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The Financial Express

Trade and income inequality in Bangladesh

| Updated: October 11, 2020 20:28:20


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Over the last four decades trade has significantly contributed to economic growth of many developing countries including Bangladesh. Also many developing countries during this period have introduced a series of trade policy reforms further accelerating the process of growth which has  helped to reduce income inequality. Now about a quarter of total global output is exported and the understanding of  this phenomenon is important because trade has generated economic and financial gains. At the same time it is equally important to examine and understand the distributional consequences of trade.

Since the 1980s the global economy has been rapidly integrating, a phenomenon described as globalisation. The integration of national economies into a global economic system has been the most important development  since the end of the Second World War. At the core of the global economic integration process is the international exchange of goods, services and capital. The production chains of these goods and services have become increasingly complex and global.

It is estimated that almost 30 per cent of the value of global exports come from foreign imports. Also, multinational corporations (MNCs) locate different manufacturing functions in countries which are comparatively advantaged in the production of that product, then put them together in another location to make the final product resulting in intra-firm trade. The reduction of trade barriers under the auspices of GATT/WTO also resulted  in a phenomenal growth in what is described as intra-industry trade or the trade in similar products having different market characteristics. Al these factors together  have  caused remarkable growth not only in trade but also in  capital flows among countries.

A general consensus emerged by the very end of 1980s known as the Washington Consensus (a consensus reached  among three Washington based institutions. These three institutions are  the World Bank, the International Monetary Fund and the US Treasury) which considers that trade is central to ending global poverty and benefits lower income households by offering more affordable goods and services. More importantly, the consensus has further advanced the argument that integrating with the global economy through trade and global value chains contributes to economic growth and higher income, thus reducing poverty both locally and globally.

This link between trade and enhanced household welfare is achieved when a country opens up to trade. This results in  the demand and supply of goods and services to shift causing local markets to respond and prices change impacting on households both as consumers and wage earners. The effect of trade, therefore, has knock on effects on the prices of non-traded goods relative to traded goods resulting in changes in wages. As such not everyone will benefit from international trade in the same way.

A number of empirical studies do support that trade has negatively impacted on earnings, employment for wage earners and that the impact of trade on income inequality is real. Theoretically, international trade affects income inequality through its effects on employment structure and wage structure and that can cause income inequality. As opening of trade raises the average level of productivity  for the trading sector which in turn leads to increased productivity gap between this sector and the non-trading sector leading to income differentials.

The latest Household Income and Expenditure Survey (HIES) by the BBS indicates the Gini-coefficient-- a measure of income inequality  for Bangladesh stood at 0.482 in 2016. In fact, the Gini-coefficient has shown a rising trend since 1992, rising from 0.388 in 1992 to 0.482 in 2016 indicating a rising trend in income inequality in the country. During this period the top 10 per cent of the households have been increasing their share of income and wealth  while that of the bottom 10 per cent declining. The share of income for the top 10 per cent stood at 38.09 per cent while the same for the bottom 10 per cent was 1.02 per cent in 2016. If this is further narrowed down between the top 5 per cent and the bottom 5 per cent of the households, it even becomes more glaring-- 27.8  per cent and 0.23 per cent  respectively.

According to the World's Bank's Poverty and Shared  Prosperity, 2018 report Bangladesh is home to 24.1 million extremely poor people  who earn less than US$1.90 a day. Bangladesh now accounts for  3 per cent of the world's extreme poor having 2.2 per cent share of the global population. The high incidence of poverty and the rising income inequality are likely to further worsen due the current Covid-19 pandemic. The Research Firm Wealth-X, based in New York  in its 2019 report suggested that Bangladesh would record the third fastest growth in the number of high net worth individuals in the world in the next five years.

Between 2000 and 2019, Bangladesh has been enjoying current account surplus for 10 years coinciding with the rapid expansion of RMG exports. It also now appears that in this financial year (2020-21), Bangladesh is heading for another  current account surplus. According to the Financial Express of October, 4, the current account surplus stood at US$3.3 billion by the end of August, 2020.

Current account has two major components-- net balance on exports and imports of goods and services and net balance on transfers including unrequited transfers. A current account surplus indicates an excess of savings over investment causing an outflow of capital and vice versa. That is how the  balance of payments balances through the capital account. Therefore, the overall balance in goods and services is explained by savings, investment and capital flows.

The RMG industry overwhelmingly dominates  exports from Bangladesh. The value of exports by the industry stood at US$34.13 billion accounting for 84.21 per cent of total exports (US$40.53 billion) from Bangladesh in 2018-19. Therefore, what happens in this industry is also very symptomatic of other export oriented industries in Bangladesh. The RMG industry employs about 3.6 million people. The minimum wage of a RMG worker is US$95.00 a month. The average take home wage is US$112.00 a month or more precisely about US$4.00 a day which can just about buy a cup of coffee in the US.

