adverse incentives for export diversification,

(b) role of cost competitiveness, (c) ease of doing business, (d) availability of skills, (e) Foreign Direct

Investment (FDI) inflows into export sectors, and many more. This write-up mainly focuses on a scarcely

discussed issue of trade policy bias arising from adverse incentives, while taking note of some of the

standard issues like cost competitiveness and ease of doing business.

Incentives for exports versus production for domestic sales: This concerns the attractiveness of investorsto go into exports vis--vis domestic production. The main incentive policies arising from the trade

regime relate to exchange rate management and the tariff structure.

l Exchange rate management: Exchange rate is a critical determinant of export incentives and as such

sound exchange rate management is very important for maintaining export competitiveness,

particularly for non-RMG exports. RMG exports are partly shielded from exchange rate movements

because of the special import credit system (back-to-back letters of credits or LC) that covers import

costs from export proceeds so that any nominal exchange rate depreciation affects costs and returns

proportionately. As a long-term strategy for export diversification, the appropriate exchange rate

management would be to avoid rigidity or real appreciation of Real Effective Exchange Rate or REER; a

moderately depreciating REER would work better to sustain competitiveness of exports, particularly

non-RMG exports.

l Tariff structure and relative incentives: Perhaps the single most important determinant of export

competitiveness is the incentive regime emerging from trade policy. Bangladesh like other South Asian

countries started with an autarkic trade policy regime with a host of quantitative restrictions and high

tariffs. This complex system of anti-trade and anti-export regime slowly got dismantled, especially since

1990. Yet, a substantial anti-export bias of the trade policy remains due to a structure of tariffs that raise

profitability of domestic sales relative to exports, particularly for firms engaged in production both for

domestic and external markets, thus serving as a hindrance to non-RMG and emerging exports.

Cost competitiveness: Except for RMG, for most of the products that Bangladesh exports, it faces a

virtually infinitely elastic demand curve. Bangladesh is a very small player in the global market for non-

RMG exports and its presence or absence does not create any impact on the world price of that product.

While there may be tariff or non-tariff barriers in individual countries, these are likely to apply uniformly

for all exporters. So, for all practical purposes, Bangladesh is a price taker in the global non-RMG export

market. Market access to these products is by and large limited by cost competitiveness of Bangladeshi

suppliers.

The enabling environment for trade is a key determinant of cost competitiveness of exports. In

recognition of its importance considerable attention is now being paid by various countries to this

factor. Globally, several indicators of this enabling environment have been prepared that are regularly

updated on an annual basis to track progress relative to competitors. Two commonly used indicators are


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the Enabling Trade Index (ETI) and the Trade Logistics Performance Index (LPI). In addition, Bangladesh

does poorly on most of the indicators included in this index, but scores especially low on transport. This

is not surprising as transport and power have emerged as serious constraints to manufacturing sector in

general. Export competitiveness is sharply reduced by the high transaction costs relative to competitors

related to transport services as well as the inefficiencies of custom procedures.

Ease of doing business: The regulatory environment for doing business in a country is yet another

indicator of broad-based export competitiveness. The regulatory regime can raise the transaction cost

of doing business and hurt exports. In the highly competitive global markets the ability to respond

swiftly and timely to business opportunities and commitments can be critical factor underlying export

competitiveness.

Importantly, the regulatory environment is a major determinant of FDI inflows that can also

substantially influence the domestic supply capacity to respond to the world export markets.

Historically, the business environment of South Asia has been intrusive with high transaction

costs. Deregulatory efforts in South Asian countries, especially in Bangladesh and India, started in

earnest only since the 1990s. While progress has been made, there is still a long way to go. In terms of

specific regulatory constraints, investors in Bangladesh face a particularly difficult challenge in gettingelectricity; in registering property; and in enforcing contracts. Bangladesh, however, does a good job in

protecting investors.

On the whole, despite a series of deregulatory reforms since the 1990s, the overall business

environment in Bangladesh is difficult relative to competitors that tends to increase the transaction cost

and lowers competitiveness. Considerably more progress is needed for making the Bangladeshi

investment climate much more attractive for attracting foreign investment and improving export

competitiveness.

