Published on The Daily Star
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An emerging window of opportunity
One of the defining features of the world around us in the current juncture of history is the fast pace of change that we are witnessing around us. Of particular significance is the dynamics of changes taking place in Asia. Not surprisingly, the twenty first century is often projected as an Asian Century. This view is informed mainly by the growing prominence and economic might of China and India as the two key emerging powerhouses of the global economy, and their role as drivers of future global growth in the new century. Role of China and India in the ongoing global recovery from the financial and economic crises of the recent past, and their increasing importance as members of G-20, have reinforced the changes taking place in global economic balance as well as economic governance. India and China had a combined GDP of USD 5.5 trillion in nominal terms in 2009 (USD 11.4 trillion in PPP terms). The now-famous BRICS report’s forecast is that by 2030 China’s GDP will exceed that of the USA, and India will be the third largest economy in the world. It is interesting to recall here that in a recent speech the Singapore Prime Minister observed that it is Singapore’s ambition to fly on two wings in the twenty first century China and India. Many of the developing countries are pursuing a proactive policy of closer cooperation with neighbouring countries to harness the synergies that such partnership could generate. Indeed regional and sub-regional integration are increasingly being seen as a key strategy for strengthened global integration.
Where does Bangladesh, a country situated literally in the shadow of two of the emerging giants of the twenty first century, figure in this discourse? How should Bangladesh strategise to take advantage of the opportunities that the rise of these two economies could open for us? There are strong reasons to believe that Bangladesh, with her geographical proximity to both India and China, is uniquely positioned to realise the opportunities that could potentially accrue from closer cooperation with these two countries. Bangladesh’s membership in regional economic groupings such as the SAFTA and BIMSTEC-FTA where India is a partner, and the APTA where both India and China are partners, provides her with opportunities for deeper trade and commercial ties with India and China by taking advantage of these institutional mechanisms. Bilateral arrangements and sub-regional initiatives could service the needs of a strategy of comprehensive economic partnership with these two countries. If Bangladesh is to transform into a middle-income country and emerge as one of the next eleven emerging economies of the world, as was projected in the aforesaid BRICS report, taking advantage of the growing markets of India and China through closer trade, investment and greater transport connectivity could be key to attaining the goal. If this be the case, the importance of designing a well thought-out and comprehensive vision, and the appropriate multidimensional strategies to realise such a vision, can not be overemphasised.
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State of cooperation and strategies to advance regional integration
Regrettably, till now it had been India and China that were able to take advantage of the opportunities that was on offer from an increasingly open Bangladesh economy. Combined imports from these two countries have increased from USD 1.6 billion in 1995 to USD 6.32 billion in 2009 a four-fold increase in the span of a decade and a half, accounting for about 30 per cent of Bangladesh’s global imports. It needs to be kept in mind that whilst China, and also India have emerged as major exporters, their imports are also significant, and rising. Combined global imports of China and India rose from USD 168.8 billion to USD 1300 billion between 1995 and 2009. Though between FY1995 and FY2010 Bangladesh was able to increase her export of goods from USD 3.47 billion to USD 16.19 billion, her export to India and China over the corresponding period rose from USD 36.0 million to only USD 276.6 million in case of India, and from USD 18.3 million to USD 97.1 million in case of China. Consequently, over the recent past Bangladesh has witnessed a widening of trade deficit with both India and China. This is not to deny that in this globalised world it is the global deficit that should be of more concern than the bilateral deficit, and as a matter of fact, a large part of the imports coming from both China and India goes as inputs to our export-oriented industry. However, that Bangladesh has such a large and growing trade deficit with India and China should be seen as a matter of concern for us. This view is reinforced when it is kept in mind that inspite of these two countries being natural markets for Bangladesh, her opportunities have remained largely untapped particularly at a time when both China and India are developing at a fast pace and diversifying their imports and moving towards production of higher-end items. Of course, accessing the potential opportunities of market access will largely hinge on whether Bangladesh is able to put in place the required supply-side capacities, build comprehensive partnerships, go for the required domestic investment and is able to attract FDI targeting these markets.
It is encouraging to note that in recent times, there have been renewed efforts to deepen Bangladesh’s economic partnership with both India and China. The visit by Hon’ble Bangladesh’s Prime Minister to India in January and China in April last year, and the two communiqués that were issued following these visits, bear testimony to this. The initiatives that have been mentioned in these documents should now be followed up with concrete steps; necessary home work should be carried out in a speedy manner to give concrete shape to the envisaged deepening of economic cooperation. It needs to be kept in mind in this context that the window of opportunity at our disposal is rather narrow. Both China and India are working on several fronts, and considering various options, to maximise their potential benefits. India has already signed an FTA with the ASEAN grouping; a bilateral FTA with the EU is in the offing.
