Diversification of Export Basket Prospective and challenges for Bangladesh – Ishrat Jahan Ikra
“Don’t put all your eggs in one basket”- a popular proverb of finance that best implies the significance of diversification. Diversification abates the risk by investing in various assets and opens a wide path of economic growth. On the other hand, investing all the money and effort in one asset increases the risk and leads to less economic growth. Bangladesh is an export-import oriented country but the list of export goods is very short. The main export goods are Textile and Garments, Leather and leather goods, Pharmaceuticals, Agricultural product, Frozen foods etc. Bangladesh is the world’s second biggest apparel exporter after China. It sells its products to the traditional market including the US, the EU and Canada etc. Readymade garment (RMG) sector dominates the export and foreign earnings of Bangladesh contributing 80% of the total national export. Undoubtedly, this is the only sector our country focuses on and invests most of the budgeted amount of export. We get good returns from garments as well. But what if the buyers stop buying from us or the market collapse?
Experts say this is not wise decision to depend on a few or a single export product for a developing economy like Bangladesh. Decline of such product will result in the collapse of the whole economy. So it is high time the government took plans and strategies to diversify the export product line and market.
Export Diversification:
For the developing countries to be rich export diversification is a precondition. Diversification is a continuous process and it cannot be done overnight. It brings blessings for the economy by lowering instability in export earnings, expanding export revenues, reducing business risk. It will create employment with new skills of workers, ensure full utilization of resources and enhance economic growth through several ways. Diversification helps countries to hedge against adverse terms of trade shocks by stabilizing export revenues. It enables them to direct positive terms of trade shocks into growth, knowledge spillovers and increasing returns to scale. Other industries in the country can also gain as export diversification can lead to knowledge spillovers from new techniques of production, management or marketing practices. Furthermore economic growth and structural change depends upon the type of products that is being traded. Thus through export diversification, an economy can progress towards the production and exportation of sophisticated products which may highly contributes towards economic development. Export diversification allows the government of an economy to achieve some of its macroeconomic objectives namely sustainable economic growth, satisfactory balance of payment situation, employment and redistribution of income.
Techniques to diversify export basket:
All the high growth economies had some techniques to make export diversification successful. It is a matter of hope that the government has already took some actions for export diversification.The government should choose the sectors wisely in order to get positive return. Most productive, profitable yet demanding sectors shall be chosen. Diversification can be made through product, market or both.
Market penetration is the existing traditional concept and it doesn’t expand or diversify export basket. It represents the current situation of export. Sector diversification means exporting a new item or good to the existing buyer group or destination. It expands the export sector and new items are added to the export basket. In destination diversification existing products are exported to new destination or buyer group and export destination is expanded. And complete diversification is exporting new export goods to new export destination. This strategy expands both the export destination and sector. Bangladesh should focus on the rising sectors that contribute to the GDP and lead to economic growth. Investment on those sectors like Pharmaceuticals, leather and leather goods etc. can add a new dimension to the export basket. At the same time, buyer group shall be expanded in the international market to diversify the destination. Bangladesh has a lot of potential sectors that are awaiting the propitiousness of the Government and private sectors.
Prospective of export diversification
The main achievements that export diversification will lead to is rapid economic growth. Bangladesh is a developing country with a slow pace economic growth. For rapid growth, Bangladesh needs to implement aggressive program for product and market diversification. Export diversification will increase the number of product and market, domestic consumption, local and domestic investment flow. It will provide a solution for unemployment by creating new workplace. Bangladesh will have a new dimension in the technological center with new and sophisticated technology. Export diversification will decrease the instability in export earnings, increase export revenue and value addition.
Challenges of export diversification
Lack of Finance: The main villain in every business is the lack of adequate finance. Bangladesh has a dearth of adequate investment. Every time our budget has a deficiency of investment. Even the foreign investment has decreased after the incident of Rana Plaza. The domestic investment is solely based on banks and other financial institutions. But people are not likely to take loan from those institutions due to high rate of interest. Unless financing is available, exports will not increaselet alone economic growth.
Inefficient Infrastructure: Adequate and efficient infrastructure is a precondition for excellent export business. Inefficient infrastructure averts the export process from production to delivery. Infrastructure includes communication system, transport system, road and network, delivery process etc. So an inadequate infrastructure increases the business risk and additional costs. It frustrates the buyers and can cause of order cancellation.
Bureaucracy and Market access: Market access is a complicated matter. A lot of Government rules and regulations has to perform that kills a huge amount of time. These regulations and paper work discourage entrepreneurs to enter the market. There are a lot hassle at the border and behind the border like tariff and non-tariff barriers, quality and standard test etc. These kind of barriers obstruct market access. The customs service is still backdated, manual and inefficient.
Economic and political risks: Economic risks such as volatility and instability in foreign exchange earnings have adverse macroeconomic effects on growth, investment, employment etc. political risks includes worsened governance, risk of civil war in fragile states. Jute exports to Syria, Libya and Iran were affected in recent years.
Inadequate of FDI: Bangladesh has a great dearth in capital investments, technology and market knowledge that prohibit to diversify export basket. The best way to erase these limitations is to attract FDI. FDI ensure sophisticated and superior technology, sufficient capital, incremental productivity and better knowledge about international market. It makes the international trade easier, boosts the economic and employment growth.
Labor productivity and availability of skills: Bangladesh has a big population and abundance in labor. But Bangladesh is back warded in terms of quality of labor and, therefore, labor productivity. Unskilled labor brings nothing but a curse for the nation’s economy. It’s very difficult to make the labor force skilled. As they have a lower level of literacy, acquisition of skill is tough for them.
Bangladesh has a variety of resources but has not yet been able to utilize her full potentials. There are multifarious reasons behind this under performance in the international trade. For sustainable and rapid economic growth Bangladesh shall take some strategy as soon as possible. Export diversification can be improved if Bangladesh can overcome the obstacles successfully. Bangladesh should select some potential sectors with competitive advantages to diversify. Availability of finance and easier market access will make the process fast and successful. Adequate amount of finance is to be happened if people are given the security of their investment. And if there is available finance, infrastructure and market access will be increased. The rules and regulations, paperwork shall be simplified to increase people’s interest in this sector. Moreover, government should pay attention regarding this issue and take appropriate and necessary steps to make export diversification happen.
The author is a student of the Department of Accounting and Information Systems at the University of Dhaka.