Merits and Demerits of Foreign Direct Investment

Merits and Demerits of Foreign Direct Investment

Md. Joynal Abdin

The Daily Sun on May 26, 2017

 

There are significant reserves of foreign currency in Bangladesh. It is mounting up during the last few years. At the same time, we have a good amount of unutilised money in the banking system. It seems good to listen that we are becoming a wealthy nation with handsome cash in hand. But till now our investment in percentage of GDP is about 29%. It is 56% in Bhutan, 33.25% in India. Bangladesh’s investment in percentage of GDP is increasing day by day but the growth rate is too slow.

It is a matter of investigation whether foreign currency reserve and unutilised cash in banking system is mounting because of this poor performance in investment or not. In terms of attracting foreign direct investment (FDI) we are performing even poorer than the neighbouring or competitor countries. Bangladesh earned USD 1191, 1726, 1432, 1830 and 2001 million during the last five fiscal years. It is only 0.98, 1.19, 1.74, 1.47 and 1.73% of the GDP whereas India earned FDI of 2.00, 1.31, 1.52, 1.70 and    2.11% of its GDP during the last five years. Vietnam got FDI 5.48, 5.37, 5.20, 4.94 and 6.10% of its GDP. The Maldives received FDI 17.29, 9.05, 12.91, 10.77 and 8.70% of its GDP during the last five years.

Let’s have a look at the benefits of receiving FDI into a developing country like Bangladesh. FDI could offer the following benefits to its host country:

1    Increasing supply of foreign currency and channelise international sources of industrial funds;

2    Increases employment opportunity and help to reduce unemployment rate;

3    Increases skills of the host country’s labour and facilitate technology transfer;

4    Increases managerial knowledge of the host country’s professionals;

5    Foster economic growth, export earnings;

6    Introduces products standardisation and international exposure of other products;

7    Provides corporate tax to the government and contribute in revenue growth;

8    Creates a competitive business environment and productivity improves with the competition;

9    Develops international channel of distribution;

10    Assists in adopting international standard policies and creates a global business regime;

11    Contributes to development of backward and forward linkage local enterprises and

12    Assists in improving living standard of the stakeholders through different social responsibility measures.

Bangladesh is fighting with the development barriers like unemployment, poverty reduction, enlarging product basket, enlarging export basket etc. since its independence. It achieved significant economic advancements but till we have scope to grow further. Therefore, the government attaches the highest priority to industrialisation of the economy by any means. Already we have eight Export Processing Zones (EPZ), 78 Industrial Estate developed by BSCIC to host investment. Furthermore, the government is progressing to establish 100 Special Economic Zone (SEZ) in Bangladesh. All these arrangements are to host investment either from local or foreign sources. Bangladesh Investment Development Authority (BIDA) has been restructured by merging the Board of Investment (BoI) and Privatisation Commission together. BIDA is organising conferences, seminars, road shows abroad to draw attention of the foreign investors. The government declared a long list of fiscal and non-fiscal incentives to boost up the investment movement. But till now Bangladesh’s performance in FDI attraction is considered poor. It is because a number of other factors like good governance, political stability / understanding among the political parties, security and safety of investment, law and order situation, availability of industrial logistics, hassle-free business registration and licensing etc. are involved with an investment decision making.

Now Bangladesh has to go for a comprehensive investment services like one stop service, approaching foreign investors with specific project proposals, justification of investment policies and revision (if necessary), establishment of sector specific technical and engineering institute, establishment of sector specific testing laboratories, signing free trade agreements with existing and potential export destinations, reducing business licenses and registration requirements, activating BIDA with own manpower instead of the cadre officials deployed in deputation to activate the investment attraction measures.

Bangladesh has everything to be a good destination for foreign investment. It is located at the heart of South Asia, corridor between SAARC and ASEAN countries. It has a large number of domestic consumers. Purchasing power of local people is increasing day by day with economic growth of the country. Bangladesh has a good number of sectors to invest profitably with supply of enough manpower in competitive cost. The government keeps assisting the investors with a long list of fiscal and non-fiscal incentives. Finally export items of Bangladesh are enjoying duty-free and quota-free market access to most of the export markets other than the USA. All the LDC facilities under the WTO arrangement are enjoying by an entrepreneurs while doing international trade with Bangladesh. Therefore, Bangladesh could be considered as one of the most attractive locations to relocate global business corporations to the EPZs and SEZs being developed by the government.

It is for sure that Bangladesh needs foreign investment to boost-up its economy but we must remember that there are some adverse effects of FDI too. For example, FDI in some sectors could have an adverse effect on local employment sector. For better understanding we could imagine a scenario where a large corporation establishes a highly sophisticated readymade garment factory here in Bangladesh, where most of the tasks are completed by robotic technologies instead of human labour. Its productivity is much higher than human labour and product cost is also lower. In such cases, local factories will lose its market share. After a certain period it could be seen that local factories are reducing their manpower to adjust with the situation. Large number of people loses their employment due to that large investment. Similarly extreme competition from an FDI company may be the cause of death to many local SMEs. Repatriation of a large FDI conglomerate could have an adverse effect on foreign currency reserve or balance of payment of a country. Therefore, we must consider all these possible adverse effects of FDI into the local economy and adopt legal framework to mitigate these threats.

Finally, we could state that, Bangladesh needs FDI to functionalise its upcoming SEZs and generate employment for the growing number of job seekers. But we must reserve few product and service sectors for the local entrepreneurs. Welcoming campaign for FDI has to be increased and equipped with enough precautionary measures. Adequate preparations, practical drive and a business friendly local business environment could encourage the investors to invest here in Bangladesh. We have everything to become a middle income country by 2027 if our government, political leaders, decision makers play respective role accordingly. Otherwise piecemeal investment drive will not give us complete output up to the expectation.

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Levelling Trading Field for SMEs

Levelling Trading Field for SMEs

 

Md. Joynal Abdin

 The Daily Sun on April 2, 2017

There is a common debate that Bangladeshi SMEs are “Missing Middle” or “Excluded Middle” categories of enterprises of the economy. The first phrase i.e. the Missing Middle is mainly used by the donor communities and few Bangladeshi economists closely working with the donors.

