Bangladesh Defense
Saif
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- Jan 24, 2024
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IP portfolio based industrial economy in post-LDC Era
Graduation from the least developed country (LDC) category and the loss of trade preferences have made competitiveness a critical strategic imperative for Bangladesh. Due to sustained economic growth, Bangladesh has reached a stage where it is set to graduate from LDC status. However, such graduati
IP portfolio based industrial economy in post-LDC Era
Graduation from the least developed country (LDC) category and the loss of trade preferences have made competitiveness a critical strategic imperative for Bangladesh. Due to sustained economic growth, Bangladesh has reached a stage where it is set to graduate from LDC status. However, such graduation raises several concerns, as Bangladesh will no longer qualify for several trade and borrowing benefits, among others. For example, Bangladesh will lose duty-free and quota-free (DFQF) access and Generalised System of Preferences (GSP) benefits in major markets such as the European Union (EU), Canada, the United Kingdom (UK), Australia, and Japan. Some estimates suggest that up to 73 per cent of Bangladesh's trade currently benefits from LDC-specific preferences; hence, losing them risks a significant decline in exports.
Therefore, how to overcome these challenges and sustain economic growth poses significant challenges. This article suggests that along with graduating from LDC status, Bangladesh also needs graduation from a labour-based, imitation- and replication-based value-addition strategy reliant on imported technology. Such a transition has the potential to help Bangladesh offset the loss of trade benefits enjoyed during the LDC era. The more important is, it is likely to propel Bangladesh onto a highly scalable growth path toward achieving high-income status.
WEAKENING INDUSTRIAL HEALTH AND JOB LOSS: It's worth noting that even before LDC graduation, Bangladesh's industrial economy has started to suffer from weakening health. Although commonly cited issues such as energy shortages, tax burdens, and others are highly important, they could be addressed through sincere and local measures. Besides, there is a global trend toward technology adoption that poses a far more difficult challenge. For example, according to a study around 2010, generating $1 million in apparel exports required roughly 220 workers. However, producing $1 million in ready-made garment (RMG) exports in Bangladesh currently requires roughly 90 workers, reflecting a significant decline in labour intensity over the past decade. For this reason, total direct employment in the RMG sector has stood at around 4 million workers, even as total export volume has tripled over a 15-year period.
On the other hand, Bangladesh's manufacturing sector lost 1.4 million jobs over a decade despite achieving an average annual industrial growth rate of 10 per cent. Among other factors, technology upgrading has been a major reason for this reality.
STRATEGY OF INDUSTRIAL ECONOMY: In serving the domestic market, import substitution is the dominant strategy. Bangladesh's industrial economy is based on the imitation and replication of foreign products by factory-floor local labour, using imported intermediary components and foreign capital machinery. On the other hand, the export-oriented RMG sector's value addition is also based on factory-floor labour, which makes copies of foreign clients' designs using imported capital machinery.
COMPETITIVENESS THROUGH PRODUCTIVITY IMPROVEMENT: One of the strongest arguments for countering the challenges of the post-LDC era has been productivity improvement. For example, if Bangladesh's exports to a market face an additional 10 per cent duty after LDC graduation, competitiveness could be maintained by lowering production (and shipping) costs by a similar percentage through productivity improvement.
So far, to address productivity, Bangladesh has been pursuing production technology upgrades, as suggested by the Nobel Prize-winning economic theory of Robert Solow. The adoption of improved production equipment often leads to shorter production times, improved product quality due to precision operations, reduced material wastage, and increased output per worker. Such improvement in the productivity of all production factors taken together is termed an increase in total factor productivity. A study indicates that by adopting modern time-saving machines, RMG firms have achieved productivity increases ranging from 35 per cent for woven shirts and trousers to 150 per cent for jackets. However, such an approach to productivity improvement reduces local value addition from labour and increases spending on imported capital machinery. Hence, the benefits of labour productivity improvement migrate out of the country.
On the other hand, the learning-by-doing benefit observed by Nobel laureate economist Kenneth Arrow, complemented by the human capital theory of another Nobel laureate, Gary Becker, does not offer scalable and sustainable productivity growth, as the import of increasingly sophisticated production equipment and intermediary components keeps automating away the benefits of learning by doing.
