Bangladesh economic model extremely vulnerable to external shock: OECD study

Bangladesh's current economic development model, which is based on overreliance on one export sector – ready-made garments, high import dependence concentrated in Asia, limited regional integration, and low foreign direct investment, makes the country increasingly vulnerable to external shocks and widening trade deficits, according to a recent study.

Bangladesh needs to update its economic model by reforming trade policies, diversifying its export base, and developing a strategic network of international partnerships to prepare for graduation from the Least Developed Country (LDC) category, recommend the study titled "Production Transformation Policy Review of Bangladesh: Investing in the Future of A Trading Nation".

The report was unveiled jointly by the OECD Development Centre, United Nations, UNCTAD, European Union and Bangladesh government at an event held on Tuesday in a city hotel.

Salman F Rahman, private sector adviser to the prime minister, attended the event as chief guest while State Minister for Foreign Affairs Md Shahriar Alam, State Minister for ICT Zunaid Ahmed Palak, European Union Ambassador to Bangladesh Charles Whiteley, Director of OECD Development Centre Ragnhelour Elin Arnadottir, FBCCI President Mahbubul Alam, and Bangladesh Competition Commission Member Hafizur Rahman unveiled the report.

The report says, "Bangladesh is grappling with multiple challenges, from mitigating the impacts of climate change to preparing for LDC graduation. Additionally, the country must address the growing demands for increasing transparency and accountability in public and private actions arising from domestic and international stakeholders.

"To secure a prosperous future, Bangladesh needs to prioritise new drivers of growth: shifting from a price-led competitiveness model to one grounded in quality and innovation."

According to the study, Bangladesh needs to modernise its policy approach and it identified five priorities for policy reforms including fostering innovation, managing openness and regional integration, institutional streamlining and modernisation of cutting red tape, and updating the regulatory framework.

The report says, "Trade deficit is ballooning despite export growth, as imports have risen markedly due to growing energy and input needs to sustain established domestic and export-oriented industries, inflationary pressures and reduced remittances.

"The balance-of-payments deficit reached $7.2 billion in the first half of FY23, up from $5.3 billion in FY22, creating considerable pressure on foreign exchange reserves."

The report says, "Labour productivity growth in Bangladesh remains excessively low, standing at 3% between 1990 and 2019. By 2019, Bangladesh's labour productivity was 9% of the United States, trailing behind India and Vietnam, which albeit still far from the frontier, stand at 12% and 14%, respectively. The country risks being trapped in a low-wage and low-productivity spiral.

"Transforming industries to make them secure, safe and decent places to work for all individuals and ensuring women are not discriminated against – is a key step forward in Bangladesh's next development phase."

The study found that Bangladesh is not yet an innovation-driven economy as the private sector invests little in research and development.

In Bangladesh, only 1.2% of firms invest in innovation – less than half the rate in India while the rate in Vietnam is 30%, the study found.

The study also found that foreign direct investment (FDI) could also play a bigger role in fostering diversification, learning and innovation. Although attracting FDI is among the top government's priorities, FDI to Bangladesh remains limited and concentrated in traditional sectors.

FDI accounts only for 0.7% of Bangladesh's GDP, versus Vietnam's 6% and Morocco's 2%. During 2018-22, Bangladesh's remittances were seven times higher than FDI, according to the report.

Bangladesh has made remarkable progress in digitalisation, said the report. However, multiple gaps persist. While internet usage rose from 3% to 25% of the population in the last decade, the current share remains quite far from other economies in the region, including Vietnam where 70% of the population uses the internet.

In addition, mobile data speed in Bangladesh remains very low – 11Mbps in 2022 – only one-third of the global average and eight times slower than the fastest country, Singapore.

These gaps limit the capacity of the country to fully reap the benefits of digitalisation in government and business, hampering users' experiences in digital transactions and limiting the usability of government services, of which 66% have been commendably digitised in Bangladesh, the study reveals.

The study also found that labour productivity growth in Bangladesh remains excessively low, standing at 3% between 1990 and 2019. By 2019, Bangladesh's labour productivity was 9% of the United States, trailing behind India and Vietnam, which albeit still far from the frontier, stand at 12% and 14%, respectively. The country risks being trapped in a low-wage and low-productivity spiral.

The report recommended that three issues emerge as pivotal: readying the state for the future, shifting mindset in doing business and modernising the policy mix. Digitalisation and international partnerships are two powerful drivers of change that Bangladesh should harness to move forward and implement the reforms needed to continue succeeding.

How to avoid middle-income trap

When delivering a speech as chief guest, Salman F Rahman laid emphasis on joint efforts to address the challenges ahead to avoid the middle-income trap.

"If we fall into the middle-income trap, we will not be able to achieve our goal of becoming a developed nation by 2041," he said.

Salman said there is a great risk after Bangladesh graduates from LDC status if the challenges that come with the graduation are not addressed.

He said the devaluation of the taka and increased prices of energy and commodities have wreaked havoc on the Bangladesh economy like other economies in the world.

He laid emphasis on domestic revenue mobilisation, modernising the tax collection system with a wider tax net and diversification of exports.

"There is a huge potential to diversify in the textile sector," he said.

Salman said Bangladesh needs to attract more domestic and foreign investment and there are efforts to do more in terms of easing doing business here.

On the climate front, he said the international community needs to do more to address these challenges.

EU Ambassador Charles Whiteley said the share of RMG is now much higher and there is potential to have diversification within the RMG sector.

"Bangladesh has the vision and the policies in place, including the Smart Vision 2041, plus the burgeoning interest from the outside world…I think half of the world's leaders have been beating a path to this door in Bangladesh or meeting the prime minister abroad. And this sends a very clear signal and we are very happy as the European Union to be part of that international interest. It is not just geopolitical interest, it is also of course commercial interest as the visits of the French President showed," Whiteley said. 

"With more planning, we will go ahead and with more willingness and so forth, we will all invest in the future of this great trading nation," the EU ambassador added.

Agreeing with the challenges addressed in the report, State Minister for Foreign Affairs Md Shahriar Alam, said the ministry is trying to increase international engagement to increase foreign investment in Bangladesh. 

Calling for international support in this regard, he said, "We are already in negotiations with some countries including the EU about investment in Bangladesh."

The government is working in line with international requirements which was reflected in the major reformation in the garment sector after the Rana Plaza disaster, Shahriar Alam added.

Tapan Kanti Ghosh, senior secretary of the Ministry of Commerce, said, "We need to increase the tax-GDP ratio but it is not possible overnight as businesses will not be able to compete with the world."

"The government is working on reforming tariff policy. However, with this reformation, the country needs international support to ensure access to the EU market and extension of Generalised System of Preference (GSP) facilities for a decade," Tapan Kanti added.