Case for addressing anti-export bias in FY 2013-14 budget

Over the past two decades, Bangladesh has emerged as the second largest readymade garments {RMG} exporter in the world after China. Driven by this one product group, exports have averaged comfortable double digit growth for the entire period. Prospects for sustained high export performance are bright, though vulnerabilities remain. One primary source of vulnerability arises from "export concentration" characterized by the extreme reliance of export earnings on just one product - RMG.

The problem has been duly identified by analysts and policymakers alike, and the need for export diversification is well recognized by the government which, to be fair, has made it a cornerstone of trade policy. But, judging from the record thus far, results are modest. Though the number of export products has increased over time, the share of RMG in the export basket has remained steady at 75-79% for the past decade. This is partly due to the approach taken to address the challenge, which has been to identify products with strong past growth record or assessment of potential comparative advantage using some indicator like revealed comparative advantage (RCA), and to include these among the "thrust sectors" in industrial or export policy to give them all kinds of support in preference to other sectors not so identified. 

The emphasis of trade or industrial policy based on the principle of thrust sectors has its merits and demerits. It is a fact that RMG was never a thrust sector at its inception three decades ago. Most recently, ship building has emerged as a viable and prospective export sector to everyone's surprise. The thrust sector approach is largely a post facto device to distribute public resources rather than an effective criterion to diversify production or exports going forward. 

What is missing in this approach is a proper diagnostic of what generates the momentum for export concentration in one product to the exclusion of others. To be sure, any strategy for export diversification should not create conditions to stem the existing momentum associated with the lead product but contain adequate incentives to generate momentum for the emergence and expansion of other products. A study by Policy Research Institute (PRI) of Bangladesh -- 2012 PRI study for the World Bank, "Assessment of Effective Rates of Protection 2012 survey of selected manufacturing enterprises" -- has revealed that, in the ultimate analysis, it is a matter of relative incentives that determine resource allocation across competing activities in production for domestic sales or exports. It also established that while non-RMG exports suffered from significant anti-export bias of incentives (resulting in exports of a product being less profitable than its domestic sales propped up by high protection), RMG sector - being a 100% export-oriented sector -- was largely immune to it. The consequence of this structure of relative incentives seemed to accentuate the uni-product export concentration. 

Policies and institutions that favour export expansion will also be conducive to export diversification. Bangladesh is probably a unique case where this proposition might not hold. This is because the high reliance on RMG exports has put in place institutions and policies that give high priority to this sector resulting in an asymmetry of policy support that accentuates the existing uni-product export concentration, on the one hand, and also hinders the emergence and growth of non-RMG exports, on the other. Given the size of the global market for textiles and clothing, Bangladesh's strong market position in RMG is unlikely to diminish anytime soon. Given that (a) China is moving away from basic garments to high-value products, (b) Japan, the second largest apparel market in the world, has opened up to Bangladeshi garment exports, and (c) emerging markets are becoming significant buyers of Bangladeshi garments, McKinsey and Company - "Bangladesh's Readymade Garments Landscape: The Challenge of Growth" - project (2011) that Bangladesh RMG exports will double by 2015, and triple by 2020. Nevertheless, the case for diversifying Bangladesh's export basket in the interests of reducing vulnerability from industry-specific shocks has been made. 

The following policy and institutional mechanisms need to be put in place if export diversification is to be attained within a reasonable period:

l Trade policy bias against exports must be eliminated. As for the trade policy regime, PRI research in the past year has highlighted the fact that the tariff structure is generally skewed in favour of import-substituting activities with a substantial anti-export bias. Because of the essentially "free trade enclave" created for RMG production -- a 100% export-oriented industry -- it is not affected so much by the anti-export bias of the incentive regime as are other exports. 

However, in recent years, the government has taken some steps to selectively provide such facilities like special bonded warehouse or SBW (previously restricted for 100% export-oriented firms like RMG) to exporting firms that satisfy a critical minimum export volume, thus mitigating some of the anti-export bias. We find that an increasing number of non-RMG exporting firms are now making use of this facility which is the principal means by which the dis-incentives from a high-tariff regime can be mitigated. This process needs to be sustained and made more effective. 

Nevertheless, a major challenge in the forthcoming budget of fiscal year (FY) 2013-14 will be to address the issue of anti-export bias in the tariff structure because it hurts emerging and potential exports, thus serving as a policy constraint to export diversification. It is imperative that the unusually high effective rate of protection (ERP) for import-substitute production needs to be scaled down. The process needs to start with the FY2013-14 budget by reversing the growing wedge between output and input tariffs. 

l Efficiency of customs administration. A transparent and efficient customs administration is ideal for export success. Again, it is not enough to provide green channel clearance for RMG cargo while leaving the remaining exports at the mercy of an archaic and incompetent customs administration. All exports must be brought within the fold of automated clearance mechanism that is equipped with state of the art hardware and software. 

l Efficiency of import-export procedures. It would be foolish to think that improving trade infrastructure means focusing on rapid clearance of export cargo. Export and imports are intricately linked so that export performance depends critically on simplification of import procedures as well. Modernization of import clearance by installing the latest machinery and equipment along with information technology (IT) software's is absolutely critical to achieve export diversification. 

l Transparency and efficiency of behind-the-border services. Besides providing the support of modern banking and financial institutions to trade, industrial and investment policies need to be brought in line with those of trading partners and comparators so that a dynamic export sector can be sustained for the long-term.

l Availability and quality of transport infrastructure and services. Improving trade logistics will definitely enhance competitiveness of exports. First, land and sea ports must be equipped with state of the art facilities - container depots, gantry cranes, IT-enabled port clearance services, etc. -- for rapid clearance of import-export cargo. Road, rail, river, and air transports linking the hinterland to the ports must be developed to the highest level of sophistication so that transaction time and costs are minimal, to ensure export competitiveness.

l Availability and use of IT. Export success along with export diversification calls for rapidly installing state of the art IT equipment and software for handling activities at the ports but also inland for as much of the behind-the-border activities as are related to trade. Export competitiveness in the 21st century is as much a matter of producing at the lowest cost as it is about producing with the support of the best and latest technology. In this regard, it is critical to run and stay with the latest versions of hardware and software, or else export success could be short-lived. (More on page 4. The writer, Dr. Zaidi Sattar, is Chairman, Policy Research Institute (PRI), Bangladesh.