Messages

16

Business Administration / Social Business:Turning Capitalism on its Head

« on: February 25, 2015, 03:38:22 PM »

The world today is witnessing capitalism at its worst. The system, after producing a global depression in the 1930s, and recovering from it to give the world the longest and most prosperous expansion in the history of mankind, is once again flirting with catastrophe that threatens to unravel the whole system. To anyone cognizant of economic history, it is an unseemly sight to see the world's most affluent societies beset with mounting public and private debt that are shaking the foundations of hitherto prosperous economies; to see unemployment in the double digits and youth unemployment even at 50% in some pockets of Europe. Laissez faire financial capitalism that took roots in the 21st century soon unravelled in the severest financial crisis from which world markets are yet to recover. In the wake of this crisis, trillions of dollars worth of equities and housing values vanished literally into thin air making millions of citizens across Europe and North America feel poorer and radically cut consumption, the engine that drove capitalist economies for decades. As affluent societies get a taste of humble living by cutting down on their spending habits, less affluent societies and those living in poverty could feel the pinch as the demand for their products and services fall off. In consequence, the global economy slows down or falters in its forward march.

Globalisation, an offshoot of the capitalist economic system, did unleash the forces of trade, growth and poverty reduction across the globe for a long period. But now it seems the day of reckoning is upon us. Or, is it? It was Joseph Schumpeter, writing about the capitalist system, who coined the expression “creative destruction”. Is the present predicament simply a reflection of the destructive process within capitalism, to be followed eventually by more innovation? It comes after what was considered by Alan Greenspan, the former Chairman of the US Federal Reserve System, as “financial innovation”, which was then allowed free reign from the trappings of prudential financial regulation. As a result, corporate “greed” ran amok on Wall Street and beyond. Much of the world today is getting a taste of the consequences of the financial collapse that ensued. But what is now certain is that far too many people around the globe are afflicted with the negative consequences of the destructive process inherent in capitalism and addressing their call for resuscitation has become a global imperative.

Along comes Nobel Peace Laureate Professor Muhammad Yunus with a new initiative -- Social Business -- a kind of business that is created to address a social problem, like child malnutrition in Bangladesh. Indeed, a wider definition of social business would include any business which has a social rather than financial objective. But Yunus narrows his focus. He argues that the malaise that is inherent in capitalism has its origin in the assumption of human beings as unidirectional -- seekers of maximum profits to enrich themselves. That need not be so. He argues there is a selfish and a selfless side to all individuals. It would then be possible to create social businesses to solve social problems by harnessing the selfless motivations in people. These could be business enterprises driven not by the motive to maximise profits but to address a social problem that causes suffering to large sections of society. By suggesting this he is not negating the fundamental tenets of capitalism governed by free markets, competition and private ownership. Rather, by calling it a business, he is at ease with all these principles except to say that businesses need not always be driven by the motive of profit maximisation. Investors could have the option of exploiting capitalism to do “social good”. In his latest book, Building Social Business: The New Kind of Capitalism that Serves Humanity's Most Pressing Needs, Yunus asserts that a Social Business is “Operated as a business enterprise, with products, services, customers, markets, expenses, and revenues -- but with the profit-maximising principle replaced by the social-benefit principle”. This is clearly a deviation from traditional non-profit enterprises established to provide health care, education and a host of social benefits to the poor and needy. Those enterprises typically rely on donation from generous individuals or corporations. Without such donations or fund-raising initiatives, these enterprises lack sustainability. A social business, on the other hand, has to be set up as a commercially viable proposition, i.e. they must generate surplus to reinvest and sustain or expand the business. They cannot be running at a loss. Since maximising profits is not the objective, the social good, such as solving child malnutrition, could be provided at a price that is affordable to the poor, but below what the market could bear. I believe the strongest case he makes for such a business is by arguing that a charity dollar has only one life, a social business dollar can be recycled multiple times. The key point is to develop a viable business model that pays its way while solving a nagging social problem.

Sifting through Yunus' book on social business, one sees the emergence of a new form of investment, where investors pursue altruistic rather than material goals. A social business then becomes a “no-loss, no dividend company designed to address a social problem”. The purpose of the investment is purely to achieve one or more social objectives through the operation of the company; no personal gain is desired by the investors. The company must cover all costs, make a profit, and at the same time achieve a social objective, such as, healthcare for the poor, housing for the poor, financial services for the poor, nutrition for malnourished children, providing safe drinking water, introducing renewable energy and so on.

17

Business Administration / Managing food price inflation in South Asia: An agenda for reforms

« on: February 25, 2015, 03:38:00 PM »

The large magnitude of the terms of trade shock primarily owing

to oil prices along with the acceleration of food prices, especially staple food grains of wheat and rice, have imposed a tremendous burden on South Asian countries, particularly on the low income economies of Afghanistan, Bangladesh and Nepal. The adverse effects of food and fuel price crisis have been compounded by the global financial crisis.  South Asian governments have responded in varying degrees to contain the rise in prices as well as to mitigate the adverse effects on the poor.  Steps have also been taken to stabilize the economy and accelerate growth.  Yet, the negative impact remains substantial and further efforts are needed to respond more effectively to the external shocks.

Short-term policy responses: Policies taken by governments in the first round were aimed at stabilizing food prices. Some of the policies like trade bans, price controls and subsidies may have been justifiable as short-term response on political economy grounds, but they have adverse implications for efficiency and resource allocation over the longer term.  As well, the fiscal space is scarce and the magnitudes of the subsidies entailed are not likely to be sustainable.  Similarly, the efforts of governments to initiate safety net programs are laudable; yet there is a need to examine the programs carefully to ensure their effectiveness and fiscal sustainability.  Finally, the longer term agenda of addressing the supply problems in agriculture remain to be fully tackled.

Long-term policy agenda: At the heart of South Asia’s supply response is the challenge of farm productivity.  South Asian governments need to pay much more attention to the productivity issue in order to reconcile the rising input prices with the objective of keeping food prices stable and affordable for the poor.  Other key long-term policy issues concern trade policies, stock management, input-output pricing, safety nets and regional cooperation.

