The industrial sector has historically been the sector that has driven growth as countries have moved from low to middle-income status. This is because industry can provide high-wage employment for large numbers of workers and can raise social productivity by producing high-value goods on a mass scale.
Poor countries can earn valuable foreign exchange by exporting manufactured products and the foreign exchange can be used to invest in newer machines and technologies so that a rapid move up the technology ladder becomes possible.
The average productivity of industry is higher than in agriculture or most service-sector activities. So as people move out o agriculture into industry, gross domestic production (GDP) increases. Bangladesh as a country with a poor land-person rationing unlikely to prosper thought agricultural growth alone.
Agriculture is unlikely to deliver rapid growth in Bangladesh because of the difficulty of setting up large-scale farms that can compete with countries that specialize in agriculture such as Australia or Argentina.
Importance of Industrialization to Bangladesh’s Development
Nor does Bangladesh have natural resources that can be exploited, with the exception of natural gas. Thus, industrialization and specialization in manufacturing in the obvious way in which Bangladesh can raise its per capita income and social productivity.
The industrial sector consists of manufacturing, together with utilities (gas, electricity, and water) and construction.
Figure 7.1 shows that Bangladesh has indeed been quite successful in recent years in achieving rapid manufacturing growth compared to many of its competitors. The challenge for Bangladesh is to sustain these high growth rates and to develop new manufacturing sectors that can follow in the footsteps of high growth manufacturing sectors like the garments industry.
The industrial sector accounted for 26.3% of GDP in 2003, with manufacturing (a subset of the industrial sector) accounting for 15.8% of GDP. The industrial sector as a whole employed about 10% of the total workforce of Bangladesh.
Obstacles to overcome
A number of different types of obstacles need to be overcome in industrial performance has to improve further.
The first type of obstacle relates to the general environment in which industrial investment is taking place. These obstacles include the legal framework, law enforcement, and the quality of infrastructure.
It is difficult to encourage investors in an environment where contracts are easily violated and courts cannot enforce contracts easily, where strikes and herbals are frequent occurrences, and where the physical infrastructure in terms of communication networks, roads, ports, and even electricity supply is not satisfactory.
Thus, an important precondition for industrial investment to be significantly increased is for these shortcomings in the investment environment to be address. This requires action by the state, and even if not all of these conditions can be immediately addressed, progress on a number of fronts may be sufficient to have a significant impact on industrial investment.
The second type of obstacle in more difficult to address but is no less important. This obstacle in the absence of support from the state targeted towards specific entrepreneurs and industries to accelerate their development.
Developing countries like Bangladesh typically have entrepreneurs who are unable to compete in international markets because they do not have the experience and knowledge of new technologies, market opportunities, and legal systems.
Their ability to start competing in these new markets can be greatly accelerated if some assistance could be provided by the state. However, this assistance must be very carefully determined and not given without conditions or monitoring, otherwise such assistance can easily lead to waste and inefficiency.
The assistance that can help new entrepreneurs in developing countries can take many different forms, ranging from caring out improvements to local infrastructure to improve the viability of new enterprises, assistance with the training of workers and manages, assistance with developing marketing in foreign countries, assistance with technology licensing establishing partnerships with foreign companies, and so on.
However, none of this assistance should be unconditional. The state has to have institutions that can monitor the performance of new industries and withdraw support if progress is not being made.
The mistake that was made in many developing countries with strategies that aimed to develop infant industries in the past was that when support was given, the state failed to monitor performance, and even when it was known that performance was poor, the state lacked the political will to withdraw support.
This resulted in permanent inefficiency and poor industrial performance, a feature that also affected Bangladesh’s experiments with promoting infant industries in the past.
A third type of obstael relates to the failure of the financial system to provide adequate finance for the industrial sector. The financial sector in many developing countries like Bangladesh suffers from historical bad debts because loans to industries that failed could not be recovered.
This is related to the point above, namely that government support for industry failed in the past because support was not withdrawn from poorly performing industries or entrepreneurs for political reasons. Similarly, banks were under government pressure to continue to fund poorly performing industries for political reasons.
This meant that banks soon built up very large “non-performing” loans, or loans that were unlikely ever to be repaid. Over time, banks started to cut back lending to the industrial sector.
A very serious problem in counties like Bangladesh in that it is now very difficult of ran enterprise in the industrial sector to borrow money for long-term investments from the banking system. This can clearly slow down industrial sector growth.
A faster rate of growth in the industrial sector will require a resolution of the bad debt problem of the banking sector, together with stronger support from the state in the future to enforce the withdrawal of the banking sector, together with stronger support from the state n the future to enforce the withdrawal of loans from badly performing industries.
Without the latter, banks will remain unwilling to lend money for the long-term development of industry in Bangladesh.
