Fourth Meeting of the

Asia-Pacific Foreign Direct Investment (FDI) Network for Least Developed and Landlocked Developing Countries

FDI, Trade Agreements and Value Chains – Lessons from/for South Asia

by

Mizanur Rahman, Ph.D. Associate Professor of Accounting & Public Policy

Director, Accounting for Capital Market Development (ACMD) University of Dhaka

E-mail: mizan@univdhaka.edu

Organized by:

United Nations ESCAP

Colombo, Sri Lanka

25 November 2014

Key Messages

The globalization of the world economy has progressed by a relative concentration

of world economic activity across three economic regions.

Economic interdependency has however grown stronger than the economic growth

only within the East Asian economic region. International/regional/global

organization of production has become the norm.

The latest phase of globalization also accompanied the development of an

unsustainable payment imbalance btw the US and some East Asian countries

including China notably. Capital flow happened to be from the poor to the rich.

As the imbalances are unwinding and the world economic crisis is yet continuing, a

tectonic change is underway that the gravity of the world economy is moving away

from “Across the Pacific” to the “Indo-Pacific Region.”

South Asia itself in this latest phase of globalization is yet no coherent economic

region and no credible framework of shared responsibility is in place. But the

economic zone is poised to be increasingly integrated in the Indo-Pacific economic

landscape.

Integration into the global value chain brings about rising technological capabilities. Evidence from the East Asian countries indicate how China and ASEAN countries have upgraded across the value chain.

Proliferation of free trade agreements (FTAs) across Asia and the Pacific and a growing coverage of non-traded and services in recent FTAs. How does a trans-pacific partnership will impact trade and FDIs across Asian economies?

Will Bangladesh be a “nod & hub” in the Indo-Pacific Ocean Rim? Potential and challenges to this end.

2

3

Globalization, Regional Growth, and Economic

Interdependency, 1990-2014

NAFTA

EU15

East Asia-15

SouthAsia

05

10

15

20

25

30

sh

are

s o

f S

A,

EA

15

, E

U1

5,

& N

AF

TA

in %

of

wo

rld

PP

P G

DP

01

02

03

04

05

06

07

08

0

Worl

d P

PP

GD

P

(In t

rilli

on

s o

f U

S d

olla

rs

200

5 p

rice

s)

1990 1995 2000 2005 2010 2014Year

The world economy& its distribution

EU-15

NAFTA

East Asia-15

South Asia

010

20

30

40

50

60

70

Intr

a-r

egio

nal tr

ade s

hare

in %

1990 1995 2000 2005 2010 2014Year

Economic interdependency

Sources: International Monetary Fund, World Economic Outlook Database, October 2014,the IMF Direction of Trade Statistics (DOTS) and the CEPII CHELEM Databases.

4

Schematic View of East Asian Production Network

(Trade flows in 2010)

5

Triangular Trade in East Asia, 1990-2012

(China & ASEAN)

(Y)

(X)

.15

.25

.35

.45

.55

.65

.75

1990 1995 2000 2005 20102012Year

(China)(Y)

(X)

.15.2

5.3

5.4

5.5

5.6

5.7

5

1990 1995 2000 2005 20102012Year

Triangular trading index(Y/(1-X))

(China & ASEAN)

.6.7

.8.9

11.1

1990 1995 2000 2005 20102012Year

Triangular trading index(China)

.5.6

.7.8

.9

1990 1995 2000 2005 20102012Year

Source: Authors' estimates based on CHELEM Database. Each series is a weighted movingaverage with weights being 1, 2, and 3 to the x(t-2), x(t-1), and x(t) terms respectively.(Y): (Export of final goods from China and/or ASEAN to developed markets)/(Export of finalgoods from China and/or ASEAN to the world). (X): (Export of intermediate goods from Japan& NIEs2 to China and/or ASEAN)/(Export of intermediate goods from Japan & NIEs2 to the world).

6

Dynamic Competitive Advantage of Exports by Stages of

Production & Geo. Locations, 1990-2010 (Contd.)

