‘It is time for a paradigm shift in Bangladesh’s manufacturing sector’

To address growing inequalities and ensure a more sustainable economic trajectory, the government has formed a 12-member task force to redesign its development strategies. Led by economist KAS Murshid, the task force will explore ways to mobilise resources for equitable growth and prepare a comprehensive report within three months. 

One of the members of the task force is former World Bank official Syed Akhtar Mahmood. 

He shared his insights with The Business Standard, analysing the challenges of fostering sustainable and inclusive development in Bangladesh. In this conversation, he discusses the structural barriers to reducing economic disparities, the effectiveness of past policy approaches, and the key strategies needed to create a just and dynamic economy.

The 2024 Economic Census by BBS suggests a slowdown in the manufacturing sector. While the sector nearly doubled between 2003 and 2013, growth dropped to just 15% in the next decade. As a result, its share of total enterprises fell from 11.54% in 2013 to 8.77% in 2024, raising concerns. But why does manufacturing matter for the economy?

The manufacturing sector is crucial for creating jobs and earning foreign exchange through exports. But it is not just about job creation; improving productivity is also very important. Machines are used much more extensively in manufacturing than in agriculture and services. 

When workers, even those with few skills, move to manufacturing, they become more productive. This sector can hire many unskilled or semi-skilled workers at higher productivity levels than agriculture or services, as seen, for example, in Bangladesh's garment industry. Moreover, manufacturing offers more opportunities to learn and improve skills over time, which leads to even greater productivity. While skills can also be developed in farming or services, those opportunities are usually fewer. 

Manufactured goods are easier to trade than services, providing more scope to learn through exporting. Trade allows countries to gain technological knowledge by interacting with global businesses. Exporters must meet the demands of global customers, which pushes them to enhance productivity. There's also the opportunity to benefit from economies of scale. Being part of the global market allows for increased production and efficiency. 

In summary, the manufacturing sector is vital not only for creating jobs but also for providing better-paying jobs by boosting productivity. It needs to grow, offer diverse products, and connect with more global supply chains.

Bangladeshi firms lag in technology adoption and innovation. How can Bangladesh create an ecosystem that encourages businesses to invest in innovation and technology, especially when many firms are focused on short-term gains?

Bangladesh's ability to grow its exports and achieve higher productivity depends on how well its companies adopt new technology and business practices. For example, the garment industry needs to adjust to changing global demands, such as online sales and eco-friendly production. 

This requires adopting technologies such as automation and ICT systems for supply chain management, as well as focusing on green production and recycling.

Unfortunately, many Bangladeshi firms are falling behind in technology adoption. A 2022 World Bank survey found that only 1% of manufacturing companies made process improvements, and none created new products in the past three years. 

This is much lower than global averages, where 35% introduced new products and 27% made process improvements. In South Asia, one in five manufacturing firms launched new products and one in four improved processes. 

Moreover, only 1.2% of Bangladeshi manufacturing firms invested in research and development, and 2.6% used foreign technology, which is significantly lower than global and South Asian averages.

While there are some Bangladeshi firms making strides in R&D, particularly in the pharmaceutical sector, these are exceptions. To improve the situation, we need to create an environment that encourages innovation and R&D in manufacturing. This includes collaboration between academia, government, and businesses, as well as international partnerships. Policies such as tax breaks and grants can incentivize research and development. Establishing high-quality labs and innovation centres, along with better access to venture capital, is essential. 

Investments in technical education and modern facilities are crucial. R&D spending, currently below 0.5% of GDP, should ideally increase to 1% or more.

The semiconductor industry offers Bangladesh an opportunity, especially in lower-end, labour-intensive manufacturing. How realistic is this, and what steps are needed to develop the required skills and infrastructure?

To draw more FDI, we need to improve our overall investment strategy, both in and out of the economic zones. We recommend consolidating all investment promotion efforts under the Bangladesh Investment Development Authority (BIDA).

The 4th Industrial Revolution is changing economies worldwide, leading to job losses but also creating new opportunities, including for countries such as Bangladesh. Key technologies such as semiconductors are central to this change and are expected to grow significantly. In 2022, the global semiconductor industry generated $630 billion in revenues. By 2040, this is projected to grow substantially, reaching between $1.7 trillion and $2.4 trillion. There is a great opportunity for Bangladesh to engage in the semiconductor industry, in both manufacturing and services.

Bangladesh may not be able to enter advanced manufacturing immediately, but it can focus on simpler tasks like assembly and testing, which require less investment and can leverage lower labour costs. This could help integrate Bangladesh into the supply chains of the semiconductor industry and create jobs for semi-skilled workers. Additionally, manufacturing services like chip design hold promise. This requires a skilled workforce and investment in relevant education. Some Bangladeshi companies are already working in this area, employing over 500 chip designers and earning about $8 million from exports in 2023.

A multi-faceted approach is needed to support this growth, including policy reforms, public investment, and support for businesses, universities, and research institutes. Some actions can yield short-term benefits; others may take longer to implement. Basic manufacturing in the semiconductor industry is competitive, so both the government and private sector must be proactive.

We made a set of recommendations in the report, such as expanding science and engineering education, investing in specialised infrastructure such as small fabs, and providing funding for practical experience and software development. These steps will equip engineering students with essential skills, allowing companies to hire them without extensive training, which may also attract foreign investment. There are some other practical recommendations in the report to support this agenda.

