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close this bookDeveloping the non-farm Sector in Bangladesh: Lessons from other Asian Countries (WB, 1996, 116 p.)
close this folderRural industry and export-led growth
View the document(introduction...)
View the documentPossibilities for foreign investment
View the documentDomestic hardles
View the documentFinancing of new enterprises
View the documentNiche exporting


Export oriented activities are virtually nonexistent in rural Bangladesh, setting it very far behind the East Asian countries. But there is potential for establishing export activities on a broad scale. The sudden rise of the ready-made garments industry in the urban sector shows that local initiative can yield good results and that foreign capital combined with technical assistance can play a vital role.

Possibilities for foreign investment

Assuming that agricultural intensification and commercialization gain momentum, they can trigger the development of sideline activities such as the production of vegetables, tropical fruit, cut flowers, and fresh water shrimp, which can be exported. In some respects entry barriers into an industry such as cut flowers, which commands a growing international 33 market, are not especially high. The investment required for greenhouses, piped irrigation systems, rootstocks, cooling facilities, and packaging equipment is moderate. More important is to stay abreast of technology, sustain quality, meet standards with regard to pesticide residues, and conform to delivery schedules. Because significant scale economies are absent and technology is widely accessible (from Israel and the Netherlands), a country can entry the market relatively easily. But the experience from Kenya (Jaffe1994) and Zimbabwe suggests that becoming established and finding a foothold in the international market is not easy. Survival requires close relations with foreign networks, and foreign direct investment is often a precondition for success. Apart from capital, foreign participation brings a bundle of services-technology, quality control, financial, and marketing-and induces the necessary degree of specialization. Local firms that do not have foreign partners frequently distribute their efforts across several smallscale activities. As a result that export business fails to reach a critical mass, and there is insufficient learning and uncertain commitment.

Inadequate communications facilities can be a serious bottleneck to FDI. Without good telephone and fax connections it is difficult to respond quickly to market opportunities, keep in close touch with buyers, regularly update delivery schedules, and organize the transport logistics of highly perishable commodities that require efficient post harvest handling and reliable shipment. In the absence of reliable modern communications system the cost of doing business can be prohibitively high. In the modern international marketing environment, "telecommunications is at the heart of the kind of logistics management necessary to move products from rural farms through ports [or airports] and to the clients door, just-in-time. [Furthermore] rural telecommunications, can be a [source of profitsJ-private sector suppliers of rural cellular systems in countries such as Mexico, Brazil, Thailand, Malaysia and Philippines are finding it a profitable undertaking." (Goldstein 1993: 25, 29).

Foreign involvement can also help overcome the problems posed by lumpy investments in cold storage and packaging facilities and can facilitate dealings with air carriers, which are an essential link in the marketing chain. Without regular, competitively priced freight services running to desired international destinations, an export business in cut flowers cannot survive.

Domestic hardles

Commercial production of fruit and vegetables is already well established in Bangladesh.

But a modern food processing industry has not yet taken root. Again, the technological and capital-related barriers to entry are not daunting. Two changes are needed: the willingness to enter a higher technological milieu and the development of a marketing environment that enforces international standards. Important to these developments is the established, conventional, and widely traded nature of the technology, which eases entry and offers a technological fix for initial teething difficulties. Also, mature external markets establish clearly what is required of a new producer. Standards, protocols, and business expectations are explicit and easy to imitate. There is a number of hurdles that exporters of garments made from indigenous handwoven fabrics or exporters of Asian vegetables must surmount. First, undeveloped local markets pose a serious handicap. Consumers in Bangladesh do not demand consistently high standards of quality, cleanliness, uniformity of products, ultra-high temperature processing for perishable foodstuffs, aseptic packaging, and adherence to precise specifications (such as color, shape, size, texture, moisture content, acidity, and so on for fruits and vegetables.). In the case of indigenous material-based garments, consumers are also not looking for frequent changes in styles, weaves, colors, and blends of fiber-details for maintaining international competitiveness.

