***The country should first exploit the full potentials of the existing tariff structure before it launches another major tariff reform. A breathing spell of a feu years will give this opportunity. A rush to further reform may cause to the country's fledgling industrial sector a great damage.

AN important seminar wa* held recently under the aecia of the World Bank on an in-house draft paper. Trade Policy Reform For Higher Export Growth." with participants mainly from the trade related government ministries and business community along with some consultants who have interest in the field The central question of the seminar was whether or not Bangladesh should further liberalise im torts to stimulate exports. Be ig a provocative subject, an In-te.'ise and lively debate followed as one expected However in the present state of a newly installed popular government in office committed to achieving "7 per cent rate of growth next year' "social justice" and poverty alleviation by giving "equal opportunity to export -led and import-substitution" industries In a free market economy, the initiation of such a forward looking policy debate on trade issue is very timely But whether or not It will find receptive ears at the top level of the new government at its present stage, the trade llberalisa tion Issue will have to be cdh tlnuously debated and right solutions will have to be found for the country in the light of changing global market condl tions as well as the internal dynamics of Industrial adjustment. There Is a need for general awareness, high quality research to fine' optimal *oiu tions and the willingness to implement them for sheer sur vival of the country in the ruthlessly competitive world that is emerging ft is therefore important to examine what has been done so far and what needs to be done in future.

Tariffs and Controls in lUHOs

The decade of 1980s was marked by prohibitively high nominal tariffs ranging from somewhere around 40/50 per cent to about 150 per cent in some cases, high quantitative restrictions (like bans on imports of some goods and limited permission of imports of some other goods), tariff anomalies (tariffs on finished goods being lower than those on their inputs). and the Use of tariff val ues which arbitrarily fix tariff rates on some imported items far above their invoice values. Thhse measures raised a high tariff wall within which prices oi outputs in the domestic market in general became very high, industrial inefficiencies became rampant, and anti-export bias was built-in in the economy leading to low rate of growth of exports, high real effective exchange rate, poor external competitiveness, and poor external reserve etc. Further, high tariff wall encouraged under-invoicing of imports and widespread smuggling-in of goods especially from India (with the consequence that huge deficits developed in both official and unofficial trade). It also gave rise to a situation of "water in the tariff (domestic prices being lower than duty-tax-paid prices of imported products due to smuggling and under-invoicing of imported products) implying redundancy in tariffs in some cases. These led to low quality domestic products compared to high quality Imported products. There was hardly any doubt that there was a need for drastic change in the tariff structure. Dismantling of Tariff

Structure in 1992-95

Although there were some marginal change* In tariffs in the 1980*. the real drastic change or dismantling of the existing tariff barrier* wa* introduced from 1992 onwards By 1995. the tariffs on finished products came down to between 50 and 70 per cent, on interme dlgle goods to between 15 and 30 per cent, and on raw materials to zero and 15 per cent With the ex< eption of a few Items, quan Utatlve restrictions were eliminated and the number of Items with tariff values was drasti caliy reduced to about 600 items, in a sum. these reforms led to a drastic reduction in unweighted average nominal protection (including tariffs and taxes) from 89 per cent (of the assessed value of trade) In 1990 91 to 25 pir cent in 1995 96. But the Im port-weigh ted average nominal protection rate declined only from 42 per cent In 1990-91 to 21 per cent In 1995 96 (Bangladesh Trade Policy Reform for Higher Ex port Growth The World Bank page 5 table 2.1. for short it will tie referred to a* TPR be low) The effective rale* of protection for the whole economy) (weighted by value added) fell only 15 per cent (from 82 per cent In 1992 93 to 67 per cent In 1995-96). but If one excludes steel and engineering and food and dairy sectors In which ef feet Ive rates of protection have Increased, then one finds that the effective talcs oi protection fell from 93 per rent to 45 per cent during the same period (table 2.3 of TPR)