Exports by stages of

production

Intermediate goods Final equipment goods Final consumer goods

Trading partners/Year 1990 2000 2010 1990 2000 2010 1990 2000 2010

Japan

China & Hong Kong 0.81 1.05↑ 1.20↑↑ 1.22 1.43↑ 1.42↑↑ 0.84 0.86↑ 1.08↑↑

South Korea & Taiwan 1.73 1.55↓ 1.78↑↑ 1.87 1.81↓ 1.95↑↑ 1.44 1.61↑ 1.92↑↑

ASEAN-7 1.15 1.17↑ 1.21↑↑ 1.24 1.17↓ 1.11↓↓ 0.70 0.76 0.56

East Asia 1.06 1.07↑ 1.19↑↑ 1.29 1.16↓ 1.20↑↓ 0.57 0.62 0.77

US 1.26 1.22↓ 1.31↑↑ 1.33 1.05↓ 0.84↓↓ 0.94 1.07↑ 1.10↑↑

EU-15 1.13 1.15↑ 1.12↓↓ 1.44 1.03↓ 0.72↓↓ 0.98 0.93↓ 0.79↓↓

US+EU-15 1.21 1.20↓ 1.23↑↑ 1.37 1.04↓ 0.78↓↓ 0.95 1.02 0.97

ROW 1.22 1.08 0.92 1.50 1.11 0.80 0.94 0.91 0.99

Total 1.14 1.12↑ 1.17↑↑ 1.36 1.09↓ 0.96↓↓ 0.83 0.87↑ 0.90↑↑

South Korea 1990 2000 2010 1990 2000 2010 1990 2000 2010

China & Hong Kong 1.54 1.91↑ 1.76↓↑ 0.56 1.13↑ 1.94↑↑ 0.78 2.00↑ 2.12↑↑

Japan 3.42 1.92↓ 1.70↓↓ 2.88 1.16↓ 0.85↓↓ 2.51 1.33↓ 1.16↓↓

ASEAN-7 0.97 1.14↑ 1.04↓↑ 0.56 0.56 0.77 0.58 0.97 0.89

East Asia (inc. Taiwan) 1.26 1.35↑ 1.35↑↑ 0.65 0.83↑ 1.16↑↑ 1.31 1.28↓ 1.30↑↓

US 1.07 1.18↑ 0.97↓↓ 0.69 0.89 0.57 1.42 0.73↓ 0.68↓↓

EU-15 0.86 1.10↑ 0.74↓↓ 0.65 0.95↑ 1.08↑↑ 1.01 0.75↓ 0.86↑↓

US+EU-15 0.99 1.15↑ 0.87↓↓ 0.68 0.91 0.80 1.26 0.74↓ 0.76↑↓

ROW 1.43 1.57 1.25 0.68 1.18 1.24 1.31 1.15 1.06

Total 1.17 1.30↑ 1.21↓↑ 0.67 0.90↑ 1.00↑↑ 1.28 0.97↓ 0.99↑↓

Taiwan 1990 2000 2010 1990 2000 2010 1990 2000 2010

China & Hong Kong 1.81 2.08↑ 2.62↑↑ 1.49 1.61↑ 1.70↑↑ 1.52 1.59↑ 2.91↑↑

Japan 1.77 1.94↑ 2.03↑↑ 2.59 2.14↓ 0.80↓↓ 1.65 0.71↓ 0.60↓↓

ASEAN-7 0.93 1.16↑ 1.64↑↑ 1.03 0.78↓ 0.67↓↓ 0.82 0.78↓ 1.35↑↑

East Asia (incl. South Korea) 1.03 1.34↑ 1.83↑↑ 0.99 1.12↑ 1.04↓↑ 1.20 0.88↓ 1.51↑↑

