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Where industries are made

  • Published at 06:52 pm October 20th, 2018
Encourage other industries to set up elsewhere Mainoor Islam Manik/Dhaka Tribune

Our nation’s industries need to spread out

Bangladesh is too concentrated an economy.

Too much of what economic activity there is, is in Dhaka, with Chittagong coming a distant second, the rest of the country hardly getting a look in in terms of the creation -- and enjoyment -- of that new economic wealth. 

This is what we’re being told by a discussion at the Policy Research Institute and by and large they’re correct. The horrible thing is though, what do we do about it? 

Our problem is that there’s a very strong association between urbanisation and economic growth. This becomes even greater when the growth is being driven by just the one industry when agglomeration comes into play. There’s not really any answer to this either. 

Other than gaining some of that growth from other industries, where similar effects will still occur but perhaps in other places. What no one has really managed is to continue with that idea of it being the one sector driving growth and yet also managing to spread it out over geography. We humans seem not to really work that way.

This is as true of London as a global financial centre as it is of Bangladesh and its garment manufacturing sector.

It’s entirely true that the hill districts, the islands, aren’t gaining those factory jobs. They’re hugely concentrated in the two big cities. It is that sector producing the vast majority of Bangladesh’s exports, value, and thus, economic growth. Yet, as above, we then face the problem of what to do.

For it is true that people in cities, as a result of urbanization, tend to have higher economic output than those out in the country in villages. This is really just a reflection of the old Adam Smith ideas of the division and specialisation of labour. 

We can and should then trade our better -- or higher -- output with those who are similarly specializing. In this manner, there’s more for all, and we’re all richer. 

And, quite obviously, we can do more of this if we’re in a grouping of more people who are doing this. We’re less limited by transport costs over who we can trade, divide, and specialise with. 

Thus, urbanisation increases output per head, and we become richer. It’s also true that the recent Laureate Paul Romer has pointed out that ideas are what really matter. And more people in the same place discussing things with more people seems to lead to more ideas being thought through and then implemented -- that innovation which is the only important driver of long-term growth.

Cities are, therefore,a good thing. But we also have this agglomeration. Once a specific path of the sector starts to dominate, then we find that the further specialisation tends to be in again this sector. The specialization itself generates more division of labour within that specialization. 

More sub-contracting, more experts, more and more activity in that sector itself. And it’s this part of the process that we cannot really then distribute over geography. Simply because it’s being created by so many people following that same path in that one place.

Examples of this are abundant.

Stoke on Trent used to be where the British potteries were (the surrounding area was called “The Potteries”) and even now if you set a new china maker up, you’d do it there. The trained workforce, all the supporting services, the general unspoken knowledge of how to do it, that’s where they all are. 

Sheffield and Rotherham are still, centuries after they started to be, the centres of the UK’s metals industries. And London, of course, is a global financial capital, as it has been for those centuries now. This is just what happens, a place starts to get good at something and it snowballs down the decades.

And it is true that if you want to set up in those industries, those are the places you will go. In my own specialist area, weird metals, that latest entrant is in Sheffield. And anyone starting out in financial services will at least consider London.

Which is how we can explain what is happening in Bangladesh. It is the RMG sector which dominates the formal economy, certainly as far as exporting is concerned. And this is subject to those agglomeration effects

The network of sub-contractors needs to be close to other such subcontractors. And all need to be close to the major factories who perform the final assembly and contracting work. We simply have to have geographical proximity for the cluster of excellence and efficiency to work at all.

So, yes, we end up with industry and economic value add being concentrated into those major urban centres and much of the rest of the country doesn’t really get a look in. The thing being that there’s little to nothing we can do about this. 

Nothing we can do about this specific industry -- that is the economic pull or logic of that clustering and agglomeration -- is too strong. It’s the same process that leads to much of the world’s socks -- 80% by some counts -- being made in one city in China, a similar portion of the world’s spectacle frames being made in one area of Northern Italy.

The only thing we can do is try to spread other economic activity over other parts of the country. That is, we can’t try and make RMG spread itself over those rural areas, that’s not going to work. 

But we might be able to encourage other industries to set up there. Which, and how, is another matter. But trying to spread out an industry which is succeeding precisely because it is geographically concentrated isn’t going to work.

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.

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