At independence, Bangladesh inherited a highly-protected, import-substituting trade regime. The economy neither grew rapidly nor developed its industry. Starting in the 1990s, the government started dismantling the protectionist trade regime. Exports surged, growth accelerated and poverty fell rapidly. Here’s the paradox: Despite fairly compelling evidence that trade liberalization helped to reduce poverty in Bangladesh, no one in the country seems to be advocating further trade reform. Every argument against trade liberalization can be found, but none that appeals to the fact that reducing protection has helped the poor. In a recent paper for the Golden Jubilee celebration of the Bangladesh Institute of Development Studies, Zaidi Sattar and I try to explain this paradox. After reviewing various possibilities (highly vocal losers from trade liberalization, left-leaning economists, strong labor unions), we suggest that one reason could be that all the trade reform episodes in Bangladesh were supported by external partners, especially the World Bank. Supporting trade liberalization, therefore, is associated with supporting external agents--even if the policy itself may help reduce poverty.
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Mariam Claeson
Fri, 12/07/2007 - 19:55 Well, where is the contribution of microfinance in reducing poverty? Ironically, I find it parodoxial that you seem to ignore the impact of microfinance on poverty. I would be highly skeptical to buy the conclusion that trade liberalisation helped reduce poverty, without looking at the impact of microfinance and similar institutions on poverty level. I don't think the impact of trade liberalisation on poverty is not as simple as is stated!
Fri, 12/07/2007 - 11:34 Bangladesh has proved that in order to succeed in exports, duty free inputs are needed. This was achieved not by lowering tariffs but by an innovative method of back to letter of credit and bonded warehouse facilities. The initiative was taken by a catalyst Mr. Nurul Qadir and the Korean investors. Moreover in 1978 incentives for investors were published in the newspapers and guide to investment. These were later published in the New Industrial Policy 1982. All these resulted in the growth of the ready-made garment industry (RMG). Initially the RMG faced three critical constraints: access to finance, lack of mid-level managers and access to inputs. The training of managers in Korea, and the back-to-back letter of credit and bonded warehouse facilities helped to overcome these constraints. The MFA did not provide a protected market. The quota was a restriction on export. Hence, the Koreans were looking for countries without quota. Bangladesh started as a non-quota country. Then as exports from Bangladesh increased quotas were imposed in those categories. Bangladesh started with basic shirts and has moved to not only designers shirts but also trousers, sweaters and T-shirts. The success was not only due to duty free inputs thru bonded warehouse facilities but also due to duty free market access to EU. The expansion of T-shirt and sweaters was due to the derogation of the rules of origin from three stages to two stages. But the woven did not gain from it as dyeing and printing is not considered as a stage. The change in rules of origin based on value addition will help expand export if the value addition criteria is 25% as provided by Canada and world cumulation is allowed. USA is yet to provide duty free market access. USA should provide duty free market access to the LDCs by 2008 as envisaged in the Hong Kong declaration of WTO. General trade liberalization in Bangladesh started in the 1990’s, which were driven by external actors, especially the World Bank and this had no effect on the RMG. The private sector were the innovators and drivers of RMG. The RMG has grown using the concept of export-processing zones (EPZ). Each factory has a bonded warehouse where inputs are duty-free. It is time now to develop Special Economic Zones SEZ) where all inputs should be duty-free. The EPZ in Bangladesh is a special economic zone. But it restricts the selling of the zones product to the domestic tariff areas to 10%. In the EPZ both local and foreigners can invest. Hence, by relaxing the restriction of 10%, any industry can reap the benefit of duty free inputs if located in the zone. All products from the zone are exported either to the domestic tariff area or outside the country. When exported to the domestic tariff area, they have to pay import duty on the product. This type of trade reform to diversify should have been suggested in the paper present by the World Bank as the World Bank is a proponent of Special Economic Zones. Moreover there is a need for policy coherence. Bangladesh being an LDC does not need to reduce tariff under the WTO. Moreover, subsidies can also be provided under WTO. Hence, there is no need to reduce tariff further. It is surprising to see that the paper suggest that Bangladesh should not lower its tariffs until Europeans and Americans reduce their tariffs and agriculture subsidy. This prescription can be given to India but not to Bangladesh because Bangladesh is an LDC who does not need to reduce tariff and is a net-food importing country. So it will not benefit from EU and USA reducing agriculture subsidy. Rather as price will rise when these subsidies are withdrawn, the net-food importing countries should support slower reduction in agricultural subsidy.