US 1.04 1.16↑ 1.23↑↑ 1.13 1.31↑ 0.72↓↓ 1.24 0.59↓ 0.46↓↓

EU-15 1.02 1.01↓ 0.88↓↓ 1.17 1.35↑ 0.75↓↓ 0.84 0.62 0.45

US & EU-15 1.03 1.10↑ 1.08↓↑ 1.15 1.32↑ 0.73↓↓ 1.08 0.60↓ 0.45↓↓

ROW 1.03 1.23 0.83 0.97 1.27 0.56 0.97 0.56 0.43

Total 1.03 1.25↑ 1.53↑↑ 1.08 1.24↑ 0.84↓↓ 1.11 0.69↓ 0.84↑↓

Kawai and Rahman, 2014. Trade and Exchange Rates in East Asia. Asian Development Bank Institute (ADBI).

7

Dynamic Competitive Advantage of Exports by Stages of

Production & Geo. Locations, 1990-2010 (Contd.)

Exports by stages of

production

Intermediate goods Final equipment goods Final consumer goods

Trading partners/Year 1990 2000 2010 1990 2000 2010 1990 2000 2010

China

Japan 1.61 1.11↓ 1.07↓↓ 0.82 1.41↑ 1.71↑↑ 2.43 2.73↑ 1.78↓↓

South Korea & Taiwan 0.38 0.55 0.73 0.26 0.54↑ 1.09↑↑ 0.36 0.94 0.96

ASEAN-7 0.53 0.26 0.45 0.19 0.44 0.78 0.68 0.49 0.41

East Asia (inc. Hong Kong) 0.88 0.48 0.51 0.41 0.60 0.83 1.45 1.44↓ 0.81↓↓

US 0.34 0.60↑ 1.03↑↑ 0.25 1.00↑ 1.38↑↑ 1.47 1.78↑ 1.42↓↓

EU-15 0.83 0.76↓ 1.13↑↑ 0.19 0.98↑ 1.43↑↑ 1.67 1.69↑ 1.50↓↓

US & EU-15 0.51 0.66↓ 1.08↑↑ 0.22 1.00↑ 1.40↑↑ 1.54 1.75↑ 1.46↓↓

ROW 0.60 0.84 1.24 0.27 0.83 1.39 1.26 1.51 1.22

Total 0.71 0.57 0.73 0.29 0.82↑ 1.16↑↑ 1.49 1.62↑ 1.19↓↓

Singapore 1990 2000 2010 1990 2000 2010 1990 2000 2010

China & Hong Kong 0.41 0.81↑ 1.50↑↑ 1.04 1.45↑ 1.18↓↑ 2.23 1.76↓ 1.87↑↓

Japan 0.57 0.82 0.81 2.01 1.30↓ 0.76↓↓ 1.69 0.45↓ 0.55↑↓

South Korea & Taiwan 0.44 0.97↑ 1.24↑↑ 0.78 1.09↑ 0.60↓↓ 2.32 1.26↓ 0.56↓↓

ASEAN-6 1.16 1.73↑ 1.77↑↑ 1.63 2.20↑ 2.15↓↑ 4.25 3.61↓ 4.69↑↑

East Asia 0.70 1.17 1.43 1.33 1.58 1.26 2.58 1.61↓ 2.01↑↓

US 0.62 0.67 0.53 1.59 1.27↓ 0.70↓↓ 0.39 0.17 0.22

EU-15 0.72 1.07↑ 1.02↓↑ 1.15 1.26↑ 0.74↓↓ 0.65 0.27 0.34

US & EU-15 0.65 0.82 0.74 1.40 1.27↓ 0.72↓↓ 0.49 0.21 0.27

ROW 0.48 0.43 0.36 0.92 1.32 0.98 1.38 0.96 1.48

Total 0.66 0.99↑ 1.14↑↑ 1.34 1.40↑ 0.97↓↓ 1.20 0.78↓ 1.06↑↓

Indonesia 1990 2000 2010 1990 2000 2010 1990 2000 2010

China & Hong Kong 1.66 0.85↓ 0.63↓↓ 0.34 0.29 0.42 0.37 0.62 0.90

Japan 6.11 2.75↓ 2.50↓↓ 0.23 0.89↑ 1.00↑↑ 4.22 1.56↓ 1.74↑↓

South Korea & Taiwan 1.15 0.95↓ 0.84↓↓ 0.03 0.24 0.29 1.27 1.59↑ 1.02↓↓

ASEAN-6 1.59 1.22↓ 1.97↑↑ 0.18 2.01↑ 2.03↑↑ 2.11 2.22↑ 2.33↑↑

East Asia 2.13 1.25↓ 1.26↑↓ 0.17 0.96 0.92 2.41 1.48↓ 1.51↑↓

US 0.53 0.55 0.57 0.02 0.30 0.23 0.92 1.23↑ 1.20↓↑

EU-15 1.54 1.12↓ 0.96↓↓ 0.03 0.39 0.32 1.40 2.03↑ 1.65↓↑