It means that the SMEs are the middle segment of the enterprises which are missing either microfinance facilities i.e. exclusively for the cottage, and micro enterprises operated by the NGOs. On the other hand upper medium to large enterprises are enjoying every facilities of the institutional support offered by the government agencies and other institutes like banks, leasing companies, and multinational or regional trade negotiation platforms etc. Similarly in the second phrase Excluded Middle the concept is the same but only different is that, missing middles are out of service by error or unknowingly.

On the other hand, Excluded Middle are the missing part who are deliberately excluded by the policy makers, decision markers, government, development partners etc. to offer more benefits to the other segments. I would like to be with the second groups i.e. SMEs in Bangladesh are “Excluded Middle” segment of enterprises. Manufacturing SMEs are not getting any extra privilege over the trading and service sector enterprises from any policy aspects. SME loan are draining away by the traders or defaulter large enterprises that are included in the SME categories by the new definition of SMEs mentioned in the National Industrial Policy 2016 of the government. They are destroying reputation of the manufacturing SMEs through becoming defaulters in repayment of bank loans in time.

That means including trading, service and large enterprises into the categories of SMEs through broadening its threshold in the definition became harmful for the real entrepreneurs, I mean manufacturing SMEs from both the sides. Firstly they are competing with the manufacturers to grab benefits and destroying their reputations by becoming defaulters. Not only for these two reasons but due to many other reasons time has arrived to examine whether we are providing policy support to the real entrepreneurs i.e. local manufacturing enterprises those are creating jobs for the unemployed population in mass scale or their benefit is going to somewhere else due to policy gap of the government. To ensure optimum use of the government incentives and benefits definition of the manufacturing SMEs should be revisited and redefined by the government of Bangladesh.

To ensure inclusive and sustainable development of the economy it is not enough that the government will be happy with the GDP growth and increased amount of export earnings.

But government has to ensure stakes of every segment in the growth and export earnings as well. Large companies have competitive advantage over the SMEs in terms of organisational capacity, technical ability, access to finance, and negotiation capacity etc. aspects. As a result they are dominating in the national as well as the global trade of a country. But it is proved that the SMEs could have a vital stake in national and international market if proper policy support is available from the government. Japanese large companies are outsourcing required tools and equipment’s from their SMEs whereas Bangladeshi large companies are importing these from abroad to assemble or manufacture their products for national or international market. It could be said that the SMEs in Bangladesh are not capable of producing quality goods for supplying to the large companies. The question is how Japanese SMEs are being capable to produce qualitative goods? Why large enterprises, donors and government are not helping Bangladeshi SMEs to overcome their limitations and produce qualitative products for supplying to the large companies?

Arguments could come up survival to the fittest, why government should offer them extra benefit? The answer is quite simple that SMEs are contributing two-thirds of formal non-agricultural private employment around the world. They are contributing 63% of the total employment in OECD countries. In most of the developing countries and LDCs, SMEs are contributing more to employment generation than that of their GDP contribution. It is because SMEs are mainly labour intensive and using traditional low productive machineries due to their inability of further access to technology. But In Japan, Korea, and China it is proved that the SMEs could play the role of feeder organisation and supply qualitative intermediary goods for boosting up mass production of the large entities. On the other hand export orientation of SMEs could increase demand for their products and help them to go for large scale production.

Export orientation of SMEs could be facilitating in various forms like direct exports, indirect exports, non-equity contractual agreements, and foreign direct investment (FDI) etc. A recent study shows that, only 7.6% of the SMEs involved with export around the world are mostly from developing countries. On the other hand 14.1% of the large enterprises of the developing countries (that means double of the SMEs) are involved with export business. In terms of LDCs SMEs export involvement is about 3%, but direct export of manufacturing SMEs is a negligible, where 0.09% of service SMEs are export linked, this figure is 31.9% in case of large enterprises. That means SMEs are missing a level playing field in terms of international trade around the world. But for fostering inclusive and sustainable development a level playing field has to be created for the SMEs in international trade.

In terms of direct export Bangladeshi SMEs have limitation in trade negotiation with the potential buyers, limited ability to go abroad for buyer searching, limited managerial knowledge to handle export procedures and documentation etc. Therefore indirect export through large companies or group wise export could be encouraged here in Bangladesh. For example, one or two SMEs are unable to bear initial export costs but if ten SMEs become united and export under on single brand name and export documentation then it could be worthwhile in terms of export cost bearing and procedure handling. But till now buyer searching and proper positioning of products remains as challenges. In this case all the Bangladeshi embassies located outside Bangladesh could organize Bangladeshi product fairs once a year and display our SME products by inviting local chamber of commerce and business leaders and play the role of match makers in this case.

SMEs participation in indirect export is much better around the world. About 90% of export earnings of developing countries are indirectly contributed by the SMEs. The same report shows that, 78% of global enterprises are SME representative but only 34% of these are involved with direct or indirect international trade. That means SMEs have ability to further contribute in international trade around the world. If a level playing field could be ensured. Major obstacles to create a level playing field for the SMEs are:

SMEs are facing high tariff even more than the large firms due to the existing market mechanism. They are facing double even triple taxation due to their inability to maintain or obtain required tax relevant documents.

Adverse effects of the Non-tariff measures imposed by the importing country hit the SMEs much. Because large companies could adopt newer measures to address NTM requirements and enter into the market as a compliance company. But due to their limited capacity SMEs could not.

Cumbersome boarder procedures and delay shipment or clearance effect the SMEs more due to their inability of bearing highly charged boarder storage cost.

Access to information and distribution channel development is also another major challenge for export orientation of SMEs. Difficulties in access to required amount of trade finance is another major challenge for SMEs export orientation.

Most of above challenges require government policy intervention for creating and maintaining a level playing field for SMEs in national as well as international market. Adoption of ICT, e-marketing, e-commerce adoption could give them advantage over few of the above mentioned challenges but finally it is the government who has to come up with kind heart to support SMEs to grow further and contribute more in employment generation, GDP growth, export earnings and ensure an inclusive and sustainable development of the economy. Otherwise they will remain Missing Middle or Excluded Middle as mentioned.