Thus producers have no exposure to a modern market environment and are easily discouraged by the demands of foreign buyers. Psychological capital must be expanded before successful exporting can begin. Aside from the mental readiness to accept an alien set of market rules, in many instances a "traditional" production function must be deconstructed and replaced by technologically sophisticated procedures that, initially, require training in techniques and in the conscious acceptance of new standards. Eventually, as East Asian experience has clearly revealed, producers learn to accommodate divergent rules and business practices, dealing with the domestic and foreign markets differently.

Second, rural areas in Bangladesh, especially those far from the main cities, often lack electricity. This absence does not hinder agriculture, but it impedes growth of rural manufacturing and circumscribes its location. Producers of horticultural products that are unable to invest in generators are handicapped because the product, is perishable and thus 35 dependent on a cold chain, refrigerated storage and rapid processing.

Third, meeting international standards almost inevitably calls for additional investment in equipment and technology, much of which must be imported. Equipment and technology can be obtained with relative ease, but the appropriate channels must be identified, search costs incurred, false starts accepted, and information distinguished from noise. Learning to use a new technology can be expensive. And although an exportoriented production system can be introduced with foreign assistance, it must eventually be sustained and serviced by a home grown support network. This is another element of sunk costs: exporters must shoulder part of the costs of network development by entering into contractual arrangements with suppliers. Manufacturers in southern China were able to break into foreign markets with amazing speed because Hong Kong had already incurred the sunk costs of building a support system network, which provided new Chinese entrants with intermediate inputs.

Overseas marketing networks will be decisive to success for every exported good. Bangladeshi producers can link up with multinational marketing companies, such as del Monte, and use the companies' brand names and distribution systems to sell worldwide. Or, large Western retailers that purchase ready-made garments might provide outlets for rural industry. The overseas Asian business community may offer a third possibility. Asians are becoming better represented among businessmen and professionals in industrialized countries. They have the capital, market information, and connections to advise which products from Bangladesh have good sales prospects and to orchestrate marketing and distribution strategies. The Asian community in Britain was instrumental in helping Kenyan vegetable producers find a market (Jaffe 1994). Asians overseas also boast a reservoir of technical skills, which could help launch new industries and could be transferred to Bangladeshis.

Fourth, export financing, the opening of letters of credit (L/Cs), and arranging payments through banks can be problematic for beginners, especially for rural producers that have access to only the most rudimentary banking facilities. In southern China the Hong Kong nexus aided the inexperienced enterprises from the Pearl River Delta, in ping their toes in export markets. The plight of Senegalese manufacturers attempting to sell textiles and ethnic goods to major US retailers is more typical. After a promising trial run, the effort by the two sides to consummate the first sizable order was extremely trying.

Biggs and others (1994) observe that from the perspective of the Senegalese firm, "the financing of [export] transaction was the greatest obstacle to successful completion of the order. The letter of credit (LC) was finalized only four months after the original order was placed. This delay in financing delayed production. The [Senegalese manufacturer] had no previous experience financing exports using LCs, and was overwhelmed by the financial aspects of the transaction. This was compounded by the complex structure of the LC".

Fifth, most producers in developing countries plunge into the export business carrying high discount rates. They expect to earn large profits within a year or two and quickly recoup the initial outlay. But mature businesses, such as garments or horticultural products, such a performance is nearly impossible. Because of the ease of entry, intense competitiveness of international markets, and necessity of building a reputation, profits accrue only after a lag, and net returns on capital are rarely more than single digit. Winners must be prepared to stay the course, acquire a reputation, and export large volumes, preferably in more than one important market. In mature markets supplying first-tier mass consumption products, exporters must aim for volume if they want large gross earnings. Profitability improves with higher quality items aimed at smaller, albeit more prosperous, segments of the market. But scaling the quality ladder takes time and progressive investment in skill development and equipment.

