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close this book Developing the non-farm sector in Bangladesh
View the document Foreword
View the document Abstract
View the document Acknowledgements
View the document Summary
View the document Imperatives and models
View the document Macroeconomic trends in Bangladesh
Open this folder and view contents What drives growth?
Open this folder and view contents Pattern of development
View the document Choosing appropriate technologies
Open this folder and view contents Other lessons from comparative experience
Open this folder and view contents Rural industry in Bangladesh
Open this folder and view contents Rural industry and export-led growth
View the document Growth poles
View the document Concluding observations
View the document Tables and chards
View the document Bibliography

Summary

 

1. Introduction

Bangladesh has been growing at an average annual rate of 3-4% during the last decade. Although this rate compares favorably with the average for many developing countries, it is not sufficient to significantly reduce poverty and unemployment. For that to be achieved, the economy must attempt a doubling of the growth rate and sustain this higher level of performance over an extended period. In our paper we argue that nonfarm sector in Bangladesh could greatly stimulate the rural economy with substantial linkage effects on agricultural output, exports, employment and the tempo of the urban economy. Our view is based on the scale of the rural sector in Bangladesh (one-third share of GDP and twothirds of the populace) the existing base of proto-industry, mainly textiles, the apparent unexploited potential in light manufactures and food processing, and the experience of Southeast Asian countries that have built rural industries from comparable resource endowments.

Growth in Bangladesh has been driven largely by services. The contribution of agriculture and of industry has averaged between 20-25% apiece. This must change. Given the modest level of domestic resource mobilization in the mid-1990s, the state of infrastructure and the degree of institutional development, rural small-scale industry alongwith agriculture are the most likely sources of growth over the medium-term, although in the longer run urban industry and modern producer services must emerge as leading sectors if the country is to achieve middle income status. The experiences of successful East Asian economies - China, Thailand, Taiwan (China), Indonesia and Malaysia - indicate that nonfarm development follows or parallels rapid gains in agricultural production. This can spur expansion and growth in rural industry and commerce, commencing usually near cities, but spreading eventually to include a broad swathe of the rural economy. With the help of suitable policies, investment infrastructure and some FDI, rural industry can even develop substantial export potential.

In this paper we attempt to answer three questions. Using conventional indicators as a guide what are Bangladesh's prospects in sharply accelerating growth? What lessons can be derived from the experience of East Asian countries especially with respect to nonfarm development? Can these lessons be applied in Bangladesh and how?

2. Macroeconomic indicators for Bangladesh

As indicated above, much of the growth in Bangladesh over the past decade is the outcome of an expansion in services. This is in contrast to the fast growing Asian economies which derived much of their impetus in the early stages from an investment led increase in manufacturing output, a sizable part of which they were able to export after achieving competitiveness. As incomes increased, East Asians enlarged their savings and invested heavily in education thereby providing the physical and human capital to sustain economic momentum and gradually improve total factor productivity. A comparison of Bangladesh with other low and some middle-income countries highlights a number of macroeconomic characteristics. The ratio of gross domestic savings to GDP in Bangladesh was just 6 percent, one of the lowest in a sample of Asian and African economies. This had a direct bearing on the volume of investment, which at a bare 12 percent is far short of the investment rates in the successful East Asian economies. The situation is not appreciably alleviated by foreign direct investment, which is much lower than India, Sri Lanka, Malaysia and Pakistan. The revenue base of the government is also less than for the other Asian and African comparators with revenue GDP ratios in the comparators range during the early 1990s. All these factors contribute to a rate of capital accumulation that has averaged less than 14 percent of GDP in the first half of the 1990s. Building human capital has also proven to be difficult for Bangladesh. Illiteracy rates remain very high, though enrollment in primary and secondary schools has been picking up in the 1980s. However, these are partly vitiated by the poor quality of education and excessive dropout rates. Thus, in terms of resource availability other than unskilled labor, Bangladesh is at the level of most East and Southeast Asian countries in the 1950s.