The living wage is estimated to be US$190.00 a month. So RMG workers earn far less than the amount needed to just live on. The total monthly wage bill for the industry is estimated to be US$495 million a month (US$5.94 billion a year). Therefore,  wages accounted for about 17 per cent of the industry's total export revenue in 2018-19. There is no breakdown  available for the remaining 83 per cent of exports income in terms of variable and fixed costs and profit. No account has also been taken of any income if generated by firms in the RMG industry in the domestic market.

However, it must be noted that using the alternative data sources such as the World Bank and UNCTAD, data on imports from Bangladesh (i.e. mirror statistics) as opposed to exports from Bangladesh,  it has been  found that exports from Bangladesh during the 2019 calendar year stood at US$46.00 billion, of which RMG share of total exports was  US$40.4 billion  accounting for 87.8 percent of total exports. Both exports value data based on the BBS and the alternative data sources reveal about US$6.27 billion difference on account of RMG exports from Bangladesh.

The difference between the financial year data from the BBS and the calendar year data from the alternative sources as well as differences arising from FOB (exports) and CIF (imports) valuation should not be very significant. Also, global trade flows slowed down in 2019. In fact, merchandise trade volume  fell by 0.1 per cent in 2019 but in terms of the US dollar value the decline was 3 per cent. This decline has been attributed to trade tensions and slowing economic growth.

Therefore, US$6.27 billion or some very close approximation of this value to account for the differences in the time frames and valuation methods remains not only unaccounted for but also seeems to have disappeared into the thin air. If this US$6.27 billion are added to  RMG export earnings, the wages share stands at 14.7 per cent. But more disturbingly, from the current account perspective, if this missing US$6.27 billion were added to the 2019  calendar year current account, that  would have recorded a current account surplus of US$3.18 billion instead  of a deficit of  US$3.09 billion.

The unexplained 83 per cent  or 85 per cent based on the alternative data sources of export earnings by the RMG industry clearly indicates the suppression of wage growth with income being redistributed to capital from labour or more precisely an upward redistribution income from wages to profits. A substantial part of these profits constitutes economic rents.

All RMG exports are invoiced in the US dollar and  it is quite often suggested that  invoices are under quoted thus the true export earnings are under-recorded. This proposition is clearly supported by the alternative sources data. Therefore, the true levels of profits are underestimated. As the US dollar continues to appreciate, RMG industry further financially benefits from this.

Also, in many instances  a part of transfers from wages through wage suppression also goes to high salaried employees including managerial and highly skilled technical staff of  the industry. It is reported that a very large number of these managerial and highly skilled technical staff are recruited from India and Sri-Lanka who transfer a substantial share of their income to their home countries with the negative implications for the current account. Overall, RMG workers significantly foot the bill for all these financial transfers overseas at their own expense.

RMG workers also pay higher prices for products produced by protected domestic import competing industries.  The Global Wage Report, 2018-19 indicated that the real wage growth (adjusted for inflation) declined by 3 per cent in Bangladesh in 2017.

This double squeeze faced by RMG workers leads to reduced  purchasing power available for consumption expenditure on the one hand and  lower propensity to consume by the wealthy on the other hand leads to what in economics  is described as under-consumption which J.M. Keynes also mentioned in the 1930s. This under-consumption has created a savings glut. This savings glut is clearly reflected in current account surpluses in the Bangladesh balance of payments.

This trade fuelled rising accumulation of profits and economic rents by RMG exporters in particular and other exporters on the one hand and the wage suppression of workers accompanied by  declining purchasing power of wage earners on the other hand are now propelling an spiralling income inequality in Bangladesh, in particular in the manufacturing sector. This sector accounts for 21 per cent of GDP of which 66 per cent is contributed by RMG and 18 per cent of employment of which 49 per cent is accounted for by RMG. 28 per cent of workers are informally employed in the manufacturing sector with a substantial proportion of them are being employed in the RMG industry. It is equally likely that the situation is not any different with regard to wage suppression for non-exporting firms across all industries and sectors who also benefit from trade protection provided to them.

In summary, it can be argued that the structure of trade in Bangladesh  is not only putting downward pressure on wages of manufacturing workers, especially in the RMG industry, but also causes the erosion of purchasing power of the workers due to trade protection and inflation. To reverse this trend will require reform of the income tax regime with special attention to tax economic rents for reasons of both efficiency and equity and also to  discourage and disincentivise  economic rent seeking activities and  to  direct efforts to profit seeking activities. This may  reduce the burden of  regressive consumption tax, bring comprehensive changes to the trade  protection regime to create a more open and competitive  economy, and also enable the workers to organise and bargain. 

muhammad.mahmood47@gmail.com

 

 

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