LDC graduation: A pyrrhic victory?
It is heartening that Bangladesh is set to graduate from LDC status. While there is much exuberance regarding this issue, an analysis will prove that the promising future that is being painted contradicts the looming herculean challenges that will ensue. And this blissful ignorance about challenges may undermine the preparation to surmount the hard time that lies ahead.
Bangladesh was under the LDC category since 1975. In 2018, after the fulfilment of the criteria to graduate from LDC, Bangladesh acquired eligibility for the graduation. The eligibility is measured based on three indices namely-GNI per capita income, Human Asset Index (HAI) and Economic Vulnerability Index (EVI).
Committee for Development Policy (CDP) has given another nod to the ultimate graduation of Bangladesh. It is to be mentioned that, following a solicitation by Bangladesh to prolong the period for LDC graduation on the ground of ill-effects of COVID-19, authorities had shifted the time to 2026 from 2024.
The benefits those Bangladesh will have after the graduating is dwarfed by the cost that will be imposed. Admittedly, Bangladesh's image will be projected as a developing country and a consequent confidence-boost in the potential investors. Perhaps, the most paramount among the benefits is the fact that Bangladesh's credit rating will upgrade and Bangladesh will decidedly see a high flow of FDI and it will also open the opportunity of external finance.
However, the adverse effects or challenges that will be posed is rather strenuous for a country like Bangladesh. According to UNCTD (United Nations Conference for Trade and Development),Bangladesh will see 7.5 percent decline in its export while Center for Policy Studies(CPD) forecasts a 8.7 percent drop in export earnings.
It is important to understand that the graduation from LDC status has many consequences. Firstly, Bangladesh will no longer be able to access WTO waiver which exempts the country from Trade Related Intellectual Property Rights [TRIPs] with obvious impact on country's pharmaceutical industries. Secondly, Bangladesh will also fall out of favour of WTO flexibilities regarding subsidies with repercussions for country's agriculture. Thirdly, Bangladesh will lose MFN (Most Favoured Nations) and GSP (Generalized Systems of Preferences) provided by various regional blocks and trade partners with fallout for RMG sector.
LDCs are exempted from intellectual property hurdles as exacted by an arrangement called TRIPs. While other developed countries had to count an exorbitant sum of money owing to patent and intellectual property related conditions, Bangladesh was exempted because of its LDC status. This exemption came as a windfall for pharmaceutical industries of Bangladesh and stimulated its rise as a major industry of Bangladesh. However, this unique privilege will cease after the graduation--with repercussions for pharmaceutical industries in particular and whole economy in general.
Besides, Bangladesh as an LDC country enjoys zero-duty tariff, preferential trade and regional trade benefit to 38 countries worldwide, 28 of which are within EU. European Union is one of the major export destinations for Bangladeshi RMG and other goods through its GSP facility--a privilege which will cease after LDC graduation. However, Bangladesh can avail GSP+ facility which comes with a constellation of conditions. Among others, GSP facility requires ratification of 27 international conventions relating to Human Rights, ILO and environment protection and good governance.
Bangladesh RMG sector, since its inception, was beneficiary of comparative advantage emanating from cheap labour. However, this industry is now facing strains. One of the significant challenges confronting this industry is the rise of new competitors. Vietnam poses a threat to Bangladesh's erstwhile unrivalled position and competitiveness in the global market. With the current trend continue unabated, Vietnam is poised to dethrone Bangladesh's longstanding 2nd position in this sector. With diversified market, increased productivity, decreased lead time, Vietnam had managed unique combination to excel in the industry.
Vietnam has recently inked an FTA with European Union which entails 99% elimination of tariff. Far from harnessing this potential of free trade agreements, Bangladesh is now in jeopardy given the cessation of GSP being on the horizon. To better combat this cessation, Bangladesh has to utilize economic diplomacy and negotiate with regional trade blocks and trade partners for concessions.
Any external shocks, therefore, will be cataclysmic to the whole economy. Therefore, Bangladesh should emphasize developing other sectors, such as leather, glass, ceramics, cement, ships, light engineering products, microchips, smartphones, computer, and IT-related products. If Bangladesh can diversify its export basket, it will reduce the vulnerability from external shocks. Besides diversifying industry, Bangladesh should also diversify product that RMG sector offer. While Vietnam is known for its high-end apparel products and diversified exports, Bangladesh till now is confined to only 4-5 items and low-end cheap products. Besides, Bangladesh lacks a robust a backward linkage industry.
Besides, according to the World Bank (WB) Ease of Doing Business 2020 index, Bangladesh ranked 168. Bangladesh should remove its legal and infrastructural bottlenecks that dissuade foreign investment and should offer more benefits to the prospective investors.
Unfortunately, privileges of our economic growth are not equal to all. A section of the country's population has accumulated wealth. The Gini Co-efficient measured on a scale of 0 to 1; the closer it is to 1, the higher the inequality rate. A rate of 0.5 point refers to dismal inequality prevailing in a country. While the Gini Coefficient was 0.29 in 2014, it rose steeply and stood at 0.36 in 2020. This rise is illustrative of ominous state of economic inequality. What's more worrisome is the rampant corruption is eating into vitals of our economy. Government should, therefore, take measures in order to attain much greater progress in the future.
To better coordinate these efforts, government should craft a transition strategy which may contain various goals. To gain uninterrupted international support in form of aid and other facilities should be the focal point of this strategy paper. This strategy paper should as well entail coping up strategies in the event of halt of the prevailing facilities. Free trade deals and other form of economic diplomacy should top the agenda of the strategy paper.
Therefore, rather than relishing in fleeting success, Bangladesh government should put all its efforts in order to better cope up with the challenges that will be posed by this transition. If Bangladesh can combat these emerging challenges with aplomb, then this transition will bring new dawn for country's economy.
The writer is a student,
University of Dhaka