Creating Investment-friendly Business Environment

Creating Investment-friendly Business Environment

Md. Joynal Abdin

The Daily Sun on March 15, 2017

 

Bangladesh is a land of unutilised opportunities and untapped potentials. Traditionally Bangladesh was an agriculture driven economy but during last few decade it is shifting its agriculture dependency into industrial economy. At the same time a steadily growing service sector is backing the industrial development of the country. According to a recent report contribution of agriculture, industry and service sector to Bangladesh economy was 51.03%, 7.69 % and 41.28% respectively in the year 1971.  Contribution of agriculture decreases into 31.55% and industry increases into 20.63% in the year 1980. Service sector contributed 47.82% to Bangladesh economy in the same year. Since then contribution of industry and service sector to Bangladesh economy is increasing and agriculture is decreasing day by day. It does not mean that the agriculture sector is losing its importance but it indicates industry and service sector is becoming stronger but agriculture is contributing as before. Agro processing industry is fully dependent upon agriculture sector; therefore no way to underscore agriculture sector too. Currently (2015) contribution of the same sectors to the Bangladesh GDP is 15.50% (Agriculture), 28.14% (Industry) and 56.34% (Service). From the above discussion it is quite clear that the economy of Bangladesh is going through a transformation from agriculture dependent economy into industrialized economy.

Agriculture has a highest limit of production per acres of land. But industry and service sector have the liberty to produce unlimited number of units or value by using the same piece of land. Therefor government of Bangladesh took parallel initiatives for agriculture and industrial development.

Foreign Recognitions of Bangladesh:

Prospect of Bangladesh economy is not recognised by the Bangladeshis only. Today it is widely recognised by the global think-tank and investment Banks like Goldman Sachs. The Goldman Sachs Investment Bank described Bangladesh as one of the Next – 11 countries (N-11) due to its prompt growth potentials (Lawson, Heacock, and Stupnytska, 2007). Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea and Vietnam – identified by Goldman Sachs investment bank and economist Jim O’Neill in a research paper as having a high potential of becoming, along with the BRICS countries, among the world’s largest economies in the 21st century.

Regulatory Environment for Investment in Bangladesh:

Indian subcontinent inherited the British legal system since the colonial period. As a result Bangladesh has a very structured legal system since its inception. It has about 45 laws relevant to the investment, business, trade and commerce in various sectors. There are more than 10 policies with different incentives and supports of the government to promote private sector investment in various sectors.

The foreign private investment (promotion and protection) Act, 1980 has been passed that ensures legal protection to foreign investment against nationalization and expropriation. It also guarantees repatriation of capital and dividend; and equitable treatment with local investors with regard to indemnification, compensation, restitution, or other entitlement as is accorded to investment. The government has made bilateral agreements for avoidance of double taxation with 26 countries and negotiations are going on with 23 countries.

Investment treaty for promotion and protection of investment between Bangladesh and twenty countries have been concluded and negotiations are going on with 9 other countries. Besides these, Bangladesh is a signatory to MIGA (Multilateral Investment Guarantee Agency), OPIC (Overseas Private Investment Corporation) of USA, ICSID (International Centre for Settlement of Investment Disputes) and a number of WIPOs (World Intellectual Property Organisation) a Permanent committee on development and cooperation related to industrial prosperity. Adequate provision is also made available for intellectual property rights, such as patents, design and trademarks and copy right.

The government has already enacted bankruptcy law. A law commission has been constituted with a view to identify the anomalies and weaknesses in the existing laws and legal system. One of the main tasks of this commission is updating the existing laws in relation to industries, trade and business.

All these are expected to improve general business environment along with the environment of FDI. Efforts are being made to reform the bureaucratic administration in order to make it efficient and supportive of better services for inflow of FDI and economic development oriented activities. Substantial modifications have been made to up-date the laws dealing with financial sector. The Companies act 1994 and labour Act 2006 have been enacted for facilitating inflow of FDIs in Bangladesh.

In order to improve the environment of private foreign investment and FDI, several EPZs have been established in Chittagong, Dhaka, Khulna under the Bangladesh Export Processing Zones Authority (BEPZA) in 1980. The private Export Processing Zones (PEPZs) Act has also been enacted to encourage the establishment of “Private Export Processing Zones” by the local and foreign investors. These EPZs are well enriched with the necessary infrastructural facilities and are completely protected from any law and order problems or union activities.

The BEPZA approves all projects to be located in the EPZS and offers “One window same day service” to the investors in the EPZs. The government has also approved the private power generation policy of 1996 and tax exemption on income of the company for 15 years from the date of commercial production is allowed.

The Government has undertaken several steps to make import liberalization and industrial deregulations more effective including announcing its strategy of reducing effective protection over the medium term, continuing its efforts to lower and simplify tariffs, publishing a clear tariff schedule, developing an action plan for legal reforms and a blue pint for deregulation, and putting an action plan for implementing its exports development strategy. These efforts have improved the investment environment in Bangladesh.

Bangladesh is one of the promising economies with a large domestic market, availability of labour with competitive price, low utility charges, two seaports and a potential deep seaport facility, long-term tax holiday, 100% repatriation facility, and easy access to largest regional market like India and China.

Investment Friendly Facilities and Incentives: 

Tax  exemption  on  royalties,  technical  knowhow  and  technical  assistance  fees  and  facilities  for  their repatriation, tax exemption on interests on foreign loans, tax exemptions on capital gains from transfer of shares by the investing company, remittances  of  up  to  50%  of  salaries  of  the  foreigners  employed  in  Bangladesh  and  facilities  for repatriation of their savings and retirement benefits at the time of their return, no restrictions on issuance of work permits to project related foreign nationals and employees, facilities for repatriation of invested capital, profits and dividends, provision of transfer of shares held by foreign shareholders to local investors, reinvestment of remit table dividends would be treated as new investment, and foreign owned companies duly registered in Bangladesh will be on the same footing as locally owned ones etc. facilities are available for foreign investors.

Besides the above facilities Bangladesh is offering corporate tax holiday of 5 to 7 years for selected sectors, reduced tariff on import of raw materials capital machinery, bonded warehousing, accelerated depreciation on cost of machinery is admissible for new industrial undertaking (50% in the first year of commercial production, 30% in the second year, and 20% in the third year), tax exemption on capital gains from the transfer of shares of public limited companies listed with a stock exchange, reduced corporate tax for 5 to 7 years in lieu of tax holding and agricultural deprecation, Cash incentives and export subsidies ranging from 5% to 20% granted on the FOB value of the selected products, At best 90% loans against letters of credit (by banks), and permission  for  domestic  market  sales  of  up  to  20%  of  export-oriented  companies  outside  EPZ  (relevant duties apply) etc. fiscal benefits to the local or foreign entrepreneurs.