US & EU-15 0.89 0.75 0.74 0.02 0.33 0.27 1.10 1.50↑ 1.39↓↑

ROW 0.89 1.40 1.25 0.04 0.30 0.29 0.66 1.27 1.34

Total 1.52 1.09↓ 1.12↑↓ 0.07 0.59 0.54 1.47 1.48↑ 1.43↓↓

8

Dynamic Competitive Advantage of Exports by Stages of

Production & Geo. Locations, 1990-2010 Exports by stages of

production

Intermediate goods Final equipment goods Final consumer goods

Trading partners/Year 1990 2000 2006 1990 2000 2006 1990 2000 2006

Malaysia

China & Hong Kong 0.86 0.51↓ 1.18↑↑ 0.25 0.84 0.75 1.02 0.51↓ 0.80↑↓

Japan 1.41 1.71↑ 1.21↓↓ 1.71 1.62↓ 0.90↓↓ 0.71 0.85 0.63

South Korea & Taiwan 0.90 1.33↑ 0.89↓↓ 0.13 0.76 0.52 0.74 0.54 0.73

ASEAN-6 1.82 1.62↓ 1.65↑↓ 2.31 1.76↓ 1.86↑↓ 3.56 1.79↓ 2.17↑↓

East Asia (inc. Hong Kong) 1.29 1.25↓ 1.25↓ 1.29 1.28↓ 1.03↓↓ 1.54 0.93↓ 1.08↑↓

US 1.55 1.22↓ 0.73↓↓ 0.50 1.28↑ 2.27↑↑ 0.70 0.57 0.45

EU-15 1.77 1.17↓ 0.97↓↓ 0.31 0.97↑ 1.13↑↑ 1.20 0.63↓ 0.52↓↓

US & EU-15 1.63 1.20↓ 0.84↓↓ 0.42 1.16↑ 1.75↑↑ 0.89 0.59 0.48

ROW 0.70 0.85 0.83 0.25 1.08 1.04 1.32 1.00 0.67

Total 1.37 1.20↓ 1.09↓↓ 0.68 1.20↑ 1.37↑↑ 1.12 0.75↓ 0.72↓↓

Philippines 1990 2000 2010 1990 2000 2010 1990 2000 2010

China & Hong Kong 0.59 0.61↑ 2.58↑↑ 0.38 0.78↑ 1.61↑↑ 0.41 0.23 0.39

Japan 2.05 2.25↑ 2.02↓↓ 4.02 2.85↓ 2.30↓↓ 1.62 0.56↓ 0.55↓↓

South Korea & Taiwan 0.85 1.87↑ 1.48↓↑ 0.50 1.42↑ 0.71↓↑ 1.05 0.27↓ 0.31

ASEAN-6 0.98 1.45↑ 1.96↑↑ 0.30 0.85↑ 1.01↑↑ 0.30 0.32 0.59

East Asia 1.00 1.43↑ 2.10↑↑ 0.72 1.37↑ 1.40↑↑ 0.93 0.38 0.47

US 1.37 2.15↑ 1.16↓↓ 0.63 0.99↑ 0.67↓↑ 1.94 0.77↓ 0.66↓↓

EU-15 1.31 0.97↓ 1.48↑↑ 0.24 1.26↑ 1.01↓↑ 1.33 0.38↓ 0.36↓↓

US & EU-15 1.35 1.72↑ 1.30↓↓ 0.46 1.10↑ 0.82↓↑ 1.71 0.64↓ 0.54↓↓

ROW 0.43 0.69 0.52 0.14 0.51 0.31 0.79 0.30 0.22

Total 1.09 1.47↑ 1.73↑↑ 0.52 1.16↑ 1.01↓↑ 1.39 0.51↓ 0.47↓↓

Thailand 1990 2000 2010 1990 2000 2010 1990 2000 2010

China & Hong Kong 0.27 0.64 0.70 0.24 0.83↑ 1.32↑↑ 1.04 0.88↓ 0.84↓↓

Japan 1.74 1.42↓ 1.61↑↓ 3.08 1.90↓ 1.85↓↓ 2.74 1.72↓ 1.68↓↓

South Korea & Taiwan 0.38 0.78 0.70 0.29 0.73 0.59 1.25 0.83↓ 0.63↓↓

ASEAN-6 0.60 0.88↑ 1.23↑↑ 1.23 1.42↑ 1.27↓↑ 0.99 1.60↑ 2.32↑↑

East Asia 0.63 0.86 0.95 0.97 1.21↑ 1.26↑↑ 1.70 1.35↓ 1.42↑↓

US 0.61 0.75 0.76 0.69 0.77 0.85 1.16 1.08↓ 0.82↓↓

EU-15 1.03 1.10↑ 0.90↓↓ 0.30 0.96 0.87 1.78 1.14↓ 0.86↓↓

US & EU-15 0.76 0.88 0.82 0.53 0.84 0.86 1.40 1.10↓ 0.84↓↓

ROW 0.56 0.84 1.25 0.24 0.96 0.87 1.23 1.02 0.93