As a result, the conventional, technology-import-driven approach to productivity improvement, supported by Nobel Prize-winning economic theories, does not appear to offer a recipe for crafting a sustainable and scalable path for addressing the challenges of the post-LDC era. The underlying reason is that unlike in the industrial economies of advanced countries, productivity improvement through technology in Bangladesh increases imports of capital machinery and lowers value addition, resulting in job losses. However, if those technologies were developed by Bangladesh, the loss of low-paying factory jobs could have been outweighed by the creation of higher-paying jobs in the research, development, and precision manufacturing of those machines.
On the other hand, all these productivity improvement theories overlook the option of improving products and lowering their costs through the addition of ideas, resulting in evolution. Perhaps this role of technology in improving competitiveness is lost in the Solow Residual, which attributed as much as 80 per cent of growth in the US economy from 1909-1949 to technological progress. It is worth noting that during that period, US firms were making remarkable progress in driving the evolution of products through incremental advancement and reinvention.
Therefore, we should look beyond conventional, technology-import-driven productivity improvement in an imitation- and replication-based industrial economy to sustain and scale up growth in the post-LDC era.
INTELLECTUAL PROPERTY PORTFOLIO STRATEGY: As explained, in addition to improving replication or production machinery, technological advancement plays a significant role in economic growth by driving the inventions, innovations and their evolutions. For example, the invention of the light bulb as a substitute for the oil lamp, and its continued advancement, contributed to economic growth in the USA. Bangladesh has the option to pursue a similar approach.
A huge portfolio of products produced by Bangladeshi firms consists of imitations of foreign products. Despite their success in imitation and replication, these firms have not yet attained the competence to make these products better and cheaper through evolution by the development of intellectual property (IP) portfolios and their integration into those products. It appears that driving the evolution of products and production processes through their own IP will open a far more scalable path to improving competitiveness than improving total productivity of the factories through the import of advanced production machinery. However, to leverage this opportunity, both firms and academic institutions should improve their competence base, and the government should establish a supportive policy framework.
As explained, Bangladesh needs to find a way to improve quality and reduce costs to offset the challenges of the post-LDC era. At the same time, the industrial economy must have a highly scalable path to improving competitiveness while creating high-paying jobs for graduates. It seems that moving from machinery-import-driven productivity improvement to an IP-portfolio-based approach to drive the evolution of products and production machinery will offer a sustainable and scalable path to improving competitiveness while creating high-paying jobs for graduates.
M. Rokonuzzaman, Ph.D is academic and researcher on technology, innovation, and policy.
Graduation from the least developed country (LDC) category and the loss of trade preferences have made competitiveness a critical strategic imperative for Bangladesh. Due to sustained economic growth, Bangladesh has reached a stage where it is set to graduate from LDC status. However, such graduation raises several concerns, as Bangladesh will no longer qualify for several trade and borrowing benefits, among others. For example, Bangladesh will lose duty-free and quota-free (DFQF) access and Generalised System of Preferences (GSP) benefits in major markets such as the European Union (EU), Canada, the United Kingdom (UK), Australia, and Japan. Some estimates suggest that up to 73 per cent of Bangladesh's trade currently benefits from LDC-specific preferences; hence, losing them risks a significant decline in exports.
Therefore, how to overcome these challenges and sustain economic growth poses significant challenges. This article suggests that along with graduating from LDC status, Bangladesh also needs graduation from a labour-based, imitation- and replication-based value-addition strategy reliant on imported technology. Such a transition has the potential to help Bangladesh offset the loss of trade benefits enjoyed during the LDC era. The more important is, it is likely to propel Bangladesh onto a highly scalable growth path toward achieving high-income status.
WEAKENING INDUSTRIAL HEALTH AND JOB LOSS: It's worth noting that even before LDC graduation, Bangladesh's industrial economy has started to suffer from weakening health. Although commonly cited issues such as energy shortages, tax burdens, and others are highly important, they could be addressed through sincere and local measures. Besides, there is a global trend toward technology adoption that poses a far more difficult challenge. For example, according to a study around 2010, generating $1 million in apparel exports required roughly 220 workers. However, producing $1 million in ready-made garment (RMG) exports in Bangladesh currently requires roughly 90 workers, reflecting a significant decline in labour intensity over the past decade. For this reason, total direct employment in the RMG sector has stood at around 4 million workers, even as total export volume has tripled over a 15-year period.
On the other hand, Bangladesh's manufacturing sector lost 1.4 million jobs over a decade despite achieving an average annual industrial growth rate of 10 per cent. Among other factors, technology upgrading has been a major reason for this reality.