Additionally Bangladesh is offering 100% foreign equity allowed, unrestricted exit policy, remittance of royalty, technical know-how and technical assistance fees, full repatriation facilities of dividends and capital at exit, and an  investor  can  wind  up  investment  either  through  a  decision  of  the AGM  or  EGM, he  or  she  can repatriate the sales proceeds after securing proper authorisation from the Central Bank etc. benefits to a foreign investor.

Investment Friendly Factors of Production:

  • Largely a homogenous society with no major internal or external tension Bangladesh has a population with great resilience in the face of adversity.
  • The people of Bangladesh, a liberal democratic country irrespective of race and religion are living in harmony for years.
  • Bangladesh enjoys broad non-partisan political support for market-oriented reforms and offers the most investor-friendly regulatory regime in South Asia.
  • This country has a large trainable, enthusiastic, and hardworking low-cost labour force suitable for any labour-intensive industry.
  • A bridge between ASEAN and SAARC nations, the Geographical location of Bangladesh is ideal for global trades with very convenient access to international sea and air routes.
  • Bangladesh is endowed with abundant supply of natural gas, coal, water and very fertile soil.
  • Although Bangla is the official language. English is widely spoken as second language.
  • Increasing trend of per capita forecasting its purchasing power is increasing in the local market.
  • All Bangladesh products other than armaments enjoy complete duty and quota free access to EU, Japan, Canada, Australia, Norway and most of the developed countries. However, for apparel export to USA, Bangladesh has a quota regime which ended on 1st January 2005.
  • Export earning is continuously increasing.
  • Increasing trend of remittance earning.

Challenges and Recommendations:

With all of the above benefits Bangladesh have few limitations and challenges to attract further investments. Government could consider following recommendations to make the business environment sustainable and attractive to foreign investors:

  • Decreasing number of permissions / registrations / licenses requirements with a predetermined time frame / one stop investment services.
  • Ensuring hassle free and in-time delivery of industrial utilities like Electricity, Gas and water etc.
  • Making Bangladesh Investment Development Authority functional and effective with adequate resources.
  • Special investment attraction drive with specific project proposals to attract local and foreign investment.
  • Activating entrepreneurship promoters like better business forum or regulatory reform commission.
  • Developing infrastructure as per requirement of tomorrow’s business world.
  • Developing sector specific demand driven skilled manpower with specific technical knowledge.

Finally, we could conclude here with a statement that, Bangladesh has long lists of sectors and wide feature to promote local and foreign investment. But in absence of an effective and functional investment promotion agency (not regulator) Bangladesh is performing not as per the expectations. There are several entrepreneurship development, SME Development and Industrial Promotion agencies of / establish by the government. But due to lack of manpower, financial ability, technical and professional knowledge most of the organisations are less performing. Activating those organisations with right person at the right place could be one of the ways forward to strengthen investment attraction movement of Bangladesh.

Quick and inclusive economic development

Quick and inclusive economic development

Md. Joynal Abdin

The Independent on January 12, 2017

Bangladesh achieved its independence through a bloody war in 1971. The 1st government of independent Bangladesh under the leadership of Bangabandhu Sheikh Mujibur Rahman took initiative to rebuild the war destroyed country as soon as possible. Foreign aid, grants, loans were collected to rehabilitate Bangladeshi’s into respective profession. A large number of West Pakistani and foreign entrepreneurs, professionals went back to the respective countries and a common vacuum was visible in every sector. The then government of Bangladesh was influenced by the communist leaders of Bangladesh. As a result government adopted socialistic policies in economic arena. Socialist model resultants into nationalization movement and control market economy situation. But after a certain period, government has to shift its sole communist ideology into moderate socialistic approach due to many reasons. After 19980s capitalistic movement started to get momentum and individual investment in many sectors were inspired by the government policies. A long list of nationalized industries started to be sold into private sector. Foreign direct investment and private sector driven economy get started its progress in the independent Bangladesh.

Global free market economy concept was totally adopted in 1990s in Bangladesh. Almost all major barriers were withdrawn to allow private sector entrepreneurs to be involved in and uplift the economic development through employment generation in private sector. There are few cases of misappropriation of privatization concept but the free market economy concept strengthens its position in Bangladesh economy. Post 90s situation was made complex to determine its position.

With the change in government privatization was inspired by one party others are discouraging it. Five year plane got new title as PRSP. As the major political parties are rival to each other’s this contradictory environment started to be reflected everywhere of the government, bureaucracy, policy papers, and other governments priorities. One party is influenced by the socialistic ideology while others are the free market biased. Whatever is the motive but everyone has to be returned into the poverty alleviation, employment generation, social safety net, economic growth, overall development of the country etc. issues.

The world experienced failure of socialism and troublesome condition of capitalism as well. Therefore it is difficult to state that a single ideology is best to be adopted in Bangla desh for ensuring optimum level of inclusive welfare for the general people. Socialism / communism discouraged competition, innovation, and highest level of efficiency while capitalism made the human a product to be sold. A class of people becomes richer than ever while his neighbors are fasting to eat.  There are positive and negative aspects of each of the models offered by economist, social scientist till date. Therefor it is really difficult to determine which one is the best model to be replicated by a newly development potential country like Bangladesh?

In such a situation we could search information to determine the key factors contributed in economic development of the countries like Germany, China, and Japan etc. The ideal case of this condition could be Germany. It is the largest economy of Europe and forth largest GDP of the world. Size of the German GDP is $ 3.5 trillion to $ 4.00 trillion. GDP per capita of Germany is $ 42,000 to $ 48,000 in 2016. Contribution of service, industry and agriculture to the GDP of Germany is 69.1per cent, 30.2per cent and 0.7per cent respectively. Service sector contributed 73.8per cent, industry contributed 24.6per cent and agriculture contributed 1.6per cent of employment generation in Germany.

Major industrial sectors of Germany are iron and steel, coal, cement, mineral fuels, chemicals, plastics, production machinery, vehicles, trains, shipbuilding, space and aircraft, machine tools, electronics, information technology, optical and medical apparatus, pharmaceuticals, food, beverages, and textiles etc. The top 10 exports of Germany are vehicles, machineries, chemical goods, electronic products, electrical equipment, pharmaceuticals, transport equipment, basic metals, food products, and rubber and plastics. Major export destination of German products are the United States 9.6per cent, France 8.6per cent, United Kingdom 7.5per cent, The Netherlands 6.6per cent, China 6per cent, Italy 4.9per cent, Austria 4.8per cent, Poland 4.4per cent, and Switzerland 4.2per cent. Germany is one of the highest trade surplus nations of the world. In 2014 total trade surplus of Germany was $285 billion that is more than the total GDP of Bangladesh.