18

Business Administration / The economics of transit

« on: February 25, 2015, 03:37:29 PM »

There are few topics that spark more emotions and irrational thinking

than the issue of transit access through Bangladesh for neighboring countries. Due to the dominant presence of the large neighbor India, the discussion of transit issue in Bangladesh has been hijacked by politics contributing to the confused thinking and rationale. Transit is seen by many as “concession to India” and by some as “loss of sovereignty”. This confused thinking has clouded the underlying economic issues of transit.  When the rest of the world is getting better integrated through transport network, trade and investment, Bangladesh and rest of South Asia remain isolated as a region. Legal trade among South Asian countries is very limited,investment flows are negligible and physical connectivity is highly restrictive. The lack of transit agreement for traffic between Bangladesh and other neighboring countries is a reflection of this broader anomaly. Deep suspicion, historical baggage and unhealthy politics remain as major constraints to strengthening economic relations between South Asian countries.  Similar difficulties have also constrained the relationship between Bangladesh and India.

This is a lose-lose situation. An important breakthrough happened in January 2009 in the context of the visit of the Bangladeshi Prime Minister to India and the resulting joint communiqué issued in New Delhi on January 12, 2009 by the Prime Ministers of the two countries. Among other areas of cooperation, the communiqué provides the political framework for developing a broad-based transit agreement involving initially the two countries with provisions for broadening it to include Nepal and Bhutan.  Nevertheless, controversy over the transit issue continues to prevail in Bangladesh, which is constraining the implementation of the agreements.

The objective of this article is to provide a framework that looks at the economics of transit and asks in what ways this is a right policy decision for Bangladesh.  The article will show that transit is a part of a sensible economic policy that seeks to help Bangladesh accelerate economic growth and reduce poverty.  More broadly, it is a good policy for South Asia in general and for the North-east sub-region of South Asia in particular.  The economics of transit, the article will argue, also makes good politics.   Transit access for neighbors opens up a whole host of political opportunities for addressing long-term difficult regional issues relating to immigration, water sharing, and security issues. The gains are win-win for all parties.

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Business Administration / Curtain falls on US debt ceiling drama only to roil global markets

« on: February 25, 2015, 03:37:05 PM »

The long protracted bickering barely over, the US Congress passed into law a compromise bill to raise the debt ceiling by some $2.3 trillion dollars

on August 02, 2011 thus averting the possibility of an imponderable default by the most trusted repository of global sovereign holdings – US Treasury debt. For those who followed the squabbling between Republicans and Democrats in the US Congress must be well aware that the Budget Control Act of 2011 was a compromise deal that neither side liked. It was hardly the bipartisan pursuit of rapprochement that characterized many compromises worked out in Congress throughout history. This time it was all too apparent that neither side got what they wanted. It felt like the parting of ways rather than a meeting of minds. What is now clear, the markets as well as the rating agencies did not like what they saw.

Hypothetically, if the debt ceiling were not raised by August 02, the US government would have had to cut spending immediately by 40% which would mean defaulting on many of its obligations, including debt. For one, that would have been the most vexing development for the Chinese – holders of the largest amount of US Treasury Bills, to the tune of some $1.5 trillion. For another, that would have led to the downgrade of US debt, creating a firestorm in financial markets across the globe. In the end, the two groups in Congress thought it better than to let the US economy fall off the precipice.

But perhaps the damage was already done. The way the two sides kept tossing their dogmatic positions at each other until the final hour would make the Awami League (AL)-Bangladesh Nationalist Party (BNP) confrontation in Dhaka look like a friendly football match. Republican members of Congress (House and Senate) found themselves boxed in on their inflexible stand for spending cuts and no tax (revenue) increases which left little room for compromise with their Democratic colleagues – led by President Obama -- who argued for a balanced approach to debt and deficit reduction comprising a combination of spending cuts and revenue increases. As subsequent polls and market developments show, neither side won, but the nation lost.

What was merely a threat did come to pass as S&P, one of the three leading global ratings agencies, went ahead with the downgrade of long-term US debt as of August 05, 2011. S&P reduced the triple-A rating held by US debt to AA+ -- the first such downgrade of US Treasury debt since 1917--, pointing fingers at the budget deal recently brokered in Washington which they said didn't do enough to address the gloomy outlook for America's finances.

20

Business Administration / China opportunity beckons but not for long

« on: February 25, 2015, 03:36:46 PM »

In the competitive world of globalization it is smart to stay ahead of the game; to be proactive rather than reactive. Some opportunities in global trade come once in a

lifetime. Lost opportunities seldom return. The Multi-Fiber Arrangement (MFA) presented one such opportunity for Bangladesh. Our entrepreneurs seized it. The rest is history.

Such a once-in-a-lifetime opportunity for Bangladesh is again captivating the minds of global analysts and observers of the global shifts in comparative advantage. The new window of opportunity that beckons Bangladesh has its roots in what is going on in China, known to the world as the export powerhouse, as the biggest source of cheap exports of all manner of goods, from clothing and toys to consumer electronics and durable goods like air conditioners and refrigerators.

Internal developments in China are now revealing the limits of producing cheaply. Abundant, cheap, and productive labour was the primary source of China's global competitive advantage. As a natural phenomenon of industrial success, that advantage is fast eroding.

Wages are rising in China, not by a few cents per month, but by a hundred dollars over the past year. Average wages of factory workers in industrial zones, up 20% over last year, have already reached $150 a month, and are still rising. Yet, that is not the principal problem. In special economic zones like Guangzhou, with heavy concentration of manufacturing industries, labour shortages have become acute to the point that on a particular afternoon, at a government employment office, reporters found more employers seeking workers than there were job hunters. Global recovery has fueled so much demand for Chinese exports that a worker could literally walk into a factory and get a job right away. Gone is the notion of vast reserves of unemployed rural workers storming into the urban centers in search of work. Labour shortages are creating wage pressure in industrial centers. Wage-push inflation in China means that competitive advantage is no longer assured, at least not for the labour intensive commodities whose fabrication is less complex and demands relatively low-skilled workers. Examples of these Chinese products include readymade garments, shoes, electrical goods, car parts, toys, kitchenware, and multifarious consumer goods. In these sorts of products, China's competitive edge stemming from low labour costs is fast eroding.