The important point is that while these constraints could be generic to all exports, they hurt non-RMG

exports and emerging or potential exports even more thus inhibiting their expansion.Anti-export bias of the incentive regime and trade policy: An in-depth analysis of the critical role of the

anti-export bias in trade policy shows how it works as a constraint to export diversification. Bangladesh

like other South Asian countries started with an autarkic trade policy regime with a host of quantitative

restrictions and high tariffs. This complex system of anti-trade and anti-export regime slowly got

dismantled, especially since 1990. Yet, a substantial anti-export bias of the trade policy remains.

While quantitative restrictions have been largely eliminated and customs duties reduced and simplified,

tariff reforms, incomplete though they are, have stalled in recent years. Over the past 13 years, average

customs duty has come down; but average nominal rate (NPR) has not, due to the emergence of para-

tariffs, such as supplementary and regulatory duties. What is striking is the growing wedge between

output and input tariffs resulting in higher effective protection (ERP) for domestic producers at a cost to

non-RMG exporters, in particular, who face anti-export bias in export expansion and diversification.

RMG firms, being 100% export-oriented, are immune to this bias of the tariff regime, thanks to the duty-

free regime they operate in.

Structure of nominal tariffs: The analysis of relative incentives for exports and domestic sales would

have to begin with an analysis of nominal protection to various categories of products imported under

the tariff and import tax regime. It turns out that with progressive trade openness, and virtual

elimination of trade-related quantitative restrictions (QRs), tariffs on imports are now the single most

important determinant of trade protection. Whereas tariffs and QRs together determined the extent of


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openness or restrictiveness of trade policy in the 1990s and before, the QR slate has been wiped pretty

much clean since FY2005, leaving tariffs as the main instrument of trade policy and protection.

The tariff structure has been simplified by moving to only four non-zero tariff slabs - 3.0%, 5.0%, 12%

and 25%. Although the average customs duty has come down over the past 13 years, the average

nominal protection rate (NPR) shows mixed trend (Table 1). It initially declined between FY01 and FY09

and then started rising again over FY10-FY13.

Two aspects of the tariff structure and its trend are particularly noteworthy: (b)proliferation of para-

tariffs, and (a) perceptible divergence between the top NPR rate (which moved up since FY01) and the

average NPR, and a growing wedge between output and input tariffs.

Dr. Zaidi Sattar is Chairman, Policy Research Institute (PRI),

Bangladesh.

[email protected]

Challenge and promise of export diversification

Sunday May 20 2012

Zaidi Sattar

After a record export performance last fiscal year, export pessimism is in the air once again.
mailto:[email protected]:[email protected]:[email protected]


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And for good reason. When the Eurozone is in the grip of a crisis, Bangladesh exports cannot be immune

to that event. Because countries of the European Union (EU) together buy 51% of our exports.

Moreover, in an integrated world, a Eurozone crisis can become a global economic crisis in no time.

Yet, these events are beyond our control. For Bangladesh, integrating with the world market is good for

the long-term - even along with the ups and downs of the world economy. Access to the wider global

economy presents a much larger market for Bangladeshi goods with the potential for job creation and

economies of scale that might not be possible from even a growing domestic economy. Recall that we

are adding about two million people to our labor force every year, and we have a persistent problem of

under-employment. So reliance on exports and efforts at ensuring and strengthening export

competitiveness should continue to be the long-term policy strategy to absorb the additional labor

force.

That strategy has yielded rich dividends so far. Bangladesh experienced double digit export growth over

the past two decades. And 90% of Bangladesh's exports were manufactured goods, making it the only

least developed country (LDC) with such a high share of manufactured exports in its export basket. This

illustrates its strength in mass manufacturing and cost competitiveness. Yet this superior performance

masks the fact that the export surge was limited to one product group -- readymade garments (RMG) --

aided not least by the Multi-Fibre Arrangement (MFA) regime, a fortuitous global arrangement that wasphased out in 2005. With over three million jobs and 76% of export earnings from the RMG sector, too

much of the nation's fortune is riding on this one sector. Export concentration in readymade garments

makes the economy, jobs and income, extremely vulnerable to external shocks arising from changes in

global demand for RMG.

Export diversification is one way the economy can come out of this bind. Indeed, it is now a national

imperative. The government has correctly set export diversification as the cornerstone of its export

policy for several years now. But progress has not been encouraging so far. Therefore, the problem

deserves to be re-examined in light of recent analytical research and cross-country experience.