Now come to the question was Germany in the top position from the very beginning? The answer is no. Because of the industrial revolution occurred in Germany about 100 years later than that of the industrial revolution in England, France or Belgium. German states eliminated tariff barriers among themselves in 1834 while we are suffering to do so in SAARC even after 200 years later in this 21st century. To promote social development German Chancellor Otto von Bismarck promoted laws that provided social insurance, improved working conditions and instituted the world’s first welfare state during 1881 to 1889. Germany was the first to introduce social insurance programs including universal healthcare, compulsory education, sickness insurance, accident insurance, disability insurance, and a retirement pension. Moreover, the government’s universal education policy bore fruit with Germany having the highest literacy rate in the world 99per cent education levels that provided the nation with more people good at handling numbers, more engineers, chemists, opticians, skilled workers for its factories, skilled managers, knowledgeable farmers and skilled military personnel. These are the key factors of rapid development of Germany.

The German economic miracle was also intensified by an unprecedented population growth from 35 million in 1850 to 67 million in 1913 (while we are considering population growth as a burden). From 1895 to 1907, the number of workers engaged in machine building doubled from half a million to well over a million. Only 40 percent of Germans lived in rural areas by 1910, a drop from 67per cent at the birth of the empire. Industry accounted for 60 percent of the gross national product in 1913. The German chemical industry became the most advanced in the world, and by 1914 the country was producing half the world’s electrical equipment. The rapid advance to industrial maturity led to a drastic shift in German economic situation, from a rural economy into a major exporter of finished goods. The ratio of finished product to total export jumped from 38per cent in 1872 to 63per cent in 1912. By 1913, Germany came to dominate all the European markets. By 1914, Germany became one of the biggest exporters in the world. It was as like as China is doing in Asia today.

The economic model of Germany is based on the concept of the ‘Social Market Economy’. It is neither socialism nor capitalism in total nature. It is a socioeconomic model combining a free market capitalist economic system alongside social policies which establish both fair competition within the market and a welfare state. In other words it could be termed as a coordinated market economy known as Rhine capitalism.

The social market economy refrains from attempts to plan and guide production, the workforce, or sales, but it does support planned efforts to influence the economy through the organic means of a comprehensive economic policy coupled with flexible adaptation to market studies. Effectively combining monetary, credit, trade, tax, customs, investment, and social policies, as well as other measures, this type of economic policy creates an economy that serves the welfare and needs of the entire population, thereby fulfilling its ultimate goal. The “social” segment is often wrongly confused with socialism and democratic socialism, and although aspects were inspired by the latter, the social market approach rejects the socialist ideas of replacing private property and markets with social ownership and economic planning.

The ‘social’ element to the model instead refers to support for the provision of equal opportunity and protection of those unable to enter the free market labor force because of old-age, disability, or unemployment.

There are supporters of both the doctrines i.e. socialism and capitalism in Bangladesh. There are two types (socialism biased and capitalism biased) of policy makers in our existing parliament as well.

Therefore this German model of ‘Social Market Economy’ could be the best model for adopted in Bangladesh. Its success is proved in Germany as well as in China in some extent. Bangladeshi policy makers (political leaders), bureaucrats, and other stakeholders could be oriented with the model through more interaction between two friendly countries Bangladesh and Germany. The German Embassy in Dhaka could be play the role of catalyst here in adoption of German Social Market Economy model in Bangladesh.

Selecting appropriate approaches to industrialization

Selecting appropriate approaches to industrialization

Md. Joynal Abdin

The Financial Express on July 30, 2016

Industries are playing a vital role in entrepreneurship development, self-employment, and new-employment opportunity creation and increasing economic growth throughout the world. Therefore governments are keen to promote industrialisation for fostering economic growth, fighting unemployment and reducing poverty. The government used to establish an organisation for promoting and developing industries. But due to lack of specialised knowledge to select an appropriate approach for industrialisation these organisations are becoming less productive or ineffective in this regard.

Bangladesh classified industries / enterprises into five different categories (based on size), namely; Cottage, Micro, Small, Medium and Large enterprises / industries. At the same time Bangladesh segmented up the industries into seven different segments (based on purposes) namely; Handicraft, Hi-tech, Creative, Reserved, High Priority, Priority and Control industries. Size-based classification of industries in Bangladesh is as follows:

Sl. Type of Industry Replacement cost and value of fixed assets, excluding land and factory buildings (in BDT) Number of employed workers
1. Cottage Industry Below 1 million not exceed 15
2. Micro Industry 1 million to 7.5 million 16 to 30
3. Small Industry Manufacturing 7.5 million to 150 million 31 to 120
Service 1 million to 20 million 16 to 50
4. Medium Industry Manufacturing 150 million to 500 million 121 to 300
Service 20 million to 300 million 51 to 120
5. Large Industry Manufacturing More than 500 million More than 300
Service More than 300 million More than 120
Source: Ministry of Industries, Government of Bangladesh, (2016). National Industrial Policy.

Development / promotion agencies are generally categorised as enterprises according to the following approaches:

  1. Classification of industries as per the basic raw materials used: One of the most common approaches of classifying the industries as per their basic raw materials used. For example, the enterprises use primary agricultural crops to produce their products. These crops are known as agro-processing industries / sector; such as producers of jam jelly or chutney, rice, flour etc. Similarly, the enterprises use leather to produce shoes, bags; belts etc. These are known as leather goods industries or sectors.

  1. Clusters-based classification of industries / as per location: Development agencies are often identifying the industries based on their location at any specific pre-determined industrial clusters. This cluster-based approach to industrialisation could be one of the most effective tools for their development for many reasons such as serving maximum enterprises with minimum resources, promoting inclusive and geographically balanced development etc.

  1. Classification of industries based on entrepreneur’s gender: Industries are often getting priority for special treatment based on the gender of the entrepreneurs. For example, women entrepreneurs are usually lagging behind the men-owned enterprises. Therefore, governments are offering special treatment for the women entrepreneurs-owned enterprises to inspire women to become entrepreneurs.