The role of the state, private sector, and multinational corporations(MNCs) and the impact of polices
1960s and 1970s: the state
In the 1960s and 1970s, it was widely believed by international economists that the state had to play a direct role in industrial development. Development economists and international agencies encouraged the state to promote public sector enterprises in the industrial sector and to support the industrial sector and to support the private sector with subsidies and cheap credit from the nationalized banking system.
This system of state-led growth did produce very rapid growth for a time in most developing countries, but this growth ran out of steam in most developing countries. It turned out that the state was not very good in imposing discipline on public sector enterprises or on private sector capitalists receiving state assistance.
In most cases, these enterprises received state assistance but remained inefficient, and did not succeed in raising their productivity.
Raising productivity and efficiency takes a lot of effort, and manages and owners of enterprises would only put in this effort if they believed that failure would result in the withdrawals of state support and the bankruptcy of the enterprise, or at the very least result in a change of management.
However, if they believed that the state could be forced to keep on supporting the enterprise regardless of performance, there would be no incentive to improve performance. Unfortunately, in many developing countries, including Bangladesh, entrepreneurs and public sector mangers rightly believed that the state was too weak to upset vested political interests and withdraw subsidies or support from failing enterprises.
They therefore failed to put in the effort to improve their efficiency and productivity, and in the end, the strategy of state-led development had to be abandoned.
1980s onwards: liberalization and privatization
From the 1980s onwards, the international consensus shifted towards liberalization and privatization, and a reduction in the role of the state in leading industrial development.
In Bangladesh too, there were significant privatizations from the early 1980s as industries in the public sector were sold or handed back to their previous owners.
There were also reductions in state subsidies to all sectors, including industry, as part of a general move towards liberalization and the opening up of markets by reducing the protection offered to domestic industry. In the past, domestic industry had been protected using tariffs, quotas and subsidies.
Tariffs assist domestic industry by putting taxes on imports that make them more expensive, and thereby allow domestic producers to sell more of their products. Quotas are absolute limits on the quantity of particular imported products that can be imported.
Quotas are absolute limits on the quantity of particular imported products that can be imported, and this too obviously helps domestic producers in particular sectors. Subsidies of the type that we discussed earlier the assist new enterprises and sectors also help domestic producers to compete in the international market.
Liberalization led to a reduction in all these forms of assistance to domestic producers (even though liberalization did not remove protection entirely) and resulted in many of the companies that had been set up under the earlier system of state-led development facing growing difficulties.
The theory was that the removal of this assistance would lead to firms making greater efforts to raise their efficiency and productivity. In fact, this did not happen, and many of the privatized industries, for instance in the jute and cotton textile industries, simply closed down.
This is because the productivity and efficiency of many of the privatized industries was too low to be rapidly raised and there was no strategy about how this productivity could actually be raised. A challenge for the liberalized economy is to ensure that industries will actually survive in international competition.
A further challenge for the Bangladeshi garment industry is the entry of China as a major player into the garment industry because of World Trade Organization (WTO) rules that will force rich countries to remove quotas on Chinese exports of garments to their countries from 2005.
Unless the Bangladesh garment industry can keep improving quality and productivity to provide cheaper and high quality products, it will start to lose markets to the Chinese.
Foreign and multinational investment
To raise productivity and achieve better quality requires investment, and one possibility is that this investment will come from foreign countries in the form of foreign direction investment (FDI) or investment by multinational corporations (MNCs).
The liberalization and privatization that reduced the scope of the state to promote industrialization increased the potential importance of foreign investment and of multinational corporations (MNCs) because these have now become the most likely way in which advanced technologies and new investment will come into developing countries.
Bangladesh has had limited success so far in attracting foreign investment, for the reasons discussed earlier. In 2002, Bangladesh attracted a total of US$ 47 million in foreign direct discussed earlier. In 2002, Bangladesh attracted US$ 823 million in the same year.
In the same year India, whose population is around 10 times that of Bangladesh, attracted foreign direct investment that was around 70 times greater than Bangladesh at US$ 3,030 million. The only area in which Bangladesh has been reasonably successful in attracting foreign investment has been in the gas exploration sector where Bangladesh is believed to have large reserves of gas.
Thus, the policy environment that emerged in the 1980s did not address the problem of low efficiency and low productivity in the large-scale industries that had been set up with state assistance. Nevertheless, largely owing to the newer industries like garments that emerged in the liberalized economy, industrial output overall increased by a substantial 86% in the decade 1990- 2000, ensuring Bangladesh’s emergence as one of the rapidly growing and globalizing economies of the developing world.
Its industrial growth rate was comparable to the industrial growth rates in the very successful Indian economy, even though much of ht industrial growth in Bangladesh was coming from low technology sectors like reader-made garments, shrimp procession and so on.
The challenge for Bangladesh is how to move up the technology ladder through backward and forward linkage industries. This will require a combination of policies involving improving the investment environment, attracting foreign investments, and providing support to new entrepreneurs while importing the capacity of the state to withdraw support from poorly performing industries and entrepreneurs.
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