In its international trade, Bangladesh aptly fits the description of a small open economy that is a pricetaker in the world market, for its exports as well as imports. Consequently, it must face the consequence

of adverse movements in its terms of trade (TOT), stemming from exogenous price shocks in its imports

or exports. Typically, such exogenous TOT shocks have originated in adverse movements in the prices of

imports such as petroleum, foodgrains, and raw materials, such as cotton - a major import of

Bangladesh's textile sector. When Bangladesh's exports were dominated by primary products, such as

jute and jute goods, and tea, exogenous movements in the prices of these exports often affected export

revenues. It was a major weakness in Bangladesh's export trade that prompted all efforts to diversify

exports into non-traditional manufactures leading to the emergence and eventual predominance of

RMG. With few other manufactures, such as footwear, home textiles, light engineering goods, ceramics,

and ocean-going vessels, manufactures now dominate Bangladesh's export basket with the result that

TOT shocks no longer occur through adverse price movements in exports, except for the one-off event

when the MFA elapsed in 2005.

But TOT shocks do occur through price shock of imports, such as petroleum or food grains and shocks in

export demand. Moreover, the switch to manufactures and export concentration in RMG, failed to stem

the steady decline in Bangladesh's TOT for the past 15 years, as the index fell from 90.2 in FY97 to 71.9

in FY10. All this indicates a fair degree of vulnerability from the current structure of exports, which

makes it absolutely essential to strive for greater export diversification.


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However, product diversification in exports reflects a narrow view of this issue. By moving from heavy

reliance on primary products (jute and jute goods) to manufactures, Bangladesh already achieved what

is called vertical diversification of exports. But export concentration in manufactures (such as RMG)

could be just as problematic as concentration in primary products. Evidence is strong that export

concentration has been detrimental to the economic growth performance of developing countries in the

past decades, due to export instability and declining terms of trade.

To come out of export concentration phenomenon, Bangladesh could pursue the following

diversification options.

The most common approach is to go for greater diversity of products. This appears to be the widely

recognized albeit limited mode of export diversification. It describes a process whereby a range of new

products is introduced in the export basket - described by trade economists as "discovery" -- which

gradually assumes significant proportions thereby diluting any export concentration that might have

existed.

Second, export destinations can be diversified. This involves widening the range of destination markets

for exports of existing products, also referred to as horizontal diversification or diversification at theextensive margin. Research has shown that developing countries tend to do better at this sort of export

diversification.

Third, quality diversification is another option but much more challenging. This describes the process of

upgrading the quality and value of existing products, i.e. moving up market from low end to high end

products (described as moving up the value chain). Moving to higher productivity (or higher value

added) items in the same product group is also referred to as diversification in the intensive margin.

Increasing export growth at the intensive margin requires some combination of productivity

improvements to lower costs and quality improvements to differentiate products from those of

competitors.

One more option could be to go from goods to services exports. Services, with the right skills and

training, could be a job creator of the future if, for instance, tourism could become a significant

attraction for non-resident Bangladeshis (NRBs) and global tourists alike. Given its strategic geographic

location striding South and East Asia, what is preventing Bangladesh from becoming a trading hub of the

vast hinterland across several political borders? What is preventing Bangladesh from becoming a

Singapore of the future? It is time to look forward and well beyond the present.

The focus of current policies seem to be more on product diversification, and the approach taken is to

pick winners, i.e. select "thrust" sectors and promote them with all sorts of incentives in the hope that

they will be the RMGs of the future. If we recall, this is not how RMG emerged as the leading export

item of Bangladesh; nor, for that matter, was ship-building - a recent success. With the advent of MFA,the right policies were formulated to give RMG production a free trade channel, i.e. by providing duty-

free inputs through bonded warehouse and back-to-back LC system. With success, ship-building

received duty-free bonded import facility almost instantaneously. International experience suggests

that, in a high tariff regime, export success cannot come through subsidies provided to "thrust" sectors.

It could, however, come through providing RMG-like free trade channel to existing and potential

exports. That is the big policy challenge.