3. Pattern of development in Bangladesh and other Asian economies

Further insight into the reasons for slow growth and possible approaches to improve performance can be gained by comparing the pattern of development in Bangladesh with other Asian economies. In Japan, China, Taiwan (China), the Republic of Korea and some of the Southeast Asian economies such as Malaysia, Thailand and Indonesia, agricultural prosperity - in several instances motivated by changes in land ownership and tenure - preceded industrial modernization in these countries. Rising rural incomes provided financing for investment and generated demand for manufactured goods and services. Agricultural intensification and diversification into cash crops established forward linkages to processing industries, which then became the nucleus of a diversified rural industrial system which forged close links with the urban economy. Using their urban contacts and producer services rural industries in virtually all these economies began producing for overseas markets as well, capitalizing on their lower overheads and cheaper labor. The strength of rural development in East Asia and the persistent backwardness of the nonfarm sector in South Asia and Africa, underscores a necessary precondition: that is, agriculture must be modernized and made more productive. This necessitates an improvement in land productivity, by way of better methods of farming, greater application of fertilizer, wider use of agricultural chemicals, and the mechanization of certain operations using appropriate technology. Though land productivity in Bangladesh, as evident in average yield of cereals per hectare has risen, it still lags behind Southeast Asia. Furthermore, the sheer density of population appears to have muted the effect of increases in land productivity on labor earnings. It could well be that the threshold land productivity, beyond which nonfarm activities begin to multiply, is higher for Bangladesh, which calls for developing a strategy for further intensification of agriculture. One possible direction followed by countries such as Indonesia and China, entails greater mechanization, the use of weedicides to eliminate labor intensive operations and the shift to rice varieties that obviate the need for transplanting. Such a shift can raise yields and reduce the demand for agricultural labor, which in turn pushes a larger number of workers to seek nonfarm jobs. It will also result in the spread of technology that multiplies

linkages with industry in rural as well as urban areas. Diversifying the product mix would be another appropriate strategy, since the increased ratio of vegetables, fruit and tree crops has been found to trigger the emergence of processing industries, as well as service activities to handle collection, distribution and marketing. Increasing the area under HYVs, strengthening the irrigation system, expanding public as well as private extension services would constitute essential parts of such a strategy. Another supply side intervention would be to extend the reach of credit and marketing facilities, which would make it easier to shift to a more productive farming regime. In certain respects Bangladesh is ahead of its neighbors in establishing rural service organizations such as Grameen Bank and Bangladesh Rural Advancement Committee. These and other bodies have been remarkably successful in setting up micro credit schemes for targeted populations. More recently, they have begun moving into tubewell irrigation, primary education and rural industry. The nearterm, rural development strategy for Bangladesh requires such NGOs to join forces with leading farmers so as to create a nucleus of entrepreneurship, capital, services and extension, sufficient to push rural industry to a higher trajectory.

4. Lessons from the experience of East Asian economies

Several lessons from East Asian countries are of relevance for Bangladesh.

Develop Infrastructure. Transport infrastructure has supported the growth of agricultural and nonfarm activities in China, Indonesia, and Taiwan (China) while lack of road and energy facilities have constrained off-farm activities in some African countries. Roads are necessary for the development of the markets, which induce farmers to intensify cultivation, diversify crop mix and pursue nonfarm activities. Research shows that road density is significant in explaining the growth of agricultural output in India; location of manufacturing activities was strongly influenced by telephone connections and nearness to a highway in Indonesia; and rural manufacturing could grow in Taiwan because of the extensive network of roads constructed in earlier stages to support cash crop agriculture and later to buttress the growth of manufacturing in the western part of the island. An expanding road system generates vehicular traffic which has spin-offs in increasing the demand for repairs, manufactured spare parts and other services. Recent experience in East Asia has highlighted the contribution of telecommunication facilities for rural producers needing information on prices and markets, domestic or foreign. Without adequate telecommunication facilities, it is difficult to respond quickly to market opportunities, organize logistics and meet the exacting schedules of foreign buyers.

Exploit export potential. In Taiwan (China), Thailand, the Philippines, and China, rural industries have been in the forefront of export push. Rural industries have a comparative advantage in production of labor intensive goods such as woven textiles, garments, silk products and handicrafts utilizing raw material and skills readily available in the sector. Once this base has been established and has acquired a reputation, it is possible to bid for subcontracting arrangements with urban industries and foreign joint ventures.

