What is holding back export diversification?

Over the years, much has been said about the necessity of export diversification to ensure sustainable growth in international trade and safeguard the economy against unforeseen global events. Yet, very little progress has been made in this regard. The ready-made garment (RMG) sector still plays an outsized role, contributing around 84 per cent of the country's export earnings. 

There is nothing inherently wrong with the RMG industry being the cornerstone of Bangladesh's economy. Its extraordinary growth over the last three decades has lifted millions out of poverty and propelled the country from an impoverished state to middle-income status. The garment industry, which fetches about US$ 40 billion a year, is expected to grow even further, as Bangladesh's share of the global apparel market stands at only 6.5 per cent. This means as the second largest apparel exporter of the world after China, Bangladesh has considerable opportunity to expand its market share and increase foreign exchange earnings from the sector.

However, over-dependence on a single sector is far from ideal for any economy, as it creates what economists call concentration risk, exposing the country to heightened vulnerability in the face of external shocks. A sudden drop in global demand, a shift in trade policies, technological disruptions, or geopolitical tensions can have a disproportionately severe impact, triggering sharp declines in export earnings, large-scale job losses and fiscal instability. Without a diversified economic base, recovery from such shocks could become slower and more painful.

The urgency of export diversification has gained further weight as Bangladesh prepares to graduate from the United Nations' Least Developed Country (LDC) category by 2026. Upon graduation, the country will lose preferential trade benefits currently enjoyed by LDCs, putting the RMG sector to the test whether it can sustain its global competitiveness without such advantages. Policymakers and experts, therefore, have long been saying that unless Bangladesh broadens its export basket, it risks undermining its resilience in the post-LDC era.

Beyond garments, Bangladesh's notable exports include jute and jute goods, leather and leather products, agricultural produce, frozen foods, home textiles, pharmaceuticals, plastic products, light engineering goods, handicrafts and bicycles. The leather sector, in particular, holds considerable potential, yet its growth is constrained by the failure to ensure environmental compliance, such as obtaining Leather Working Group (LWG) certification. Without this certification, Bangladeshi leather goods face restrictions in key markets like the United States and Europe. Similarly, the desired export growth from frozen shrimp, processed foods and agricultural produce is held back by deficiencies in packaging and quality control. But the prospects and problems of other promising sectors receive far less policy attention compared to the RMG sector, which enjoys extensive state support through cash incentives, bonded warehouse facilities, preferential loans, and tailored policy measures.

A White Paper Panel on the State of Economy last year showed that entrepreneurs aiming to diversify the export basket face a host of challenges. These include inadequate infrastructure, high logistics costs, shortage of skilled labour, slow technology adoption, limited access to finance, bureaucratic hurdles, exchange rate instability and costly regulatory compliance. Non-RMG exporters also struggle with weak product diversification, limited branding and marketing capabilities, and insufficient institutional support for small and medium enterprises (SMEs).

The White Paper highlights that poor transport networks, inadequate port facilities and frequent power shortages increase logistics costs and cause delays. At the same time, entrepreneurs face difficulties in securing loans due to high interest rates and limited access to financial instruments. Thus over-reliance on a few export sectors makes the economy vulnerable to market fluctuations and limits growth potential.

Added to the entrepreneurs' woes is the bureaucratic red tape. Lengthy administrative processes, excessive paperwork, and delays in obtaining necessary permits discourage diversification. SMEs, which could play a critical role in broadening the export base, have to grapple with limited access to finance, lack of incentives and weak government support.  Therefore, in spite of the repeated calls for export diversification over the past decade, outcomes have been underwhelming.  

Apart from removing the aforementioned bottlenecks to export diversification, another key priority should be to address the 'anti-export bias' in current trade policy, which makes production for the domestic market far more profitable than exporting. Anti-export bias refers to a situation where a country's trade and tariff policies make it more profitable to produce for the domestic market than for exports. This usually happens when high import tariffs protect domestic industries while exporters don't get equivalent support, discouraging firms from entering global markets and thereby limiting export growth and diversification. Since RMG sector is 100 per cent export-oriented and enjoys duty-free access for all its imported inputs, it does not suffer from this trade protection bias. But other promising sectors including footwear, leather goods, jute products, ceramics, home textiles and light engineering face substantial anti-export bias. But the implications of this trade protectionism are rarely discussed in our policy debates. The White Paper suggests that the government needs to create a more level playing field for exporters, either by reducing import tariffs or increasing export subsidies.

Overall, a strong political will, coherent policy coordination and strong commitment for export diversification will be vital. If the country can tackle entrenched bottlenecks, foster innovation and nurture emerging industries with the same determination that fuelled RMG sector's growth, it can build a more resilient and competitive export base.

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