This paper evaluates the export perjormance of Bangladesh after tirerapid trade ... ready made garments (RMG) has emerged as the single II10st dominant export item, which now .... clear shift from primary exports to manufactures, and from.
'joreign ~rade
Trade Liberalization and Export Performance of Bangladesh K.M.Golum Mohiuddin, MBA, FOrA Md. Didarul Hasan This paper evaluates the export perjormance of Bangladesh after tire rapid trade libaatization in the early 1990s. The trade-GOP ratio of Ballgladesh has increased significantly during 1990s,ref/ectillg greater openlless of the economy to tire external world. Bangladesh also achieved fairly high growths in exports in iha! period compared fa previous decades. The structure of export hos changed significantly, shifting from priman) goods to mallltjacturing goods, and from traditional to non-traditional items. The ready made garments (RMG) has emerged as the single II10st dominant export item, which now aCcollntsfor almost 80 per cent of total exports. However, the export of Ballgladesh is highly concentrated ill both C01l11110diM) and market dimensions, whidl reflects the weakness and fllIlllerability of the export sector. Introduction
T
hough Bangladesh pursued import-substitution strategy in the early years of independence, it has been gradually liberalizing trade since the 1980s. However, the pace of liberalization has gained momentum from the early 1990s, by the abolishment of quantitative restrictions, a drastic reduction in the tariff rates, and the convertibility of Taka in the current account. Simultaneously, a number of policy reforms were carried out to provide adequate incentives to the domestic export sectors as well as foreign investors. These reforms have been undertaken through the guidance of the WTO and also been encouraged by the South Asian Preferential Trading Agreement (SAPTA), signed in 1995. The economy of Bangladesh is thus currently exposed to the global economy to a greater extent than ever before. This paper examines the trade performance; especially export performance of Bangladesh after the trade liberalization in the early 1990s. The structure of the paper is as follows: Section 1 provides introduction, Section 2 shows the methodology, Section 3 analyses the trade liberalization and economic integration process of Bangladesh. Section 4 illustrates the performance of export sector of Bangladesh after trade liberalization, and finally Section 5 concludes the paper.
Methodology The paper is based on secondary data. The secondary sources include World Bank and Asian Development Bank reports, annual reports of Export Promotion Bureau, and Research and lnforma tion System for The Non-Aligned and Other Developing Countries (RlS, lew Delhi, India). The paper uses different indicators to show the
trade liberalization process and export performance of Bangladesh. Data are presented in the tabular form.
Trade liberalization Bangladesh
and Economic Integration of
Bangladesh initiated trade liberalization in the 1980s, but the pace of liberalization accelerated in the early 1990s.Though Bangladesh, being a least developed country, was exempted in the Uruguay Round Agreements of WTO from making commitments regarding tariff restriction, rationalization of the tariff structure has been one of the key elements of trade policy reforms of Bangladesh. Prior to 1986, there were 24 tariff slabs, which have been reduced to 12 by 1993-94;6 by 1996-97;and 4 by 1999-00.Preferential rates of duties applicable to public sector enterprises were eliminated in 1989. As part of rationalization measures, the maximum tariff rate was reduced from a level of 350 per cent in 1991-92 to 50 per cent in 1995-96,42.5 per cent in 1997-98,and further down to 37.5 percent in 1999-00. As a result, the average tariff protection fell from 89 percent in 1990-91to 25 per cent in 1995-96,22 percent in 1999,and further down to 17 per cent in 2003. The tariff reduction rate of Bangladesh has been faster than the neighbour South Asian countries, as shown in the Table 1. Table-I : Trends in un-weighted
average tariff rates in South
Asia (per cent) Bangladesh India Nepal Pakistan Sri Lanka
1986 81.8 100.0 21.0 66.0 27.3
1991 88.6 7912 22.6 66.0 26.9
1995 42.0 41.0 11.0 51.0 20.0
1999 2002-03 22.2 17.0 30.0 20.0 14.7 16.3 20.6 41.7 20.0
s.",rrt: l\'.vtJ &Ilrl alld RIS (Rtsa!rcll alUi IIIformation System for Tile Non-Aligned and OIlJer DeveJoping GNnJrits, 1\'(;1) Dtlhi.lndw). 200t 44
The Cost and Management, May - June, 2005