STRATEGY OF INDUSTRIAL ECONOMY: In serving the domestic market, import substitution is the dominant strategy. Bangladesh's industrial economy is based on the imitation and replication of foreign products by factory-floor local labour, using imported intermediary components and foreign capital machinery. On the other hand, the export-oriented RMG sector's value addition is also based on factory-floor labour, which makes copies of foreign clients' designs using imported capital machinery.
COMPETITIVENESS THROUGH PRODUCTIVITY IMPROVEMENT: One of the strongest arguments for countering the challenges of the post-LDC era has been productivity improvement. For example, if Bangladesh's exports to a market face an additional 10 per cent duty after LDC graduation, competitiveness could be maintained by lowering production (and shipping) costs by a similar percentage through productivity improvement.
So far, to address productivity, Bangladesh has been pursuing production technology upgrades, as suggested by the Nobel Prize-winning economic theory of Robert Solow. The adoption of improved production equipment often leads to shorter production times, improved product quality due to precision operations, reduced material wastage, and increased output per worker. Such improvement in the productivity of all production factors taken together is termed an increase in total factor productivity. A study indicates that by adopting modern time-saving machines, RMG firms have achieved productivity increases ranging from 35 per cent for woven shirts and trousers to 150 per cent for jackets. However, such an approach to productivity improvement reduces local value addition from labour and increases spending on imported capital machinery. Hence, the benefits of labour productivity improvement migrate out of the country.
On the other hand, the learning-by-doing benefit observed by Nobel laureate economist Kenneth Arrow, complemented by the human capital theory of another Nobel laureate, Gary Becker, does not offer scalable and sustainable productivity growth, as the import of increasingly sophisticated production equipment and intermediary components keeps automating away the benefits of learning by doing.
As a result, the conventional, technology-import-driven approach to productivity improvement, supported by Nobel Prize-winning economic theories, does not appear to offer a recipe for crafting a sustainable and scalable path for addressing the challenges of the post-LDC era. The underlying reason is that unlike in the industrial economies of advanced countries, productivity improvement through technology in Bangladesh increases imports of capital machinery and lowers value addition, resulting in job losses. However, if those technologies were developed by Bangladesh, the loss of low-paying factory jobs could have been outweighed by the creation of higher-paying jobs in the research, development, and precision manufacturing of those machines.
On the other hand, all these productivity improvement theories overlook the option of improving products and lowering their costs through the addition of ideas, resulting in evolution. Perhaps this role of technology in improving competitiveness is lost in the Solow Residual, which attributed as much as 80 per cent of growth in the US economy from 1909-1949 to technological progress. It is worth noting that during that period, US firms were making remarkable progress in driving the evolution of products through incremental advancement and reinvention.
Therefore, we should look beyond conventional, technology-import-driven productivity improvement in an imitation- and replication-based industrial economy to sustain and scale up growth in the post-LDC era.
INTELLECTUAL PROPERTY PORTFOLIO STRATEGY: As explained, in addition to improving replication or production machinery, technological advancement plays a significant role in economic growth by driving the inventions, innovations and their evolutions. For example, the invention of the light bulb as a substitute for the oil lamp, and its continued advancement, contributed to economic growth in the USA. Bangladesh has the option to pursue a similar approach.
A huge portfolio of products produced by Bangladeshi firms consists of imitations of foreign products. Despite their success in imitation and replication, these firms have not yet attained the competence to make these products better and cheaper through evolution by the development of intellectual property (IP) portfolios and their integration into those products. It appears that driving the evolution of products and production processes through their own IP will open a far more scalable path to improving competitiveness than improving total productivity of the factories through the import of advanced production machinery. However, to leverage this opportunity, both firms and academic institutions should improve their competence base, and the government should establish a supportive policy framework.
As explained, Bangladesh needs to find a way to improve quality and reduce costs to offset the challenges of the post-LDC era. At the same time, the industrial economy must have a highly scalable path to improving competitiveness while creating high-paying jobs for graduates. It seems that moving from machinery-import-driven productivity improvement to an IP-portfolio-based approach to drive the evolution of products and production machinery will offer a sustainable and scalable path to improving competitiveness while creating high-paying jobs for graduates.
M. Rokonuzzaman, Ph.D is academic and researcher on technology, innovation, and policy.
