LDC graduation: Is Bangladesh ready to fight an uphill battle?

It is heartening that Bangladesh is set to graduate from LDC status. What's more, this unique achievement coincided with the golden jubilee of Bangladesh's liberation and the Mujib Year 2020-2021. 

While there are many exuberances concerning this graduation, an analysis will prove that the promising future that is being painted by the Government concerning LDC graduation contradicts the looming herculean challenges that will ensue and this blissful ignorance about challenges may undermine the preparation to surmount the hard time that lies ahead.

Bangladesh has been under the LDC category since 1975. In 2018, Bangladesh acquired eligibility for graduation from LDC. The eligibility is measured based on three indices, namely- GNI per capita, Human Asset Index (HAI) and Economic Vulnerability Index (EVI).

This year, in the second triennial review, CDP (Committee for Development Policy) has given another nod to the graduation of Bangladesh. It is to be mentioned that, following a solicitation by Bangladesh to prolong the period for LDC graduation on the ground of ill-effects of Covid-19, authorities had shifted the time to 2026 from earlier stipulated 2024.

The benefits that will accrue to Bangladesh after graduating is dwarfed by the cost that will be incurred. Admittedly, Bangladesh's image will be projected as a developing country and a consequent confidence-boost in the potential investors. 

Perhaps the most paramount among the benefits is the fact that Bangladesh's credit rating will upgrade and Bangladesh will decidedly see a high flow of FDI and it will also open the opportunity of external finance.

However, the adverse effects or challenges that will be posed is rather strenuous for a country like Bangladesh. According to UNCTAD (United Nations Conference for Trade and Development), Bangladesh will see 7.5% decline in its export while Center for Policy Studies (CPD) forecasts a 8.7% drop in export earnings.

It is important to understand that the graduation from LDC status has many corollaries. First, Bangladesh will no longer be able to access WTO waiver which exempts the country from Trade Related Intellectual Property Rights [TRIPs] with obvious impact on the country's pharmaceutical industries. 

Second, Bangladesh will also fall out of favour of WTO flexibilities regarding subsidies with repercussions for the country's agriculture. 

Third, Bangladesh will lose MFN (Most Favoured Nations) and GSP (Generalised Systems of Preferences) provided by various regional blocks and trade partners with fallout for the RMG sector.

WTO accords special treatment to LDC countries including enhanced market opportunities, policy flexibilities and preference. Besides, as stated earlier, LDCs are exempted from intellectual property hurdles as exacted by an arrangement called TRIPs. 

While other developed countries had to count an exorbitant sum of money owing to patent and intellectual property related conditions, Bangladesh was exempted owing to its LDC status. This exemption came as a windfall for pharmaceutical industries of Bangladesh and stimulated its rise as a major industry of Bangladesh as well as a major contributor to the country's GDP. 

However, this unique privilege will cease to exist after Bangladesh graduates from LDC with repercussions for pharmaceutical industries in particular and the whole economy in general.

Bangladesh as an LDC country enjoys zero-duty tariff, preferential trade and regional trade benefits to 38 countries worldwide, 28 of which are within the EU. European Union is one of the major export destinations for Bangladeshi RMG and other goods through its GSP facility, a privilege which will cease after LDC graduation.

However, Bangladesh can avail GSP+ facility which comes with a constellation of conditions. Among others, GSP facility requires ratification of 27 international conventions relating to Human Rights, ILO and environment protection and good governance. 

However, it is to be mentioned that GSP and GSP-plus cover only two-thirds of tariff lines meaning that some products that Bangladesh enjoyed tariff reduction under the purview of EBA initiative will cease to exist.

A confluence of factors make this an uphill battle. Rising protectionism in international trade, shrinking world economy which is in a free fall since 2008 Global Financial Crisis, the nascent competitors of Bangladesh and not least Covid-19.

