Bangladesh’s growth and export performance has been impressive and resilient in the face of both external shocks, such as the global financial crisis, as well as internal one’s such as hartals and the Rana Plaza disaster. GDP growth has consistently had an average of around 6%, while the expansion of RMG exports from around $10bn in 2010 to around $24bn today speaks for itself.
Nonetheless, I believe that Bangladesh has the opportunity, by deepening its ties to Japan, China, South Korea and Asean, of what I term as a new “Look East Policy” (LEP), to achieve an acceleration in GDP growth to 7-8%. This would be driven by an expansion of export sectors on the back of a rapid increase in FDI and infrastructure development.
Last week, I attended a seminar hosted by Jetro (Japan External Trade Organization) on Look East Policy where Professor Fukunari Kimura, Chief Economist of the Economic Research Institute for Asean and East Asia (ERIA), outlined new growth opportunities for Bangladesh.
In this article I want to discuss three core themes:
- The China relocation trade
- Japanese PM Abe’s “Big B” growth corridor concept
- Professor Kimura’s key theme of international production networks and a new approach to economic development
I will then conclude with some suggestions on how Bangladesh should move forward.
The China relocation trade
Let us first start with what has been termed as the China relocation trade. The evolution and rebalancing of Chinese macro-economic policy looms large as potentially the most important influence on the future growth and investment opportunities for frontier markets like Bangladesh.
It has already begun to trigger a major expansion in existing export sectors such as RMG, will spurn dramatic growth in others such as footwear and shipbuilding and spawn whole new export sectors such as toy manufacturing, light engineering and electronics/appliance assembly.
Professor Gus Papanek noted in a speech in Dhaka in 2010 that: “Bangladesh has a unique opportunity within the next year and a half or two years because it has the possibility of taking over part of the world market that China is going to abandon.”
Former World Bank Chief Economist, Justin Li-fu Lin has echoed a similar theme in several articles and speeches stating that “industrial upgrading has increased wages and is causing China to graduate from labour-intensive to more capital and technology-intensive industries.
These industries will shed labour and create huge opportunities for lower wage countries to start a phase of labour-intensive industrialisation. This process, called the Leading Dragon Phenomenon, offers an unprecedented opportunity to … (developing countries) … where the industrial sector is underdeveloped and investment capital and entrepreneurial skills are leading constraints to manufacturing.”
There is a major opportunity for those countries that can resolve investment constraints by attracting some of the FDI flowing currently from China, India and Brazil into the manufacturing sectors of other developing countries.
Lin concludes that “all low-income countries will compete but to catch the jobs spilling over from China, the winner must implement credible economic development strategies that are consistent with its comparative advantage.”
‘Big B’ growth corridor
It’s also important to recognise that the China relocation trade will not be driven by China alone. Indeed, counter-intuitively, China may play a lesser role than countries such as Japan, Korea and Taiwan.
The reason for this is that companies from these three countries, and to a lesser extent those from the US and EU, have established lower cost factories in China in the past two decades. Their re-appraisal of the attractiveness of those destinations as a result of higher wages will drive both the movement of existing facilities from China as well as the re-direction of future FDI.
It is also worth adding that geo-political tensions between China and Japan as well as other countries over territorial disputes in the resource rich South China Sea is also likely to influence FDI decisions in terms of reducing political risk to investments.
In this context, the initiative taken by Prime Minister Sheikh Hasina to visit Japan in May 2014 and the subsequent return visit by Japanese PM Shinzo Abe in September, is especially significant.
At the joint press conference, Prime Minister Abe, as part of the “Japan-Bangladesh Comprehensive Partnership,” committed Y600bn (approx $5bn) over 4-5 years in the form of development loans. He also noted that “Bangladesh has great economic potential. In order to realise its potential and expedite further growth, Japan has come up with the concept of the Bay of Bengal industrial growth belt …” or what he termed “The BIG-B.”
This concept was clarified in a speech by JICA president Professor Akihiko Tanaka at Dhaka University in June 2014 in which he stated that: “Perhaps it is high time for the Bay of Bengal to be considered as a coherent strategic region within the broader framework of the Indo-Pacific.
Bangladesh’s renewed focus to “look east” would be timely and appropriate in this sense. Bangladesh, in other words, is the linchpin of the Indo-Pacific region. It stands to gain a great deal from the shift in global economic dynamism toward the Indian Ocean. Indeed, the Bay of Bengal Industrial Growth Belt initiative (BIG-B) seeks to take full advantage of this trend.
It foresees Bangladesh transcending its national borders to become a “node & hub” of the regional economy, so that she may reshape herself as a sparkling trading nation deeply incorporated into inter-regional and global value chain networks. This transformation is imperative if its national target of becoming a middle-income country by 2021 and a developed country by 2041 is to be achieved.
Professor Tanaka went on to outline the three pillars of “Big B” policy as follows:
1) Trade and Industry: This pillar mainly consists of constructing a long-awaited deep sea port at the Matarbari Island which would offer Bangladesh an important trade gateway to the rest of Asia and beyond;
2) Energy: Matarbari Island can be developed into a massive supply base of primary energy (such as coal, LNG, and oil). The electricity produced from those sources can support a quantum leap in industry and trade, not only within the area covered by BIG-B but also all over Bangladesh.
JICA has already committed $1.8bn plus to the Matarbari Coal-Fired Power Project which has two key components, a deep sea port 18m in depth for importing coal and a coal-fired power plant with an electricity generation capacity of 1,200MW. That is equivalent to 15% of current electricity demand.