Ir addition, the Duty Draw back system which was intro duced In 1988 wa* effectively Implemented since 1992 Not a ■ingle farthing of Duty Draw back was paid to the exporters until March 1992. but since then exporters were receiving over Tk 100 crore* every year Until 1990. there were only 35 items of export on which flat rates of duty drawback were calculated, but by 1993 about 700 items of flat rates were put on the roster for payment of duty drawbacks The facility of Export Development Fund of ■30 million dollars for import Ing Inputs for manufacturing export products on back-to-back L/C basis was utilised only from the last part of 1991 onwards which considerably helped the exports of leather garments, ceramics, packaging and other products. Of course, in 1980s. there was the Special Bonded Warehouse facility given only to the 100 per cent exporters of garments on a back-to-back L/C basis but it was extended to 100 per cent direct and deemed exporters of all other products in 1993. Simi larly. there was Export Processing Zone facility established in 1983 only in Chittagong, but in 1993 another Export Processing Zone was set up in Dhaka. The Pre Shipment Inspection scheme introduced in 1993-1994 has been helpful to large importers of any item But due to detection of some discrepancies in the invoice valuation, the National Board of Revenue has temporarily banned the use of Pre-Shipment Inspection system for 12 Items

Effects of Tariff Cute and

Others Measures

Ail these measures brought about a significant change in the export environment in the country which can be seen in a rapid growth of exports from a level ofSl 7 billion in *990-91 to 3.4 billion dollars In 1994 95 registering an annual aver age rate of growth of about 25 per cent. This rate fell some what in 1995-96 due to political turmoil The external reserve level went up from 967 million dollars in 1990 91 to 3 2 bil lion dollars In 1994-95 but re duced to 2.01 billion dollars in 1996 The real effective ex change rate went down from 95 47 in 1989 to 7 5 10 in 199 5 Indicating an improvement In the external competitiveness of Bangladesh export* The (l»< al deficits decrease*I from 7 7 per cent in 1990 to 5 9 pet cent In 1994 and the current account deficit decreased from 6.9 per cent of GDP In 1990 to I 4 per cent of GDP in 1994 On the other hand. Imports went up from 3 5 billion dollars in 1990-91 to 5 8 billion dollar* in 1994-95 registering an annc .1 average rate of growth of about 17 per cent (The Import and export trade data have been taken from Bangladesh Eco nomic Update. July 1996. table 3 I page 42) One must note that after about a whole decad-<>l 3-s per rent average annual rate of growth Imports lumped to about 38/39 per cent In 1993 94 and 1994 95 But It Is still premature to say whether it ha* set the trend at that level

Impediments to Further Gains

These are certainly the most Impressive gains that the coun try ha* made so far by systematically dismantling the trade barrier*. But there are also some impediments to realising the lull benefit* of trade liber alisatlon. These are: (1) insplte of such drastic tariff cuts, the current trade structure still provides incentives for smug gling and under invoicing of imports' for duty evasion According to the World Bank re port, the illegal improts from India In 1994 was about 18 pr cent of total imports, which is a staggering figure. Similarly, under-invoicing of imports Is rampant (11) Compared to the unweighted average tariffs of some selected countries like Sri Lanka, Malaysia Ghana and Argentina etc. Bangladesh still has the highest unweighted average nominal tariffs at 25, per cent . (ill) Because of increase in the effective cates or protection for steel and engineering, and food and dairy industries, as noted above, the aggregate ef fective rates of protection has fallen only by 15 per cent during 1992 and 1995. which is rather low. (rv) Because of increasing the number of duty-free status from 300-500 items in 1989-90 to about 1.295 in 1995-96. and quantitative re strictions in Textile sector, the tariff dispersion has increased. Based on these impediments, the author of the paper argues that " trade policy reform has not chitted incentives firmly tou irda the production of exportable* (TPR page 9)

What has to be Done?