That is not all. The emergence of bulging and sustained trade deficits in the US and other developed economies has given rise to a common refrain that grows louder by the day, for China to participate in a strategic understanding to rebalance global trade - by helping to lower trade deficits in US and other deficit economies while lowering its own trade surplus by raising its own consumption and imports from the rest of the world. The fulcrum of this strategy happens to be the Chinese Yuan and its alleged under-valuation. Since the breakout of the Great Recession of 2008-09, Western pressure, spearheaded by the US, has been relentless and focused on one issue above all else - an accusation that China has gained undue competitive advantage from what is being described as "currency manipulation". The accusation is directed at China's policy of sticking to a largely pegged Yuan to the US dollar - a virtual fixed exchange rate in the face of persistent trade surpluses that would have appreciated the Yuan under a flexible exchange rate system. That, claim the critics of Chinese exchange rate policy, is tantamount to under-valuation of the Yuan which helps to lower costs of Chinese exports on the world market making them more competitive. The case for a Yuan revaluation has been linked to restoring balance in global savings and consumption (high savers like China being required to raise consumption and high consumers like US being required to save more). The imbalance between savings and consumption on either side of the Pacific was blamed as one of the root causes of the global economic crisis. The bottom line is that the mounting pressure for China to revalue the Yuan - which will make its exports dearer and therefore less competitive - remains and though China has not wilted under this pressure, there is a perceptible but slow movement in the direction of modest Yuan appreciation in the past months. Analysts believe there is more Yuan appreciation in the offing in the coming months. This adds the third element in the erosion of Chinese cost competitiveness, apart from rising wages and labour shortages.

It is important to note that global trade is characterized by shiftingcompetitive advantage of nations. The Heckscer-Ohlin model of trade provides the rationale for comparative advantage based on factor endowments, such as the abundant supply of low-skilled labour. But there is nothing static about this notion. The Chinese experience shows that robust export growth in labour-intensive products eventually raises labour costs enough to undermine competitiveness which then shifts to other countries. That is, the loss in competitive advantage for one country becomes a gain for one or more countries. Those ready to gain from China's falling competitive edge in labour-intensive products are countries like Bangladesh, Vietnam, Cambodia, Indonesia, Philippines, and even India.

21

Business Administration / Possible gains from regional cooperation

« on: February 25, 2015, 03:36:28 PM »

The growth path of the South Asia Region (SAR) has improved dramatically since the 1980s. As compared with a miserly 3.7 percent growth per year between 1960 and 1980, average GDP growth climbed to around 6 percent

during 1980-2000 and further accelerated to 7 percent plus during 2000-09. South Asia is now the second fastest growing regional economy in the world (Figure 1). Private investment has boomed, supported by rising national saving rates. It now attracts global attention because of rapid growth, global outsourcing, and skill intensive service exports. South Asian economies also demonstrate resilience to external shocks. For example, South Asia has weathered the global financial crisis much better than most other regions. As a result, the downturn in South Asia’s average growth rate was much less severe and the recovery has been faster than in other regions.While the conflicts have varying elements of religious, ethnic and other social dimensions, irrespective of the source, internal and external conflicts are inter-linked. Important examples are:

Afghanistan-Pakistan conflict (Pashtun ethnicity spillover in internal Pakistan conflict);
India-Pakistan conflict (religious divide spilling over in internal conflicts in both countries)
India-Sri Lanka conflict (Tamil ethnicity spillover in Sri Lanka internal conflict)
Bangladesh-India conflict (religious divide at least on the surface contributing to internal political divide)
Nepal-India conflict (Nepali Pahadi (hilly areas) ethnic conflict with Madhesi Nepalis of Bihar origin in the terai region)
On the surface conflicts appear as related to language, ethnic or religious divide. Looking at the root causes, the conflicts are economic in nature. Important examples are:

Afghanistan-Pakistan conflict is rooted in a belief that NWFP and Baluchistan areas in Pakistan are neglected and left out, combined with the inflow of Afghan population seeking better economic opportunities.
Pakistan-India conflict over Kashmir is linked substantially to who controls the rich water and other natural resource base. At the same time, Kashmiris feel left out of the development process on both sides of the border.
Sri-Lanka-India conflict originates from Sri Lanka’s Tamil population getting alienated and perceives being discriminated against in economic and social opportunities.
Bangladesh-India conflict is fanned by a combination of parts of population in the North-eastern states of India feeling by-passed by India’s development and migration from Bangladesh’s border districts into India seeking better economic opportunities.
Nepal-India conflict is rooted in deep-seated perception that Nepal is not getting a good deal from its various cooperation agreements with India and restrictions on Nepal’s access to other neighboring countries.
Bhutan-Nepal conflict is linked to the ouster of Bhutanese inhabitants of Nepali origin from Bhutan and Nepal’s refusal to take them back, causing these people to be restricted to refugee camps in Nepal.
Conflict, Lagging Regions and Poverty

At the macroeconomic level, these economic conflicts are broadly correlated with South Asia’s lagging regions problem. These lagging regions, most of which are also beset with serious conflict, are either land-locked countries (Afghanistan and Nepal) or are border districts/states/provinces of Bangladesh, India, Pakistan and Sri Lanka. This is illustrated in Map 1 that shows the following results.

The landlocked countries of both Afghanistan and Nepal are among the lowest per capita income group in the region.       Both are afflicted with serious conflict.
Out of 14 states of India that have borders with neighbors, 12 have per capita income levels that are at or below the national average (Arunachal Pradesh, Assam, Meghalaya, Mizoram, Nagaland, Tripura, Manipur, West Bengal, Bihar, Uttar Pradesh, Jammu and Kashmir, and Rajasthan). The only exceptions are Punjab and Gujarat. The 7 sisters of Eastern India, Bihar, UP, and Jammu and Kashmir are also conflict prone regions of India.
In Pakistan, per capita income is lower than average in the border provinces of North-West Frontier, Balochistan, rural Sindh and the Kashmir part of Pakistan. As in the case of India, Pakistan’s Punjab is an exception. Similarly, urban Sindh is richer than the national average because of the dominance of the port city of Karachi. These border areas are hotbeds of serious regional conflicts.
In Bangladesh, the border districts tend to have lower than average per capita income. The border districts of Bangladesh on the Eastern side of India (the 7 sisters) are a part of the conflict region with India.
 

