Industrial automation: a challenge for Bangladesh’s manufacturing future

Muhammad Mahmood

Published in The Financial Express on November 15, 2017

Photo: The Financial Express

Manufacturing will continue to be an integral part of securing a better economic future for Bangladesh. According to the World Bank, manufacturing contributed 28.6 per cent to the GDP (gross domestic product) in 2016, accounting for 13 per cent of the total employment. The manufacturing sector is fairly diversified focusing on labour-intensive basic manufactures. But the sector is currently dominated by the RMG industry due to its predominance in exports accounting for almost 80 per cent of total exports, a position held by jute and jute goods in the early days of Bangladesh’s nationhood. Almost close to a half of manufacturing output contribution to the economy also comes from the RMG industry.

Medium and large-scale firms in the manufacturing sector now account for 80 per cent of the manufacturing output. Small and household-based (cottage) firms also play an important role in this sector but their output growth rate is much lower than that of medium and large manufacturing firms. There is also a very significant number of state-owned firms in the sector. They are among jute, chemical, textile, steel and other industries.

With the decolonisation process of countries in Asia and Africa beginning in the late 1940s and the early 1950s, these countries have targeted manufacturing both for output growth and creation of employment opportunities for unskilled labourers. Both Arthur Lewis and Paul Rosenstein-Rodan outlined a vision for these newly independent but poor countries with abundant labour supply (mostly unskilled) to make a transition from ”underdeveloped to “developed” countries through industrialisation (i.e. manufacturing activity). From Arthur Lewis’s point of view, industrialisation is synonymous with the creation of a modern sector. In his “dual economy” mode as the modern sector expands, the traditional sector shrinks and the economy bounces onwards in a self -propelling manner. But the history of economic development really does not lend much support to such a hypothesis except in few cases like South Korea and a few other East Asian countries.

However, all developing countries continued to rely on manufacturing as the principal instrument of economic growth which sometimes is considered synonymous with economic development. The Perspective Plan, 2010-2021 of Bangladesh clearly identified manufacturing as the main driver of economic growth and employment for years to come. The Plan further states that the main driver of manufacturing growth will be the export market and the resultant income growth will lead to import substitution. Implicit in this is that Bangladesh will pursue export promotion and import substitution simultaneously. Such a policy objective is consistent with neo-mercantilist doctrinaire view. Such a policy orientation has dismally failed to achieve the industrialisation objective in countries that tried it.

But after decades of experiment with manufacturing, the success remains very patchy for developing countries including Bangladesh. Bangladesh, in particular, produces basic manufactures with high levels of labour input (mostly unskilled). Cheap unskilled labour is where Bangladesh has its comparative advantage. But such a comparative advantage based on abundant labour but mostly unskilled has its own limitations. The drive of developing countries including Bangladesh to generate high levels of manufacturing output has not been a great success. Even today more than half the manufacturing output comprising high technology-intensive and high value added manufactures are produced in high income countries.

Since Independence the economy of Bangladesh has witnessed gradual decline of the agriculture sector’s contribution to GDP and rising contribution of manufacturing and services sectors (something akin to the Lewis model). It is now estimated that agriculture’s contribution to GDP is 17 per cent while that of manufacturing now stands at 29 per cent. But the agriculture sector employs more than half the labour force indicating that the manufacturing and services sectors could not absorb the surplus labour force from the agriculture sector (which goes against the Lewis hypothesis).

As mentioned earlier, the sector is overwhelmingly dominated by the RMG industry. It also employs about 4.0 million workers, of which 80 per cent are women. This industry now accounts for half the labour force employed in the manufacturing sector. The rapid expansion of the RMG industry in Bangladesh is aided by factors such as government subsidies, tax holidays, restrictive labour laws causing wage depression and the GSP (generalised system of preference). To keep the rent-extracting regime in place, politics and economics have merged in Bangladesh to such an extent that now almost half the members of the parliament have direct or indirect financial links with the RMG industry. Their whole efforts for this industry are directed to ensure that public money keeps flowing in, which according to some estimate, amounts close to 6.0-8.0 per cent of revenue foregone. Such continuing efforts, directed to keep the economic rent-extracting regime in place, are bound to cause inefficiency within the industry. Furthermore, the RMG industry also failed to help develop neither interconnected industries as reflected in its very high reliance on imported inputs nor contributed to expanding the manufacturing base comprising other industries.

The industrial policy emphasises the importance of a more diversified manufacturing base and identifies a number of industries. But no clear idea on the criteria used to identify those industries has been provided. This drive towards a more diversified manufacturing sector will be spearheaded by small and medium enterprises based on labour-intensive technology and the use of local raw materials. Again no rationale for this has been provided. The importance of more capital-intensive industries is also recognised and a set of incentive packages are also on offer to achieve that. Overall, the culture and the scope of rent seeking are being further encouraged and extended.

The state involvement in promoting a particular sector or sectors will inevitably lead to developing a rent-seeking entrepreneur class but more importantly, this will cause the massive resource misallocation – a sure recipe for creeping inefficiency. These inefficient industries will then require further financial bailouts as happens with state-owned enterprises. These entrepreneurs will support the government to stay on its good side and would do everything to ensure that money keeps coming in.

However, the real challenge to the sector comes from increased use of industrial automation and other advanced technologies which will cause more manufacturing activity to take place in developed economies closer to consumers. Many MNCs (multinational companies) are already reshoring their production from low labour-cost countries. So, solely relying on cheap labour to gain the competitive advantage will not work any longer as this advantage is offset by lower productivity due to lack of skill development. This is clearly reflected in firms’ hiring workers without raising wages in Bangladesh. Available dates clearly indicate that real wages in the manufacturing sector in Bangladesh have not increased over the last decade and a half.

Obviously, this clearly signals that more resources should be directed towards skill development. Bangladesh now spends 2.3 per cent of GDP on education against an international average of 3.5 per cent of GDP. Bangladesh not only has to focus on skill development for today’s jobs but, more importantly, with the rapidly-changing technology it also has to focus on developing skills for tomorrow’s job market, some of which are predictable today, but others are not. At the same time changes in the global economic environment is presenting further challenges. The latest IMF World Economic Outlook describes the current phase of economic recovery as still incomplete. Its reference to the current “cyclical upswing” clearly indicates that economic conditions have not returned to the level of the pre-global financial crisis of 2007-08.

Though the rapidly-changing global economic environment resulting from accelerating technological changes can cause disruption in producing traditional products which Bangladesh does, yet opportunities are there for Bangladesh to continue to focus on labour-intensive products such as clothing and footwear which have not yet been seriously affected by automation. But how long it will continue is difficult to predict. That underlines the necessity that Bangladesh must have to position itself to take the advantage of new opportunities being created from technological changes and innovations. But that will require significant investments in skill and infrastructure development. Most importantly, the government must refrain from choosing winners, because true winners can only emerge through the open competition in the markets.