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close this bookDeveloping the non-farm Sector in Bangladesh: Lessons from other Asian Countries (WB, 1996, 116 p.)
close this folderOther lessons from comparative experience
View the document(introduction...)
View the documentLesson 1: Take advantage of location
View the documentLesson 2: Promote exports
View the documentLesson 3: Develop infrastructure
View the documentLesson 4: Encourage local government entrepreneurship
View the documentLesson 5: Preparing for industrialization


Rural industrialization is generally preceded by substantial gains in the productivity and technological sophistication of the agricultural economy. In contrast to some of the macroeconomic indicators, agricultural trends in Bangladesh are more positive. But not enough progress has been made. A way ahead can be distilled from the collective experience of the more dynamic East Asian countries.

Lesson 1: Take advantage of location

Shultz (1953) proposed the hypothesis that rural industry develops most vigorously near an urban-industrial nexus-either on the pert-urban fringes of major cities or within a 25 to 18 30 mile radius of major economic centers. This has since been verified through empirical work in a number of countries, for example Brazil (Nicholls et al, 1969) and China (Benziger, 1996). Cities are a source of markets for rural products and of ideas that diffuse out into the surrounding countryside. They can provide alternative employment possibilities for rural residents, who are prepared to commute to urban industries and businesses. For example, commuter employment is widely observed near China's coastal cities, enabling agricultural households to diversify income sources and enlarge total 19 20 earnings. Commuting in turn, gives rise to multiplier effects in the local rural economy.

In addition, the city provides a lucrative market for high-value food items such as fruit and vegetables. Beyond that, urban demand stimulates the spread of processing activities, packaging industries, refrigerated storage facilities, delivery companies, and a wide range of ancillary industries. Spillover benefits from cities can trigger rural manufacturing activities, which capitalize on lower overhead costs and the elastic supply of labor. Research suggests that enterprise productivity is higher for medium-size firms than for firms hiring only one or two workers. In addition, productivity is greater for firms located near larger towns and cities (Lanjouw and Lanjouw 1994). The most important spillover benefits are:

· The quality of transport infrastructure around cities, communications facilities, electricity, and municipal services,

· subcontracting arrangements with urban industries, technical assistance for setting up and maintaining production lines. Assistance can be part of sub-contracting linkages, but the experience of the region around Shanghai indicates that the flow of engineers and technicians from the city to the surrounding countryside was crucial to the transfer of technology and production skills. Thus the fusing of local entrepreneurship with access to urban engineering expertise enabled countries in Southern Jiangsu and Zhejiang to develop sophisticated rural industry (see Ho 1994).

· supply of credit from formal and informal banking and other financial institutions which are more numerous in and around cities,

· Market access. Geographical closeness plays a part, and cities also sustain an infrastructure of distribution services that can handle marketing for rural producers. In other words, the availability of specialized services lessens the risks for manufacturers and eases market entry. For instance, marketing services 21 provided by Hong Kong-based firms have enabled thousands of rural enterprises in nearby Guangdong province of China to sell their products in the Hong Kong markets and throughout the world. Hong Kong was a source of capital and producer services that initiated manufacturing activities. In addition, Hong Kong provided essential banking, brokerage, marketing, insurance, transport, and repair services. Without this package-ready-assembled and tested-Chinese producers would have experienced a far more protracted learning spell. Quite possibly, they may not have succeeded.

· Cities have more and better schools and training facilities, and as a result the local labor market offers a higher and more diverse range of skills. To succeed, rural industry must adopt modern technology and meet acceptable quality standards. Technology absorption is mediated by the labor market, and cities are much better endowed with the skilled workers needed for running modern production establishments.

· Finally, cities are a prolific source of ideas and entrepreneurship, which can spark rural industry. Through casual or business contacts, non-farmers transfer ideas about industrial options to the rural sector. This process is visible in China and in Taiwan (China). Interaction between urban and nearby rural counties was instrumental in diffusing industry around many of the urban centers along China's eastern seaboard. Likewise, the belt of rural industry beyond Taipei and Kaoshiung reflects the train of industrial ideas that filtered from the cities to the countryside along pathways created by agricultural processing and subcontracting. In addition, the regional neighborhood matters a great deal. Proximity to a mid-sized or large city may not be sufficient for rural industrialization if the city is relatively isolated from other economically dynamic regions. Cross-country analysis suggests that the contagion effect of growth in neighboring countries can be a powerful stimulus and, likewise, sluggish neighbors can put a brake on development (see Easterly and Levine 1995).

