Countries need to focus on their comparative advantage and import products that other countries can produce more efficiently
In a previous column, I commented on the measures proposed in the recently announced budget to promote the “Made in Bangladesh” strategy. One of the targeted industries is the electronics industry.
The choice of electronics is justified because it is a complex product.
Getting into complex products will allow us to acquire certain types of knowledge that will help us to diversify into other complex products later.
I argued in this column that the fiscal support that the government plans to grant to the electronics industry must be accompanied by severe performance conditions.
This will prompt the industry to continuously strive to increase its productivity and sophistication. But what does increased sophistication mean?
I have tried to capture this notion of increased sophistication in the following table. It shows two dimensions of sophistication, one on each axis.
The vertical axis represents the share of components used in industry that are manufactured locally while the horizontal axis shows the proportion of the industry’s output that is exported abroad.
Bangladesh’s electronics industry is now near point A where most of the components used in the industry come from overseas and most of the production is sold domestically.
From there, we can move forward in three directions: i) gradually start manufacturing the components ourselves while continuing to sell primarily in the domestic market (ie, move to point B); ii) continue to import most of the components but gradually expand into the export market with our electronic products (move to C); or iii) do both (ie go to D).
Going forward, we should monitor whether our electronics companies are taking these steps, identify what is constraining them if they are not, and take action to remove the constraints.
At the same time, any tax support granted to them (tax breaks or subsidies) should be contingent on the progression of firms through the ladder of sophistication along the two dimensions presented in the graph.
If we are giving grants, it should be to promote change, not to maintain the status quo.
Let me clarify that we should not necessarily aim to manufacture all the components ourselves.
Countries need to focus on their comparative advantage and import products that other countries can produce more efficiently.
This is the essential logic of international trade.
However, we can also note that comparative advantage is not a static concept.
Over time, countries acquire different capacities that they did not have before.
As new capabilities are acquired, countries develop a comparative advantage by manufacturing certain products for which they previously did not have this advantage.
Thus, economists also speak of dynamic comparative advantage.
Nevertheless, it is likely that we will never reach a situation where it will make sense for us to manufacture all the electronic components ourselves.
But surely we can manufacture a much higher proportion of components than we currently do.
Let us come to the other dimension, namely exports of electronic products.
We haven’t made much headway on this front since 1995, when our total electronics export earnings were around $ 22 million.
About a decade and a half later, it comes to around $ 75 million. The export basket of electronics products is not very diverse.
Defined at the HS 4-digit code level, the top five products accounted for 71% of electronics exports in 2018.
Topping the list were batteries, which alone accounted for just over a third (36%) of electronics exports.
The next four were electrical transformers, parts of radios, telephones and televisions, microphones and electrical machines.
One of the stars of electronics exports in recent years is Vietnam.
How does it compare to Vietnam in terms of the composition of electronics exports?
The following charts show the top 10 electronics exports from Vietnam and Bangladesh respectively in 2018 (the latest year for which I have comparative data; data is from Harvard Growth Lab’s Atlas of Economic Complexity website).
We do not, of course, expect Bangladesh’s export profile for electronics to match that of Vietnam.
Countries have different comparative advantages, and in addition, Vietnam is now a mature exporter of electronics products with an export value of $ 102 billion in 2018, compared to $ 72 million for Bangladesh.
Nonetheless, the current makeup of Vietnam’s electronics exports can perhaps serve as a guide as to where we might want to be in 10 to 15 years (it can be noted that Vietnam’s great breakthrough in electronics exports occurred from 2010, when for 10% of the country’s exports; in 2018, that is to say in 8 years, this proportion had increased to 36%).
From this perspective, it is interesting to note that five of Vietnam’s top 10 export electronics (defined at the 4-digit level of HS code) in 2018 were also among Bangladesh’s top 10 electronics in the same year.
These are transmission devices for radio, telephone and television, radio parts, telephones and televisions, microphones, semiconductor devices and electrical transformers.
The absolute values of these exports are still very low compared to that of Vietnam (for example, in 2018, Bangladesh exported only $ 8 million worth of electrical transformers compared to Vietnam’s $ 13 billion).
But at least we have entered the world markets with such products.
Going forward, we need to closely monitor what is happening with these exports and, if they start to stagnate, we will need to take a close look and see what corrective actions are needed to catalyze momentum.
The announcement of increased government support for a “Made in Bangladesh” strategy is just the start. Hard work awaits us.
The author is an economist, previously in an international development agency