Shahid Sattar and Eman Ahmed
According to the IMF’s latest estimation, the growth of India’s gross domestic product (GDP) will witness a contraction of over 10% this year. A striking development in contrast to this is that the per capita income of an average Bangladeshi citizen will become resultantly higher than the per capita income of an average Indian citizen. With a per capita income at $1877, Bangladesh is economically at the highest position across South Asia. Compared to Pakistan, this is nearly 36% higher in terms of estimated per capita income, with Pakistan currently at $1377 and expected to decline (World Bank). Pakistan, Nepal and Afghanistan are now the poorest nations in South Asia.
All these developments have taken place within the last two decades, highlighting a difference in long term planning that paved the way for Bangladesh to claim its high growth rate despite the fallout from COVID-19. Meanwhile, Pakistan unfortunately remains the only economy dependent on the IMF to avoid default, leading to substantial uncertainty and a risk of remaining stagnant in medium term. India and Sri Lanka are also expected to race ahead in the post-COVID era, largely owing to pre-existing structures that have strengthened their GDP over the long haul and insulated them from the external shocks of this year.
The figure below shows GDP per capita for India, Pakistan, Bangladesh and China in 2010, where Pakistan was still ahead of Bangladesh and appeared to have a higher growth rate. (Figure 1).
Bangladesh’s current track record is particularly impressive given its status at the time of the then East Pakistan’s secession from Pakistan in 1971. Back then it was much poorer, with a per capita income of $133.5 – one-third lower than Pakistan’s $178.5. By 2019, it was a third higher at $1795.5 as against $1359.5 of Pakistan. For the first time in 2019, its nominal GDP exceeded that of Pakistan by 9 percent at USD 302.7 billion. Bangladesh’s growth trajectory has its impetus in an export-led growth strategy – one that Pakistan would do well to recreate given its similar preconditions and performance in textiles.
How did this happen?
For a country that was once short of cloth, Bangladesh now exports more ready-made garments to the world market than India and Pakistan combined. The garmenting sector that was formed in the 1970s has evolved into a $40 billion industry. Of the country’s $45 billion in total annual exports, textiles account for nearly 85% and employ roughly 4 million workers, mostly women from rural areas. At the same time, the Bangladesh economy is diversifying. The services sector now accounts for 53% of the GDP. The success of its IT industry is central to the digital transformation and ongoing economic growth of Bangladesh. It exports nearly $1 billion of technology products every year – a figure that the government is prepared to increase to $5 billion by 2021. The country also has 600,000 IT freelancers.
Bangladesh has experienced a period of growth fueled by strong consumer demand at home, and an improvement in capacity and technology to meet international demand via exports. The country adapted well to changing market conditions, an essential quality for survival in the global arena. The establishment of world class factories has played a key role and become a norm for the country’s textile industry. The manufacturing sector which is heavily reliant on the export of ready-made garments has also remained adaptive and incorporated sustainable growth, although further product diversification is needed. Given that the textile sector of Bangladesh branched out into high value-added products in the wake of COVID-19, the sector faced losses due to shrinking demand for these goods. The exports of Bangladesh therefore suffered more relative to other textile economies such as Pakistan’s which is more focused on traditional and low value-added goods. However, the sector is expected to pick up again, given the unwavering government support, competitive energy and exemplary DLTL system which strengthens the textile industry as the mainstay of the economy.
The need of the hour for Bangladesh is to counteract the troubling impacts of the pandemic on trade – a task which they are diligently focused on. Bangladesh’s imports went down 30% due to COVID-19, the effects of which continue to hamper its exporting sector. However, Bangladesh still retains its spot as “second in global apparel trade.” The textile industry of Bangladesh encountered difficulty as global brands including Wal-Mart, H&M and Marks & Spencer canceled orders because of the pandemic. Exporters attributed the sluggish global demand for last couple of years to the decline in apparel exports to non-traditional markets, while COVID-19 worsened the situation further. They also blamed high duties in certain emerging countries such as Brazil for the decline. The country was able to mitigate its own anti-export bias in non-RMG sectors, improving competitiveness and product diversification. But further market diversification remains essential for the sector to ensure sustainable growth, since over-saturation in a few products and markets increases sensitivity to economic shocks and other external factors. Efforts for higher energy supply are also needed in the long run, as well as more sustainable power to determine how efficiently the industry moves forward.
The leather sector in Bangladesh is the second largest export earner for the country at present. The sector earns US$1.21 billion and produces high value-added products, for which a considerable amount of raw material is available locally. Bangladesh ranks 20th in footwear exports and has the potential to scale up its export volume, particularly with the opportunities arising from the US-China trade dispute. The sector has the potential to become a multi-billion-dollar industry, provided the environmental issues pertaining to the shifting of the tanneries to the allocated area are addressed and rectified for the long term. This sector has significant employment prospects as it is highly labour-intensive, and provides an opportunity for image building for the country as the products are of high value.