While there is no magic recipe to promote diversification, a broad array of policies might be needed to


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create and sustain new export products. The important point to note is that the diversification challenge

might be unique to each country context though some commonalities can always be identified. The

Bangladesh context, for one, might call for some customized approach to addressing the problem,

namely:

l First, exports need imports. So the import regime must be made seamless to facilitate duty-free

imported inputs into exports. Why duty-free? Exports, to be competitive in world markets, must be

provided with world-priced inputs. Duty-free makes imported inputs bought at world prices.

l Second, the incentive structure for exports must be set right (i.e. removing anti-export bias) by

ensuring that relative incentives for export and import substitute production are about the same;

l Third, lowering the costs of trade-related services (improved trade and transport logistics, and, of

course, energy infrastructure) is critical for ensuring export competitiveness;

l Fourth, proactive policies, such as helping exporters upgrade existing products, break into geographic

markets, and launch and consolidate new line of business abroad, might be important in view of serious

governance deficiencies.

Though progress in product diversification so far has been muted, Bangladesh has made good strides in

geographical diversification as the share of exports to top five destinations has fallen significantly over

the past decade and exports of over one million dollars reached as many as 112 countries in FY11,

compared to only 61 in FY90. The strategy of geographical diversification is expected to yield good

dividends as markets open up in Japan plus emerging market economies of Brazil, Russia, India, and

China. Likewise, application of technology and improved management techniques will raise productivity

and ensure quality diversification, by introducing higher value added exports of existing products like

RMG.

All in all, export diversification in its various forms and phases remains a complex process. There is nomagic recipe for diversifying exports, and each country, faced with the challenge, needs to mould

policies and practices befitting the unique country context. While the standard prescriptions of

improving trade logistics and infrastructure apply in Bangladesh, more important is the need to shape

trade policy orientation in favor of existing and potential exports that suffer from anti-export as well as

anti-diversification bias within a high tariff regime. Doing nothing while muddling through is not an

option.

(Dr. Sattar is Chairman, Policy Research Institute of Bangladesh. E-mail:[email protected])
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Export diversification: A way to sustainable overseas trade

Refayet Ullah Mirdha

Amran Hossain

http://archive.thedailystar.net/beta2/news/export-diversification-a-way-to-sustainable-overseas-trade/

Export is the lifeline of the economy of Bangladesh. The most important contributing sector is the

exporting sector in the GDP. But, overdependence on a few products or on a single product is not a wise

decision. For sustenance of business, it needs diversification of both export products and export

destinations.

In the perspective of export performance of Bangladesh, the country is still dependent on ready-made

garment (RMG) sector with contribution of nearly 80 percent national export. If the home textile and

specialised woven and knitted fabrics are included with knitwear and woven garment items the

contribution will reach nearly 85 percent. So, it is clearly noticed that the country is dependent on

apparel sector. If we analyse markets, we will see Bangladesh is dependent on few traditional markets

including the US, the EU and Canada.

Of the total exports of the country 23 percent goes to the US, nearly 60 percent to the EU, 5 percent to

Canada and 12 percent to the rest of the countries of the globe. So, it is clear that how much isconcentrated of the countrys exports on a few numbers of markets.

But, the hope is that, Bangladesh started exploring new export destinations like Japan, Russia, South

Africa, Mexico, Brazil, Chile, Malaysia, New Zealand, India, South Korea, China and Australia. The export

growth to those countries has been higher over the last few years.

Export diversification is a continuous process. The initiatives by both the government and private sector

will help expanding both products and markets.

Looking for new markets with new products will help increase the export basket. Through export

diversification it is possible to minimise the risks in business.

Export diversification is needed not only for minimising risks, but also to create employment with new

skills of workers. Full utilization of natural resources is also possible through product diversification.

Ready-made garment (RMG) sector

RMG is the highest contributing sector in the export market. Bangladesh has a lot of scope to diversify

its garment products. Bangladesh mainly produces basic garment items, although the country has a

scope to avail benefit of upscale market through diversification of garment products. Bangladesh should

focus more on high-end products while the country produces 30 percent high-end products of the total

RMG exportable garment annually.

As the rate of high-end production is increasing some internationally renowned buyers are also coming

to the country with higher volume. Hugo Boss, Adidas, Puma, Tommy Hilfiger, G-Star, Diesel, Ralph
http://archive.thedailystar.net/beta2/news/export-diversification-a-way-to-sustainable-overseas-trade/http://archive.thedailystar.net/beta2/news/export-diversification-a-way-to-sustainable-overseas-trade/http://archive.thedailystar.net/beta2/news/export-diversification-a-way-to-sustainable-overseas-trade/http://archive.thedailystar.net/beta2/news/export-diversification-a-way-to-sustainable-overseas-trade/http://archive.thedailystar.net/beta2/news/export-diversification-a-way-to-sustainable-overseas-trade/http://archive.thedailystar.net/beta2/news/export-diversification-a-way-to-sustainable-overseas-trade/


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Bangladesh exported ICT and IT enabled services worth $70.81 million in the last fiscal year. More than

150 companies are exporting ICT and IT enabled services to different countries.