  1. Classification of industries based on owner’s race and ethnicity: Another most important approach to differentiating enterprises to the based on the race or ethnicity of the owners. For example, tribal community or minority group could get special attention to bring them economically forward or to the mainstream.

  1. Classification based on output of the enterprises: Primary classification of the enterprises could be determined based on the output of the enterprises i.e. it is producing a product or performing service. Manufacturing and service enterprises have different attributes, this than that of the others. Therefore, policy makers identify them differently under manufacturing or service sector heads.

  1. Objective-oriented classification of enterprises: Promoters often differentiate the enterprises based on the objective of their products; such as domestic enterprises vs. export-oriented enterprises. Domestic enterprises produce products for the local market. On the other hand, export-oriented enterprises produce products only for export. Mixed types of enterprises could be there but they are not eligible to get special treatment offered by the government for exporters or others.

  1. Special-purpose approach of classification: Enterprises working for rehabilitating any special groups like disabled population or autistic group could be described as special-purpose enterprises.

A country may have a series of policies like, National Industrial Policy, SME Policy, Export Policy, Import Policy, Fiscal policy, ICT Policy, Women Development policy, Education Policy, Investment Policy, Skilled Development Policy, Credit Policy, Different Sectoral Policies on agriculture, handicraft, poultry and livestock etc. The government usually formulates policies to focus on any specific group or problem or purpose. But industrialisation / entrepreneurship development is such an important issue that could address multiple objectives at a time. Therefore, enterprise development agencies usually select approaches to achieve any specific goal of different government policies at a time. For example, one action plan could address employment generation, promotion of any specific sector as well as increasing export earning of the country through a single intervention. Therefore, designing development intervention by addressing multiple objectives requires appropriate selection of perfect approach to industrial development of a country.

India is providing more emphasis on SME development by having a specialised ministry, namely, the Ministry of Micro, Small & Medium Enterprises. This ministry is implementing Five-Year Plan for Economic Development. Indian SME promoters are working with Trade Promotional Programmes, Connectivity with MNCs and Government, Inbound and Outbound Investment, Strategic Business Alliances, Delegations and Study Tours, and Restructuring and Revival of stressed SMEs etc. issues additional to the Bangladeshi practices (SMBDC, 2016). India has several acts namely the Micro, Small and Medium Enterprises Development Act, 2006, Khadi & Village Industries Commission Act, 1956 – March 17, 2008, Re-establishing Khadi & Village Industries Commission dissolved in October’ 2004, July 19, 2006, Notification regarding implementation of provisions of Khadi and Village Industries Commission (Amendment) Act, 2006 and The Industries (Development and Regulation) Act, 1951. India has a long list of sector-specific policies, laws, bylaws etc. for promoting respective sectors, while a single act is missing in Bangladesh for promoting SME development or industrialisation.

Small and Medium Enterprises Development Authority (SMEDA) is the premier institution of the Government of Pakistan under Ministry of Industries & Production. SMEDA is implementing different projects namely; Prime Minister’s Youth Business Loan, Common Facility Centre projects, Cluster Development, and the Multi Donor Trust Fund (MDTF) project ‘Economic Revitalisation of Khyber Pakhtunkhwa and Federally Administered Tribal Areas (FATA)’ etc. for promoting SMEs in Pakistan (SMEDA, 2016).

Iran Small Industries and Industrial Parks Organisation (ISIPO) is focusing more on clustre development as well as development of Industrial Parks and Industrial Areas to promote industrialisation in Iran. They have their specialised approach to SME clustre development throughout the country.

The Small and Medium Enterprises Development and Support Administration of Turkey is generally known as KOSGEB. Their distinguishable programmes for SME development are Entrepreneurship Support Programme, Cooperation Joint Forces Support Programme, R & D, Innovation and Industrial Application Support Programme, International Incubation Centre and Accelerator Support Programme, Emerging Enterprises Market SME Support Programme, Thematic Project Support Programme, Laboratory Services etc. (KOSGEB, 2016). They are working on a much more wider scale than that of the above mentioned institutions.

From the above discussion it is clear that different countries have different approaches to SME development. Some of the above mentioned approaches are quite different from the others. Countries like Bangladesh, Pakistan or Iran has a lot to replicate from the countries like India or Turkey. We would like to recommend few approaches to SME Development for a least developed country like Bangladesh:

  1. Clustre-based development intervention: Clustre is defined in many ways by the experts around the world. There are a large number of homogenous enterprises located at a particular geographical area as a clustre. Therefore, trained manpower, raw materials, buyers and other factors of production are available at that particular place. A development agency could easily implement interventions for promoting and developing entrepreneurs of that clustre with limited resource deployment. Therefore, it could be one of the best approaches for industrialisation in a least developed or even in a developing country.

  1. Objective-oriented classification approach: We would like to offer this new approach for better output within a limited timeframe. For example; an SME promotion agency could identify few promising sectors with export potentials. Special export-oriented intervention could be developed and implemented to make the sector capable of export as well as competitive in the targeted international markets.

  1. Special purpose projects: A development agency shall have special purpose projects to rescue declining local sectors, promoting newly-developed sectors, mainstreaming any particular race or ethnic groups etc. Thus an organisation could contribute to achieving national goals of the country.

  1. Available skill-based enterprise development approach: The government could facilitate new sectors based on the available skills of the general people. For example, currently Bangladesh is producing a remarkable number of computer engineers every year. So IT / ICT-based industries like software development, outsourcing, freelancing etc. could be promoted for the sake of their self-employment or employment generation.

Industrial promotion agencies of a country have a great role to play with. But if any organisation is tagged with a set of predetermined approaches, they may not be capable to face newly-emerging challenges and needs of the sectors. Therefore, such institutions shall have a live, flexible set of targets to undertake newer approaches and interventions as and when required for promoting and development of the industries of that particular country. We must remember that effectiveness of the output and usefulness of the result of an organisation depend upon its approaches to designing, implementing and delivering their services to the clients. Appropriate methodology selection shall get highest priority before devising any strategy, undertaking interventions and implementing the plans.

