Industrialisation policy: Embracing local innovation

There has been a belief that economic growth can be accelerated by actively directing economic activity away from traditional agriculture and resource-based economic sectors towards manufacturing. The least developed countries (LDCs) have historically adopted two alternative strategies for achieving industrialisation: inward-looking strategy, and outward-looking one. Among the two, inward-looking strategy in the form of import substitution (i.e. producing goods at home that would otherwise be imported) has been favoured by many of them. Bangladesh is no exception. The strategy uses tariffs, import-quotas and subsidies among others for promoting and protecting import-substitute industries. Such trade restrictions are intended to 'protect' domestic industries so that they can gain comparative advantage and substitute imported goods by domestic ones. It has been believed that by producing domestically, local inputs such as low-cost labour and raw materials would be used in production to offer lower-cost alternatives to imported finished products. It was also believed that through such productive activities, domestic producers would also acquire technology, market intelligence and access to business networks for growing as internationally competitive producers.

After following such strategy over several decades, it is time to ask some vital questions: Has it been offering cheaper alternatives to imports for consumers? Has such strategy helped acquire globally-competitive industrial capacity for opening up new export opportunities?  Has such strategy been creating globally-competitive and sustainable industrial base? These and many other questions need to be answered.

Recently, the Policy Research Institute (PRI) reported that the protection cost of import substitution in Bangladesh over previous five years appears to be more than $64 billion. "Who is paying this bill?"-that is an important question. It has been reported that Bangladeshi consumers pay 50 per cent to 100 per cent more than world prices for consumer products-either imported or produced locally. As reported, "Bangladeshi tariff protection structure presents a unique case where much of the protection is accorded to producers of import-substitute consumer goods." As a result, Bangladeshi consumers pay some of the highest prices for consumer goods in Asia. According to this PRI research, consumers paid 70 per cent above international prices on average for buying consumer goods from the domestic market. Such extra cost is basically a veritable transfer of resources from the pocket of consumers to that of producers. By paying such staggering amount, what is Bangladesh gaining?

One of the gains could have been acquisition of substantial industrial competitiveness by producers through import substituting production activities, and exporting these or innovating for development of new products. As a result, new jobs could be created and the government could earn additional revenue from exports. But, it has been found that these import substitution strategy has failed to achieve such success. Producers negotiate low tariffs on inputs (including capital machinery and intermediate products) and high import tariffs on outputs. According to the PRI research findings, import substitution is neither offering consumers less costly alternatives, nor supporting the acquisition of globally-competitive industrial capacity by producers for opening up new export opportunities.

Thus the reality is: (1) forcing consumers to pay far higher prices than international rates; (2) limiting the expansion of local production of intermediate goods; and (3) discouraging Research and Development (R&D) investment for process innovation. A portion of that protection cost could have been used to undertake industrial R&D for acquiring sustainable capability to reduce cost and improve the quality of production. For example, the manufacturing industries spent about 90 per cent of the total industrial R&D expenditures in Korea during 2007. Such a focus in resource allocation could have empowered Bangladeshi producers to offer cheaper import substitutes, create high-paying R&D jobs for graduates, create new export opportunities, and generate new revenue base for the government. Some may say that Bangladesh is not rich enough to finance R&D. Even 10 per cent of that $64 billion over five years could have been a substantially large R&D fund for opening up a new dimension of industrial capacity in Bangladesh.

Many countries have succeeded in entering the upward spiralling cycle of industrial growth by pursuing import substitution strategy. Upon introduction of import substitution, they absorbed and assimilated production techniques, often leading to redesigning of processes and products. On proceeding further with learning, they eventually succeeded in improving production processes to produce import substitutions at lower cost than the international level. Such successes led to expanded manufacturing of import-substitute products to meet the demand of export markets. Korea's remarkable industrial success primarily hinged on the accumulation of this capacity. China has been pursuing such a strategy-starting from introduction, then leading to assimilation, absorption, and re-innovation. On the other hand, Bangladeshi producers often pursue high-end import-substituting production technologies, as import tax on capital machinery is virtually zero. 

There appears to be a significant flaw in the policy framework governing industrial capacity of Bangladesh. In the name of import substitution, consumers have been charged astronomically high prices just to make a few producers rich. Moreover, producers have not gained globally-competitive production capability through the process either. Despite having such a costly protection, some producers have been struggling to remain afloat as they have failed to acquire sustainable capacity for increasing quality and reducing costs. As a result, it appears that Bangladesh has suffered a huge net loss by pursuing this tariff protection-based import substitution strategy. Recent development of robotics and automation has substantially eroded the underlying labour advantage of this strategy. With the steady decline of labour content in industrial production, cost of labour for many industrial products has gone down to less than 15 per cent of the total production cost. For example, in smart-phone assembling, the cost of labour is less than five per cent. Moreover, Bangladesh's raw as well as intermediate inputs for producing industrial outputs are also very negligible.

Under the circumstances, protection-based labour-centric import-substituting industrial strategy appears not to be beneficial for the country any longer. It is time to focus on creating the scope for adding value through local innovation - particularly process innovation. It is worth noting that Korea's success started with process innovation. As has been reported, conventional means of protection did not serve any meaningful purpose. Rather it caused sufferings to millions of consumers as against channelling benefits to a handful of import-substituting producers. It is therefore time to change the incentive framework. Incentive should go to acquiring innovation capability, starting with process, for continuously reducing cost and improving the quality of production. Import substitution strategy should lead to lower cost substitution, as opposed to the other way around. Progress along this line will not only reduce the sufferings of consumers, but will also open up export opportunities for the producers.

As opposed to low-cost labour, the focus should be on utilising mental capacity of a growing number of university graduates for innovating processes and products in order to offer better quality products at lower cost. Progress along this line will also yield better returns from the investments we make for producing university graduates. Time is running out. Bangladesh must be serious about changing the focus from low-cost labour advantage and trade protectionism to development of innovation capacity. This would enable the producers to commence their journey of producing higher quality products at lower costs, by engaging knowledge-based professionals.

M. Rokonuzzaman, PhD, is an Academic, Researcher and Activist in the areas of Technology, Innovation and Policy. [email protected]