Only about 10% of the investment in the zones, and a similar share of land allocated so far, is in export-oriented investments. What do you think is holding back foreign investors, and how can Bangladesh make its economic zones more attractive to global companies?

One major reason for creating economic zones in the country is to attract foreign direct investment (FDI) and diversify exports. In the past, many foreign investors hesitated to invest due to challenges in finding available land. The economic zones program aims to solve this problem. However, despite some progress, it has not significantly attracted FDI or diversified exports.

Currently, 12 operational zones have a total of 1950 acres of land, which is close to the 2300 acres in the eight export processing zones (EPZs). This means the amount of serviced land for investors has nearly doubled with the new economic zones. But the question remains: what benefits are we seeing?

In preparing the report, we obtained some data from the Bangladesh Economic Zones Authority (BEZA), which indicates that there are 122 investment projects in the economic zones. Out of these, 47 are operational, while the others are still being built. The total investment so far is $5.06 billion. However, only $197 million of this is FDI, making up just 3.9% of the total investment. 

Only about 10% of the investment in these zones is focused on export-oriented activities. In brief, most investments in the economic zones are from local investors targeting the domestic market. The potential for these zones to attract FDI and enhance exports remains largely unmet.

To draw more FDI, we need to improve our overall investment strategy, both in and out of the zones. We recommend consolidating all investment promotion efforts under the Bangladesh Investment Development Authority (BIDA). 

The government should evaluate and streamline the investment facilitation roles of various agencies. BIDA should also enhance its capacity for investment promotion, including implementing an investor tracking system to monitor the progress of foreign investors in Bangladesh. 

This system would help identify where potential investors are on their journey and any obstacles they are facing. Finally, it is essential to unify the one-stop services currently scattered across multiple agencies and also simplify the approval process for foreign investors to repatriate profits.

In the report, you have also talked about the importance of resource reallocation. What specific recommendations do you have in this regard?

There are two types of efficiency to think about: allocative efficiency and technical efficiency. Allocative efficiency means using resources like capital or labour in the best possible way. 

For instance, if we have Tk10 crore to invest, we might choose the pharmaceutical industry over the garment industry if we believe it will yield better returns. When we talk about the diversification of our export basket, in a sense we are focusing on allocative efficiency.

Technical efficiency refers to maximising the output from resources that have already been allocated. This includes aspects such as productivity and technical learning that I talked about earlier. Both types of efficiency are important.

Allocative efficiency often involves moving resources from less productive activities to more productive ones. This is crucial for a dynamic economy, a concept highlighted by the famous Austrian economist Joseph Schumpeter who came up with the evocative term "creative destruction", i.e, destroying something to create something more valuable.  A clear example is the closure of the Adamjee Jute Mills in 2002, which was losing money and needed subsidies. After its closure, the land was repurposed for the Adamjee Export Processing Zone, which opened in 2006 and, within seven years, created twice as many jobs as were lost. The new factories in the EPZ do not need subsidies. Also, some equipment from the jute mills was used to start small jute mills in North Bengal.

In today's fast-changing world, driven by rapid technological advancements, creative destruction is even more vital. As we indicate in our report, we cannot continue with business as usual. We have already seen some changes, such as the consolidation in the garment industry. Seven to eight years ago, there were about 4,000-4,500 garment factories, but now there are around 2300, with many subcontractors closing down. Some garment firms have grown larger by acquiring others.

These changes can sometimes be difficult and should be managed carefully. That is why our report suggests reforms to the bankruptcy system. The current Bankruptcy Act from 1997 is outdated and does not align well with Bangladesh's legal and business environment. There are multiple laws covering bankruptcy that create confusion, and the process for handling bankruptcy cases is complicated and slow. We recommend introducing a new Bankruptcy Act, and some other reforms, to improve the situation.

With global trends favouring sustainable manufacturing, the report urges Bangladesh to adopt green practices in RMG and agro-processing. How feasible is this, and what role can the government and private sector play?

The green transition is important and feasible. It is necessary to protect our environment and meet the demands of the global economy. Our trade economists warn that future trade benefits will rely more on our commitment to social and environmental standards. This makes it urgent. 

It is also achievable if we focus on it. For instance, I once worked on an IFC-supported project that aimed to improve water efficiency in Bangladesh's textile factories. We found that many factories used three to four times more water than needed because it wasn't priced. The project demonstrated that with small investments, these factories could reduce their water use by half or more. 

This is just one example; there are many others. Our report discusses the potential for solar-powered factories, local production of renewable energy components, energy-efficient tools, recycling businesses, and investments in sustainable packaging and green building materials. We have made several recommendations, including green financing, eco-friendly subsidies, and compliance measures. These public sector actions should support private sector efforts to meet global standards.

Any final thoughts?

Just a couple. Firstly, almost everything that I have said is about bringing about a paradigm shift in our manufacturing sector. It can't be business as unusual. Incremental change will not do. This is both a long-term as well as an urgent agenda. We must be there for the long haul, but we must start right now. The world is moving very fast. It is not going to wait for us to catch up. 

Second, I did talk a bit about the role of the government in fostering this paradigm change. But there are some cross-cutting issues, especially regarding economic governance (such as regulations, incentives policy, tax regime and competition) that we have barely touched upon here. Perhaps that is for another conversation.