The Financial Express

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: Pathway to sustainable growth

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).


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