Adopting the concept of multi-role projects

Adopting the concept of multi-role projects

 

Md. Joynal Abdin

The Financial Express on March 9, 2016

A programme is a plan of actions made in order to achieve a specific result. In other words, a programme is a plan of things aimed at achieving a clear objective, with details on what is to be done, by whom, when, and what resources to be used. On the other hand, a project is a planned set of interrelated tasks to be executed over a given period of time and within a certain amount of budget and other limitations. Main objective of this article is not defining programmes and projects with a few sweet sounding words, but to analyse the development projects now being implemented by the government, NGOs, development partners. We all know that Bangladesh passed 44 years of its independence. Bangladesh has earned the experience of implementing of hundreds of projects with billions of Taka either with local fund or donor grants and loans. The main objective of all the development projects is to empower people to eradicate poverty, overcome infrastructure limitations, and effect employment generation, entrepreneurship development, industrialisation, rehabilitation, education, healthcare, communication development and so on.

 We are happy to watch the country grow. But have we ever thought about the opportunity cost of all the projects and programmes implemented here in Bangladesh since independence? Bangladesh received about US$ 50 billion as foreign aid through government or non-governmental (NGO) channels. The sum is equal to US$3000 per head of our present population (160 million). Besides foreign aid, grants, loans internal funds were also being used in numerous development projects. Have we got optimum result out of this huge investment? The answer is obviously in the negative, because our earlier projects were not scientifically planned and designed with a broad vision.

Many plans, policies, targets and visions are now under implementation by 43 ministries and about 350 departments, directorates and agencies. Hundreds of development projects are approved by concerned authorities and implemented every year. Few projects have inter-ministerial coordinated components (combined efforts to address different needs).  As a result, a good project of one ministry/agency may cause huge damage to other ministry’s/agency’s role. For example, over-bridges and flyovers were built to reduce traffic jam in the city. But the same over-bridges and flyovers are identified by experts as one of the major causes of traffic jam in the city.

The above phenomenon has arisen due to single-purpose programme planning by our decision makers. Time has come to give up this one-eyed (single-purpose) planning and think about multi-role project/mega projects. For example, Dhaka is one of the worst cities to live in (as per a few recent research reports) owing to its environment pollution and unplanned urbanisation. Traffic jam, shortage of public transport, water pollution, and environment pollution of Dhaka city could be reduced if a ‘Back Home’ mega project could be implemented.

The idea of this project is not to send everybody to their respective native villages by force, but to create a situation whereby people will automatically leave Dhaka. For example, an office executive at present has to waste an hour and a half to attend his office at Motijheel from Uttara or Mirpur. The same person can attend his/her office from Comilla easily if there is a fast train service between Comilla and Dhaka with only two stoppages at Daudkandi and Bhoberchar. It will not take more than an hour. Similarly someone from Gopalganj, Rajbari or even from Mymensingh may not require more than one hour to reach Dhaka by a bullet train. So we need a six-lane road with double railway lines from Comilla to Dhaka, Gopalganj to Dhaka, Rajbari to Dhaka and Mymensingh to Dhaka. We already have highways in these routes which should be developed. These four routes will allow half the Dhaka dwellers to move back to Comilla, Munshigonj, Narayangonj, Madaripur, Faridpur, Gopalganj, Rajbari, Manikganj, Narsingdi and Mymensingh districts.

These six-lane routes will not be a matter of connectivity only. These routes will facilitate economic development through industrialisation of respective districts. As a result, new employment will be generated. One such multi-role project can offer multi-dimensional solution to our existing problems.

Construction of multi-lane roads has multiple effects. Other projects like development of existing SME (small and medium-sized enterprises) clusters could also help provide multiple solutions to existing problems. For example, a cluster development includes several segments of activities like skill development of existing workers and entrepreneurs, creating new workers and entrepreneurs, upgrading existing machineries, establishing training centres, testing laboratories, storage facilities, specialied transportation system, market linkage, new market searching, and expanding value chain for maximum value addition, etc. As a result, new employment will be generated in each of the segments of the chain. It will raise productivity, improve product quality, augment sales, increase profit and so on. All of these effects will cause poverty reduction and ultimately usher in economic development of the country. Critics may argue, why SME cluster development instead of Special Economic Zone (SEZ), or Export Processing Zone (EPZ)? The answer is simple. SEZ or EPZ requires huge cash investment for infrastructure, utility and land development. On the other hand, in case of SME clusters, these are already available there. Plot allocation, utility supply etc. of a SEZ or EPZ may be controversial in terms of political identity or corruption. SME clusters are free from these controversies. Therefore it is better to think about development of existing 177 SME clusters without going for expensive industrial estates, SEZ, EPZ, etc.

The concept of multi-role projects could be applicable in every other sectors. For example, existing ‘Sadar’ hospitals located at district headquarters could be transformed into nursing institutes, medical colleges, medical technology centres and hospitals. It would require huge money and premises to establish a separate nursing institute, medical technology institute, medical college and a ‘Sadar’ hospital in separate premises as separate programmes. All these institutions can be set up in the same premises, or in other words, existing Sadar hospitals can be transformed into such a multi-role organisation and much lesser allocation will be required. A co-located multi-sectoral technical education centre concept can drastically change our existing education system and turn it into a practical demand-driven, profession-oriented education system.

It is time to think about multi-role inter-related/inter-connected institutions both in case of public and private entities through implementing multi-role projects. It could be far more productive with lesser investment.

Transformation of the economy: Problems and prospects

Transformation of the economy: Problems and prospects

Md Joynal Abdin
The Financial Express on November 22, 2014

Bangladesh is one of the most emerging countries of the world. The current size of its GDP is about US$ 140 billion with annual 6 per cent plus growth rate during the last decade.  Economic growth of the country is mainly dependent on a very few sectors like readymade garments, manpower, leather goods, plastic goods, pharmaceuticals, ceramics and a very few agro-processed items.

Contribution of industries to the GDP was 29 per cent in 2012-13 FY and it is rising day by day. On the other hand, contribution of agriculture to GDP was 13.09 per cent in the same period and it is decreasing gradually. Till now, agriculture is the single largest sector for employment generation; agriculture employs 47.5 per cent of total manpower. This means productivity of agriculture sector is still lower in terms of employed population.

As per the Labour Force Survey 2010, conducted by the Bangladesh Bureau of Statistics, there are 2.6 million unemployed people in Bangladesh; at the same time, another 2 million workable labour force is coming forward per year into the job market. Employment generation for this large number of unemployed population is a very hard task for any government. Therefore, the government has emphasised private sector development and industrialisation as an effective tool for employment generation. Development and promotion of labour-intensive small and medium enterprise (SME)-led industrialisation could offer a better solution to this unemployment problem. If adequate policy, institutional and monetary supports are made available, a large number of this unemployed population could emerge as entrepreneurs and employ others in their own firms.