China is trying to balance its regional and global ambitions through closer economic ties with the ASEAN and through increasing investment in many developing countries including those in Africa. It is also of interest to note that both these countries are developing strategic trade partnership on bilateral basis and making every effort to benefit from the synergies originating from their dynamism. The target is to increase Indo-China bilateral trade to USD 100.0 billion by 2015; to compare, this was a mere 15.4 billion in 2005 which had increased quite significantly to about USD 60.0 billion by 2010.
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Deepening of trade relations with India will require several steps. As is known, long sensitive lists have been a major constraining factor limiting the prospects of both intra-SAARC as well as Bangladesh-India bilateral trade. To recall, Bangladesh’s negative list contained 1249 items, whilst India’s included 744. However, an important departure of the SAFTA relates to the additional measures to complement the tariff reduction plan. These included: (a) Harmonisation of standards, reciprocal recognition of tests and accreditation; (b) Harmonisation of customs clearance and customs cooperation; (c) Transit facilities, particularly for land-locked contracting states; (d) Removal of barriers to intra-SAARC investments; (e) Development of communication system and transport infrastructure and (f) Rules of fair competition. The Agreement also recognised that cooperation in the area of investment is an important key to enhancement of trade cooperation in the region, and gave high priority to trade facilitation. Dispute Settlement Mechanism, a key provision in any FTA, has also been spelt out in some detail. However, regrettably, most of these provisions have remained on paper, with adverse implications. Because of this experience, most of the South Asian countries have either gone for Bilateral FTAs (Indo-Sri Lanka BFTA being the most prominent one which in fact predates SAFTA) or are contemplating one. Indeed, India has mooted the idea of a BFTA with Bangladesh a few years back (as had Pakistan and Sri Lanka). These proposals are now being studied by Bangladesh and strategies are being designed under the initiative of the Ministry of Commerce.
It is of interest to note that exports to India from Bangladesh has been on the rise in the recent past. Between FY2004 and FY2010 export has gone up from USD 90.0 million to USD 300.0 million. There are indications that in 2010 Bangladesh was able to fulfil the tariff rate quota for eight million pieces of RMG exports to India (at zero duty). Indeed, Bangladesh may now decide to request India for further enhancement of the quota. In a welcome move, India has earlier accelerated the pace of reduction of tariffs on items outside of the negative list and tariffs have now come down to between 0-5 per cent. India’s sensitive list has been reduced to 480 items; Bangladesh has requested for taking out another 62 items from this list. As may be recalled, till FY2003-04 more than 90 per cent of Bangladesh’s exports to India comprised of only a few traditional items such as chemical fertiliser, raw jute and jute manufactures, frozen fish etc. In recent years, however, there has been important compositional change in exports to India, with the share of traditional commodities in total export coming down significantly whilst that of non-traditional items posting impressive rise (31.2 per cent in FY2008-09 compared to 9.5 per cent in FY2004), whilst share of top 5 traditional products in Bangladesh’s export to India has declined sharply, from 75.9 per cent to 46.2 per cent. There is thus an opportunity to target these items for higher exports to the Indian market. However, Bangladesh’s ability to realise the potential expansion will depend on a number of critical determinants: (a) supply side capacity, (b) elasticity of demand for the particular items in India, (c) duty-free access if the item is in the negative list, (d) removal of non-tariff barriers and (e) enhancement of micro (enterprise) level efficiency and competitive strength. Attracting Indian investment to Bangladesh targetting the Indian market should also be seen as an important tool towards a move robust export performance. Cooperation with India could be further strengthened through SAARC Agreement on Trade in Services (SATIS) by following the agreed two-track liberalisation that envisages slower pace of opening by weaker partners such as Bangladesh.