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Business Administration / The global crisis, rise of Asia and policy challenges

« on: February 25, 2015, 03:35:42 PM »

A major economic crisis -- characterized as the “Global Economic Crisis” -- has just passed with devastating impacts on many parts of the world. Throughout the world policymakers, policy analysts, and academicians are assessing

lessons learned, policy insights that we can draw from this major global shock, and the challenges and opportunities ahead for the global economies. The global crisis has, inter alia, shaken the global economic power structure and shifted it perhaps permanently in favor of Asia.


The outlook for the emerging Asia has become much stronger, consolidating the already held belief that the current century will belong to Asia. The rising Asia, while certainly a welcoming phenomenon creating more opportunities for the Asian economies including Bangladesh, the process need to be nurtured and should be inclusive in nature so that smaller countries like Bangladesh are not left behind. While the government must do its part, the international community particularly the emerging Asian giants would have to take greater responsibility in the transition process.


Asia has certainly done much better than what was expected earlier. Experience of Asia shows that despite continued dependence on exports to the Europe Union (EU) and North American countries, and a collapse of foreign trade, Asian economies have weathered the crisis much better than what was anticipated at the outset. Asian economies are certainly in a much better shape this time than at the inception of Global Crisis. Not only that, today Asia, led by China and India, is powering the engine of global economic recovery/expansion.


Against this background, Asian economic policymakers and strategists certainly need to reflect on the Asian experience and challenges ahead. Asia has always been the largest continent both in terms of population and land mass, and now it is also firmly on the way to regain its historical position as the largest economic region in the world. This outlook is certainly more inevitable in the post global crisis situation.

This outcome did not happen on its own. It happened because major Asian economies have much stronger economic fundamentals than their industrialcountry counterparts. Asian economies are characterized by: high savings and investment levels, key elements for sustaining higher economic growth; high growth in private sector driven domestic demand which has made these countries attractive destinations for foreign direct investment (FDI) from all over the world; strong balance of payments position characterized by high level of reserves and sustainable levels of current account balances (surplus or deficits as they may be); stronger fiscal position with adequate fiscal space to respond to the global economic crisis without giving rise to medium- and long-term debt sustainability issues.

 

Bangladesh’s experience with the global economic crisis, although, like other Asian economies, has been better than expected, it was also hit by the crisis, albeit at a later stage than envisaged earlier. More than 80% of Bangladesh’s exports are destined to the EU and the USA, both of which were severely impacted by the crisis and still struggling to get out of it. Our narrow export base, comprising mostly textile products, also made Bangladesh economy vulnerable to the crisis. Although initially many of us thought that, demand for Bangladeshi textile exports will be spared from the global crisis because of the so-called “Walmart Effect”, in the event Bangladesh was not spared. Both unit price and volume of textile exports to both destinations declined significantly, causing a significant reduction in exports and a general slowdown in industrial activity during at least two quarters of fiscal year (FY) 10. Continued strong domestic demand, supported by strong inflow of workers’ remittances helped sustain domestic economic activity despite sluggish export demand.



The government of Bangladesh also adopted stimulus packages to help the export sector and support the agriculture sector. The stimulus packages—amounting about 0.6% of gross domestic product or GDP (Tk. 34 billion) in FY09 and an additional 0.2% of GDP (Tk. 10 billion)in FY10—although modest in size, was designed to boost agricultural output, support the export sector suffering from power shortages, and diversify export destinations by providing incentives for exporting to destinations other than the EU and North America. The budget presented to Parliament also had an expansionary fiscal stance, primarily through much higher spending on development projects, higher allocations for health and education, and expanded social safety net programs. The Government was able to adopt an expansionary fiscal policy and also adopt stimulus packages, primarily through self financing, due to fiscal space that Bangladesh created in recent years through prudent macroeconomic management. Overall, Bangladesh has been successful in managing the global economic crisis and posted respectable growth rates of 5.5-6.0%.

 

Asia has certainly emerged much stronger after the global crisis and may be poised to regain the relative size of the global economy that it historically enjoyed in the mid-seventeenth century. Long-term economic outlooks prepared by several researchers/organizations for the Asian economies indicate that by 2050 Asia once again will account for 57% of global GDP, more than what it used to account for in 1825. Asia has already come a long way from the historical low of 15% of global share of output in 1950 to about 35% in 2010.


While this achievement and the ongoing transformation of Asian economies is certainly a cause for celebration, sustaining the gains and making the 21st century the Asian Century will require further managing the transition. Managing the transition period will require: (i) strengthening global economic coordination to avoid potential trade and currency wars which may threaten global economic stability; and (ii) sustaining the transformation of the Asian economies through rebalancing the sources of growth in major economies. These two issues are also linked and reinforce each other.


The reason Asian policymakers should underscore the importance of global economic coordination is because of the persisting and deteriorating problem of global economic imbalance arising from the very large and persistent trade account deficit of the USA, financed by a corresponding large surplus in the Asian economies. This is a “ticking bomb” and would need to be defused only through policy coordination. The global economic crisis has also weakened the financial position of the deficit country (United States) further and its capacity to undertake discretionary fiscal cuts in view of the weak domestic economic condition.

23

Business Administration / Debate over transit fees

« on: February 25, 2015, 03:35:19 PM »

Landlocked countries have a huge geographical disadvantage in transport costs and many such countries are amongst
the poorest developing countries. To offset this natural disadvantage, a number of international conventions have been formulated that seek to ensure freedom of transit for these countries.

These include: Convention and Statute on Freedom of Transit, Barcelona, 1921; Convention on the High Seas, Geneva, 1958; United Nations Convention on the Law of the Sea, Montego Bay 1982; Convention on Transit Trade of Land-Locked States, New York, 1965; and World Trade Organisation, The General Agreement on Tariffs and Trade (GATT).

These UN conventions all provide for freedom of transit. The WTO agreement, in particular, lays down clear rules and obligations for member countries in the matter of transit access, including what are considered as proper levies and charges in relation to transit.

Despite this well-defined international convention, there is debate and confusion in Bangladesh on transit fees and the implementation of the trade and transit agreements reached by Bangladesh and India in January 2010. These agreements were laid out in the joint communiqué issued in New Delhi on January 12, when Prime Minister Sheikh Hasina visited India.

The communiqué broadened the transit trade routing options for India's land-locked northeast states to the rest of India and abroad from river routes only to include road, rail and ports of Bangladesh. It also offered similar opportunities to Bhutan and Nepal. This policy change is undoubtedly a bold step in the right direction and will have far reaching positive implications for Bangladesh as well as other northeastern countries of South Asia (India, Bhutan and Nepal). The main challenge is implementation.

