The Financial Express

Dilemma of self-sufficiency or trade openness

A case of onion prices in Bangladesh

Dilemma of self-sufficiency or trade openness

Following India's ban on onion export aimed at controlling its own domestic market, the onion prices rose dramatically in Bangladesh in late 2019. A number of factors have contributed to a sharp increase in onion prices, such as over-reliance on imports from a single source (India), market manipulation by dubious local traders (colloquially known as the syndicate), reactive response on the part of stakeholders, inadequate production of onions due to bad weather in South Asian region and so on. A growing number of individuals, including policymakers, have advocated Bangladesh's self-sufficiency in onion production instead of depending heavily on onion imports from India and the rest of the world. Some have even called for Bangladesh to boost onion production and become an onion exporter in two years.

Advocates of self-sufficiency in onion production claimed that the onion crisis is analogous to the stopping of cattle smuggling from India, which led to increases in domestic production of beef. The domestic supplies of beef, along with other meats, had increased drastically since FY2009-10 and henceforth Bangladesh became self-sufficient in beef. Indeed, Bangladesh has exhibited remarkable success in raising domestic output of food products, including fish, meat (livestock), rice, vegetable, inter alia. While being self-sufficient brings food security, local employment, protection against volatility in the international markets as well as national pride, it is not always in the (economic) interest of the nation. This is due to a phenomenon economists dub the 'comparative advantage'. One of the most popular handbooks on globalization and trade, penned in 2014 by prominent American economists, Robert Feenstra and Alan Taylor, refers to comparative advantage as "one of the economic principles that even intelligent people struggle to understand." In general, if we consider a two-country universe where only two goods are produced, a country has a comparative advantage in the production of a good, in this instance onion, if it has a lower opportunity cost of producing onion compared with another country. Simply put, a country has a comparative advantage in producing onion, if it can produce it cheaper and more efficiently. This has important implications for this two-country universe: since a country's resources are limited, it may be better off focusing all its resources on the good it has a comparative advantage in and buy (trade) the other good from the second country.

Now, the most important question arises: Does Bangladesh have a comparative advantage in onion production in the global market, when contrasted with leading (albeit temporarily former) exporters such as India or Turkey? The answer to the question is a simple 'no'. Latest figures from government statistics suggest that Bangladesh produces around 1.7 to 1.9 million (17 to 19 lakh) tonnes of onion against a demand for some 2.4 million tonnes per year. The country thus needs to import around .7 to 1.1 million tonnes per year in order to close this gap in the local onion market. The discrepancy between the demand and supply (local + imports) figures is due to perish ability of this ubiquitous spice. As a result, Bangladesh's onion exports are virtually zero.

Bangladesh does not appear to have a comparative advantage in onion production, as local produces are often priced higher than imports (from India and elsewhere). During harvest season, the Bangladesh government often restricts onion imports to make sure local farmers get 'fair price' in the market. This is an example of protectionism aimed at benefiting the local producers, at the expense of consumers and overall economic welfare, as prices do not fall as far as the global market. In fact, the increase in producer surplus is not enough to offset the decrease in consumer surplus and the deadweight loss as a result of government intervention. When a comparative advantage in the production of a good does not exist, governments often try to create it using trade policy, including protectionism. Such concocted comparative advantage can come with substantial costs to the domestic economy. The first and foremost of these costs involves allocating scarce resources -- especially land in the context of Bangladesh -- to mass producing onion, even though the country may be better (more efficient) at producing other valuable cash crops or producing something else altogether. For example, in a general equilibrium setup, the diversion of scarce resources to onion production, where Bangladesh has neither the comparative advantage nor the necessary environment to create one currently, could lead to contraction of other sectors, such as readymade garments (RMG), where Bangladesh is arguably competitive and remains a top player globally. It is unlikely to be growth-enhancing to artificially prop up onion production where we are underperforming at the expense of sectors, such as RMG, where we are doing well.

The alternative to the self-sufficiency argument is trade openness. The government of Bangladesh may embrace trade openness as a way of tackling shortages, such as onion crisis. There is hardly any justifiable reason for India to account for over 80% of onion imports to Bangladesh. In the presence of high dependency on imports from India, Bangladesh is highly vulnerable to negative shocks to onion supply from India. A simple trade policy that allows import of onions from many countries by private importers can help to reduce over-reliance on supply from a single market, which in turn, lowers the probability of onion crisis in the future.

Trade openness confers many benefits to a country, such as access to cheap and high-quality products compared with autarky (self-sufficiency), a greater variety of goods and services, access to cheap and high-quality intermediate inputs, less dependence on a negative exogenous shock to a single market, higher productivity, and so on. For instance, eminent Canadian economist Daniel Trefler showed that lower tariffs -- which is a form of trade openness -- led to a productivity boom in Canada. Furthermore, a recent article published in the World Economy Journal demonstrated that businesses in developing countries enhanced their productivity by importing intermediate inputs and absorbing the ingrained (international) technology. In other words, technology can 'spill over' to developing economies as they trade with the world. Consequently, trade openness in the area of gradual lowering and eventually elimination of import restrictions and other barriers to international trade would help boost productivity, and in the long run lead to economic growth and development.

Trade openness is compatible with Bangladesh increasing production of onions over time and if possible, becoming an onion exporting country. If Bangladesh can muster the necessary resources to create a comparative advantage in onion production without diverting resources from other sectors, then, there is no reason not to use trade policy strategically to create one. The modern world is increasingly fragmented in terms of production of goods and services. The era in which a country specialises fully in the production of several goods from the conception of the ideas to final products is over. International competitiveness in the modern world also not only compels countries to focus more on the production of parts of goods and services where they have comparative advantages, but also on moving up in the value chain in order to produce products and services with a higher value added. Countries that produce goods and services with a higher valued added earn more foreign earnings compared with those that produce goods and services with lower value added. A gradual opening of the economy would help Bangladesh to benefit from fragmentation of the international production process and international trade. The benefits resulting from trade openness will help promote the competitiveness of the export sector and, in line with the government's ambitious goal, propel it to US$50 billion in the 2020s. Bangladesh has been a beneficiary of trade openness -- the RMG sector is a testament to this fact -- and trade contributes a significant portion of the country's GDP. Bangladesh should embrace trade openness, which will act as an engine of higher productivity and economic growth. Furthermore, it reduces Bangladesh's economic dependence on a limited number of (increasingly unreliable) players in the international market.

Drs. Luke Emeka Okafor and Muhammad Shafiullah are Assistant Professors of Economics at the University of Nottingham Malaysia. They can be reached at [email protected] and [email protected], respectively.

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