Bangladesh is the only least developed country (LDC) in the world to meet 97 per cent of its local demand for pharmaceutical products. With a market size of Tk 200 billion, Bangladeshi pharmaceutical/medicinal products are exported to 144 countries, and generated over $103.46 million in 2016-2017. Fueled by strong investments in new technology, development of state-of-the art factories and a skilled management workforce, the industry is poised to become a hub of high quality and low-cost generic medicine manufacturing. The ICT (information and communications technology) sector has generated three hundred thousand jobs so far and given the nature of this sector, job creation will continue, strengthening the economy further.
To sum up, the economic trajectory of Bangladesh has been all-encompassing: poverty has declined, provision of health, education, and infrastructure has improved and financial inclusion has thrived. Bangladesh is a frontrunner in improving the socio-economic conditions of its population, especially for women. A much higher proportion of workers such as school teachers, family planning workers, health workers, immunization workers, and even garment factory workers are women. However, those employed in export-oriented sectors are at risk of being laid off if orders don’t pick up again. How the country revives its exports post COVID-19, improves its long-term energy supply and fosters energy conservation will determine whether it can maintain its impressive growth trajectory. To paraphrase what has been said of Bangladeshi sentiments lately, exports are so central to their economy and employment that for the last 10 days, collective prayers are being offered for the revival of demand and orders.
Pakistan’s growth prospects
Pakistan cannot dream of higher economic growth without raising competitiveness in high-potential sectors such as textiles and apparel, capital goods, pharmaceuticals and medical devices etc. This includes introducing sector specific policies that benefit large and small firms alike, introducing a stable and declining tariff regime, creating efficient manufacturing clusters and reducing the cost disadvantage compared to other regional players. Both Pakistan and India need to increase ease of doing business by removing obstacles such as delayed payments and slow processes for obtaining permits through improvements like e-governance at local levels.
By acknowledging the human factor at every stage of the process, in terms of worker welfare, skill development, investment in youth and retention of top graduates, Pakistan will be able to improve its economic standing. It is vital to rectify the dependency on traditional goods, and to diversify into value-added and service sectors. In order to protect itself from market volatility as well as high risk exposure associated with single-product dependency, it is important for the country to nurture and develop other industrial sectors which have high growth potential.
A case in point is the high-potential textile industry of Pakistan, which is the only sector of the country with an exportable surplus, and thus requires special attention and facilitation to double its exports in the next four years. Textiles are posting higher export volumes as of recently, and are also poised to capture additional market share. However, despite its potential, the sector remains burdened with the relatively higher energy tariffs of the region. While India has focused on further lowering these prices from current levels which are already well below Pakistan’s, they paradoxically continue to rise in Pakistan. This has left Pakistani goods highly uncompetitive in the market. Furthermore, the government’s reliance on taxing imports has been detrimental to the export-oriented industries which rely on internationally-sourced inputs, and yet are unable to acquire them at world prices. These hindrances, along with a plethora of others, have been highlighted at length in the Textile Policy of Pakistan, along with detailed strategies to address them.
India’s economy is 10-times larger than Pakistan’s. It encompasses a range of sectors and industries, from traditional village farming and modern agriculture to a multitude of digital and IT services. Like Bangladesh, India also draws a major chunk of its economic growth from its services sector, accounting for nearly two-thirds of India’s output but employing less than one-third of its labor force. A recent report by the McKinsey Global Institute highlights the opportunity for India amidst the given circumstances. If used to spur reforms, the pandemic could actually put the country back on a high-growth track.
It is no surprise that Pakistan ranks low in the ease of doing business and competitiveness indices, as many potential startups are burdened by overregulation that hinders them from taking off. Meanwhile, the textile sector remains under immense pressure to maintain a heavy chunk of Pakistan’s exports, and therefore must be considered critical for Pakistan’s economic prosperity.
Earnings through exports serve as a valuable inflow to the economy, and paired with remittances, these will be the forces that can enable Pakistan’s economy to grow. To reiterate, the most essential measures to enable export-led growth are product and market diversification, improvements in quality, and integration into global value chains. Policy support is an absolute requirement that ties into each of these paradigms, but the measures taken by the government are often insufficient. It is essential to put our faith and resources towards our local business community as well as our entrepreneurs. We must also lobby for improvements in education, training and job opportunities for the youth. Considering the export-led economic prosperity that is taking Bangladesh to new heights, Pakistan must mitigate its reliance on primary and traditional commodities and fast-track the shift towards manufactured, value added services and nontraditional goods for export. Only then can we claim to have a functional export-led growth strategy that will have results as evident as those of Bangladesh’s economy in recent times.