From the last ten years’ statistics, it is quite clear that the Bangladesh economy is going through a transformation. Industry is fast replacing agriculture as the base of the economy. The government has already initiated a few industry-friendly policies and support through SME Foundation, Bangladesh Bank, EPB, BSCIC, BITAC, BCSIR, BEPZA, SEZ authority. We are getting dividend of their activities by this time. As a result, the Bangladesh economy grew steadily even during the global financial crisis of the recent past.

But we have the capacity to grow further if a few more policies and institutional support could be given to the micro, small and medium enterprises (MSMEs). These may include the following:

ESTABLISHMENT OF AN ‘ENTREPRENEURSHIP DEVELOPMENT INSTITUTE (EDI): Establishing a new institute for entrepreneurship development while we already have about 111 universities in Bangladesh could sound as a wrong proposition. We have about 34 public universities and 77 private universities in Bangladesh. All of these are creating skilled and knowledgeable professionals including business graduates, engineers, doctors etc. We are enlarging the list of jobseekers every year but not producing job-providers academically. That entrepreneurs are just born is an old concept. It has been proved that entrepreneurs can be created through systematic training, guidance, support and mentoring. The Indian government (Gujarat, for instance) has established a completely separate type of institute in 1983 to produce only entrepreneurs.

The Entrepreneurship Development Institute of India has achieved enormous success in its mission. Its model is being replicated by many countries including Vietnam, Cambodia, Myanmar and a few African countries. Bangladesh can easily replicate this model to establish an engine of entrepreneur creation. These types of specialised institutions for entrepreneur-creation is also available in many other countries like the Entrepreneurship Institute of Malaysia, the Entrepreneurship Institute of Australia (EIA), the Institute for Entrepreneurship & Enterprise Development (IEED) of the UK, the Entrepreneurship Institute of Canada, Global Entrepreneurship Institute (GEI) of the USA etc. So, it is quite clear that a separate institution is required to create job providers i.e., entrepreneurs. Bangladesh government could establish or inspire relevant organisation like the SME Foundation to take the lead to establish ‘Entrepreneurship Development Institute of Bangladesh’. Development partners could come forward to establish such an institute here to produce entrepreneurs, the most essential component of private sector development or industrialisation or economic growth.

ESTABLISHMENT OF ‘CLUSTER DEVELOPMENT AUTHORITY’: Cluster-based SME development could be another vital weapon for boosting industrialisation of Bangladesh. There are 177 SME clusters identified by the SME Foundation throughout the country, of which 129 fall under SME booster sector and 48 under non-booster SME sector. There are 69,902 enterprises operating in these 177 clusters employing a workforce of 1,937,809, of which 74 per cent is male and the rest 26 per cent female. Total approximate annual turnover in these clusters has been estimated at Tk 295,150.66 million. Clusters are found in 51 districts of Bangladesh. So development of SME clusters could give us another platform for balanced economic development considering their geographical locations. Undertaking massive development interventions in these clusters is required to develop and promote the SMEs located there. The government could establish a separate body, namely, ‘Cluster Development Authority of Bangladesh’ or establish specialised wings in the SME Foundation with adequate budgetary and manpower support for rapid development of SME clusters. It will increase GDP growth, make Bangladesh self-dependent, increase export earnings, generate more employment and finally alleviate poverty.

ESTABLISHMENT OF ‘SECTOR SPECIFIC ENGINEERING AND TECHNOLOGY INSTITUTE: Like the first proposal, this one too could sound wrong to establish sector-specific Engineering & Technology Institute as we are having a number of engineering universities and polytechnics in Bangladesh. But the ground reality is that there is a long gap between the graduates of these engineering universities, polytechnics and our industry’s demand. Industry needs operators and technicians of modern machinery currently being used in the sectors. Engineering universities and colleges are producing high-profile graduates to deserve 5 digit salaries from their first day at job. Therefore, it’s time to establish sector-specific engineering and technology institutes as per sectoral needs.   The government allocated Tk 100 million in the last budget to establish the Bangladesh Institute of Plastic Engineering and Technology (BIPET). Similarly, we are in need of institutes of Agro-machinery, shipbuilding technology and a host of other sector-specific institutes.

ESTABLISHMENT OF ‘COMMON FACILITY CENTRES’ (CFC) IN EVERY CLUSTER: There are 177 SME clusters in Bangladesh. Entrepreneurs in a cluster produce similar products throughout the year. In some cases, there is one or more common process to manufacture several products. Currently, these tasks are being done manually. As a result, product quality can not improve beyond a certain level. On the other hand, individual entrepreneurs cannot afford modern machinery to complete the common process due to high prices of the machines. A single testing is applicable for almost all products of a cluster to ensure product quality. But due to the same reason, none can afford it. If the government and development partners establish a common facility centre in the SME Clusters with machinery to complete the common process or test the product quality, then all entrepreneurs will be benefited. As a result, a common facility centre in each of the clusters could play a vital role to increase product quality or productivity of that cluster. It will increase overall productivity of Bangladesh as well. Quality of the products will go up and it will be acceptable to potential local and foreign buyers too.

   ESTABLISHMENT OF ‘TRADE NEGOTIATION COMMISSION’: Till date, there is no organisation for trade negotiation with a foreign country bilaterally or regionally or in the WTO (multilateral level). A group of professionals in the WTO Cell of the Ministry of Commerce, the Bangladesh Tariff Commission,  EPB, NBR etc., represent Bangladesh in different trade negotiations. Most of them are civil servants performing transferable jobs. A person, being specialised in any particular area, is  transferred to a completely different post after three or four years. We can remember many officials of the WTO Cell previously involved in the process, but currently they serving in totally different positions. Therefore, we need a constitutional body for handling our trade negotiation issues only where professionals will get chance to be specialised on a single issue and handle it efficiently with any counterpart. In this age of multilateral trade regime, Bangladesh could find itself completely isolated if proper initiatives are not taken to negotiate effectively in bilateral free trade agreements with our existing or potential partner countries.

ESTABLISHING ‘PRODUCT RESEARCH & NEW PRODUCT DEVELOPMENT CENTRE’: Product basket is extremely small in terms of local production or export items. To enlarge the product basket and diversify export items we are in need of a product research and new product development centre. It should be a separate body to conduct research in existing and potential products or items that could be produced in our industries.