Sustaining manufacturing sector

The manufacturing sector currently contributes 17 per cent of the value added to the country's GDP as well as 90 per cent of exports. However, as is well-known, low-skilled and labour-intensive segment in the manufacturing sector still plays a significant part in the economic wellbeing of Bangladesh. Although only about 15 per cent of the country's employment comes from this sector, it has made significant contribution towards bringing women into the labour force and is generating employment opportunities in an economy where large segments of workers remain self-employed. In fact, almost half of urban working women below the age of 25 years are engaged in the manufacturing sector that generates robust multiplier effects as about two direct and induced jobs are created for each direct job in the sector. These are some of the interesting findings contained in the country private-sector diagnostic study titled 'Creating Markets in Bangladesh: Unleashing the Private Sector to Sustain Development Success' published recently by the World Bank Group (WBG).   

Official statistics of 2019 indicate that with fewer than 10 workers, microenterprises account for 90 per cent of all manufacturing enterprises in the country. Among these entities, large firms possessing over 250 workers have a share of just 6.5 per cent in terms of numbers, with textile and garment factories accounting for 85 per cent but contributing 68.5 per cent jobs. In contrast, although factories having less than 100 workers have a share of 87 per cent among all manufacturing establishments, their contribution towards jobs is only 23.5 per cent. Within the manufacturing sector, the garment and textile factories dominate with a share of 40 per cent among non-microenterprise entities; but they contribute half of the manufacturing value-added and 85 per cent of exports. The food- and beverage-manufacturing establishments have a share of 20.5 per cent in the total, but generate only 14 per cent to the value added. On the other hand, minerals and metal establishments have a share of 17 per cent but contribute about 22 per cent to the manufacturing value-added.

The WBG report points out that manufacturing in Bangladesh is still of basic nature, and productive capabilities have not developed significantly despite the success of the RMG subsector in recent decades. It implies that the sector including RMG remains focused on low-productivity activities involving limited technological complexities that require only basic skills. Consequently, the local RMG arena has remained stuck to the lower rungs of global product quality ladder over the previous decade. Not unsurprisingly, annualised manufacturing sector productivity growth in Bangladesh during 2010-16 was only 2.2 per cent on an average, which limits the pace of wage growth thereby slowing the pace of poverty alleviation as well.

The ongoing Fourth Industrial Revolution presents some opportunities for the Bangladesh manufacturing sector despite growing challenges to the country's dependence on low labour costs. The worldwide automation trends and use of additional service inputs in manufacturing (called 'servicification') will undoubtedly shrink the relative role of unskilled manufacturing labour including in RMG factories. Although the latter is considered to be least susceptible to automation, some recent technological changes are already impacting on the labour-use in RMG. That in turn may put at risk the employment of low-skilled labour as well as competitiveness of local manufacturers who have traditionally relied on low workers' wages and were weak in the adoption of new technology. However, timely adoption of industrial, informational, and transactional technologies as well as improved managerial practices can certainly aid the local manufacturers to shift to more complex and higher value-added production that can support higher wages (WBG, 2021).  

The case for diversifying manufacturing exports of Bangladesh has been reinforced by the new reality that the Covid-19 pandemic might have contributed towards acceleration of the Fourth Industrial Revolution. The pandemic has also laid bare the vulnerability of Bangladeshi manufacturers to over concentration in exports with regard to both products and markets, as lockdowns in Europe and America resulted in a collapse in demand across supply chains. The WBG report predicts that the pandemic may be accelerating two critical trends in the manufacturing sector that would have substantial implications for Bangladesh. Firstly, many manufacturers may adopt newer technologies at a faster pace for minimising risks to labour and respond swiftly to rising consumer demands in online platforms. As a consequence, the impact of the Fourth Industrial Revolution may be felt sooner in Bangladesh than what might have happened otherwise. Secondly, the supply chain strategies across the world are likely to undergo changes as lead buyers are reassessing the balance of risks against associated costs, which may result in restructuring of existing global supply chains. Both these trends may pose opportunities and threats for the Bangladeshi manufacturers including those in RMG.

There are some cross-cutting priorities as pointed out by the WBG report, though diversification of manufacturing sector requires certain sector-specific interventions. For example, subsectors adding higher value should be encouraged. The common areas that require improvement include the creation of an enabling environment for FDI incentive schemes, compliance with environmental, labour and social standards, trade logistics, reliable energy supply, and upgrading labour force skills. In the short term, the creation of an enabling environment for FDI is needed to bring know-how and expand access to the export market. Besides, access to long-term finance should be improved by expediting approvals for foreign commercial borrowings.

In the medium term, the incentive regime should be reformed, which could include doing away with excessive trade protection as it discourages the growth of sectors not covered by the existing schemes. Compliance with environmental and social standards should be strengthened by bolstering regulatory enforcement and investing in technical infrastructure like laboratories and testing facilities. The trade logistics need to be improved for curtailing the cost of transportation and storage. Access to reliable energy can be expanded by further strengthening the connectivity infrastructure. And skills of workers can be improved by identifying the gaps, expanding technical and vocational education, and by strengthening the collaboration between industries and the academic arena including universities.

Dr Helal Uddin Ahmed is a retired Additional Secretary and former Editor of Bangladesh Quarterly. [email protected]