~------------------------------------------------------------Joreigncrrade While in 1991 Bangladesh had the highest average tariff rate in South Asia, by 2003 the country's average tariff became lower than both India and Pakistan. Thus, Bangladesh liberalized its economy speedily than other SAARC countries. As part of trade liberalization, Bangladesh also reduced quantitative restrictions significantly from 1980s to 1990s. For example, the coverage of quantitative restrictions has been reduced from 42 per cent in 1995 to 25 per cent in 1990, and drastically down to 2 per cent of imports in 1996. Other policy measures include shifting from a fixed exchange rate regime to a managed system of floating. In 1996-97, the Bangladesh government accepted the conditions of article VIII of IMP by making the Taka fully convertible for current account transactions. In addition to trade liberalization, FDI inflows were encouraged by setting up special economic zones. In 1989, the board of investment was established in the country to encourage foreign investment: The foreign investment policy was revised in 1991 and it removed the limit on foreign equity participation and obligation for joint venture or ban on fully owned companies to sell shares through public issues. In addition, the 1991policy allowed foreign investment through working capital loans equivalent to the foreign equity amount and participation of foreign investors in stock exchanges, and exempted tax on royalties, technical know-how, interest and capital gains. Reforms also aimed at making use of market based instruments to manage liquidity and bring about a more realistic interest rate. To encourage lending and inturn investment in the private sector, the central bank has reduced the bank rate significantly in recent time. In 2002 the government made it mandatory for the commercial banks to meet their cash reserve ratio only through local currency and not through their foreign currency balances as the later weakens monetary control. Covernment also undertook measures to tighten budgetary discipline and set up Public Expenditure Review Commission and a Revenue Reform Commission in 2002. On the whole, Bangladesh has undertaken unprecedented liberalization and reforms initiatives during the past decade. As a result the economy of Bangladesh is more open and integrated to the world economy than ever before. The increasing openness of the economy is reflected by the dramatic increase of the trade-CDP ratio of Bangladesh during the 1990s. Table 2 shows that the trade CDP ratio of South Asian countries (except Pakistan) has increased significantly from 1990 to 2001. Table-2 :Trade-CDP ratios of South Asian countries, 19902001(per cent). 1990·92
Bangladesh India Pakistan Sri Lanka Nepal
19.83 18.78 37.45 68.42 36.28
1996·98
30.47 25.45 36.40 79.17 59.SO
2000·01
35.50 29.79 35.84 85.42 55.06
Source: World Balik alld ADS (As"", Droelopmellt Balik), World Dcvtlopm~lItllldlcators-2003.
The Cost and Management,
May - June, 2005
The table clearly shows that trade-CDP ratio of Bangladesh has increased more rapidly than other South Asian countries in that period, which again reflects that liberalization process of Bangladesh has been faster than its neighbours.
Trends and Pattern of Exports Growth in exports Bangladesh exports have registered Significant growth during the ~990s.While the average growth of exports during the 1980s was 7.4 per cent, the average growth almost doubled during the 1990s and it was 14.5 per cent. The export performance of Bangladesh was quite impressive if we compare with overall South Asian growth performance in the same period. Table 3 shows the exports growth of the South Asian countries during the 1990s.The Table shows that Bangladesh has achieved higher growth rates in exports compared to whole South Asia and as well as mostof the individual countries in South Asia. However, the growth rate has been fluctuating in the whole region. The early 1990's(1991-92) marked by a moderate rate of growth of exports for the region (6.6 percent) the mid 1990's(1993-95) marked high growth of exports of around 19 per cent; and in the late 1990's the average export growth rates have lowered to the moderate level of 6.5 per cent. The decline in the growth of exports in the late 1990's can be attributed to the slow down of the world trade in that period, which was further aggravated by the East Asian financial crisis. Table-S : Average growth of exports of South Asia at different phases in 1990's (per cent). South Asia Bangladesh India Pakistan Sri Lanka Nepal Maldives Bhutan
1991-2000
1991-92
1993·95
1996-2000
10.3 14.5 9.6 5.6 11.6 16.5 7.1 6.3
6.6 14.2
18.9 21.0 19.6 5.0 15.7 4.0 12.3 3.7
6.5 10.7 7.0 1.3 8.0 16.9 4.4 10.8
1.1
17.2 14.4 34.5 6.0 ·0.9
Source: RIS (Research and llIformatioll SysteJII for The NOll-Aliglled alld Other Developillg Countrie«, New Delhi, Illdia), 2004.