Bangladesh has been exporting ICT and IT enabled services to Denmark, the US, Japan and other

developed countries. The companies are also meeting demands for the domestic market.

Agricultural and agro-processed food industry

Agricultural and agro-processed food industries have become a major exporting item for Bangladesh

now. The demand for Bangladeshi vegetables, fruits and agro-processed food items is higher among the

non-resident Bangladeshis residing in different countries. Bangladeshi exporters can take this

opportunity to grab more market share. The popularity of some agro-processed items like Papadum is

higher among the European consumers.

A good number of people are now exporting Papadum from Dinajpur district to England and other

European countries. Some farmers are exporting Agor Atar from Sylhet area at higher prices in the

Middle-East countries.

Potentials for ready-to-eat food items are also very high globally. Bangladesh has been exportingvegetables to many countries like the US, the EU, Middle-East, Japan and Malaysia for years. The

domestic value addition is very high in the business of agricultural and agro-processed food industries.

Leather and footwear sector

Bangladesh has already become a popular country for exporting quality leather, leather goods and

footwear Bangladesh exported $335.51 million worth of leather goods and footwear in last fiscal year.

Bangladesh is exporting leather, leather goods and footwear to Germany, England, The Netherlands, the

US and other destinations. Having cheap labour and raw materials a good number of footwear and

leather goods manufacturers are exporting quality products globally.

Bangladesh has great potentials in exports of ceramics, tiles and earthen tallies, fisheries and crabs,

plastic goods and furniture as well.

It needs government and private sector joint initiatives to diversify the exportable products and market

diversification. The government should incentivise the nascent industries so that these can become

stronger and capable of exporting goods. The government should provide policy supports to the new

export sectors. Both the government and private sectors should continue research on exportable

products and markets for higher export from the country. Bangladesh exports nearly 695 to 192

countries, but more than 90 percent exports constitute only six to seven products. So the country has

immense potentials in export, only needs goods initiatives.

..

The writer is Senior Business Reporter, The Daily Star.


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Export Diversification and Global Value Chain: Opportunities for Bangladesh

April 3, 2013 11:44 pm

Dr.Ashikur Rahman

http://www.clickittefaq.com/more-stories/export-diversification-and-global-value-chain-opportunities-for-bangladesh/

Bangladesh exhibits a highly concentrated export sector. As it can be noted from figure-1, our economy

entertains a concentrated export base in comparison to other Asian markets. In fact, the export

diversification scenario in Bangladesh remains bleak as 77% of export earnings emerge from the RMG

sector. This dependence on readymade garments makes our economy extremely vulnerable to any

adverse external shock to the global demand or prices (terms of trade). In this respect, Global Value

Chain [GVC] offers an unique possibility for Bangladesh to diversify its export base. Consequently, in this

write up, I evaluate the key characteristics of GVCs, so that the nature of trade that governs the

production of final and intermediate goods within such framework is understood. This is important as it

will help explain how private sector can expand our export potential by utilizing the opportunities

available by emerging as a key actor within the GVCs. More specifically, it is essential to pinpoint what

constraints the capacity of our entrepreneurs to participate in the global value chain and how public

policy and private sector initiative can facilitate their role in GVCs. It also involves disentangling the type

of production structure in which entrepreneurs in Bangladesh is likely to have a relative comparative

advantage.

Source: International Trade Centre, Geneva

GVCs are an essential unit of analysis for understanding the pattern of trade that dominates global

economic environment in the present globalised era. The activities along GVCs may involve concept,design, production, marketing, distribution, retailing and R&D. In other words, a value chain involves the

full range of activities through which a good or service evolves from its conception to its distribution and

consumption. Depending on the industry needs, each link of the chain performs an activity, and

different enterprises add value at each stage of the production or service process. All these activities can

be contained within a single enterprise or divided among different firms. They can also be contained

within a single geographical location or spread over wider areas. Thus, a GVC is a chain of activities

which are divided among different firms in multiple geographical locations, and this increasing

fragmentation of value chains has led to the rise of trade flows in intermediate goods, especially in the

manufacturing sector.