Location matters. A hypothesis proposed in the 1950s by Theodore Schultz and tested in Brazil, China and elsewhere suggests that rural industry develops most vigorously near an urban-industrial nexus - either on the periurban fringes of major cities or within a 25-30 mile radius of major economic centers. The obvious advantage is urban demand and a good transport network, which stimulates the spread of processing and packaging industries, storage facilities and a wide range of ancillary activities. Proximity to urban areas has important spillover benefits too, like those from infrastructure, technical assistance, credit and financial, and marketing services. Cities are also a prolific source of ideas and are better supplied with entrepreneurs possessing the necessary skills, who can turn these ideas into commercial ventures.

Encourage local government entrepreneurship. Empowered local governments with the statutory right as well as organizational capability to develop a sound revenue base can make significant difference to the success of nonfarm activities. They can be instrumental in building and maintaining infrastructure, managing public services and in making the legal system work. Strong, development minded local authorities can also initiate new industrial activity, as well as supply seed capital and managerial expertise to initiate nonfarm activities. The enormous growth of rural industry in China is largely due to the enterprise of local governments given the mandate to build a rural production base by the central government.

5. Rural industry in Bangladesh

How can these experiences by put to use in Bangladesh? Before tackling that question, we need to provide a brief descriptive overview of rural industry in Bangladesh. In 1989-90, about four million workers comprising about 10 percent of the rural labor force were engaged in nonfarm activities. Of these 1.5 million people were engaged in some form of manufacturing. Trade, commerce and services formed the bulk of nonfarm activities. Within manufacturing, the dominant activity was the spinning of yarn and the manufacture of textiles using handlooms. Other activities included wood products, furniture making, bamboo cane products, and food processing. Because agriculture is still largely unmechanized, there are few repair, engineering, and metalworking activities. From the available data it appears that growth of employment in nonfarm activities has been low since 1980. There is evidence of some traditional cottage industries declining in importance and modern activities like metal products and machinery taking root. At this stage, the contribution of nonfarm activities to rural GDP is fairly modest and it is a trivial source of growth for total GDP.

6. Analytics of rural growth and policy suggestions Rural Infrastructure. An attempt at explaining changes in agricultural output on variables proxying transport infrastructure, rural electrification, human capital availability, credit supply and irrigation density, shows that agricultural output is significantly associated with density of paved roads and the number of bank branches. Past research has also emphasized the large benefits to rural economy from all-weather roads. Therefore, improving the rural all-weather road network is intrinsic to a strategy aimed at creating conditions for sustained growth of the nonfarm sector. Apart form the benefits mentioned before, it is expected that construction and maintenance of roads, culverts and bridges, which are labor intensive in nature, will also create additional gainful employment. Further, a better transport system can help trigger farm mechanization and diversification into cash crops. In turn, both these can reinforce backward linkages from infrastructure building.

Rural Industry and export-led growth. Currently, export oriented activities are virtually nonexistent in rural Bangladesh, but the emergence of the ready-made garments industry around Dhaka and Chittagong shows that the possibilities are there to be grasped. Garments made from hand-woven fabrics, is an obvious example. If agricultural intensification and diversification proceed apace, then tropical fruits, vegetables, cut flowers and fresh water shrimp can also be produced with an eye on the foreign demand. Then there are niche markets, in which competition is less fierce and locally available craft skills could facilitate entry. Three examples of niche products suited to mix of skills available in Bangladesh are bamboo fishing rods and fishing flies; bamboo cane, coconut fiber and straw products; and handloom products. Crafting wooden boats for recreational sculling is another activity which could draw upon the large pool of boat building skills present in Bangladesh.

