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We need to give thought to changing our manufacturing product mix, including our export basket, by introducing more complex products

 

Through an impressive effort over the past few decades, Bangladesh has made an important breakthrough in manufacturing exports. However, this success has been based largely on one product, i.e., ready-made garments, which now account for more than 80% of our exports. The manufacturing sector oriented towards the domestic market is a bit more diversified with a range of products being produced to meet the demands of a $250 billion economy. 

However, most of Bangladesh’s manufacturing products, whether destined for global or domestic markets are relatively simple products, not requiring a sophisticated set of skills. Exceptions are products such as pharmaceuticals and electronics. As we approach middle-income status, we need to give thought to changing our manufacturing product mix, including our export basket, by introducing more complex products. 

Why is this so? The argument for complexity is a simple one. Complex products, such as electronics, involve a wider range of knowledge and skills than simpler products such as garments. Thus, countries which produce a critical mass of complex products acquire skills and knowledge that allow them to branch into a larger set of complex goods later. Complex products fetch a higher price, which allows us to pay higher wages to the higher-skilled workers needed to produce such products. It is time for Bangladesh to compete based on skills, not cheap labor.

The Harvard University Growth Lab has developed the Economic Complexity Index (ECI), a useful tool to assess the extent to which countries have gone into production of complex products and how they compare on this front relative to others.  This index is based on two factors: the diversity of a country’s exports and the ubiquity of its exports. 

The latter is an interesting concept. If a country is exporting a product that only a few other countries are also exporting, that product is somewhat unique to that country. It suggests that the country has some unique capabilities that other countries do not have. Thus, if a country exports a wide range of goods and some of these are rather unique to the country, it’s ECI will be higher. Since more complex products require greater knowledge, the ECI is a measure of the amount of productive knowledge acquired by a country.

So how does Bangladesh do on this index? As the chart below shows, not very well. And the performance has declined over time, largely due to the increased share of garments, a low-complexity product, in our export basket. Among the countries shown in the chart, USA had the highest rank in 2018 (11), followed closely by China (18). Next came India (42) and Vietnam (52), followed by Ethiopia (92) and Bangladesh (108). Interestingly, Bangladesh was ranked higher than Vietnam in 1995 (87 vs 107) but Vietnam has significantly increased the complexity of its exports since then while Bangladesh’s score on the ECI has declined due to the reason mentioned above. 

How did Vietnam increase the complexity of its exports? It did so by focusing more and more on products that are complex. One example is electronics. The following chart shows the different trajectories of Vietnam and Bangladesh with regard to electronics exports.The difference is staggering

In 1995, electronic exports were a minuscule part of the total exports of both Bangladesh and Vietnam, accounting for less than one percent of each country’s export earnings (0.75 per cent for Bangladesh, and 0.64 per cent for Vietnam). Total electronics exports from Bangladesh were $31.5 million, a tad higher than the $30 million from Vietnam. So, the two countries were at par in 1995.

But then the trajectories started to diverge, and in a big way. By 2018, Vietnam was exporting $102 billion worth of electronics, accounting for 36 per cent of the country’s total export earnings. Bangladesh’s electronics exports in 2018 was a meager $72 million. The share of electronics in Bangladesh’s total export earnings had in fact gone down over time and was only 0.17% in 2018. 

How did Vietnam achieve this remarkable transformation in its export basket and what can Bangladesh do to emulate Vietnam’s success? That will be the subject of another column. But we may note one factor here, i.e., foreign investment. Vietnam has attracted far more FDI than we have and a substantial part of this has gone into electronics production. There is a significant message there. Will we heed it?

 Syed Akhtar Mahmoodis an economist, previously with an international development agency. 

 This article was originally published Dhaka Tribune.
Views in this article are author’s own and do not necessarily reflect CGS policy.