“Our road to rapid industrialisation” – op-ed by Dr. Selim Raihan

op-ed_ds_july_selim raihan 05Experience from successful industrialised countries suggests that industrialisation brings significant structural change in the economy which leads to considerable reduction in poverty, large-scale job creation and substantial improvement in the welfare of the people of a country.

Bangladesh has undergone some structural transformation over the past four decades, where the share of agriculture in the gross-domestic product (GDP) declined from around 60 percent in the early 1970s to 15 percent in 2016. The share of the services sector increased from 34 percent to 56 percent, the share of manufacturing increased from four percent to 18 percent, and the share of the non-manufacturing industry (mining quarrying, construction, and electricity and gas) increased from two percent to 11 percent during the same period.

Despite some fluctuations, the share of manufacturing in GDP increased from as low as four percent in 1972 to around 15 percent in 1984. But, between 1984 and 2016, this share increased by only three percentage points, from 15 percent to 18 percent. Though there has been a consistent but slow upward trend in the share of manufacturing in GDP between 1990 and 2016, the trend of the share of manufacturing in the country’s employment has been rather uneven during the same period. From a share of 14 percent manufacturing employment in 1989, the share declined to 7.3 percent in 2000. However, the manufacturing employment share had seen a steep rise since 2000, and in 2013, the share reached the level of 16.4 percent. Yet, it is a matter of grave concern that since 2013 the share started declining and, in 2016, it stood at 14.4 percent. This raises the fear of “pre-mature” deindustrialisation in Bangladesh at a very low level of per capita income.

It is important to note that the structural transformation through manufacturing is primarily the movement of labour from agriculture to manufacturing. Successful newly industrialised countries from East and Southeast Asia, at their peak of industrialisation, had employment share in manufacturing well above 20 percent. Also, the share of manufacturing in GDP in those countries at their peak was well above 30 percent. Despite the fact that over the past four decades, the share of agriculture in employment in Bangladesh declined, agriculture still accounts for over 40 percent of total employment. The labour released from agriculture has been absorbed primarily in the low-productive services and non-manufacturing industrial (especially construction) sectors. This process has led to an unsuccessful headway towards the creation of productive jobs, slow progress in reduction in poverty as well as rising inequality.

The aforementioned analysis also points to the fact that the pace at which Bangladesh has increased its manufacturing shares in both GDP and employment has been considerably slower than those of many newly industrialised countries in East and Southeast Asia. Newly industrialised countries from East and Southeast Asia saw rapid rises in shares of value-added manufacturing and employment. All these contributed to the massive reduction in poverty, large-scale employment generation, and rise in per capita incomes by many folds within a much shorter time in those countries. The immediate lesson Bangladesh can draw from the experiences of these successful countries is that Bangladesh needs to graduate from the current very sluggish process of industrialisation to achieve the aforementioned large development goals of poverty reduction, employment generation and per capita income growth within a short time period.

There are four major issues which need to be in order for a rapid industrialisation in Bangladesh. First, there are a number of policy-induced challenges. The first generation of reform of trade and industrial policies in the 1980s and 1990s helped Bangladesh achieve the current level of progress in manufacturing. However, returns from those reforms have been exhausted, and also there are now some policies in place towards the wrong directions. There is a need for second-generation strategic and dynamic industrial policies aiming at rapid expansion and diversification of manufacturing through large-scale domestic and foreign investments. Given the changes in the global and regional trade scenarios, the need for such strategic trade and industrial policies is more important now than ever.

Second, a number of supply-side constraints in the form of weak infrastructure and the high cost of doing business need to be addressed within a short time span. The initiatives taken by the Bangladesh government in setting up 100 special economic zones (SEZ) as well as the development of some infrastructural projects seem to address these infrastructural and high-cost-of-doing-business issues. However, the progress in the implementation of the SEZs and the infrastructural projects is slow and is yet to show the signs of any “regime change”. A major departure is needed in terms of enhancing the government’s institutional efficiency to ensure timely and cost-effective delivery of such projects.

Third, the current state of human capital is not at all conducive to rapid industrialisation in Bangladesh. The country needs to attach utmost importance to improving the existing low level of human capital by enhancing investment on education, skill development, and health.

Finally, the political economy factors, especially institutional development for rapid industrialisation, require proper attention. The incentives to maintain the status-quo are huge in the form of generation of substantial rents from the existing economic system. The onus now is on the political elites to break this vicious cycle of rent generation. There is also a need for strong commitments from the political elites for necessary economic and institutional reforms for a rapid industrialisation.

Online link: Our road to rapid industrialisation