Financing of new enterprises

Surveys of small and medium scale rural enterprises in Bangladesh (Ahmed 1984, for example), other South Asian countries, and Africa frequently reveal that financing constraints are binding. But closer examination of the findings uncovers equivocation, both with respect to need, as well as local availability (Aryeetey, et al 1995). Proposals about remedying the situation have become more hedged as experience has accumulated. Cross-country evidence suggests that entrepreneurs draw personal savings and, if possible, the resources of the extended family to set up an enterprise. Thereafter, profits are the main source of funds for expansion. Small firms in Africa and Bangladesh do obtain some working capital from informal sources, credit cooperatives, and banks. They also receive credit in the form of raw material advances from suppliers and advances from their customers (Islam and others 1994). Because most borrowers cannot supply collateral and banks have difficulty ensuring repayment, banks rarely extend term financing for equipment and structures. Likewise, although rotating savings and credit associations (ROSCAS) are widespread in Asian and African countries, they rarely contribute directly 36 to the development of small-scale industry. They do not contribute mainly because the amounts involved are fairly small (Jaffee 1994) and because the loans are mainly used for consumption purposes. But if these associations are able to spread and strengthen the ethic of disciplined saving, as in Taiwan (China) (Besley and Levenson 1993), then they can indirectly encourage rural industrialization by increasing household demand for durables. The message is that very small pools of institutional finance do not have a discernible effect on rural industrialization. Only when the pools expand do they enter the picture, either through market demand or, as in China, by enabling community-managed rural cooperatives to finance industry.

In Africa low rates of rural household savings have rendered ROSCAS ineffectual for industrial purposes. Household savings are higher in Bangladesh, in areas where the Grameen Bank, which requires that borrowers save, is active. But these efforts will be a slow process, and will probably work through the demand side rather through direct industrial financing. Does that mean that financial instruments are ineffectual or irrelevant? The Bank's record of lending to small and medium-sized enterprises shows that the cost per job created was US $4,000 in Asia and nearly US $10,000 in Africa (Webster 1994). Programs involving development banks were ineffectual, and lending for technical assistance yielded slim returns. But if the local business environment was buoyant and a base of supportive institutions was functional, financing through competent banks or NGOs produced good results.

Continuing to improve savings, investment, and exports would spur the rural industrialization in Bangladesh. Institutions such as Grameen Bank, BRAC, and BSCIC can serve as conduits for financing and extension, with commercial banks also playing a larger role. A deliberate attempt to stimulating rural industry around a small number of strategically located growth poles can ensure the needed supply of services. Lending by the World Bank and other donors, which gave rise to an interlinked cluster of rural enterprises, could start a virtuous circle if early success generated a strong demonstration effect.

Niche exporting

A more profitable but riskier export strategy involves targeting niche markets, in which competition is less fierce and locally available craft skills facilitate entry. Handicrafts and traditional textiles and clothing for ethnic markets in industrialized countries are some of the available options. Finding a lucrative niche market requires market knowledge, the ability to manufacture a well designed product, luck, and an innovative sales drive. Most attempts fail. But a few outstanding successes can have profound demonstration effects. 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. Currently, the demand for exclusive and pricey bamboo fishing rods is met by a small number of craftsmen in the United States and Europe, who import their materials from southeastern China. Converting a piece of bamboo into a fishing rod worth hundreds of dollars requires little equipment other than hand tools, but demands labor skills. Some of these skills and the tradition of fashioning fishing poles from bamboo are already present in Bangladesh. Through breeding and experimentation better varieties of bamboo can be produced, and the deliberate acquisition of skills can refine the art of making fishing rods. Good bamboo rods are superior to those made from synthetic materials and the availability of good quality, comparably priced bamboo poles would induce substitution and stimulate demand.

Labor, technique, materials, and attention to detail are needed to produce fishing 37 flies, but there is nothing esoteric about the process. Kenya produces flies using mostly imported material and exports its flies to Europe and the United States. It is a niche product ideally suited for rural industry in Bangladesh.

