Export diversification: Pathway to
sustainable growth
Mir Ashrafun Nahar | Published: March 13, 2020 21:30:19 | Updated: March
19, 2020 20:36:59
Export diversification is simple and sound prescription for developing
countries since it contributes to higher per capita income growth and potential
structural change as well as assists in overcoming predicament of economic
slowdown. For over 50 years, export diversification has been given highest
position on the list of priorities for development policies.
Though the world economy has been experiencing trade war between the US
and China in recent times, it is inevitable to endorse significance of mutual
benefits of sustainable trade and businesses among countries. Export is key to
international trade and growth of emerging economies such as Bangladesh,
Vietnam and India, as it is the most useful technique to reap benefits of
international trade in favour of domestic development and growth. Exporting
various products and services enables a country to obtain handsome amount of
foreign currencies, which is treated as bloodline of emerging economies.
Equivalently, modifying composition of export basket with diversified
products can assist poor countries to grow rich. Export earnings have crucial
effects on the economy and stability as many macroeconomic factors like
investment, GDP growth, real exchange rate, unemployment, government
revenue and expenditure in social safety net depend on it. A narrow basket of
exportable products poses threat to stability in export earnings due to instable
global demand. Export instability may lead to stagnation by discouraging
investment, increasing macroeconomic uncertainty and shattering longer-term
economic growth.
Since, export diversification denotes transition from 'traditional' to 'non-
traditional' exports, in the context of Bangladesh, it refers to increase in
exports of various products such as medicine, leather, glass, ceramics, cement,
ships, light engineering products, microchips, smartphones, computer, and IT-
related products, apart from the main export-earning item - readymade
garments -- that the country has been exporting over the decades.
Bangladesh has been maintaining a lucrative GDP growth of over 8.0 per cent
recently. But the country's exports have high concentration on RMG products.
According to Bangladesh Bank's July-September data, that 86 per cent of total
export was RMG products whereas jute and jute-related products came 2nd
with only 2.6 per cent of total export in that period. Other exported items are
leather, shrimp, fish, terry towel, plastic products, ceramics, bicycle,
pharmaceuticals, and handicrafts comprising slightest share of exports ranging
from 0.1-2.3 per cent.
Furthermore, export diversification provides benefit in two ways - portfolio
effects and dynamic effects. Portfolio effect denotes the greater the degree of
export diversification the less volatile will be export earnings. The country
having single-or-a-few-product-led export tends to have more volatile real
exchange rate than the country having more diversified export structures. Real
exchange rate volatility depresses investment in tradable goods and services.
Portfolio effect also assists the economy to evade the threat of volatility of
export earnings to maintain stability in investment and employment.
On the contrary, dynamic effect refers to addition of new products to export
basket resulting in addition of new skills to labour force and in the long run
growth of an economy can be achieved by skills to produce new products.
Dynamic effect enables an economy to sustain long-term growth by widening
the export basket and enhancing capacity of labour force. Thus, per capita
income and GDP rate could be raised in the long run with increase in export
earnings (Agosin, 2007).
In the context of Bangladesh, executing 'Export Diversification' confronts
major challenges from product diversification, market diversification, supply
side constraints and supplementary constraints. At one hand, our export
products are not much diversified, RMG products comprises over 80 per cent
of total export with the government\s cash subsidy. On the other hand,
destination of our exported products is also highly concentrated in Europe and
USA with many tariff and non-tariff barriers such as not having GSP in the
USA, free trade agreement of USA and European countries with the
competitor countries of Bangladesh. Also, supply side constraints are
inadequate infrastructure, poor rail, road, airport and sea port services and
failure to provide uninterrupted power supply.
Furthermore, the government's rules and regulations are much critical and
involve bureaucratic tangle that depress export diversification. Access to
finance for SME exporters is stricter due to large collateral prerequisite of
bank. However, supplementary constraints comprise shortage of skilled labour
force, inefficient exchange rate management and inadequate foreign direct
investments.
Despite a challenging global environment, India's total exports have been
growing on a secular basis and have surpassed the US$ 500 billion mark in
2018-19 and attained a growth of 7.47 per cent. Growth achieved through
various export promotion schemes with diversification of product like
engineering goods, petroleum, organic and inorganic chemicals, drugs and
pharmaceuticals, cotton yarn made-ups, electronic goods, plastic and linoleum
(Annual Report 2018-19, India). Moreover, Indonesia also faces vulnerability
in export growth, like Bangladesh, due to high dependency but the Southeast
Asian country took a strategy to overcome volatile export growth by
diversifying its export base.
On the other side, World Bank data reveal that Vietnam with $31 billion of
apparel exports in 2017, topped Bangladesh exports for a few months recently.
Because, Vietnam's exports are diversified enough to include substantial
exports of electronic goods (mobile phones), machinery and electrical
products, footwear, and agricultural products and it continues to gain market
share in the USA while Bangladesh's share of 6.0 per cent has remained
steady. So, Bangladesh can do better by implementing those strategies.
To secure economic stability, export diversification is inevitable measure
which can be ensured by designing and implementing proper policies.
Investment for and export of new products must be encouraged by government
policy e.g. cash subsidy, tax holiday and other policy assistance. Identically,
foreign direct investment should be attracted by simultaneous public and
private sectors and easy access to finance for small and medium enterprises
(SME) exporters are to be ensured by banks and other non-bank financial
institutions. To ensure continuous supply of quality and skilled human
resources, the policymakers should emphasise training and learning
institution's betterment. Nonetheless, efficient exchange rate management by
the 'Bangladesh Bank' needs to be ensured as it raises competitive capacity
over competitor countries. Recently, countries like Vietnam and Sri Lanka
have depreciated currency value against US dollar and Euro, enabling them to
obtain more purchase order of RMG products from the USA and Eurozone
countries.
On the contrary, we have not yet depreciated our currency value resulting in
loss of export earnings and negative growth rate of RMG products export. The
government's intrigued rules and bureaucratic hindrances to export need to be
abolished whereas business-friendly rules regulations, amd one-stop services
for export have to be established. Free trade agreement with major export
destinations (e.g. EU countries, the USA, Canada, and the United Kingdom)
need to be struck to alleviate tariff and non-tariff barriers.
We are approaching to graduate from least developed country (LDC) to a
developing country in 2024. With this new tag of middle income country,
Bangladesh will lose the right of getting low interest loans and other trade
benefits. So in this decade, there is no substitute to export diversification for
rapid growth and stable economy. The sooner the export diversification is
done, the stronger the economy will be in the near future.
Mir Ashrafun Nahar is a Research Associate, South Asian Network on
Economic Modeling (SANEM).
mirasha974@gmail.com
Share if you like