The deep sea port will enable 80,000 ton class ships (panamax size) to directly enter the port for coal unloading. Its construction is expected to be completed in 2020. The coal-fired power plant should start commercial operation in 2022, or perhaps even earlier.
3) Transportation: To enable greater industry, trade, and energy production, the Dhaka-Chittagong-Cox’s Bazar transport artery needs to be strengthened and even extended to neighbouring countries. More and better national highways and railways are an absolute must to accelerate the movement of goods and people that is essential for highly vibrant industrial agglomeration.
Finally, Professor Tanaka, formerly of Tokyo University, who is also recognised as a leading development economist, highlighted the lessons for Bangladesh from the development experience of Thailand. He noted that JICA’s Eastern Seaboard Development Programme in Thailand is a model of how Japan’s experience and a pro-growth development strategy can bear fruit elsewhere.
From the 1980s to the early 1990s, JICA supported efforts by the Thai government to pursue industrialisation through the promotion of industrial parks and networks of ports, highways and railways with ODA loans and technical cooperation. Thailand has now become a big manufacturing hub in the global supply chain.
He gave the example of the automobile sector, where Thailand’s auto production has reached 2 million units per annum in 2012, led by a cluster of major makers with 640 parts suppliers and 1,700 auto-parts subcontractors. The Eastern Seaboard itself has grown into a large industrial and export base with 14 industrial complexes, 1,300 factories and 360,000 workers. It is now the country’s second largest economic area next to Bangkok.
International production networks and a new approach to economic development
This brings us to Professor Kimura’s paper “International Production Networks and a New Development Strategy in East Asia” that he presented at the Jetro seminar on December 1. His core theme was that Asean countries in the past decade have benefited from the formation of international production/distribution networks.
He noted: “The international production/distribution networks consist of vertical production chains extended across the countries in the region as well as distribution networks throughout the world.
“The major players are corporate firms belonging to the machinery industries, including general machinery, electrical machinery, transport equipment, and precision machinery, though some firms in other industries, such as textiles and garment, also develop the networks.”
It sounds complicated but the concept is more straightforward. Let’s use the example of something we are all familiar with, the Apple Iphone 6. It is assembled by Taiwanese companies, Foxconn/Honhai and Wistron in Southern China, using screens supplied by Japanese companies Sharp and Japan Display as well as LG from Korea. Memory chips come from arch rival Samsung and the camera from Taiwan Largan precision.
But most of these companies have offshore production factories in cheaper countries. For example, Iphone 6 touchscreen supplier Wintek has factories in China, Taiwan, India and Vietnam. We could do a similar analysis or breakdown for autos, electronics, heavy machinery and many other sectors.
The chart from Professor Kimura shows the breakdown of machinery exports and imports between final products and parts and components by region in millions of US dollars. You can see that in Asean, parts and components have an even larger share than final products.
The way forward
The key point is that international production has become increasingly specialised. What economists call production “fragmentation,” has been driven by reduced transport, telecommunications and other costs between countries that allows economies of scale from specialisation.
What are the conclusions for Bangladesh policy of the three themes of China Relocation, “Big B” and production networks I have outlined above? I would suggest that we adopt more explicitly a Look East Policy centred around the four core themes:
1) Investment – to include Special Economic Zones policy, FDI promotion/attraction, regulatory environment;
2) Trade policy – to ensure tariffs are reduced to allow our products to integrate into regional networks as well as a goal of developing new Free Trade Agreements (FTA) with key trading partners such as Japan, China, Korea, Asean;
3) Regional connectivity – including concepts such as Japan’s “Big B” or China’s Maritime New Silk Route that was unveiled by Chinese President Xi Jinping at the recently concluded APEC Summit in Beijing. These are not competing concepts, notwithstanding geopolitical rivalries between the regions’ great powers. They are both largely about enhancing regional integration and connectivity for the mutual benefit of all countries in the region;
4) Infrastructure – to ensure improved energy, roads, rail and sea networks are economic growth enablers and not constraints.
Maintaining ongoing dialogue with our key Asian trading partners is critical. Since PM Abe’s visit on September 6, it appears that there has been a substantial increase in Japanese companies visiting and/or expanding their local presence in Bangladesh. The presence has been broad, ranging from larger conglomerates such as Sumitomo, Mitsubishi, Mitsui, Itochu, Marubeni as well as medium sized companies.
A 38 member Japanese business delegation also concluded a visit to Bangladesh last month. The first Bangladesh-Japan Public-Private Economic Dialogue was held on August 21 in preparation for PM Abe’s visit with a focus on boosting bilateral trade, investment and economic cooperation between the two countries.
Japanese Vice-Minister (International Affairs) of METI Norihiko Ishiguro led a 38-member Japanese delegation, while Senior Secretary of the Prime Minister’s Office (PMO) Abul Kalam Azad led a 32-member Bangladeshi delegation. It is important to maintain the momentum and I would recommend that the Bangladesh Government request the second Bangladesh-Japan dialogue be held in Tokyo in Q1 2015.
Finally, I would suggest that the government consider setting up a Look East Policy cabinet sub-committee headed by the prime minister and also establish a dedicated unit that focuses on the four key LEP components I have highlighted above.
Bangladesh stands at a critical juncture in its economic development and an enhanced focus on LEP could be the transformational factor in accelerating growth and reducing poverty. Let’s not miss the opportunity!