Entrepreneurs in Bangladesh can help diversify the export base by tapping into the opportunitiesavailable in GVC. Furthermore, two specific options are available to domestic entrepreneurs while they

opt to engage in the export of a new commodity:

1.

Produce intermediate goods: Trade in intermediate goods was the most dynamic sector of

international trade, constituting more than half of non-fuel world merchandise trade in 2009.

Hence, there is great scope for entrepreneurs in Bangladesh to participate in the production of

intermediate goods for export purposes. So, policy makers must scrutinize the existing


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constraints that private sector actors must aim to mitigate if we need to reap the opportunities

available in the production of intermediate goods. It also involves understanding the strategies

that are likely to aid the scopes of entrepreneurs in Bangladesh to emerge as producers of

intermediate goods for the GVC.

1. Emerge as an assembling hub: The economic rise of China is associated with the emergence of

a distinctive structure for the Asian-US production system, commonly understood as the tri-

polar trade through China model. In this structure: (i) East Asian countries, except China,

produce sophisticated parts and components and export them to China; (ii) China assembles

them into final products; and (iii) these are further exported to the US market for consumption.

Consequently, understanding the strategies that will allow local policy makers and

entrepreneurs in Bangladesh to replicate this structure is fundamental for attaining any success

in transforming Bangladesh as a key assembling hub in the global economy.

As a result, it is important to offer an intuitive discussion on the possible options that are available to

entrepreneurs and policymakers in Bangladesh from a pragmatic view point. To start with, if localentrepreneurs are willing to engage in the production of an intermediate good, then it is probable that

they will face issues that are associated with efforts dedicated to learning how to imitate. In short, the

technical know-how needed for the production of an intermediate good in the GVC must be obtained if

the local entrepreneurs are not exposed to such expertise. In this context, a prudent strategy for local

entrepreneurs is to opt for a collaborative production structure that builds long-run commitments

between local and foreign actors, so that the technical know-how needed by the local actors is

obtained. Forming collaboration with foreign actors for the production of an intermediate good also

minimizes the risks that the local entrepreneurs will find themselves in some sort of hold up problem.

That is, given the strict specification criteria and compliances associated with the production of an

intermediate good, the local entrepreneurs will not have an option to sell such items to other actors if

the relevant foreign actor refuses to consume such items. Thus, such risks are magnified if theproduction structure is fragmented or depends on minimum coordination, due to the lack of long-term

commitments.

On the other hand, if local entrepreneurs are willing to devote resources to assembling activities, then

they should choose a product where there is a high local demand in addition to high export demand.

The security of sales in the domestic market will attract the FDI from the foreign firm, and a

collaborative production structure will diffuse the initial technical know-how needed for the assembling

of the final good. Thus the choice of the product for which assembling activities is undertaken is partially

determined by the characteristics of the local market, especially the level of effective demand it carries

for the product. For example, it is often noted that the growing joint ventures between Japanese and

Indian automotive firms (especially between Maruti Udyog Ltd, a State-owned company, and the

Japanese multinational Suzuki Motor Company) is a resultant outcome of the growing middle class in

India, which appeared as an important and lucrative market for the Japanese firms. Hence, local

entrepreneurs in Bangladesh can choose to assemble products for which there is a high local demand, as

it will attract foreign firms to undertake possible joint ventures. Additionally, once such joint-ventures

materializes, local firms can then explore export markets for these products (in the same manner how

Indian firms have started exporting Maruti Suzuki cars).


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To conclude, this article aimed to describe how local entrepreneurs in Bangladesh can diversify its

export by participating in the GVC. To this end, it discussed the variation in the production structures

that are associated with GVCs, and the nature of the trade that governs GVCs. It also tried to isolate

some prudent but pragmatic strategies that the local entrepreneurs can adopt if Bangladesh has to

diversify its export base. In this respect, it is argued that local entrepreneurs are more likely to merit

success if their choiceof production structure within the GVC pays attention to the need of diffusing the

technicalknow-how, so that the local entrepreneurs can learn the art of imitatingthe production of

an existing product or an intermediate product. It is also argued that for attaining any success in

assembling activities, local entrepreneurs must pay attention to the choice of the product taking into

consideration the effective demand for such products in the local economy.

Dr. Ashikur Rahman is a Senior Economist at Policy Research Institute [PRI] and can be reached at: Email:

[email protected]

Export Diversification

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