I have written quite a bit on gains for Bangladesh from this move in previous articles and in this note, I will focus on the transit fee issue that seems to have become a sticky point, at least in public and political debates.

Article V of the WTO GATT lays down the following agreed principles governing transit trade.

1) There shall be freedom of transit through the territory of each contracting party via the routes most convenient for international transit, for traffic in transit to or from the territory of other contracting parties. No distinction shall be made which is based on the flag of vessels, the place of origin, departure, entry, exit or destination, or any circumstances relating to the ownership of goods, of vessels or any other means of transport.

2) Any contracting party may require that traffic in transit through its territory be entered at the proper custom house, but, except in cases of failure to comply with applicable customs laws and regulations, such traffic coming from or going to the territory of other contracting parties shall not be subject to any unnecessary delays or restrictions and shall be exempt from customs duties and from all transit duties or other charges imposed in respect of transit, except charges for transportation or those commensurate with administrative expenses entailed by transit or with the cost of services rendered.

3) All charges and regulations imposed by contracting parties on traffic in transit to or from the territories of other contracting parties shall be reasonable having regard to the conditions of traffic.

4) With respect to all charges, regulations and formalities in connection with transit, each contracting party shall accord to traffic in transit to or from the territory of any other contracting party treatment no less favorable than the treatment accorded to traffic in transit to or from any third country.

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Business Administration / The challenge of equitable tariffs

« on: February 25, 2015, 03:34:50 PM »

There is more to tariffs than meets the eye. This was clearly evident in 18th century mercantilist Britain when Adam Smith, the father of economic science, learnt this by opting to take an assignment as a customs commissioner before becoming the Rector of Glasgow University. While tariffs were an essential source of government revenue in those days, Smith recognised the protective implications of those tariffs. That scenario has not changed to this day, except that there are far too many interlocking issues now than there were in those times. Let me make an attempt here to cover some of the critical ones that impact everyday life and the economy.

A stylised fact of development is that as countries develop, their reliance on tariffs and other import-based taxes decline. The USA and other members of OECD – the developed countries – collect less than 3.0% of their tax revenue from import taxes, compared to Bangladesh’s 40%. Customs administration in those countries is engaged in surveillance and prevention of contraband items from entering the country. Revenue is least of their concerns thoughtrade facilitation is. We still have a long way to go before reaching middle income status, and longer still before tariffs are discarded as a significant source of revenue. Though declining in importance, we are willy-nilly stuck with substantial amounts of import tariffs for the foreseeable future, along with the distortions in business incentives and inequities associated with such taxes. The formidable challenge for policymakers in Bangladesh is to mobilise the maximum revenue with the minimum rates of tariff and minimal distortions in the economy. If past experience is any guide, there appears to be as much pressure to raise certain tariffs as there is to reduce some. The tax authority is left to perform a delicate balancing act – with success not always guaranteed -- because stakeholders are many.

To be sure, stakeholder interests diverge and are often in conflict with each other. Making sense of all these divergent viewpoints while making sure there is enough revenue pouring into the national exchequer is no mean task for the national tax authority – the National Board of Revenue (NBR). Even more important is to make sure that business incentives are not distorted by the structure of import taxes, leaving production and investment on a progressively higher growth trajectory.

The first stakeholder is the NBR, entrusted with the sovereign task of mobilising revenue in order to finance public expenditures. Less revenue means less resources for the government to spend on roads, bridges, health and education. Just like individual budgets, there is a limit to how much government can spend in excess of its revenue income. Foreign aid and domestic borrowing can be relied on to finance some amount of the government’s budget deficit, but not a whole lot without sending the economy on an inflationary spiral. Each year NBR has to prepare an estimate of tax revenues – from domestic activities and external trade -- to finance planned public expenditures. At a time when export taxes are all but gone, imports remain the principal source of tax revenue generation from our external trade. Tariffs and other import taxes and levies (described in economic jargon as para-tariffs) become the instruments of revenue mobilisation. The problem is that tariffs play the dual role of raising revenue on the one hand and providing shelter (protection) to domestic industries on the other. The two roles are complementary only up to a point. Beyond that higher tariffs yield lower revenues by discouraging imports of high tariff items but, because of that, they provide even higher protection. For NBR then, whose legal mandate I believe is to raise revenue (protection being the statutory subject of the Bangladesh Tariff Commission), the strategy would be to search for that optimal tariff rate that yields the highest revenue. That is the ideal scenario though reality is quite different.

Enter the next group of stakeholders – the producers. When it comes to tariffs the interests of two groups of producers diverge: those that produce import competing goods for the domestic market would like to see tariffs on imports as high as possible; those that produce for exports would like to see the opposite. At this point, popular wisdom and economic rationale are at odds with each other. It is popular – and even nationalistic – to talk of protecting domestic industries. High tariffs provide shelter from import competition and raise profitability, allowing local industries to flourish – or, so we believe. In the 1960s, this was described as “infant industry protection” and was considered the only strategy for industrialisation in developing countries. Not any more. After two decades of infant industry protection, the world was littered with geriatric infants who never seemed to grow out of their infancy. In the 1980s, this notion of industry support got discarded. Economic research produced evidence that countries that had more opentrade regimes (less protection) with export orientation experienced much faster rate of industrialisation and economic growth (e.g. S Korea, Hong Kong, Taiwan, Singapore -- Asian Tigers).

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Business Administration / Resilient despite shocks, natural and man-made

« on: February 25, 2015, 03:33:54 PM »

Current setting. After passing through a prolonged period of political uncertainty Bangladesh is now at the threshold of getting an elected political government. Now that all eyes and minds are focused on the upcoming elections, unlike last year this time, economic news seem to have mostly disappeared from Bangladesh radar. This situation is in sharp contrast to the economic shocks of external and domestic origins, which distressed the nation and dominated the media last year this time. As stated in the old proverb that "no news is good news", this absence of economic distress signals in the radar is a welcome development. This situation on the economic front, however, is in stark contrast to the ongoing economic crisis creating havoc throughout the globe. Against this unique background, this article attempts to assess the state of Bangladesh economy at this juncture by looking at the recent past and figuring out the near-term outlook. We start with the economic developments and management during 2007/08, describe the current state of the economy on the eve of a newly elected government taking over economic management, and conclude with the key challenges and opportunities for the future government in moving Bangladesh firmly toward a middle income country.


