Changing the focus of resource allocation  

Just a week ago Bangladesh began its journey into fiscal year 2019-2020 with a new budget. Despite its figures, not everybody is happy with it.

Already dairy farmers have expressed their disappointment by pouring milk on the highways. The association of the largest export earning sector of the country, Bangladesh Garment Manufacturers and Exporters' Association (BGMEA), expressed its disappointment by citing inadequate measures like cash incentive to offset their eroding competitive advantage. The budget also increased taxes on a number of products including mobile communication services. The argument for the government is plain and simple. The government needs to generate revenue from certain sections in order to address the expectation of other segments. But is there any way through which the government can successfully meet its expectations without enhanced taxation?  

The Bangladesh Dairy Farmers' Association (BDFA) expressed resentment because the increase of import tariff on milk has been raised to 10 per cent from 5 per cent. This is not sufficient to protect them. It was argued that the increase in duty would not be enough to protect domestic producers from the competition of imported milk. It's good to observe that dairy farming grew fast over the last seven years, due to which milk production soared to 9.4 million metric tons in fiscal 2017-18 from 2.9 million metric tons in 2010-11. Milk production needs to grow further, as there is a likely demand of 15 million metric tons. Despite the gap between supply and demand, it's being argued that producers are not making sufficient profit as low cost milk is being imported and sold in the local market.

Moreover, the cost of local milk production has been increasing as the cost of labour has been rising sharply. Under the circumstances, the government is expected to provide incentives to the dairy industry, which involves 1.2 million producers and tens of thousands of jobs.

The cost of milk production in European countries from where Bangladesh imports is falling. For example, during the period of 2012 to 2017, the cost of per kilogram of milk production in Germany fell from 44 cents to 41 cents. The underlying cause is increasing adoption of automation for reducing labour cost in major tasks like milking, heat detecting, and feeding. Installation of an automatic milking system has been found to reduce milking labour by approximately 75 per cent and reduce heat detection labour by around 70 per cent. Automated precision feeding has also brought similar benefits. Such success is creating high paying innovation jobs in European countries and making their dairy products ever more competitive, without increasing subsidy.

Bangladesh's readymade garments sector is facing growing erosion of labour content in production. On the other hand, the recent increase in the minimum wage has also eroded the labour cost advantage further. To offset the rising cost, factories have been importing labour-saving equipment from advanced countries, where Bangladesh does not have a comparative advantage. As a result, this vital export-earning sector, once known to be labour intensive, has been suffering from the erosion of competitive advantage by becoming capital intensive.

What are the likely solutions that can address the erosion of competitive advantage virtually in all productive sectors of Bangladesh? It appears that the recently approved budget did not shed adequate light on this vital issue. To address it, expectations of producers are that corporate taxes should be lowered and interest rates should be slashed. Producers also feel that public investment in infrastructure and cash incentives should be increased, currency should be further devalued, and import duty on technology should be reduced. So far, the government has been busy with adjusting these parameters to meet expectations of different sectors. In doing so, the government is neither succeeding at offering a sustainable solution, nor succeeding to exit zero-sum exercise of resource collection and allocation.  

The lesson from advanced countries indicates that the solution lies in the capacity of attaining technological development and innovating solutions so that producers keep succeeding in offering increasingly higher quality products at decreasing cost. Yes, Bangladesh has been taking advantage of technology; but that is through import from advanced countries. Such technology import-driven agenda neither offers a comparative advantage nor creates high-paying innovation jobs to offset labour-intensive job loss. So far, Bangladesh's success in attaining this capacity is extremely insignificant. Like all other past budgets, this budget could not initiate the journey of accelerating the contribution of local innovation, often measured as Total Factor Productivity (TFP), in economic growth. It's imperative that Bangladesh accelerate TFP's contribution from the current 0.3 per cent of GDP to reach 4.5 per cent to meet economic aspiration. 

There is no denying that Bangladesh has been making progress in building capacity to increase contribution from the local capacity of technology and innovation. There has been progress in multiple indicators starting from internet penetration to the production of Science and Engineering graduates. To attain meaningful success in this globally connected competitive economy, we need to outperform competing countries. But despite some progress, Bangladesh's relative position in innovation ranking among competing countries is not encouraging.  For example, according to the recently released Global Innovation Index 2018 report, Bangladesh has been ranked as the least innovative country in Asia. 

It's time Bangladesh looked into local innovation capacity development as a strategic tool to meet conflicting interests. Offering increasing quality products at decreasing prices will meet consumers' expectations. Overall strategy and policy of resource allocation in preparing the budget should be significantly changed in order to empower producers to make increasing profit while paying more salary to employees and more taxes to the government. Increasing resources should be allocated to create the supply of locally developed innovation targeting the competitiveness of productive activities, whether for export or domestic consumption. Incentives should also be given to integrating those innovations in productive activities so that producers succeed at improving quality and reducing cost simultaneously.

It's high time that Bangladesh changed the focus of resource allocation so that the country continues to enjoy increasing competitiveness by strengthening the local market of innovation. Otherwise, the country runs the risk of suffering from slowing down of the economy, losing jobs and missing the economic targets of 2030 and 2041. 

M Rokonuzzaman PhD is an academic and researcher on technology, innovation ands policy. [email protected]