Bangladesh's RMG sector, since its inception, was a beneficiary of comparative advantage emanating from cheap labour. However, this industry is now facing strains. One of the significant challenges confronting this industry is the rise of new competitors. Vietnam poses a threat to Bangladesh's erstwhile unrivalled position and competitiveness in the global market.

With the current trend continue unabated, Vietnam is poised to dethrone Bangladesh's longstanding 2nd position. With a diversified market, increased productivity, decreased lead time, Vietnam has managed to excel in the industry. 

What's more, Vietnam has recently inked an FTA with European Union which entails 99% elimination of tariff. This is sharply contrasted by Bangladesh's feeble economic diplomacy. Far from harnessing this potential of free trade agreements, Bangladesh is now in jeopardy given the cessation of GSP being on the horizon.

To better combat this cessation, Bangladesh has to utilise economic diplomacy and negotiate with regional trade blocs and trade partners for concessions. In a global business environment marked by stiff competitiveness, failing to cope up with this competition will spell a devastating blow to the country's main driver of growth: RMG.

Besides RMG, Bangladesh needs to focus on other industries. Bulk of the Bangladesh export earning hinges unevenly on RMG. Any external shocks, therefore, will be cataclysmic to the whole economy. Therefore, Bangladesh should emphasise developing other sectors, such as medicine, leather, glass, ceramics, cement, ships, light engineering products, microchips, smartphones, computer, and IT-related products.

If Bangladesh can diversify its export basket, it will reduce the vulnerability from external shocks. Besides diversifying industry, Bangladesh should also diversify products that the RMG sector offers.

RMG owners decide to run factories at full capacity Photo: Mumit M

While Vietnam is known for its high-end apparel products and diversified exports, Bangladesh till now is confined to only 4 to 5 items and low-end cheap products. Bangladesh also lacks a robust back-ward linkage industry which has largely facilitated Vietnam's growth.

Besides, the global image of Bangladesh as a business destination is abysmally dismal. According to the World Bank (WB) Ease of Doing Business 2020 index, Bangladesh ranked 168 which pale in comparison with its competitors. Vietnam, for one, enjoys a greater credibility in the international market and investors are attracted owing to conducive business milieu. Bangladesh should remove its legal and infrastructural bottlenecks that dissuade foreign investment and should offer much benefits to the prospective investors.

The impact of Bangladesh's economic growth isn't even. While a section of the country's population has accumulated vast wealth, bulk of the country's population haven't reaped the benefits of development. The Gini Co-efficient measured on a scale of 0 to 1; the closer it is to 1, the higher the inequality rate. A rate of 0.5 point to a very dismal inequality prevailing in the country.

While the Gini Coefficient was 0.29 in 2014, it rose steeply and stood at 0.36 in 2020.This rise is illustrative of the ominous state of economic inequality. Besides, Covid-19 had accentuated existing throes of inequality. 

What's more worrisome is the rampant corruption which is eating into vitals of our economy. Government should, therefore, take resolved measures in order to make this new-found recognition sustainable and gear up its efforts towards attaining much greater progress in the future.

To better coordinate these efforts, the government should craft a transition strategy which may contain various goals aimed at realising future milestones. To gain uninterrupted international support in the form of aid and other facilities should be the cornerstone of this strategy paper.

This strategy paper should as well entail coping up strategies in the event of halt of the prevailing facilities. Striking free trade deals and other forms of economic diplomacy should top the agenda of the strategy paper. Besides, the strategy paper should be in line with the existing development plans of Bangladesh and should be harmonised with the 8th Five Years Plan.

Therefore, rather than relishing in fleeting success, Bangladesh government should mobilise all its efforts in order to better cope up with the challenges that will be posed by this transition. 

Economic diplomacy needs to be underscored and increasing involvement with various regional trade blocks needs to be sought. If only Bangladesh can combat these emerging gruelling challenges with aplomb, then this transition will herald new dawn for country's economy and as our prime minister Sheikh Hasina mentioned, Bangladesh will reach its dream to become a developed country by 2041.

Kazi Asszad Hossan is a student at the University of Dhaka

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.