What the economy has passed through recently. The year 2008 certainly had a stormy beginning on the economic front and economic management was extremely challenging. The combined effect of two rounds of flood, cyclone Sidr, and the global energy and commodity price shocks, all happening or starting in the second half of 2007, produced an economic crisis that was uncommon even by the disaster-prone Bangladesh standard and pushed many families to poverty.

As the tensions caused by numerous shocks slowly eased off, economic activity started to regain momentum. The first signs were visible in the export sector as buyers started to place new orders in much larger volumes following the restoration of law and order after 1/11. The opportunities created by relative peace on the political front and rising cost pressures in major garment exporting countries (like China and Vietnam), focused the attention of global buying houses on to Bangladesh. The outcome was a strong surge in exports beginning in December 2007. Exports of garment products increased by 29% during the 10-month period through October 2008. This export surge also laid the foundation for the recovery in manufacturing sector expansion in 2008.

The rebound of the agriculture sector has been phenomenal in the post-Sidr period. Government's concerted efforts to ensure a bumper agricultural output to overcome food shortages, combined with farmers' response to the high product prices, contributed to a strong agriculture sector recovery. Following a bumper wheat crop, potato output reached a level that the farmers and traders were incapable of handling. Government's all out efforts to ensure supply of electricity, diesel and fertilizer and the record high rice price induced the farmers to produce a record boro output (18 million tonnes or 19 percent higher than the previous boro crop). The supply surge was entirely attributable to the introduction of hybrid boro on a large scale and compensated for the loss of aman crop due to the floods and Sidr. The high level of procurement price also enabled the government to build up the depleted stock of rice rapidly through a record volume of procurement of boro crop, laying the foundation for greater market stability and food security. Compared with the 3.0 million tonnes of domestic consumption demand for 2007/08, domestic production of food grain was to be about 29.8 million tonnes. If objectively looked at, government's handling of the food situation was remarkable despite its initial stumbling, and in many respect defied the doomsday predictions of many analysts.


In the event, most headline indicators performed remarkably well, although inflationary pressures resulting from higher commodity prices caused a lot of hardship for fixed- and low-income households. Real GDP grew by a respectable 6.2 percent in 2007/08, despite a very weak first half. Notwithstanding the surge in import payments (26% in dollar terms), the external current account was in surplus due to growth of remittance and export receipts. Bangladesh was the only country in South Asia with a current account surplus in this difficult year (Fig. 01). The growth rate of remittance inflows was the highest among the regional countries, which helped increase per capita income in dollar terms by the highest amount ($76 or14.6 percent) in any year in the history of Bangladesh, reaching $599 as of June 2008. A record number of workers left Bangladesh for work abroad, primarily from the low-income and rural families, helping alleviate the unemployment problem and also strengthening the capacity of these families to cope with adverse shocks.


The cumulative impact of the shocks in 2007 was largely manifested in higher prices. The price discovery function of the market sent a shockwave with rice prices almost doubling within a few weeks in the aftermath of Sidr and the imposition of rice export ban by India. Other basic commodities like edible oil, wheat and pulses, which are mostly imported from abroad, also jumped globally sending a tsunami-type shock wave for the Bangladeshi consumers. Already low and rapidly depleting stock levels of food grains, coupled with unscrupulous behavior of certain segments of the business community to maximize personal gains from the higher prices, made the situation alarming. With food prices accounting for a very large segment of the household budget, inflation as measured by the consumer price index (CPI) reached almost 12 percent by July 2008. The market signal was ruthless, but helped identify the vulnerabilities in food security arising from crop losses, low stock level, limited access to imports and the surging global commodity prices. Although the government was caught unprepared initially, these developments and the associated political repercussions forced it to mobilize supplies from abroad and ensure effective distribution of inputs to farmers realizing a bumper agricultural output. This surge in inflation was unacceptably high, but still lower than most regional countries (Fig: 02 & 03).


Where does the economy stand at the end of 2008? All signs on the domestic front are very favorable in the first quarter of fiscal year 2009. Real economic activity appears to have gained further momentum, while inflation is firmly on a downward trend. The phenomenal growth in exports (42 percent) and import of industrial raw materials as reflected through LCs settled, point to a further acceleration of the manufacturing sector expansion. Absence of flood and cyclone, coupled with high rice prices in the domestic markets, contributed to a bumper aman crop this year. Domestic demand has remained strong with government budgetary current outlays increasing at a record pace and as manifested through strong private sector credit expansion (26% during the first quarter of 2008/09 over the corresponding period). Under these circumstances, currently the economy appears to have been expanding at no less than 7.0 percent in real terms in the first half fiscal 2009.


While government expenditures are likely to grow fast in line with the budgetary plan, the overall fiscal deficit should be significantly lower than the preceding year because of the large savings expected to be realized on account of subsidies on petroleum products. Thus domestic fiscal borrowing should be significantly lower, releasing more resources for the private sector.

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Business Administration / Searching for Green Shoots of Recovery

« on: February 25, 2015, 03:33:31 PM »

The world economy is on a brink. Since December last, the world's leading economies have been pouring billions of dollars in a desperate bid to forestall anything like the Depression of 1930s. Now, their leaders head off to London for possibly the most crucial economic summit of our times, searching for the "green shoots" of recovery, at home, and around the globe.


In the run up to the April 02 summit of world leaders in London, the International Monetary Fund (IMF), in its latest update on its much watched World Economic Outlook, has come out with more bad news -- news which seems to get worse at every update. The latest prediction is that the world economy will shrink for the first time in the postwar era.


In 2009, world GDP is slated to decline by 0.5 to 1.0 per cent. Industrialised countries are expected to register negative growth of 3.0 to 3.5 per cent. Developing countries, which averaged 5.0 per cent growth for the past decade, will only be growing by 1.5 to 2.5 per cent, according to IMF. Not until 2010, says the IMF, is the world economy expected to revert to positive growth, as the stimulus package unleashed worldwide will need time to take hold.