Thus after the rapid trade liberalization in the early 1990s, Bangladesh showed a tremendous performance in the export sector. The contribution of exports in CDP also increased Significantly from 1980s to 1990s. For example, Rahman (1997) shows that exports as a percentage of..CDpmcreased from 4.98 per cent in 1981 to 12.58 per cent in 1995. Structural change ill exports The structure of exports in Bangladesh has undergone Significant change during the last two decades. Toa large extent this change is 45
Joreign C'fr:ade caused by, and reflects, the changing structure of GDP where the contribution of traditional agricultural sector is decreasing and that of services and to some extent manufactures, is increasing. The most remarkable change in exports where there has been a clear shift from primary exports to manufactures, and from traditional to non-traditional exports. The share of primary exports such as raw jute, tea, frozen food, and other agricultural products such as tobacco and vegetables, accounted for almost one-third of the total exports in the early 19805, declined continuously over the last two decades, currently accounted for only 8 per cent of total exports. Table 4 clearly reflects this structural shift. The shift in export structure is even more pronounced when exports are separated into traditional (which includes raw jute, jute goods, leather, tea and some minor agrorelated exports) and non-traditional categories. The most important structural shift was caused by the evolution of the garments sector in Bangladesh. The rapid development of the garment industry was possible due to the Multi-Fibre Agreement (MFA) quotas and GSP facilities provided by the USA and European Union to Bangladesh. The ready made garments (RMG) has emerged as the single most dominant export item for Bangladesh, which now accounts for almost 80 percent of total export. Table-t : Structural shifts in Bangladesh exports (per cent of total exports). Export structure 1980/81 1984/85 1989/90 1994/95 Primary exports 29.4 34.0 21.2 13.0 Manufacturing 70.6 66.0 78.8 87.0 Traditional exports 44.0 18.0 82.1 71.8 Non-traditional 17.9 28.2 56.0 82.0 Jute exports 68.4 57.8 29.9 11.5 RMG exports 0.0 12.4 40.9 64.3 Source: Annual reports of Export PromotlOll Bureau (vaT/ous years).
1999/00 8.7 91.3 13.0 87.0 8.3 74.6
The analysis of export structure of Bangladesh reflects that the country's exports are not diversified, rather concentrated on few products, especially on garments. This represents a major weakness of the export sector of Bangladesh. In fact the great challenge for garmen ts exports of Bangladesh has emerged after the abolishment of export quotas from January 2005.In the quota free world, now Bangladesh has to compete freely with China and other East Asian countries in the garment sector. Destinations for Ballgladesh Exports The major share of Bangladesh export goes to the industrial and developed world, only a small share goes to the developing countries. Thus, the exports of Bangladesh are highly dependent on the economic condi tion of the developed countries. Moreover the proportion of export directed to the industrial countries is increasing over time. RIS (2003) shows that the share of Bangladesh exports destined to industrial countries has 46
increased from 76 per cent in 1991 to 83 per cent in 1999. The export markets of Bangladesh are not diversified, rather heavily concentrated. on few countries or regions. In 1999 the US and EU markets accounted for almost three-fourth of the exports of Bangladesh. ~ote, US is the single largest export market for Bangladesh, which accounted for one-third of the total exports the country. But, in terms of region EU is the largest market for Bangladesh export, which accounted for almost 40 per cent of total exports (RlS, 2(03). Thus, the exports of Bangladesh are not only less diversified in commodity dimension, but also on market dimension. Tosustain the robust export growth Bangladesh need to diversify the export market by finding new export destinations in the emerging markets of East Europe, Latin America, Africa, and Australia.
Concluding Remarks The export performance of Bangladesh is impressive after the trade liberalization in the early 1990s.However, the exports are heavily concentrated on a single item, Ready Made Garments, which accounts for 80 per cent of total exports. Moreover, after the abolishment of MFA quotas it will be challenging and difficult for Bangladesh to maintain high growths in garments exports. Thus, the policy implication of the paper is that, Bangladesh should try to diversify its exports in different products, which will minimize the risks of losing export markets. Bangladesh's exports are also concentrated on few destinations, mainly on USA and European Union. So, the country needs to diversify its export market by finding new export destinations. The paper just analyses the export performance of Bangladesh and identifies some weaknesses in its export structure, However, the paper does not explore details remedial measures to the problems identified. Further research should find out the solution of the problems. 0
References Khan, S.M., 1997. 'South Asia: Free Trade Area and Trade Liberalization', Journal of Asian Ecollomics, vol.8, no.I, 165-177. Khan, S.M. and Khan, l.S., 2003. 'Asian economic integration: a perspective of South Asia', JOIIl7I11Iof Asian Economics, vol.13, 165-177. Mayer, J. and Wood, A., 2001. 'South Asia's Export Structure in a Comparative Perspective', Oxford Development Studies, vo1.29, no.l, 1-29. Rahman, M.,1997. 'Recent policy of trade liberalization in Bangladesh and issues of regional co-operation in South Asia', Journal of Asian Economics, vol. 8, no.l,117-141. Research and Information System for The Non-Aligned and Other Developing Countries CRIS),200t South Asia lXvelopment and Co-operation Report 2004, New Delhi, India. The Cost and Management,
May - June, 2005