Total 0.67 0.86 0.94 0.65 1.00↑ 1.03↑↑ 1.48 1.18↓ 1.06↓↓

9

Trade Patterns and RCAs of East Asian Economies (Relative Structures and Dynamic Comparative Advantage of Mfg. Exports)

(by stages of production and geographical locations)

Intermediate goods accounted for 30-45 % of manufactured exports from Japan and the NIEs in 2010. The intra-regional share was two-thirds for Japan and three-fourths for the NIEs. China alone imported 50% of them.

From 1990 to 2010 the share of final goods declined in their overall export structure, but the intra-regional share increased by 7% points for Japan, and 10% points for the NIEs. The corresponding extra-regional share declined by 15% points for Japan and South Korea, and 18 % points for Taipei,China.

Three-fourths of Chinese exports were final goods in 2010 and of this 60% went to the US and EU-15. Within the final goods the share of final equipments increased by 28% points, only to be offset by the falling share of final consumer goods.

Relative export structures of ASEAN countries are heterogeneous, but a deepening integration within ASEAN and between ASEAN and China is evident.

The RCA index across “commodity space” and “country space” focuses on the evolution of each country’s comparative advantage in the regional value chain, not the world.

The finings show that Japan and the NIEs gained comparative advantage across product lines not only vis-à-vis ASEAN and China but more so each other.

For final goods a falling RCA index for Japan and the NIEs was closely mirrored in its rising value for China.

China’s progression from the simple assembly of imported inputs to more integrated forms of production is remarkable.

ASEAN countries ,with the exception of Singapore, bear strong comparative advantage across product lines but generally within ASEAN.

10

An Evaluation of South Asian Free Trade Area (SAFTA) &the present scenario of trade and investments in the region

SAFTA supersedes SAPTA. The predecessor SAPTA was signed in 1993 and it became operational in 1995. SAPTA achieved little towards freer trade within South Asia and no progress for the removal of non-tariff barriers.

SAFTA was signed in 2006 and the agreement provided for a two-stage tariff reduction to achieve free trade. It requires that LDCs will bring down tariffs to 20 % within the first three years and to the ‘free trade level’ within 8 years.

