Barriers to building industries in Bangladesh and the way-out

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http://www.thefinancialexpress-bd.com/more.php?news_id=120545&date=2012-02-18
VOL 20 NO 378 REGD NO DA 1589 | Dhaka, Saturday February 18 2012
Barriers to building industries in Bangladesh and the way-out

M S Siddiqui concluding his two-part article

Industry is the backbone upon which the economy of any country prevails. The growth of economy as well as economic development of a nation depends upon the development of industrial sector. The external environment of any industry, mainly the political and legal along with social environments affect the growth of industries greatly.

The importance of environment analysis has significant impacts on business and economy since this is directly or indirectly affecting the growth of industry in any country.

Diversifying the economy might mean further shifting the economy away from agriculture and encouraging more manufacturing and services thus reducing the dominance of one sector in favour of others. The economic history suggests that countries tend to diversify their economies from primitive form of agriculture to manufacturing and/or service activity. All nations have their Industrial Policy (IP) considering the geo-political situation, technology, manpower and other factors. The objective of IP is to limit the role of the government generally in establishing strategic and heavy industries and to improve efficiency in the public sector.

The development of industry preferably small and cottage industry are expected on grounds of (i) labour intensity, (ii) use of indigenous raw-materials, (iii) lower capital -output ratio, (iv) generation of employment at minimum investment cost, (v) equitable distribution of income, (vi) regional distribution of industrial investment, (vii) reduction in fixed investment costs through sub-contracting tie-ups, (viii) foreign exchange earnings through exports/imports substitution, (ix) building up entrepreneurial base through trial and error at low cost, (x) introduction of new/appropriate technology atlow cost, etc.

An IP needs to develop the industrial sector in order to increase its contribution to the gross domestic product (GDP), income, resources and employment. IP can promote expansion of industrial sectors, by putting more emphasis on development of the private sector. It can make the role of the government as promotional rather than regulatory. It can encourage domestic and foreign investment in overall industrial development. The development of export-oriented, export linkage and efficient import substitution industries, especially encourage the development of small and cottage industries. A policy can be for exquisite better technology and improvement of appropriate technology. A policy can develop efficient production process to attain self sufficiency in essential consumer goods. IP can ensure development of industries based on indigenous raw materials and indigenous technology, small and medium enterprises (SME) and cottage industries as one of the major driving forces, providing assistance to women entrepreneurs on a priority basis, setting up special economic zones in different parts of the country, improving the quality of industrial products to world standard, marketing of goods at competitive prices, and enhancing productivity in the industrial sector. IP can encourage balanced industrial growth in different regions of the country and expand production in value-added sectors, with high employment and growth multipliers that compete in export markets and in the domestic market against imports. In doing so, IP can also place emphasis on more labour-absorbing production and service sectors, increased participation of historically disadvantaged people and regions in the economy. It can create possible opportunities for revitalising and rehabilitating sick industries. IP may develop policy of effective arrangements for improving standards and controlling quality products and to take appropriate measures for preventing environmental pollution and maintaining ecological balance.

A report of the Bangladesh Enterprise Institute (BEI) and the World Bank Investment Climate indicates that compared to China, India and Pakistan, Bangladesh is falling behind. The incidence of corruption is far greater, the quality of infrastructure poorer and the performance of key government departments or agencies less satisfactory. Added together, the cost of doing business in Bangladesh today compared to other countries in the region is considerably higher. Corruption is pervasive. Bangladesh ranks worse on measures of corruption than its neighbours-with more than half the firms reporting it as a major or very severe obstacle.

Among elements that add to the cost of doing business in Bangladesh invariably are the inordinate delay in the disposal of cases, by the lower courts in particular, and the indifference or incapacity of the police in enforcing law and order.

Infrastructure poses some of the most severe obstacles facing firms. Bangladesh fares worse than its neighbours in general measures of infrastructure, and the vast majority of firms report that problems in infrastructure seriously hamper their growth. The utilities section of the report focuses on three sectors: gas, power, and telecommunications. Bangladesh is already a land scared country and in near future there will be acute shortage of industrial plots.

Bureaucratic barrier is a major obstacle in Bangladesh. Investors view too many regulations also stand as a barrier. Starting a firm in Bangladesh is fairly difficult. And once firms are running, they receive frequent visits from government agencies-about 17 a year on average. Moreover, by studying and adopting best practices from other countries in the region, and South East Asia, with lower corruption indicators; Bangladesh may be able to achieve considerable success in reducing corruption and other hidden costs of doing business, thereby attracting greater investment.

Indirect expenditures most often increase the cost of doing business in Bangladesh. These include the costs of securing adequate infrastructure, obtaining necessary licences and permits, dealing with government bureaucracy, transporting goods, importing or exporting goods, and ensuring security of property and personnel. Although these costs are understood to be an integral part of doing business in Bangladesh, their exact extent is unknown and they must be negotiated unofficially. It is these unofficial costs that cause the greatest problems for businesses. Unofficial costs are difficult to estimate and plan for and may not always yield the desired outcome. Furthermore, sustainable economic growth requires a stable regulatory environment, which is at odds with the personal discretionary system currently in place in Bangladesh.

Finance appears to be a looming problem due to high interest rate, lengthyloan sanction process and high collateral. While most firms appear to have access to finance, it is mostly short-term and nearly 60 per cent of firms with a line of credit report having exhausted that credit. Small- and medium-size firms are disproportionately affected by all these problems. The smaller the firm, the more of its resources it devotes to bribes and to dealing with government visits and inspections-and the less likely it is to have access to formal finance. These problems can pose great barriers to market entry and growth for small firms.

The costs and benefits of these policies and the fairness of the distribution of these costs and benefits should be available to all citizens. Like all economic policies, IP creates winners and losers, and there should be ample public debate about the implications for equity. For example, sometimes industrial policies are deliberately intended to foster greater development in particular regions, or types of region e.g., urban or rural or different part of the country. Industrial policies may also favour particular industries over others, and thus certain types of workers, such as those in manufacturing rather than those in agriculture. Similarly, policies designed to stimulate investment in particular industries may have important implications for gender equity if jobs in that sector tend to be dominated by either men or women.

The implementation of IP is a huge job and only the Board of Investment is unable to implement (BoI) it. The agency is not provided with sufficient power in the governmental structure to cut through the bureaucracy and deliver services to investors. The entire government mechanism with visionary leadership can achieve the target. Bangladesh needs an effective industrial promotion agency out of a government department as an investment promotion agency with the philosophy and outlook of the personnel to change sufficiently.

The image crisis is another major obstacle to foreign investment and foreign trade. Bangladesh cannot sustain in global market with low labour cost and low-cost garments in the export market. It should try for value added high-end product and develop own brand. Industries cannot sustain in long run without premium price and brand image of end products. Again the brand value of 'made in Bangladesh' products depends upon brand value of country.

Bangladesh should take initiative of various bureaucratic, judicial and political reforms being undertaken in India, Pakistan, Malaysia, and Singapore that are addressing the same problems Bangladesh faces today. This policy is not an innovation but replication of our neighbours to achieve economic and social emancipation.

A few years' long evaluation and consultations by two political and one caretaker governments have given an Industrial Policy -2010 which is in fact a 'wish list'. Can the 'wish list' create a favourable environment for rapid industrialisation and to help address the existing problems?