In view of the above findings. the TPR comes out with detailed recommendations to remove all the impediments mentioned, but its most general recommendation is the following The Government should commit to a pre announced program of across-the board re form and move away from a made to-measure approach of special exemptions and com pensations (TPR page-28) More specifically, it recommends (I) A three-rate schedule of 10. 20 and 35 per cent in the next budget, with zero rates only for imported inputs used by exporters (il) A further compression of rates down to zero (for exporters . 10 and 20 per rent in the following year, ’ml Low rate* between zero and 15 per cent to be announced now for 1999 2000. (Iv) The add mm like 2 5 per cent Import fee. a 15 per cent VAT on textiles and the use of tariff values to be re moved (v) To reduce dispersion a sinle tariff rate should be applied and end user ronces stone to be eliminated and (vl) Finally. the Government should eliminate statutory rates of duty (TPR pp 28 29) It has further emphasized that until complete liberalisation is a< hlrvrd the existing export promotion measures should try to reduc e disincentive* develop Infra structural facilities, make access io finance easier, and to use the WTO to lock In trade reform. Whether one agrees to implement the five major recommendation* or not these intermediate mea sure* which have come at the tall end of the paper seem to be the most Important factors that are now preventing t/ie ex porter* from taking full advantage of the tariff cull and other export me ent Ive* that the gov ernment ha* already put in place

Should Bangladesh Adopt an AtToss-the-Board Keform?

Tlie participants in the sem Inai expressed some reserva tions about It but not quite effectively. Important voices were more In favour of further research than for immediate acceptance One private sector representative raised the ques tion that if the made-to-measure steps in the past could help the phenomenal growth of gar ments sector why can t similar steps open up newer sectors of exports now? The point was well taken.

However, one would like to argue against an immediate across-the-board tariff cuts of liberalise imports for the fol lowing reasons In the first place it is clear that the country has not been able to consolidate the gains from the exist Ing tariff -cuts already in place Exporters have not been able to take full advantage of the tariff cuts and other export incentives because of lack of infra struc •ural facilities difficulties of getting productive loans Irom the financial institutions and inefficiencies and obstacles in the export administrative agencies Further there is no doubt that tariff-cuts will reduce the incentive to take bribes and to under-tnvoice imports but it will worsen the present crisis in power transport and communication sectors.Hence the cost of these inputs to the new export industries will rise and may more than offset the benefits of cheaper Imported Inputs In the second place ft may reduce the smuggling of In dlaii goods are lower than those of competing Bangladeshi goods. Indian goods will freely come Into Bangladesh market Two consequences of this can be visualised One is that all trade with India will then be open trade rather than part le gal part Illegal trade as it Is now and It* trade deficits with India will continue to mount l>ecause Bangladesh has very few Items to sell to India. The range of exports of Bangladesh is rather narrow and has to be widened in the near future with appropriate incentive*.

The second consequence Is that quite a number of Industries In Bangladesh will simply be wiped out with disastrous effect* on production, employment and income levels Simi (ar will be the effects of cheaper imports from other countries too since a large number of Industries which are now marginally competitive will turn uncompetitive then. Bangladeshi exporter* need more time to develop newer items of export and improve the • fiiciency levels of their existing industries This is where 'he made-to-measure approach to export development will be more helpful than another major across-the board tariff cuts In the third place, if the latter approach is adopted now. then the enure burden of adjustment will fallout he existing narrow range of export industries and the less efficient import-substl tution industries In the shortterm. widespread closing down of industries, increase tn un employment and decrease in economic activities and income levels will mark the scenario. The government will then be saddled with larger number of sick state-owned Industries and larger amount of annual losses. In the mid-term, however. new export-oriented in dustries will come into existence and capita] and labour will move into these industries and employment and income level will gradually go up. But this dynamic adjustment process is painful for the society and the government of the time.

However, the pains can be minimised if a gradualist made-to measure approach is adopted rather than a drastic across-lhe- board tariff cut ap-Kich is followed. Finally does the TPR come to recommend a 10 and 20 per cent schedule of tariffs to Bangladesh without doing an exercise of optimal tariff structure for the county? One takes the view that the examples of Srl Lanka. Ghana . and Argentina etc cannot be a guide to Bangladesh since the economic structures of these countries are substantially different from that of Bangladesh Bangladesh will have to take It* decision based on Its own competitive strength vls-s- vis the positions of Its competitors in the world.

To conclude, all these can be analysed with a properly designed dynamic general equilibrium model of the economy. This should be done before another drastic tariff-cut I* undertaken. The country should, therefore, first exploit the full potentials of the existing tariff structure before it launches an other major tariff reform. A breathing spell of a few years will give the country this oppor tunity. A rush to further reform can do the country's fledgling industrial sector great damage But the government should announce the year when it will introduce such a reform so that the Industrikliata can brace themselves up for that change.