Export diversification: Pathway to sustainable growth

Export diversification: Pathway to sustainable growth

Export diversification is a simple and sound prescription for developing countries since it contributes to higher per capita income growth and potential structural change as well as assists in overcoming the predicament of economic slowdown. For over 50 years, export diversification has been given the highest position on the list of priorities for development policies.

Though the world economy has been experiencing a trade war between the US and China in recent times, it is inevitable to endorse the significance of mutual benefits of sustainable trade and businesses among countries. Export is key to international trade and growth of emerging economies such as Bangladesh, Vietnam, and India, as it is the most useful technique to reap benefits of international trade in favor of domestic development and growth. Exporting various products and services enables a country to obtain a handsome amount of foreign currencies, which is treated as the bloodline of emerging economies.

Equivalently, modifying composition of export basket with diversified products can assist poor countries to grow rich. Export earnings have crucial effects on the economy and stability as many macroeconomic factors like investment, GDP growth, real exchange rate, unemployment, government revenue and expenditure in social safety net depend on it. A narrow basket of exportable products poses a threat to stability in export earnings due to unstable global demand. Export instability may lead to stagnation by discouraging investment, increasing macroeconomic uncertainty and shattering longer-term economic growth.

Since, export diversification denotes the transition from ‘traditional’ to ‘non-traditional’ exports, in the context of Bangladesh, it refers to increase in exports of various products such as medicine, leather, glass, ceramics, cement, ships, light engineering products, microchips, smartphones, computer, and IT-related products, apart from the main export-earning item – readymade garments — that the country has been exporting over the decades.

Bangladesh has been maintaining a lucrative GDP growth of over 8.0 percent recently. But the country’s exports have a high concentration on RMG products. According to Bangladesh Bank’s July-September data, 86 percent of total export was RMG products whereas jute and jute-related products came 2nd with only 2.6 percent of total export in that period. Other exported items are leather, shrimp, fish, terry towel, plastic products, ceramics, bicycle, pharmaceuticals, and handicrafts comprising the slightest share of exports ranging from 0.1-2.3 percent.

Furthermore, export diversification provides benefits in two ways – portfolio effects and dynamic effects. The portfolio effect denotes the greater the degree of export diversification the less volatile will be export earnings. The country having single-or-a-few-product-led export tends to have a more volatile real exchange rate than the country having more diversified export structures. Real exchange rate volatility depresses investment in tradable goods and services. The portfolio effect also assists the economy to evade the threat of volatility of export earnings to maintain stability in investment and employment.

On the contrary, dynamic effect refers to addition of new products to export baskets resulting in addition of new skills to the labour force and in the long-run growth of an economy can be achieved by skills to produce new products. The dynamic effect enables an economy to sustain long-term growth by widening the export basket and enhancing the capacity of the labour force. Thus, per capita income and GDP rate could be raised in the long run with an increase in export earnings (Agosin, 2007).  

In the context of Bangladesh, executing ‘Export Diversification’ confronts major challenges from product diversification, market diversification, supply-side constraints, and supplementary constraints. On one hand, our export products are not much diversified, RMG products comprise over 80 percent of total export with the government\s cash subsidy. On the other hand, the destination of our exported products is also highly concentrated in Europe and the USA with many tariff and non-tariff barriers such as not having GSP in the USA, free trade agreements of the USA and European countries with the competitor countries of Bangladesh. Also, supply-side constraints are inadequate infrastructure, poor rail, road, airport and seaport services and failure to provide the uninterrupted power supply.

Furthermore, the government’s rules and regulations are much critical and involve bureaucratic tangle that depresses export diversification. Access to finance for SME exporters is stricter due to the large collateral prerequisites of the bank. However, supplementary constraints comprise a shortage of skilled labor force, inefficient exchange rate management, and inadequate foreign direct investments.

Despite a challenging global environment, India’s total exports have been growing on a secular basis and have surpassed the US$ 500 billion mark in 2018-19 and attained a growth of 7.47 percent. Growth achieved through various export promotion schemes with diversification of products like engineering goods, petroleum, organic and inorganic chemicals, drugs and pharmaceuticals, cotton yarn made-ups, electronic goods, plastic and linoleum (Annual Report 2018-19, India). Moreover, Indonesia also faces vulnerability in export growth, like Bangladesh, due to high dependency but the Southeast Asian country took a strategy to overcome volatile export growth by diversifying its export base.

On the other side, World Bank data reveal that Vietnam with $31 billion of apparel exports in 2017, topped Bangladesh exports for a few months recently. Because, Vietnam’s exports are diversified enough to include substantial exports of electronic goods (mobile phones), machinery and electrical products, footwear, and agricultural products and it continues to gain market share in the USA while Bangladesh’s share of 6.0 percent has remained steady. So, Bangladesh can do better by implementing those strategies.

To secure economic stability, export diversification is an inevitable measure that can be ensured by designing and implementing proper policies. Investment for and export of new products must be encouraged by government policy e.g. cash subsidy, tax holiday and other policy assistance. Identically, foreign direct investment should be attracted by simultaneous public and private sectors and easy access to finance for small and medium enterprises (SME) exporters are to be ensured by banks and other non-bank financial institutions. To ensure a continuous supply of quality and skilled human resources, policymakers should emphasize training and learning institution’s betterment. Nonetheless, efficient exchange rate management by the ‘Bangladesh Bank’ needs to be ensured as it raises competitive capacity over competitor countries. Recently, countries like Vietnam and Sri Lanka have depreciated currency value against the US dollar and Euro, enabling them to obtain more purchase orders of RMG products from the USA and Eurozone countries.

On the contrary, we have not yet depreciated our currency value resulting in loss of export earnings and negative growth rate of RMG products export. The government’s intrigued rules and bureaucratic hindrances to export need to be abolished whereas business-friendly rules regulations, and one-stop services for export have to be established. A free trade agreement with major export destinations (e.g. EU countries, the USA, Canada, and the United Kingdom) needs to be struck to alleviate tariff and non-tariff barriers.

We are approaching to graduate from least developed country (LDC) to a developing country in 2024. With this new tag of a middle-income country, Bangladesh will lose the right to getting low-interest loans and other trade benefits. So in this decade, there is no substitute to export diversification for rapid growth and a stable economy. The sooner the export diversification is done, the stronger the economy will be in the near future.   

Published at The Financial Express on March 13, 2020