High tariffs, weak policies hinder export diversification: Economists

Experts and economists have identified a lack of financing, high tariff rates, improper monetary and fiscal policies, poor institutions, weak logistics, skills gaps, and lower foreign direct investment as major obstacles to diversification of Bangladesh's exports.

They said neglecting such export diversification obstacles will worsen challenges after the country graduates from the least developed countries bloc in 2026.

The remarks came Sunday from a panel discussion at the concluding day of the SANEM Annual Economists' Conference in the capital.

The discussants called for equal treatment for export industries and introducing a broad-based policy to diversify exports to increase employment and income.

Professor Selim Raihan, executive director of the South Asian Network on Economic Modeling (SANEM), organiser of the event, presented the keynote at the session titled "Challenges of export diversification and structural transformation in Bangladesh,"  chaired by Zahid Hussain, former lead economist of the World Bank's Dhaka office.

He also said Bangladesh has a very concentrated export basket, while the ready-made garments champion's success in export diversification is unsatisfactory.

Prof Raihan said textile items comprise about 81% of export earnings in Bangladesh, but the rate is 7.54% in India, 21.34% in Vietnam, and only 3.07% in Thailand.

He pointed out the countries making progress in industrialisation are reducing the dependence on textile and clothing. That means they are reducing and diversifying. In that plot, Bangladesh appears as the super outlier, and the country is nowhere in that kind of fitted line.

The SANEM executive director also said this export concentration is very high compared to the LDC average, the world average, India, Thailand, Vietnam, Malaysia, and other competitors.

Syed Akhtar Mahmood, former lead private sector specialist of the World Bank, said that in 1995, Bangladesh ranked 85th in the economic complexity index, which was notably ahead of Vietnam's 107th position.

However, over time, Vietnam has improved its position to 42nd, while Bangladesh has regressed to the 107th position.

He also mentioned that in 1995, the share of electronics exports as a percentage of total shipments was 0.7% for Bangladesh and 0.4% for Vietnam. While Bangladesh's share of electronic exports remained below 1% over the years, Vietnam's share increased significantly to 35% by 2018.

In terms of value, electronic exports were approximately $30 million for both countries in 1995. However, by 2018, Vietnam's electronic exports had reached $100 billion, which was significantly higher than Bangladesh's $70 million.

He attributed the difference to the flow of foreign direct investment (FDI), noting that 70% of Vietnam's electronic exports come from foreign investors.

Syed Nasim Manzur, managing director of Apex Footwear, said transparency and certainty are vital to attracting foreign investors.

"In EPZs where there is no preferential treatment, there is a 55% share of non-RMG industries. While it is an 80-20 skew outside EPZs, it is 45-55 in EPZs. So, it is pretty clear from a layman's view that if there is no preferential treatment for a specific industry, there is scope for improvement for all industries."

He emphasised the need for reform to simplify export regulations, stating that innovation and simplification are crucial for increasing exports.

Putting an example, he said, import a container load of raw materials; the packing list is only two pages in Vietnam, but this is 12 pages in Bangladesh for the same container.

He also noted that even within India, states compete against each other and offer incentives to promote export diversification.

Zahid Hussain said there is some progress in the investment-to-GDP ratio, trade intensity, and the share of industrial employment in total employment, but the rate of progress is decreasing.

"These ratios for Bangladesh are below levels that are observed across similar geographies. We seem to be tiring a little too early in the process of development," he said, emphasising the need to discuss export diversification.

Zaidi Sattar, chairman and chief executive at Policy Research Institute, said the main hurdle to Bangladesh's economic diversification lies in its policy framework, not competitiveness or export potential.

"We export a variety of products beyond garments, but their growth is hindered by an anti-export bias in tariffs. Despite past achievements, the nation faces a unique 'state-policy dualism,' impeding progress.

"Without tariff reduction and the elimination of anti-export biases, export diversification remains elusive. Amid global turmoil, it is crucial to address these policy challenges to sustain Bangladesh's growth trajectory."  

Professor Selim Raihan mentioned in his paper that Bangladesh added only nine items between 2006 and 2021, considering the four-digit HS code, to the export basket, which generated earnings worth $823 million in 2021.

During the same period, Vietnam added 41 new products with $145 billion in export earnings in 2021. India and Thailand also achieved tremendous success at the same time, he added.

"Bangladesh has not been successful in diversifying its export basket for a long time," said the professor, adding that the country has failed to enjoy dynamic comparative advantage, and the number of products where it has revealed comparative advantage is very low, and it is growing at an escalating trend for Vietnam.

The SANEM executive director also presented the key challenges for exporters in the post-LDC period and said, "The top obstacles for export-oriented firms are the prices and availability of raw materials, customs and trade regulations, port facilities, tax systems, skilled labour, financing, and other issues like standard and certification, business licensing, transport, court system, and complicated legal system."

He further noted that high import tariffs in Bangladesh are preventing the diversification of exports.

In 1990, Bangladesh had one of the highest tariff rates in the world, and even in 2020, Bangladesh maintained a very high average tariff rate, he added.

"Bangladesh had more than 40% products with a tariff rate of more than 15% in 2022, which is 10.6% in India and 14.4% in Vietnam."

It also ranks poorly in the ease of paying taxes, he said, adding that it ranked the 151st position in ease of paying taxes in 2020, per a survey of the PwC.

He also blamed the improper fiscal and monetary system and said the Bangladesh Bank managed a fixed exchange rate artificially over a long period of time. The interest rate was capped at 9% for a long period when inflation was on the rise.

He said the common problem of industrialisation is financing, and that is extremely important for export diversification.

He marked high rates of non-performing loans, a weak capital market, and weak financial penetration as major challenges to financing.

He said the domestic credit given to the private sector by banks as a percentage of the GDP in Bangladesh was 38.8% in 2022. The rate was 70.7% in Bhutan, over 50% in India, 95% in Nepal, 128% in Malaysia, and 121% in Vietnam.