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Accelerating GDP growth: Duty on capital machinery needs to be rationalised

| Updated: October 22, 2017 14:48:28

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Accelerating GDP growth: Duty on capital machinery needs to be rationalised

After achieving the lower middle-income status, Bangladesh has set the ambition to maintain the development trend to cross one after another development milestone. To achieve the target of reaching to high middle-income status by 2031, Bangladesh needs to accelerate gross domestic product (GDP) growth reaching to 8.0 per cent by 2020, and 10 per cent by 2031. To accelerate the GDP growth, the role of Science and Technology (S&T) in increasing the total factor productivity (TFP) should be fully exploited. In general, TFP can be taken as a measure of an economy's long-term technological change or technological dynamism. Despite having the evidence that TFP's contribution to GDP growth has been increasing since the broad-based economic reform initiated since 1990, Bangladesh's position in relevant global S&T indices is very poor. For example, in the latest ranking of the Knowledge Economy Index (KEI) prepared by the World Bank puts Bangladesh at the low end of 137 out of 146 countries. Similarly, in the Global Innovation 2015, prepared by Cornell University, INSEAD and WIPO, Bangladesh has been placed at 129th position among 141 countries. Does it mean that Bangladesh should just increase investment in S&T education, research and development (R&D) to increase common science and technology indicators like number of graduates, patents, participation of women, and scientific publications to improve positions in different international rankings?
There is a common belief that we need to improve our knowledge base in Science, Technology, Engineering and Math (STEM) to expedite economic growth. Is there a linear correlation between STEM capacity and economic growth? Should we address certain roadblocks to turn STEM capacity into economic growth? Like many other developing countries, Bangladesh's industrialisation strategy is based on adding labour to operate imported capital machinery to manufacture products. To pursue this strategy, import duty on capital machinery has been kept extremely low, just 1 per cent. As a result, despite the growth of import of capital machinery reaching $3.5 billion in fiscal year 2015-2106 from $2 billion in 2012-13, the local capacity growth of producing capital machinery for the manufacturing sector is virtually zero. Should Bangladesh keep import duty on capital machinery unchanged? Or, is it time for rethinking?
The duty structure is primarily set to maximise the outcome. In this case, to facilitate the expansion of labour-centric manufacturing sector, such duty decision has been taken to keep it so low. The competitiveness of the sector depends on cost and quality of outputs. From the development perspective, the ripple effect on other sectors plays also an important role in taking policy decisions. If by increasing duty on import of capital machinery, if we can start building the local capacity of developing as well as upgrading production machinery, what could be its likely impact? If such capacity development leads to lower cost and improving the quality of capital machinery resulting in lowering the cost and increasing the quality of produced products, should we change policy in support of developing the local capacity for capital machinery?  Moreover, if such policy opens the door of creating high-paying jobs for engineers and scientists to replicate as well as innovate capital machinery, will it be a pro-development agenda?
Often we argue that by improving quality and increasing quantity of the Science, Engineering and Technology graduates, we will be able to accelerate economic growth. Certainly such a move will increase the knowledge and skill base of the nation. But, is such an increase of capacity alone sufficient to accelerate economic growth? If our strategy is to import capital machinery to replicate already available products, where will we use our high-calibre large number of STEM (science, technology, engineering and math) graduates? For the purpose of just installing, operating and repairing, do we need such graduates? If the strategy of industrialisation remains as it is, will added investment in STEM capacity lead to higher economic growth?
We need to translate the STEM competence into lowering the cost and increasing the quality of manufactured goods. To make this transition, there are two options for us: 1. product and 2. process innovations. The product innovation has been found to be an awfully risky proposition, as only extremely small fraction of product ideas commercially succeeds. Even in Silicon Valley, product-based innovative ventures have more than 90 per cent failure rate. It has been found that at the early stage of industrial development, replication of existing products for both local and foreign consumption is the way to go. The second option is process innovation. Should we change the duty structure on import of capital machinery to make the room for the growth of local capacity for adding value to capital machinery?
The risk of process innovation is very low. The strategy will be around incremental approach to start adding value to capital machinery so that cost and quality of producing existing products start improving. Such a capacity development strategy will open up the opportunity to turn the knowledge and skill of STEM graduates into production machinery. But, if we keep import duty on capital machinery zero, will it at all happen? The local capacity of innovating and engineering of capital machinery will also lower the downtime of manufacturing facilities. It has been found that the failure of a single component often keeps the plant down for days and weeks for the components and the technicians to show up from foreign lands. As the cost of our local STEM graduates is far lower than that of many capital machinery exporting countries, there is a possibility that eventually locally sourced capital machinery will be also cheaper. Moreover, such a strategy will also open the window of creating high-value addition, leading to high-paying jobs for STEM graduates.
Therefore, it could be argued that capital machinery import duty has to be adjusted to start developing the local capacity for engineering and innovation of production machinery for expanding the manufacturing base and creating high-paying jobs for STEM graduates. In the absence of this change, it is likely that Bangladesh and many other developing countries will lose the opportunity of increasing the per capita income by taking the advantage from Science, Technology, Engineering, Mathematics and Innovation. Moreover, in the absence of development of process innovation capability, many indigenous production processes are losing competitiveness, running the risk of being extinct.   
It is time to graduate from acquiring the technology capability to operate and repair capital machinery to getting empowered to create new wealth out of technology and innovation in a globally competitive market. To pursue this graduation, duty structure on capital machinery and policies to support local process innovation capacity development should be redesigned and change should be intelligently managed as well. In absence of necessary policy changes, investment in STEM education and research runs the risk of making extreme suboptimal contribution-both at individual and national levels. In the absence of contribution of STEM toward increasing TFP's role in GDP growth, Bangladesh runs the risk of suffering from premature income saturation before reaching the desired development status.
The writer is Professor, Department of Electrical and Computer Engineering,  North South University.
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