In effect, all the SAFTA countries continue to a have a long list of “sensitive” products and almost 53% of current intra-SAARC imports are restricted under the sensitive list (Athukorala, 2013).

A variety of non-tariff barriers continue to frustrate regional trade integration. SAFTA does not cover liberalization of investment.

A ‘fast-track’ approach seems emerging. Three bilateral FTAs, India-Bhutan, India-Sri Lanka, and Pakistan-Sri Lanka, are signed. Four others involving Bangladesh, India, Pakistan, and Sri Lanka are under negotiation.

The change is largely de jure and little de facto. Non-tariff barriers are large and seriously impeding the flow of goods, people and capital.

Foreign Direct Investment (FDI) Inflows to South Asia

11

Year Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka South Asia FDI to South

Asia

(in % of

Global FDI

inflows)

India's Share

in FDIs to

South Asia

1990-94 0 7 0 414 7 2 420 119 968 0.5 42.71995-99 1 357 0 2619 10 12 536 196 3732 0.6 70.22000-04 59 416 2 4959 30 6 633 201 6306 0.8 78.62005 271 845 9 7622 73 3 2201 272 11296 1.2 67.52006 238 793 72 20328 95 -7 4273 480 26272 1.8 77.42007 189 666 3 25506 127 6 5590 603 32689 1.7 78.02008 94 1086 7 43406 174 1 5438 752 50960 2.8 85.22009 76 700 18 35596 152 39 2338 404 39323 3.3 90.52010 211 913 16 24159 212 87 2022 478 28098 2.1 86.02011 83 1136 14 31554 282 96 1327 300 34792 2.3 90.7Source: Athukorala (2013), p. 48.

Proliferation of FTAs in Asia

12

Services Coverage of Asian FTAs

13

14

Factors Explaining East Asia’s FTA Proliferation

The deepening of East Asian production networks whereby product value chains are increasingly fragmented across borders in the region. This happened when the developed economies including the US and Europe notably continued to remain as the foremost destination of East Asian exports of final equipment and consumer goods.

The deepening of European and North American economic regionalism. Expansion of EU-15 into central and eastern Europe and the Baltic.

The Asian financial crisis in 1997-98 and a heightened sense of shared responsibility across East Asian countries.

The slow progress of the WTO Doha Round of trade negotiations.

South Asia and East Asia in Future Trans-Pacific

Partnership (TPP)

15

Negotiations have been underway towards the Trans-Pacific Partnership (TPP) , which aims to be the next generation or 21st century trade agreement.

TPP is of interest for several reasons. It is of interest not only because it will US and Japan, but more so because it will overlap numerous other FTAs (e.g., FTA btw India and AFTA). Most importantly, TPP will go beyond trade and trade policy and essentially cover trade in services, technical barriers to trade and intellectual property.

Negotiations are also addressing new issues which have never been a part of trade agreements, such as competition policy, regulatory coherence and standards for labor and environment.

Potential implications of TPP for other Asian countries such as China and South Asian economies. In addition to the traditional trade creation and trade diversion effects, TPP will also cause preference erosion and trade diversion for non-member countries.

ASEAN FTA and Trans-Pacific Partnership (TPP)

16

Existing FTAs among TPP and Asian Economies

17

Exports to Top Five Destinations for TPP and Asian Economies

(Merchandise exports, f.o.b., % in 2012)

18

Imports from Top Five Sources for TPP and Asian Economies

(Merchandise imports, f.o.b., % in 2012)

19

Potential Gains and Losses due to TPP via Top Five Trade Flows

20

Bangladesh Economy

Its Size and Pattern of Growth Acceleration

21

02

46

81

0

GD

P g

row

th r

ate

(in

pe

r ce

nt)

50

01

00

01

50

02

00

02

50

03

00

03

50

04

00

04

50

0

Re

al G

DP

in

bill

ion

ta

ka

(at

co

nsta

nt

19

95

/96

pro

du

ce

r p

rice

s)