As if this was not bad enough, Pascal Lamy, vociferous Director General of the World Trade Organisation (WTO), announced WTO's latest projections of world trade for 2009. World trade volume is slated to shrink 9% in 2009, also for the first time since the second World War. Exports from the developed countries are expected to fall by 10% while those from developing countries, 2.0-3.0%. As the recession deepens, and production sags, trade volumes shrink. In tandem with the credit squeeze in financial markets and declining cross-border financial flows, depleted trade finance has been making matters worse.

Recall that throughout the post-war period, world trade growth outpaced output growth, creating jobs and income around the world. Trade had become an engine of global prosperity. So Pascal Lamy chose to sound a note of warning as the WTO observed rising protectionism around the globe lately - in rich countries and emerging markets alike - which he rightly believes will "choke off" trade, a potent engine for the economic recovery that is the target of global leaders meeting in London. Drawing lessons from the 1930s beggar-thy-neighbor tariff increases that literally destroyed world trade and made the Depression worse, WTO is carefully monitoring trade policy developments, urging governments not to make the situation worse by reverting to protectionism.


All said, world leaders will have to confront a number of burning issues, some inherently contentious. A pre-summit meeting of Finance ministers last week sought to thrash out existing differences of which there are quite a few. Too much is at stake for world leaders to let this opportunity go without a well coordinated approach to turning the global economy around in as short a time as possible. Below is a glimpse of some of the key concerns on the table.

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Business Administration / global recovery: Will the magic last?

« on: February 25, 2015, 03:33:09 PM »

THE fact was that none of the participants wanted the summit to conclude without result. At the end, the G20 summit turned out to be a diplomatic triumph of sorts – for the new US President as he stepped on to the global stage for the first time; and for the new community of global leaders assembling to give credence to the shift in the global pecking order. UK’s Gordon Brown described it as the emergence of “a new world order” while President Obama termed it a “turning point in our pursuit of global economic recovery”.

By sidelining some of the contentious issues, like the formation of a suprafinancial regulatory authority and a global reserve currency as an alternative to the dollar, the summit reached a consensus on most of the critical policy concerns brought to the table: coordinated global stimulus package, more rigorous oversight and monitoring of financial institutions and markets, adequate resources for Bretton Woods institutions for countercyclical finance and for fighting poverty, and a pledge to stem the tide of rising protectionism worldwide.

Consensus apart, a quick review of the major decisions looks like an endorsement of economic stimulus packages already in place, with additional monies for IMF and World Bank to fight consequential financial instability and poverty; an extra $250 billion for trade finance to boost trade with a renewed call to eschew protectionism; and, finally, an agreement to clamp down on tax havens plus stricter national level regulation and monitoring offinancial institutions and markets.

The developed and emerging market economies together have formulated stimulus packages totaling $1.8 trillion or some 3.0% of global GDP of $62 trillion (Table 1). Governments have built up huge debts to finance these packages. The US is running a 8.0-10.0% budget deficit in the current fiscal year on top of its $10 trillion of debt. UK is in much the same situation with an 8.0% budget deficit and public debt of 40% of GDP. At this time, nobody is talking of the long-term implications of the mounting debt burdens and fiscal stimulus on future inflation or interest rates.
 

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Business Administration / The new global challenge: Stemming the tide of rising protectionism

« on: February 25, 2015, 03:32:41 PM »

An unfortunate fallout of the global economic crisis is a creeping rise in protectionism. Many of the economic stimulus packages contain provisions that encourage spending on local products in preference to imports. When times are bad, economic nationalism – protectionism in another garb -- has a tendency to raise its head. It happened in the 1930s. It might happen again, unless something is done to prevent such tendencies.

Besides giving birth to Keynesian economics -- which propagates expansion of public spending to compensate for deficient aggregate demand in economic slowdown -- the Depression of 1930s taught us more than a few lessons in economic policy. One was that raising trade barriers in times of global recession can only make matters worse. The Smoot-Hawley Tariff Act passed by US Congress in 1930 proved to be the last nail in the coffin of the pre-war global economy. It spurred beggar-thy-neighbor tariff increases – trade war – across countries, shrinking trade, and prolonging the Depression. The General Agreement for Tariffs and Trade (GATT) signed in 1947, a precursor to World Trade Organisation (WTO), was meant to prevent a repeat of such self-defeating policies. It worked, for the better part of sixty years following the World War II. With world output shrinking for the first time since 1982, WTO projects trade volume to decline by 9.0% in 2009. While the transmission mechanism for this fallout has been from diminished demand to shrinking trade, basic principles of international economics indicate that this is just the wrong time to raise trade barriers in order to shore up domestic industries in distress. That will only make things worse, prolong the current recession, and keep the global recovery at bay.

Yet, that seems to be the disturbing trend as there is growing evidence of countries, both developed and developing, adopting trade measures that smack of protectionism either directly, or in some ‘murky’ form. Despite the statements by Group of Twenty (G20) leaders at the Washington summit last November that they will hold off any protectionist measures at least until end of 2010, that pledge was upheld more in its breach, as the World Bank collated evidence that 17 of the G20 countries had initiated some form of protectionist measures (Table 2). As if that is any consolation, there is some difference in the approach adopted by developed and developing countries. Developed countries have opted for subsidies and support packages (e.g. to carmakers and farmers), while developing and emerging market economies resorted to protection of all mixes and forms: subsidies, tariffs, quantitative restrictions (QRs), special restrictions like non-automatic licensing requirements, more stringent application of WTO-compliant standards or sanitary and phytosanitary (SPS) requirements, etc.

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Business Administration / FTAs do little to Spur South Asia Trade

« on: February 25, 2015, 03:32:02 PM »

Trade, as they say, is the engine of growth. So it must be for South Asia. Yet, despite all the good intentions expressed in the numerous regional summits, intra-regionaltrade is showing little sign of an upturn.


While global trade ran ahead of income growth for the past five decades,trade between countries of this region has been stagnating. Few will doubt that there is much greater potential for mutually beneficial trade – in goods and services -- amongst South Asian neighbours. That indication is clear from the well known huge volume of illegal trade that goes on across our borders. At the time of partition in 1947, roughly one-fifth of all trade in South Asia happened within the countries in the region. That is all in the past now.