Lesson 2: Promote exports

Given Bangladesh's economic characteristics and resource poverty it must receive a substantial boost from exports of manufactures and processed agricultural commodities to attain rapid growth. The importance of exports to East Asian countries is unequivocal. In Taiwan (China), Thailand, the Philippines, and China rural industries have been in the forefront of the export push. The spread effects from this push have been critical for improving rural welfare. Thus, once rural industry has made a strong start, an export orientation can make a vital contribution (Rants and Stewart 1993). China provides an excellent example of the export potential of rural enterprises especially those that have been primed by foreign direct investment. By 1994, there were some 25 million rural manufacturing enterprises, employing over 120 million workers and responsible for a third of rural production as well as nearly half of all manufacturing output. Rural enterprises, primarily the 10,000 that have been the recipients of foreign investment, account for 40% of total exports in 1994. Rural manufacturers active in the export market produce a broad spectrum of products but they dominate the trade in woven textiles, garments, silk products, handicrafts and other light manufactures (Yen Shanping, 1995, Oxford Analytica, August 30, 1995).

Lesson 3: Develop infrastructure

Infrastructure is extremely important to the growth of nonfarm activities, which need urban amenities and services to take root. A vast fund of empirical study analyzes the relationship between infrastructure and the diversification of economic activity in the rural sector. Some of this evidence suggests that a relationship between infrastructure building and growth cannot be derived for developing countries, but sectoral analysis suggests that road transport yields respectable returns. By building rural infrastructure, China, Indonesia, and Taiwan (China) promoted rural development, whereas the lack of infrastructure constrained off-farm activities in countries such as Kenya, Ethiopia, and Tanzania. Research suggests that rural industry needs power to run machinery, roads, and transport facilities to carry goods to the market; communication services to allow producers to keep in touch with markets and suppliers; and, possibly, serviced land with water and sewerage lines. Roads, transport, and electricity are also valuable to agriculture and have contributed to productivity growth and growth of production for the market. Of these, transport and communications take priority. Rural industries can generate their own power, albeit at higher costs. They can also arrange for water and waste disposal. Road infrastructure and communications are more problematic, although wireless and satellite systems are gradually reducing dependence on wired facilities. Typically, transport and communications services (and other services) are best near cities.

Lesson 4: Encourage local government entrepreneurship

The provision and maintenance of infrastructure, and the supply of regulatory and legal services depend on the capacity of local governments. Experience from East Asia, Western Europe, and the United States indicates that the local government entrepreneurship can spur or reinforce private entrepreneurship. In industrial countries local government initiatives include providing fiscal and, possibly, financial incentives in addition to providing essential services. But in East Asia, particularly China, experience suggests local governments have directly initiated new industrial activities in the early stages of development, supplying seed capital and managerial expertise (Oi 1990; Walder 1994, 1995; Nee 1989, 1990). Local governments have shouldered the initial risks associated with entering new fields and helping the community acquire the learning needed to successfully diversify into nonfarm activities. Local authorities in China have taken a leading role in setting up rural industry. Having established these beachheads they have opened the way for private and cooperatively owned enterprises which can take advantage 23 of the pioneering efforts of the government-initiated collectives.

Competitiveness, entrepreneurship, a sound financial strategy, and accountability are the keys to the success of local governments in this endeavor. Competition induces local governments to strive for efficiency, plan for the future, and harness local talent. Entrepreneurship, in sponsoring new start-ups, attracting investment from outside the locality, and persuading provincial or central governments to enlarge their financial stake in the community is crucial for enlarging the resource base.

An effective financing strategy aims at balancing the requirements for infrastructure and services against the revenue from fees, taxes, rates and central government grants handled by local authorities. It calls for economizing on administrative costs and nondevelopmental expenses and for choosing the best possible fiscal arrangement with the nexthigher level of government. Accountability is a function of built-in legal and administrative safeguards, the participatory vigilance of the local community, and the degree to which national politics creates a milieu in which local governments can be fairly elected, have the autonomy to pursue certain developmental objectives, and, as a consequence of competition or demonstration effects, have the incentive to take responsible initiatives.

Lesson 5: Preparing for industrialization

There is an element of luck in development, but communities can increase their chances of being lucky. Well-managed communities with a thriving agricultural economy are better placed to be lucky: they are likely to have stronger trading links with urban centers, pools of investable capital, processing activities, and basic services. Communities that are plugged into the communications infrastructure will attract outside capital and will be desirable from the standpoint of industrial location. Furthermore, a readiness to use external links to aggressively enter export market, can, if successful, dramatically improve the development picture. An educated workforce, which includes a handful of individuals 24 with technical and managerial skills acquired, for example, through a stint in the military or factory employment, is inviting for rural industry. Good political connections with central or provincial leaders or strong commercial traditions, which have embedded a predisposition toward business activities and helped to develop the nucleus of a regional trading network, are also valuable. Two examples from China can illustrate their significance. Guangdong's leaders were able to influence decisions made by the central government on the policies that permitted Guangdong province to cement economic relations with countries along China's southern rim. The extraordinary growth of the Wenzhou region of Zhejiang province and its dominance in the button-making industry stems from the cultivation of button-making skills and skillful exploitation of trading contacts established by merchants from the Wenzhou area over generations. Similar examples can be used to explain regional development in other South and East Asian countries.