1985 1990 1995 2000 2005 2010 2014Year

A. Bangladesh Economy(Its size and growth, 1985-2014)

Growth of per capita GDP

Growth rate of GDP

02

46

81

0

Fiv

e-y

ea

r a

ve

rag

e o

f g

row

th r

ate

(in

pe

r ce

nt)

1985 1990 1995 2000 2005 2010 2014Year

B. Growth Acceleration of GDP and Per capita GDPof Bangladesh Economy:1985-2014

Panel-A shows GDP of Bangladesh economy (at 1995/96 prices) in billion BDT and growth rate of GDP, both actualand Hodrick-Prescott smoothed series, over the 1985-2013 period. Panel-B shows growth acceleration in both GDP andper capita GDP. A 5-year averaging of annual growth rates is done for identifying growth acceleration between periods.Source: Author's estimates from National Income Accounts Statistics of Bangladesh Bureau of Statistics (2000, 2005, 2014).

Sectoral Contribution to Growth Acceleration

between 1985/1994 and 1995/2014 (In 1995/96 producer prices)

22

Sector

GDP

growth over

1984/85~

1993/94

(billion

taka)

GDP

growth over

1994/95~

2003/04

(billion

taka)

GDP

growth over

2004/05~

2013/14

(billion

taka)

Incremental

GDP (from

1985-94 to

1995-2004)

(billion

taka)

Sectoral

share in

incremental

GDP in

1995-04 (%)

Incremental

GDP (from

1995-2004

to 2005-14)

(billion

taka)

Sectoral

share in

incremental

GDP in

2005-14 (%)

1 2 3 4=(2-1) 5 6=(3-2) 7

Agriculture 71.6 159.3 255.5 87.7 17.2 96.2 8.9

Crop production 31.6 75.7 119.7 44.1 8.7 44.0 4.1

Fisheries 25.3 49.0 72.7 23.7 4.7 23.7 2.2

Others 14.7 34.6 63.0 19.9 3.9 28.4 2.6

Industry 154.0 331.7 797.4 177.7 34.9 465.7 43.0

Manufacturing 94.9 181.1 514.3 86.2 16.9 333.2 30.7

Large & medium 68.0 126.5 380.9 58.5 11.5 254.4 23.5

Small scale 26.8 54.7 133.4 27.9 5.5 78.7 7.3

Construction 38.4 121.0 212.9 82.6 16.2 91.9 8.5

Others 20.7 29.6 70.3 8.9 1.7 40.7 3.8

Services 222.8 465.9 987.9 243.1 47.8 522.0 48.2

Total GDP 448.3 956.9 2040.8 508.6 100.0 1083.9 100.0

Foreign trade, trade gap, inward flow of remittances and

accumulation foreign exchange reserves

23

Exports

Imports

51

01

52

02

53

0

(in

% o

f G

DP

)

1985 1990 1995 2000 2005 2010 2014Year

Panel A: Foreign trade, 1985-2014

05

10

15

20

Bill

ion

US

do

llars

24

68

10

12

in p

erc

en

t o

f G

DP

1985 1990 1995 2000 2005 2010 2014Year

Panel B: Inward flow of remittances &Forex reserves, 1985-2014

Panel-A shows exports and imports in goods and services in percent of GDP. Panel-B shows inward flow of remittancesin percent of GDP in the left scale and the pattern of reserve accumulation in billions of US dollars in the right scale.Source: Bangladesh Bank (2014).