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Developing seamless multi-modal connectivity among countries of South Asia particularly with India, Bhutan, Nepal and China will be key to realising the potentials of economic cooperation in the region. As is known, a number of initiatives were agreed upon during the visit of the Bangladesh Prime Minister to India, including water, rail and road connectivity through Bangladesh, and connectivity through India for Nepal and Bhutan. There is a need to follow-up on those decisions and design appropriate strategies so that Bangladesh is able to maximise her benefits. Given the location of the North-East, connectivity provided by Bangladesh to facilitate movement of cargo between the North Eastern part and rest of India could create opportunities for higher export of goods and also export of transport services by Bangladesh. Research at CPD shows that there is a good possibility that out of the present traffic of 38.9 million tons between N.E. and rest of India about 18.0 million tons may be diverted if goods in transit are allowed through Bangladesh. However, this would require major investments in infrastructure and would call for setting up of appropriate institutional protocols to facilitate movement of cargo. Export of transport services could emerge as an important source of earnings for Bangladesh. However, Bangladesh will need to do the required homework to appropriately craft her negotiating strategies in this regard.
The Asia-Pacific Trade Agreement (APTA) which has evolved from the Bangkok Agreement signed in 1975, with China joining in 2001, allows Bangladesh to get preferential access to the Chinese market for a large number of items. Article 7 of the agreement provides for special and differential treatment for Bangladesh and other LDCs based on non-reciprocity. More than 260 items of export from Bangladesh enjoy preferential treatment in the Chinese market including duty-free access for jute goods, knitwear, woven garments, fish and leather goods. However, as was noted earlier, till now export to China has been dismally low, with raw jute and jute goods accounting for three-fourths of the total export to China. Share of Chinese FDI has been only about half of one percent of the annual FDI flow to Bangladesh in recent years. Bangladesh should negotiate with China for duty-free treatment of additional items of export to ensure greater market access. Disaggregated level analysis carried out at CPD shows that there is a subset of items which Bangladesh exports to the global market but not to China, and China imports the same from the global market but not from Bangladesh. This sub-set of items could be targeted for receiving preferential market access in China.
With yuan getting strong, Chinese factories having to move inland, in the backdrop of rising wages and increasing costs in the traditional growth zones of coastal regions, and in view of China’s strategy to move to higher-end products, significant export opportunities could open up for her neighbouring countries.
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As is known, for a long time China has been searching for a southern route to get access to the sea. Southern Chinese provinces such as Yunnan are land-locked regions and relatively underdeveloped. Per capita GNP of Yunnan is about half of that for the rest of China. Distance from sea ports seriously undermines the growth prospects of this land-locked sub-region. China is keen to open southern routes to the Bay of Bengal. In this context the developments taking place with regard to the BCIM (Bangladesh, China, India and Myanmar) Forum, and recent moves towards its graduation from Track II (civil society) to Track I (inter governmental) could provide good opportunity for deepening Bangladesh’s partnership with member countries in such areas as trade and commerce, investment and connectivity.
The opportunities offered through closer ties with China and India should allow Bangladesh to attract global companies and leading investors to use Bangladesh as a base to produce goods and services destined for these two expanding markets. A significantly large and competitively priced labour market, a domestic market of 150-160 million people that allows her to reap the benefits of scale economies, and access to a regional market of about 2.8 billion people, could provide Bangladesh a unique opportunity to actually ‘fly on two wings’ as we move forward in twenty-first century. For such a vision to be realised, Bangladesh will need to develop appropriate policies, infrastructure, financial and capital markets and adequate human resources to service the emerging demands of such partnerships. She will need to make her supply-side capacities attuned to these demands, her infrastructure and transportation facilities capable of meeting the increasing needs of trade, commerce and travel, and her investment and policy environment will have to be attractive enough to hard-nosed investors. To take advantage of the envisaged comprehensive partnership with India and China, in the coming days Bangladesh will need to develop a suitable strategy to attract foreign investment, build a mega port along the Chittagong coastline, construct the highways connecting the vast hinterland, expand port facilities in Mongla, develop cyber parks to boost ICT driven service sector, ensure uninterrupted power supply all over the country and integrate into a regional energy market, and train a suitable and productive workforce.
Concluding remarks
We are now witnessing an willingness on the part of our policymakers to deal with the challenges of the twenty-first century with the mindset of the twenty-first century. This gives us hope. Strengthened regional integration of Bangladesh must be seen as a major strategy towards strengthened global integration of our country. Bangladesh at present truly stands at cross-roads. There are reasons to believe that the country is ready for a take-off. Deepening of cooperation with India and China could help Bangladesh economy gain the required momentum for the take-off that Bangladesh deserves. There is an urgency with regard to the tasks at hand. If we walk, and others run, we will not only keep on falling behind but also miss the emergent narrow window of opportunities.
Professor Mustafizur Rahman Executive Director Centre for Policy Dialogue (CPD), Dhaka.