Economists regard South Asia as the least integrated among regions of the world – worse even than sub-Saharan Africa. This judgment is made on the criteria of trade and investment. And it is not getting any better, despite the several rounds of regional cooperation summits convened in the past two decades under the auspices of SAARC. SAFTA (South Asian Free TradeAgreement), the regional initiative for trade integration, is in the doldrums, as member countries frantically pursue and sign bilateral trading arrangements with willing parties. India and Pakistan have gone for Free Trade Agreements (FTAs) with Sri Lanka; India and Bangladesh, and Pakistan and Nepal are exploring possibilities of FTA. India, of course, is close to reaching several more FTAs outside the region – with Singapore, ASEAN, EU and South Korea. What is it that stands in the way of regional economic integration in South Asia?

30

Business Administration / There is no room for export pessimism

« on: February 25, 2015, 03:31:39 PM »

For the first time in many decades, exports around the world got clobbered by the decline in consumer demand due to the worst global recession in decades. The weakness in exports is expected to last through 2010, according to most analysts. The World Bank (WB) forecasts a decline in global exports of 9.7% in 2009; International Monetary Fund (IMF) predicts a contraction of 15% for advanced countries and 6.5% for emerging market economies this year. Both institutions project a slow recovery in 2010 - the WB being more optimistic with a forecast of 3.8% growth, compared to IMF's projection of anemic recovery at 1.4%. However, there is greater consensus on a decent turnaround in export performance come 2011.

Yes, these are tough times for economies dependent on trade in general, and exports in particular. China, for decades the export powerhouse of the world, appears to have been the hardest hit by the global recession. With 22% decline in its exports during January-June 2009, the economy could lose as much as one-half billion dollar of potential exports in 2009. Make no mistake, China is in good company. Countries we know as strong export performers of the world saw their exports plummet by over 20% during the first six months of the year. This includes India (-29%), Thailand (-22%), Malaysia (-23%), Vietnam (-24%). Sobering as these statistics might be, if you think it is time to write the obituary on export-oriented development or what is popularly described as export-led growth, think again.

History is replete with evidence to show that export success leads to high growth as well as poverty reduction. East Asian Tigers (S. Korea, Thailand, Indonesia, Hong Kong) soundly beat poverty and achieved decades of 8.0 per cent plus economic growth by riding on a wave of export success during the 1970s and 1980s. That experience was a triumph of both economic theory and policy. It demonstrated the superiority of export-oriented development over inward-looking growth strategy represented by import substituting industrialisation (ISI). The latter approach which was popularised by the Prebish-Singer hypothesis of the 1960s preached "export pessimism" for poor countries which, according to this hypothesis, were destined to export only primary commodities in exchange for relatively higher-priced industrial goods of developed countries.

Patterns of trade and development in the subsequent decades have proved that hypothesis wrong as not only did developing countries become exporters of manufactures, success stories of the import substituting approach to growth were few and far between. This approach, which required the creation of high protective walls and trade barriers, bred inefficiency and resulted in enterprises becoming uncompetitive in the world market. The best example of the ISI approach, of course, is India. After clinging to this idea for fifty years, India realised that in a globalized world, though its firms were producing almost everything under the sun, few of its products were of high quality. For those fifty years, India exported little, and grew at an anemic rate which their leading economists dubbed as the "Hindu rate of growth". All that has changed now, as India came out of the shackles of high protectionism in the late 1990s, to embrace greater trade openness and increased orientation towards export markets. India has been experiencing double digit export growth in this decade with GDP growth reaching giddy heights of 8.0-9.0%, until it was hit by the current global economic crisis.

China's export dependence has become legendary ($1.4 trillion exports in 2008 and 37% of GDP). Its trade surplus ran into almost $500 billion in 2008. Although the global crisis has been a major setback for China, I hardly think it is left with any option other than resuming exports once the world economy is on the mend. Where China and India - two economies with sizable domestic markets - have chosen to look outwards for their own prosperity, can Bangladesh do otherwise?

Since the early 1990s, Bangladesh has opted for greater trade openness. Its trade-GDP ratio has risen from under 20% in 1990 to 43% today. Exports were only $1.3 billion or 5.0% of GDP in 1990; now they are $15.5 billion or 17.7% of GDP. In the past year, the global slowdown of trade as well as exports has raised doubts in many minds, elsewhere and in Bangladesh, as to whether export dependence is a good idea, and whether it would be prudent to reduce such external dependence. Voices are being heard in seminar circles to the effect that it is time to shift focus from exports to the domestic market.

Before we begin to lose sight of the wood for the trees, let me put forth at least two cogent arguments why it is really not a matter of choice between the domestic and export markets. First, the size of any domestic market - even that of India or China, and certainly that of Bangladesh - is miniscule compared to the world market for goods and services. Imagine, what would happen if RMG industry were to focus only on the domestic market for its growth. It could not have sold $12 billion worth of garments and employed 3.0 million workers, not to mention the 10 million people who depend on their livelihood on this one sector and its compliments, namely, packaging, courier services, shipping and banking services, and of course cosmetics. As yet, we have only captured a small part of the global RMG market of $410 billion.

Second, while the vast world market is out there, the key to getting access into that market is to be competitive, in terms of both cost and quality. Being geared to the export market creates the drive to achieve competitiveness. Competition is fierce and there is no protection for intending suppliers. The idea of looking inward to the domestic market might be appealing in times of a global crisis, but the limits of the domestic market in creating jobs and income ought to be kept in view. Every year, two million people are added to our workforce. Since 2000, we have been sending nearly 200-300 thousand migrant workers, on average, every year to the Middle East and other countries. That still leaves large numbers of job seekers at home who can't find meaningful employment. Competitive export production could be the answer to solving our unemployment and under-employment problem.

While there is nothing wrong in suggesting activation of the rural non-farm sector and small & medium enterprises (SMEs), it is important to keep in mind that if we adopt a strategy of shielding these activities from external competition, we will have created non-competitive enterprises of the future, which are bound to fade away. We might have to end up protecting or subsidising them in future just to keep them alive. Instead, the strategy should be to offer only time-bound protection to enterprises, whether they are SMEs in urban or rural non-farm sector. Thailand, China and Taiwan have internationally competitive SMEs (rural or urban) and we need to draw from their experience on how to produce export quality products I small enterprises.

So, it is really not about choosing between the domestic and export markets. The central point is to ensure that enterprises are competitive on a global scale, even if they cater to the domestic market. Otherwise, as global competition gets even more fierce, we will be left with a host of enterprises that will need nursing in perpetuity.