Remittances, Monetary Expansion, and Asset (Stock)

Market Bubble & Bust in Bangladesh

24

20

30

40

50

60

M2

in

pe

r ce

nt

of

GD

P

05

10

15

Re

mitta

nce

s in

bill

ion

US

do

llars

1985 1990 1995 2000 2005 2010 2014Year

Panel A: Foreign Remittancesand M2/GDP Ratio, 1985-2014

01

02

03

04

0

An

nu

al D

SE

tu

rno

ve

r

in p

er

ce

nt

of

GD

P

20

30

40

50

60

M2

in

pe

rce

nt

of

GD

P

1990 1995 2000 2005 2010 2014Year

Panel B: Monetray Expansion and Stock MarketBubble and then Bust, 1990-2014

Panel A shows remittances and expansion on monetary aggregates in Bangladesh. The vertical barsrepresent inward foreign emittances in billion US dollars and shall be read on the left scale. The lineshows m2 in percent of GDP on the right scale. Panel B depicts an association between cheap money andsurge in the stock market turnover in the Dhaka Stock Exchange (DSE), which then followed by a bust in 2011.Sources: Dhaka Stock Exchange (2012), Bangladesh Bank (2012).

Bay of Bengal Industrial Growth Belt (BIG-B) Initiative

BIG-B is an initiative of Prime Minister Sheikh Hasina and Prime Minister Shinjo

Abe and mutually agreed upon in their Tokyo Summit in March 26, 2014.

The initiative will likely help Bangladesh evolve as a “node & hub” in the latest

phase of globalization in which the gravity of the world economy is moving away

from the Asia-Pacific region to the Indo-Pacific region.

BIG-B is comprised of three pillars.

The first pillar is industry and trade and consists of constructing a long-awaited deep

sea port at the Matarbari Island.

The second pillar is an energy infrastructure including the development of a massive

supply base of primary energy (such as coal, LNG and oil). The planned energy

infrastructure is envisioned to satisfy 50% of the forecasted 40,000MW power

demand by 2030.

The third pillar is transportation and involves the construction of Dhaka-Chittagong-

Cox’s Bazar transport artery.

JICA and the government of Bangladesh have already signed an agreement to this

end and a flagship project named “Matarbari Ultra Super Critical Power Project” is

expected to start commercial production by 2022 or earlier.

Parallels are strong btw BIG-B on the one hand and Japan’s Pacific Belt in the 1960s

and then Thailand’s Eastern Seaboard Development Program in 1980s on the other

hand. 25

Economic Opportunities from BIG-B

BIG-B is a set of basic infrastructures. It will reduce both production costs

and transactions. A sustained reallocation of labor will occur form low-

productivity activities to high-value added activities. Labor productivity will

observe a quantum jump.

Supply schedules of firms and so the aggregate supply curve will thus shift

to the right. To the extent global organization of production concentrates in

the Dhaka-Chittagong-Cox’s Bazar industrial zone, it would accompany

both FDI and technology diffusion. A shift in the long-run growth path is

thus likely.

The second opportunity is to evolve as a “nod & hub” in the global supply

chain in the Indo-Pacific economic region. That implies Bangladesh to be a

platform of final stages of assembling and exporting to the world.

The third opportunity lies with a substantial expansion of aggregate demand

via rising foreign spending on home goods from an untapped market

consisting of the land-locked Nepal, Bhutan and India’s seven North-Eastern

states.

The fourth dividend will arise from free-flow of labor, capital and goods

across borders in South Asia and it is that incentives to pursue illegal

migration and cross-border terrorism will significantly subside.

Potential Challenges to Vision 2021

Governance (broadly defined) problem comes first. It arises from low

capacity of institutions and policy incoherence across sectors and

institutions.

Outcomes of ineffective governance are many. They are namely (a) an

environment of weak enforceability of laws and rules, (b) a low tax-GDP

ratio and hence a constrained fiscal space of the government, (c) serious

information problem in private corporations (d) pervasive expropriation of

the interests of external shareholders and bondholders/depositors by insiders,

(e) ineffective capital markets, low equity base and concentrated ownership

structure, (f) excessive financial leverages by corporate managers, (g)

mounting problems and so higher borrowing costs, (h) depressed private

sector investments.

The rising demand for employment but the new labor force lacks in relevant

and transferable skills.

Inadequate provision of basic infrastructures in areas of energy, transport,

water supply, sanitation and communication.

Deepening integration with the world economy--market access opportunities

in the developed countries, international migration, FTAs, and so on. 27