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Strategy to diversify exports
There has been a great deal of justifiable national pride in the resilience of Bangladesh's twin $10 billion plus export sectors, the ready made garments (RMG) and manpower, to the global financial crisis of 2008. But, it has been evident for most policymakers that it will be difficult for us to move on to the next phase of Bangladesh's economic development without developing new industries. However, the next major export sectors, foot-wear/leather goods and frozen foods/aquaculture, are barely worth $500 million. There has been much talk over developing strategies for export diversification, but the question is how we can translate the rhetoric into policy reality.
January 17,2009
AT Capital hosted the pharma sector strategy meeting 'Challenges and Opportunities for the Pharmaceutical Sector in Bangladesh'. This was the start of an important initiative to explore how Bangladesh can take advantage of the globally changing phar-maceutical environment. The CEOs and management teams of the 10 to 12 most important pharmaceutical companies, who constitute a $600 million industry, attended the meeting. But pharmaceutical exports are relatively small at only $50 million. There seemed to be an inconsistency between the evident quality of management and companies and their export performance.
Space constrains me from going into the specifics from the seminar, which I hope to cover in a future column. However, if pharmaceuticals arc to replicate the Indian experience and become a $500 million plus export sector, then they need to overcome the constraints of financial capital, strategic capital, regulatory capital, and reputational
capital. The challenge is not only about getting resources to build world-class facilities that can meet the US or European regulatory standards, but also about building strategic alliances with global, and indeed Indian pharmaceutical companies, to gain access to markets and intellectual property.
Another interesting issue raised by a number of pharmaceutical CEOs was their conviction that the industry needs the ability to acquire overseas companies if they are to be able to fast track regulatory approvals and market access. These are not the mega $100 million acquisitions seen by India in recent years but the more modest $5 to $10 million deals.
The Bangladesh Bank might argue that with only $5.3 billion of foreign reserves, we cannot afford to do this yet. But what one can reasonably argue is that we allow a selective, focused and strategic use of a small proportion of our foreign currency reserves to help accelerate growth in industries with significant export potential. One cannot justify a wholesale dismantling of capital controls. But 1 believe that as the 2.008 global financial crisis has seen asset
prices decline and hence the cost of acquisitions plummet, Bangladesh should allow some modest overseas investment. Using a few hundred million dollars of reserves to allow our leading corporates to globalise will likely be the source of future billions of dollars of exports and hence foreign currency reserves.
My participation in the pharmaceutical seminar also got me thinking about how we can turbocharge our export diversification policy. I was reading a paper surveying export promotion agencies (EPA) in 104 developed and devcl-oping countries (Export Promotion Agencies: What works and doesn't work, Lederman, Olereagga and Payton), which offered valuable insight that is relevant for Bangladesh.
One can divide the services offered by EPAs into four broad categories:
1) country image building (advertising, promotional events, but also advocacy);
2) export support services (exporter training, technical assistance, capacity building, including regulatory compliance, information on trade finance, logistics,
customs, packaging, pricing);
3) marketing (trade fairs, exporter and importer missions, follow-up services offered by representatives abroad); and
4) market research and publications (general, sector, and firm level information, such as market surveys, on-line information on export markets, publications encouraging firms to export, importer and exporter contact databases).
Other instruments that developing countries have used to support exporters (and at times, domestic suppliers to exporters) are the provision of credit at favourable interest rates, preferential prices for inputs like electricity and transport, lower tax rates, tariff exemptions, and preferential access to foreign currency. For each $1 of export promotion, the authors estimated a $40 increase in exports for the median EPA.
In terms of what type of institutional arrangements, objectives and activities lead to a stronger impact on exports, their results suggest the following: EPAs should have a large share of the executive board in the hands of the private sector, but a large share of their budget should be publicly funded. The proliferation of small agencies within a country leads to an overall less effective programme. EPAs arc more effective when focusing on non-traditional exports, or have some broad sector focus (For example, agriculture, manufacturing. tourism, high-tech). They should also focus their activities on large firms, which can take advantage of EPAs services, but which arc not yet exporters. The use of office representation abroad has a positive impact on exports in the full sample, but a negative Impact in a sub-sample of developing countries, suggesting that in poorer countries EPAs efforts should focus on on-shore
IFTY ISLAM
activities. This means that iA poor countries, overseas export promotion through trade fairs is often a poor use of money. There should be greater focus on helping companies and sectors domestically develop their export strategies.
The International Trade Council (ITC), a UN agency, noted, “In an ideal trade support network, the national trade promotion agency would act as a 'first-stop shop' for the business community and, through its referral system, coordinate the trade support network's overall response to the individual exporter.”
Another export promotion specialist, M Czinkota in 'National Export Promotion: A Statement of Issues, Changes, and Opportunities' noted, “The key determinant of export performance is the increased competitiveness of firms. Export promotion must have a decidedly inward looking component, which makes j the production of goods and services cheaper, faster, and better."
The new government appears to be committed to a policy of change with the immediate economic priorities being the energy sector and bringing down the price of essentials. However, Bangladesh has significant potential in several export-oriented industries, including pharmaceuticals, leather goods, frozen foods, shipbuilding, and information technology-enabled services (ITES). But a more effective policy of export promotion and diversification coupled with economic diplomacy will be critical if Bangladesh is to follow other Asian Tigers like Malaysia, and more recently Vietnam, into developing dynamic new export sectors and concurrently attracting substantial FDl.
The writer is the managing partner of Asian Tiger Capital Partners and welcomes feedback at ifty.islam@at-capital.com