Crafting wooden boats for recreational sculling is another activity that could thrive in rural Bangladesh. In the West, boatbuilding skills are becoming rare, and the market is being taken over by boats made from fiberglass, carbon fiber, and kevlar. Wooden boats have a mystique, an aesthetic quality, and a durable stiffness that gives them an edge over synthetic craft, but rising costs are a severe constraint. Labor and specific boatbuilding skills are plentiful in Bangladesh (Jensen and others 1989). To sell abroad, the industry would need to adopt the designs and materials that foreign buyers demand. For instance, building a small wooden shell might require more than six different kinds of wood, some of which are unavailable in Bangladesh. Thus a producer would first have to integrate local skills with designs and some imported items, including tools, resins, and wood. Once Bangladeshi boats had gained market acceptance overseas, producers would have to progressively refine their designs incorporating feedback from buyers, and conduct a modest amount of research to generate a regular stream of innovations that sophisticated Western markets routinely expect. Riverboat manufacturing is a long-established cottage industry in Bangladesh and could provide a springboard for exports to the sporting goods market.

Bamboo cane, coconut fiber, and straw products feed a modestly sized local market, but could be exported to niche markets. Furniture, baskets, mats, fabric, and headgear are some of the items that are traded. But the field is competitive, crowded with producers from South and Southeast Asia and Central America. A common thread links their successes: good design, painstaking workmanship, selective and focused marketing, and just the right measure of exclusivity. One good example of a rural-based product, made entirely by hand, that occupies a privileged market segment are straw Panama hats from Ecuador. Each Panama hat requires at least two months labor by a master craftsman, and the finest hats with a silken finish, which retail for thousands of dollars, can take up to eight months to complete. These "Montecristi fines" are the finest straw hats but the market for hats made from different kinds of natural fiber is diversified. There is a mass market for low-priced straw hats sold at very small markups. This is a point of entry. However, establishing a foothold in the market for premium headgear is the only way to ensure profitability and reputation. Traditional weaving and basketmaking skills must be put to new uses, available or imported fibers must be experimented with, reverse engineering of promising designs pursued and a cost effective marketing strategy devised, which raises the chances of success.

The handloom sector also commands a large domestic market and could develop into an important exporter. This industry has stagnated for the past decade as demand has shifted toward machine-made fabrics and handloom weavers have only slowly absorbed technological changes that would enhance quality and raise productivity. Very likely, machine-made cloth will eventually displace the lower grades of cotton fabrics used for dhotis and saris. Only the specialty fabrics, like the superior "madras" check material, the silk-cotton blends, and the weaves used for jamdani or varanasi saris, are likely to have an enduring market. But these products, suitably upgraded and refreshed with new designs, provide unique export opportunities.

Emigration from the subcontinent to the United Kingdom, North America, and East Asia has created a large, rapidly growing, and relatively affluent ethnic market in these regions. Smaller, prosperous Indian communities also live in East Africa. But Bangladesh's fairly restricted range of handloom designs, weaves, and blends appeals only to a small clientele. The cotton fabric might be rustic and uneven in quality; the sari material is often ornate and unsuited for regular use.

The specialty, high quality handloom cloth made of silk or silk cotton blend must be redesigned to have an international appeal. Handloom weavers cannot bring about this transformation on their own, although their readiness to upgrade their technology and produce new designs will be critical. The key players are designers and marketing expertsthey who must create a range of products tailored to the tastes and lifestyles of the target ethnic population. Once the needed integration of style, design, and material has been achieved, and a workable formula identified, handlooms can be improved technologically.

Bangladesh has the rural production base and skills to manufacture fabric in exportable quantities and developing a rural-based garment industry linked to handlooms 38 is certainly feasible. But important forward linkages with service activities must materialize before handlooms can be transformed into an export sector with good growth prospects. Essentially, marriage of urban-based design, marketing, engineering extension, and finance services can reverse the downward spiral of the handloom industry and position a specialized segment to enter export markets.