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How external sector supports growth

Published : Friday, 24 June, 2022 at 12:00 AM  Count : 1023
Mehdi Rahman

Growth is a term used to find out the incremental output generated during a particular time compared to previous corresponding period. Of the different conceptual frameworks, mathematical calculation is used to find out the quantum of growth. Self production and self consumption have no transactional value.

As a result, such output is not considered in formal calculation to bring monetary value. Official attribute to growth measurement is a simple term, GDP which consists of different components. Under expenditure method, there are some components, summation of which results in total production in a particular time.

The components are 'consumption', 'government expenditure', 'investment', and 'net export (export less import)'. Without external sector - 'net export', savings are equal to 'investment'. This is a situation found in closed economy.

In case of deficit in 'net export', the result indicates savings are lower than investment. This situation requires external inflows in the form of equity or borrowing to bridge the deficit. On the other hand, positive position of 'net export' refers to higher savings than investment; leading 'net export' balance goes to serve to fill in the deficit of other countries.

Open economies are interdependent. None can go alone. The birth of economic theories articulates division of work, turning point to development as well as shadow side of economies -inequality. Without division of work, self production is needed for survival. This is nothing but subsistent living, which is rarely possible to be counted in national output.

Bangladesh is on open market economy in trade transactions. It trades globally. In its trade basket, two points work - export and import.

Bangladesh is well positioned for export of readymade garments (RMG) in the world due to unique advantages, low price among others. Of the total export, RMG constitutes 85 percent. Bangladesh needs to import investment goods, intermediate goods, and consumer goods. There is a question whether consumer goods need to be imported. It depends on situation.

However, basic commodities like cereals are not imported. Intermediate goods are essential for production of import substitutes and exportables. Inward economic journey of the country is on advanced level. This results in phase-out of intermediate goods.

External sector supports to make forward journey. Under closed economy, there is only reproduction for subsistent living. Upward movement without external support is rarely possible unless the economy is in possession of national resources. The growth path is run by dissavings; investment is higher compared to savings. The gap between investment and savings is covered by external sector. The process needs no formal external investment; rather it auto sets the payment needs of incremental imports under trade finance mechanism.

To operate in global markets, trade and finance play roles. Bangladesh operates global market through trades in particular. In the aspect of finance, transactions in capital nature are restricted other than inward investment in the form of equity. In case of external borrowing by private sector, permission from central bank and Bangladesh Investment Development Authority is required. There is another committee for considering overseas investment by resident entities.

Bangladesh is opening up regarding global finance with prudent pace. Relaxation at overnight model is not possible to apply since there is a double edged sword in place. Inward borrowing requires repayment in future dates for which inflows in foreign currency are needed.

Our focus is to design development framework for betterment of the economy. In every aspect, there need supports from external sector. But supports are not free of cost. We need to pay the cost as needed. As noted earlier, 'net export' means export which is net of import. The development parameters need 'net export' to be in deficit territory. This means that investment exceeds savings.

In plain words, negative savings can bring development. How it is possible is a question. The simple answer can be articulated through an example taking an individual into consideration. An individual lives by different means - physical labour, arm chair job, business, and the like. The regular income does not support to meet capital type expenditure like home, and white goods. To acquire these items, an individual needs external money in the form of loans from banks or other sources.

If the individual is in possession of ancestral assets, s/he does not need to go for such process. The loan taken now needs to be repaid in future dates through installments. This is capitalization of future income at present time, which makes an individual to lead a better life financially and socially.

Through loans, s/he comes out from low living standard. In the same way, injection of loan in to capital fund makes a corporate entity to become bigger. Likewise an economy with deficit in 'net export' position can produce more, coming out from reproduction state.

Therefore, every economy should go for the supports of external sector. Should it be? There answer is 'yes' or 'no'. Answer with 'no' means that an economy should not go for 'net export' in negative position unless it has capacity to absorb. Hence, absorption capacity is required to achieve. What needs to do for achieving such capacity? The answer is to increase earnings from external sector by way of export of goods and services and factor incomes like income by nonresidents working abroad.

But there is no short cut measurement regarding the extent of capacity to be achieved. After Covid-19, supply chain shocks lead Bangladesh economy to a different situation in the context of external sector. Huge deficit in 'net export' teaches the economy to be more resilient for which there needs supervision of private sectoral transactions, in addition to management of external sector by authorities concerned.

Price of local currency becomes target of volatility. This situation sets few to gain a lot, depriving many by way of price hike for import goods.

Surely external sector is inevitable for growth trajectory. But policy tools need to be fine tuned continuously so to keep unseen shocks at controllable level.
The writer can be reached:
[email protected]

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