Originally published in Financial Express, Bangladesh, 2018
According to the Ease of Doing Business statistics, it takes only three months for a business to get electricity connection in Ethiopia, while it takes one year in Bangladesh. Bangladesh takes four times more time than Ethiopia to register a property, and double the time to complete documentations for cross-border trading.
For garment-makers, these can be very relevant, and investors are taking notice of these scores from the Ease of Doing Business rankings. After investments made by leading apparel-makers from China, India, etc., in Ethiopia, DBL, a garment company from Bangladesh invested in a new factory in Ethiopia in 2017 to export to the USA. While enough is said of Ethiopia as the next low-cost manufacturing hub, the Bangladeshi outbound investment raises questions that can impact the prospect of its own economy and its competitive edge in the RMG industry.
First, is Bangladesh investing elsewhere before investing amply domestically? As per the International Monetary Fund (IMF), most developing countries clocked investment rates between 35-40 per cent in the initial years of their development. As investments boosted domestic output and the virtuous cycle of growth took off, they started looking elsewhere as their wage-arbitrage diminished eventually. The average investment rate in Ethiopia at 37 per cent for five years till 2016 was also in this range. But with a rate below 30 per cent, Bangladesh’s investment was below the South Asian average, let alone the fast-developing peers. With 29 per cent of its gross domestic product (GDP) coming from industry, it is only ahead of large developing nation peers like Nigeria and Pakistan. While China seeks low-cost options, the outflow from low-cost Bangladesh highlights its lack of relative competitiveness and difficulty in doing business. Due to this, it is seeing an outflow of investment it itself needed to reach a critical mass. While it may have invested because of Ethiopia’s advantage of duty-free access to USA, there are other advantages like lower labour cost, power and one-stop services Ethiopia offers to make itself a competitive and easy investment destination. If such investment migration from Bangladesh’s garment-sector persists, it can impede its own domestic capacity building and resultant employment prospects.
Second, apart from the loss of investment that Bangladesh needs, what are its alternative sectors that can push its growth? Not many, as it turns out. World Bank estimated Bangladeshi exports at US$31 billion in 2014, of which over 80 per cent came from garments alone. That is a high-concentration. In comparison, the largest export segment in India comprised only 15 per cent of its pie in 2017, as per its commerce ministry data. If one derives the math using Bangladesh’s GDP, exports and manufacturing data, then about half of its manufacturing output came from garment sector alone. Moreover, this sector employs a large chunk of its informal workforce, who may be unemployable in other trades unless the country invests in new skills training. Sluggish employment growth in the informal demography can stimulate social tensions. Given the garment sector’s disproportionate concentration and the smaller size of alternative sectors, the economy’s income levels and addressable consumer base can be impeded if such investment migration in garment sector persists.
Third, is Bangladesh investing elsewhere before strengthening its own value-chain? With garment-making migrating from China to Bangladesh, India gained as a cotton exporter. Almost 40 per cent of Indian cotton exports came to Bangladesh in 2017. But while both governments are working to streamline trade processes, things are far from satisfactory. Ethiopia made border-trading easier by implementing a risk-based inspection system, enabling speedier export-growth to African countries. Ethiopia is a large producer of cotton. While its output’s quality is low, it has opened its agro sector to foreign investments to improve output. Its proximity to cotton growing Egypt is also a plus point. While Bangladesh has worked to import electricity from India, its 24-hour supply to all regions still remains a challenge. Ethiopia’s investments include a hydropower plant, which would ease power supply. Its supply chain is strengthened by the new train line to Djibouti, and the Chinese Navy now protects that strategic port. In Ethiopia’s large industrial parks, investing companies have set up training centres to train the next generation of local supervisors and make the sector more formal, unlike Bangladesh where the workforce remains largely informal. So, will gaps in value-chain incentivise further migration?
Last, is one-stop service a key differentiator for Ethiopia to evince investor interest, including from Bangladesh? The industrial parks in Ethiopia offer real one-stop services covering visa processing, apart from clearances and facilities. This makes Ethiopia stand out as an investment destination, despite its overall low ranking in the Ease of Doing Business. This convenience of one-stop service makes Ethiopia’s industrial parks a compelling case. Bureaucratic processes in South Asian nations may have improved, but still have a long way to go before they can be called real one-stop service. Ethiopia offers visa-on-arrival to many nationalities, while Bangladesh requires visa from most foreign nationalities. The experience during a visa application is often a foreigner’s first impression of a new country, setting the tone of what he may face later. So, irrespective of Ethiopia’s duty-free advantages to export to USA, persistence of such investment migration would only highlight that Ethiopia’s one-stop service is also a big decider.
While the scale of Bangladesh’s garment export is manifold larger than that of Ethiopia, it still has a lot to do. Foreign investment will always look for competitiveness. While China can afford to migrate low-cost manufacturing, Bangladesh cannot. If such outbound investments persist, it may impede its domestic sector’s job creation.
Image Courtesy: Financial Express
Originally published here – https://thefinancialexpress.com.bd/views/views/rmg-outbound-investment-vs-own-value-chain-1521213555