LDC graduation: Boosting industrial productivity is key

A recent study by BIDS stated that the country's economic growth has so far been solely reliant on factor accumulation, meaning that if capital and labour increase, output also increases. There is a risk in such growth, as relying solely on factor accumulation can eventually lead to diminishing marginal returns, potentially causing growth stagnation. This may become a primary factor in falling into the middle-income trap.

Against this backdrop of LDC graduation and the threat of the middle-income trap, increasing industrial productivity is essential to sustain high growth levels. Therefore, the only way to maintain high manufacturing growth is by improving labour productivity, which is currently much lower in our country than the South Asian average.

Efforts to enhance industrial production are crucial for Bangladesh, especially as the country stands to lose several benefits associated with LDC status. BIDS conducted a survey of 150 firms across seven key sectors, including agro and agro-processing, RMG, plastics, pharmaceuticals, leather and leather-based industries, light engineering (LE), and jute and jute-based industries, using a structured questionnaire, KIIs, and FGDs to gather sectoral information.

Bangladesh's national productivity master plan (2021-2030) targets 5-6% annual productivity growth. According to the Asian Productivity Data Book 2020, Bangladesh's labour productivity is 10.4%, significantly lower than that of other South Asian countries, which ranges between 16.3% and 27.8%. Nutrition is linked to productivity, and workers' wages must be fair to reflect this.

A long debate and discussion are ongoing in this respect. Bangladesh's Export Processing Zone is a successful example, yet it is fully saturated, while Economic Zones are still struggling to operate at full capacity.
The study has shown that GDP per worker in Bangladesh is low, at $15,200, compared to $18,600, the South Asian average. India, Pakistan, and Sri Lanka are ahead of Bangladesh. The question remains as to why this is the case and how it can be improved. It is evident that Bangladesh employs a larger workforce compared to other countries to produce the same production units.

Entrepreneurs are hesitant to increase wages, citing increased business costs in the country. Public services, legal and regulatory frameworks, infrastructure, and institutional responsibility are not yet at a level that offers sufficient support to businesses.

Meanwhile, Survey of Manufacturing Industries (SMI) data (2019) at both aggregate and industry levels indicate an increase in gross value added per worker, from $3,000 to about $12,000. Capital per worker has also doubled. The question arises whether this increase in gross value added will eventually reduce labour demand due to automation. Will it help increase productivity? This needs further analysis, particularly as doubts linger over the accuracy of statistics generated by our System of National Accounts (SNA), compiled by the national accounting wing of BBS.

The domestic industry is performing well. The share of exports in total output has decreased over time, indicating that the country is also relying on domestic demand-led growth alongside export-led growth. Sectors beyond RMG, such as electronics, plastics, ceramics, and agro, are progressing. According to statistics, Bangladesh's manufacturing sector growth rate (25.07%) is higher than India's (16.9%), Vietnam's (23.88%), and Malaysia's (23.05%), though still below China's (26.18%). However, policies must be objective-orientated.

The 8th FYP has targeted export-led growth, and industrial policy 2022 encourages import-substitution industries. Both export-orientated and import-substitute manufacturing industries rely heavily on imported raw materials. Export-orientated industries enjoy bonded warehouse facilities, but partial exporters do not, limiting competitiveness for 1,200-1,400 potential products.
Export quality and domestic products differ significantly, so they do not complement each other. Additionally, the linkage between small and large, and between domestic and export-orientated industries, has not developed sufficiently to support a strong manufacturing sector.

The survey revealed that labour productivity is highest in the pharmaceutical industry among the seven sectors studied—three times higher than in RMG. This is because the sector employs advanced technology and significant capital investments and hires skilled professionals. However, the pharmaceutical sector may face challenges post-LDC status, as the country predominantly produces non-patented generic items.
Bangladesh has already taken some steps by updating the Bangladesh Patent Act 2023, which includes provisions against "evergreening" and prevents patents on minor improvements to existing inventions. It also allows parallel importation of patented products at lower costs, enabling consumers to buy foreign products more affordably. The private sector believes it will remain sustainable in the post-LDC regime.

However, businesses still face challenges with product registration in different countries, facing constraints on repatriating funds for registration fees, which hinders exploring new markets. Exports to other LDCs or non-WTO countries may be possible if these countries lack patent protections. Patent protection could make medicines unaffordable for lower-income consumers.

The surveyed sectors vary in size and nature and require different types of support. The study found that productivity is higher for capital-intensive smaller firms (e.g., plastics) than for labour-intensive larger firms (e.g., RMG), which is noteworthy. Most manufacturing units are small, while RMG, the largest export sector, has a few large-scale industries.

The study also found that the jute sector is more female-dominated than RMG, and the leather sector also relies heavily on female workers. Female workers have gained employers' confidence, though this trend has significant social implications.

Most capital machinery across sectors was upgraded within the past 1–5 years. However, jute machinery largely remains outdated, and the light engineering and plastics sectors rely on older machinery. Research and Development (R&D) focuses on process and material improvements rather than innovation, with limited funds and an insufficient drive for technological advancement.

To sustain manufacturing growth, new inventions and innovations are essential. Foreign direct investment (FDI) is crucial, and policies must provide tax incentives to encourage this.

The study rightly highlights that resolving constraints outside the firms, such as customs and port inefficiencies, would incentivise firms to adopt new technologies and skills. Outside firm factors can boost productivity, and LDC graduation will pose challenges if these issues are not properly addressed.

Another interesting finding is that a group of conglomerates (36%) is emerging among firms as a risk diversification strategy, with around 60% of agro-processing business owners also investing in other sectors. This is also high in pharmaceuticals, leather, and jute. However, only 38% of RMG owners diversify beyond the RMG sector as they focus on exports. Plastic and light engineering have limited diversification due to their smaller firm size and capital constraints.

Expanding existing firms is an indicator of industrial growth, though figures for new firms are currently unavailable; SMI 2025 from BBS is in the final stages.
The National Industrial Policy 2022 includes measures to modernise the industrial framework (e.g., tariff rationalisation, timebound industry protection) but lacks clear direction toward openness and integrated trade and investment strategies as import-substitution tendencies still prevail. Key service and primary industries remain partially closed to foreign investors, limiting productivity gains.

Logistics sector reforms, especially in foreign investment policies, are needed to enhance manufacturing efficiency. In transport (maritime), foreign shareholding is limited to 49% in companies providing maritime cabotage, and 50% of Bangladesh's seaborne cargo is reserved for Bangladeshi-owned firms. Similar restrictions exist in the air services, telecoms, and financial sectors.

Ferdaus Ara Begum is the CEO of BUILD, a Public Private Dialogue Platform that works for private sector development.

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