For successfully exporting perishable commodities, a good telecommunication network is essential. This is not yet in place but the rapid decline in costs of alternative communications technology makes it possible to create a viable network with moderate amounts of foreign direct investment. Then, there are a number of domestic hurdles that exporters of Asian vegetables or garments must overcome. First, undeveloped local markets set low standards of quality, cleanliness, uniformity, packaging, and adherence to specifications. In such an environment, demands of foreign buyers can often be daunting. Second, there are sunk costs involved in acquiring, adapting and assimilating new technology, in learning about and then plugging into overseas marketing networks. These costs can often be high and assistance by the public sector in information gathering can lessen entry barriers. Third, export financing and arranging payments through banks can be problematic for beginners, especially for rural producers that have access to only the most rudimentary banking facilities. Fourth, profits from exporting can often take time to accrue and when they do, net returns on capital can be small, because international markets are highly competitive. Hence expectations have to be pitched at realistic levels and, at least among some participants, there should be a willingness to stay for the long haul.

Growth Poles A cost effective strategy might start by focusing on a few cities, which could act as urban growth poles for rural industrialization. Based on five indicators, namely the extent and diversity of industrial base, the density of the surrounding surface network, the characteristics of adjacent rural economy, the existing banking network and skill availability, Kushtia, Bogra, Rajshahi, and Jessore emerge as promising growth poles aside from Dhaka and Chittagong.

Local government If the experience of East Asia is a reliable guide, then local government has important leadership, administrative and catalytic roles to play in developing rural industry in partnership with NGOs. Currently local government in Bangladesh is weak and ineffectual in promoting development. It is hampered in its work by limited administrative autonomy, low degree of local political participation, narrow revenue assignments, lack of fiscal autonomy, and restricted administrative, financial and technical skills. There are no easy options but to develop these capabilities more fully.

7. Concluding observations

To substantially raise its per capita GDP, Bangladesh must take deliberate measures to increase its growth rate well above its current three to four percent per year. This quickening can be induced through from rural development-agricultural modernization and the simultaneous expansion of a few rural industries.

Agricultural growth and a change in the composition of output favoring cash crops would stimulate industry through demand and input-output linkages. But in order to turn rural manufacturing into a leading sector with the potential to employ a large number of people and good export prospects, impetus must come from other directions as well.

The starting point is the existing reservoir of skills in the rural sector, which help to define initial industrial possibilities. Textile weaving, working with natural fibers, assembly activities, jewelry making, and woodworking could evolve into modern industries serving export markets. But the current state of rural industry in Bangladesh and international experience with the evolution of rural-based, export industries suggest that five conditions must first be satisfied.

First, the paucity of capital, the importance of transport infrastructure, and the advantages of proximity to markets, argue for concentrating rural industry around a few urban centers. In Bangladesh, Dhaka, Rajshahi, Bogra, Kushtia, and Chittagong are obvious candidates. Dhaka has the broadest industrial base and is the biggest market in the country. Chittagong is the country's main port and has also attracted garment industries and associated services. Rajshahi, located in a prosperous agricultural region close to the Indian border, is well-served by road and water transport, has a range of food processing industries, and is the center of Bangladesh's nascent silk industry.

Second, several urban services must filter more deeply into rural areas if rural manufacturing is going to take root and become competitive. They include engineering services to help introduce modern production equipment, financial services, support in designing products that can penetrate overseas markets, and marketing services. Again, proximity to well developed urban centers, is an advantage.

Third, if rural industry is to gain momentum quickly, local demonstration effects and an international reputation are vital. Demonstration effects induce bandwaggoning and the entry of many entrepreneurs. An international reputation is needed to generate demand for Bangladesh's goods sufficient to draw buyers and foreign direct investment. Both require a few visible and sustained successes. Achieving these should be made priority, and popularizing them widely an essential element of strategy.

Fourth, Bangladesh must be a safe and convenient place to do business in. Hence the cities that are the centers of rural industry must be easy to reach by air and well served by hotel facilities, and travel to rural factories should be convenient.

Finally, rural industry needs a concentrated dose of entrepreneurial initiative. In China local authorities have frequently taken the lead, putting up risk capital and providing leadership and managerial inputs. Once these initial measures proved successful, others were willing to enter. Elsewhere in Southeast Asia, foreign investors setting up production in Special Economic Zones (SEZs) helped to galvanize rural industry through production linkages, training, and technology transfer. Agricultural producer cooperatives also supplied capital to launch food processing industries. When these prospered because of exports, as in Taiwan (China), the stage was set for diversification into other light.

Industries.