Assignment

An Assignment An Assignment On On

Effect ofEffect of Recession onRecession on

RMG sector inRMG sector in Bangladesh andBangladesh and

its futureits future

i

Submitted to:Submitted to:

Md. Abbas UddinMd. Abbas UddinAssistant Professor Assistant Professor Guest FacultyGuest FacultyBGMEA Institute of Fashion and Technology (BIFT)BGMEA Institute of Fashion and Technology (BIFT)

Submitted by:Submitted by:

1.1. A.H.M Ohidul HaqueA.H.M Ohidul HaqueID # 082-E-020-52MBA in APMBGMEA Institute of Fashion and Technology (BIFT)

2.2. Tapon Chandra SarkerTapon Chandra SarkerID # 082-E-03-52MBA in APMBGMEA Institute of Fashion and Technology (BIFT)

3.3. Md. FiruzzamanMd. FiruzzamanID # 082-E-037-52MBA in APMBGMEA Institute of Fashion and Technology (BIFT)

Date of Submission: 31 August 2009Date of Submission: 31 August 2009

ii

LETTER OF TRANSMITTAL

June 31, 2009

To,Md. Abbas UddinAssistant Professor Guest FacultyGuest FacultyBGMEA Institute of Fashion and Technology (BIFT)

Subject: Submission of Assignment.

Dear Sir,

Here is our term paper of Introduction to RMG Business on Effect of recession on RMG sector in Bangladesh and its future. It is a great pleasure for us to submit this term paper. We have tried our best to make it a good one within given time. Any sort of suggestion regarding this term paper would be gladly appreciated and we would be gratified if this paper serves its purpose.

We are pleased to provide you this term paper with necessary notes, reference and we shall be available for any clarification, if required.

Sincerely,

A.H.M Ohidul HaqueTapon Chandra SarkerMd. Firuzzaman

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Table of Contents

Particulars Page

02. Executive Summary v

03. Introduction vi

04. Background of RMG vi

05. Contribution to GDP vii

06. Causes of global recession viii

07. Recession effect on GDP along with RMG ix

08. Present situation of RMG x

09. Recommendation xii

10. Conclusion xiv

11 Reference xiv

iv

EXECUTIVE SUMMARY

The economy of Bangladesh is largely dependent on agriculture. However, in recent

years, the Ready –Made Garments (RMG) sector has emerged as the biggest earner of

foreign currency. The RMG sector has experienced an exponential growth since the

1980s. The sector contributes significantly to the GDP. It also provides employment to

around 3.5 million Bangladeshis. An overwhelming number of workers in this sector

are women. RMG fells victim to violence during 2007 and 2008. The worldwide

financial crisis has greatly affected the economic, financial, social and even cultural

sectors of the world and Bangladesh is going to fall victim to this global financial

distress being largely dependent on its revenue from the garments’ industry. Though

the economy of Bangladesh is not closely integrated with global economy, necessary

steps should be taken immediately to combat the upcoming financial turmoil.

v

Introduction:

According to the National Bureau of Economic Research (NBER), recession is

defined as a significant decline in economic activity spread across the economy,

lasting more than a few months, normally visible in real gross domestic product

(GDP), real income, employment, industrial production and wholesale-retail sales.

More specially, recession is defined as when business cease to expand, the GDP

diminishes for two consecutive quarters, the rate of unemployment rises and housing

prices decline. And it affects every country that is the US and hence in a chain effect,

almost every other country in the world is affected. Since we, Bangladesh, are one of

the leading readymade garments exporters in the world we are in effect as well, in a

big scale.

Origins of the Global Financial Crisis

The global financial system has suffered a severe and virtually unprecedented blow,

leading to the failure of a number of major financial institutions in developed

countries and a worldwide economic slowdown with its accompanying job losses,

erosion in consumer and business confidence, and a tightening of credit. This has

forced government intervention on a massive scale in a number of countries, through

expansionary monetary and fiscal policies. This crisis reflects the fallout from acute

economic and fiscal imbalances that developed in the first half of the decade. An

overly accommodative monetary policy in 2001 resulted in a dramatic increase in

economic growth, which led to an increase in the available funds for loans and

investments. It also resulted in a dramatic shift in the terms of trade balances between

countries, illustrated by the growing current account surpluses in Asia and the

increasing deficit in the USA. The world became awash with liquidity, with funds

chasing any opportunity for good returns. Policy initiatives in 2004 further fuelled the

liquidity bubble. In the USA, low-income earners were encouraged to buy homes with

little or no equity and the banks moved to providing low-income mortgages.

Investment banks benefited from less stringent rules that permitted them to increase

their leverage ratios. Changes in international bank regulations opened opportunities

for banks to accelerate their off-balance sheet activities. In many countries, this credit

bubble translated into higher real estate prices and abnormally strong returns in equity

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markets. It also fuelled growth in non-traditional financial products, such as financial

derivatives and complex structured products. The complexity of these products made

assessing risk and providing oversight more and more difficult, outstripping the ability

of regulators and credit rating agencies to keep pace with developments. The

traditional regulatory framework was structured to address conventional retail

banking, not the new providers of credit: investment banks, hedge funds, pension

funds and other non-retail bank entities.

As with all financial bubbles, it was only a matter of time before events triggered a

correction. That occurred when a rebalancing of monetary policy led to tighter credit

conditions in late 2005 and early 2006. As a result, U.S. house prices peaked in 2006

and U.K. prices shortly after. However, it was only in mid 2007 that the true financial

consequences began to be recognized. The resulting financial losses significantly

impaired the balance sheets of many financial institutions, as assets were marked

down but liabilities remained unchanged. This led to a shift in cash hoarding and the

unwillingness to lend between financial firms. The combination of these

developments caused credit to become less available and more costly. The value of

stocks fell dramatically around the world, household wealth declined and in many

industrialized countries and many advanced economies fell into recession. Central

banks and governments responded aggressively by lowering interest rates, providing

assistance to financial institutions, increasing public expenditures and reducing taxes.

These policy actions should eventually restore stability to the financial system and

spur economic growth.

Cause of global recession:

The truth is we are going through the most severe global financial crisis since the days

of Great Depression. Originated in USA, economic recession is affecting all the major

players of world economy. Governments and major policy makers of world economy

have taken notice of the urgency of the situation and frantic steps are undertaken to

stem the rot. At the core of the term 'recession', spirals of several financial mistakes

are intermingled. The biggest problem with economic turmoil is;

It creates fear and panic amongst general people.

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Rumors are thick and they fly, resulting into even more fear amongst the

households about their savings and hard earned income.

Economic problem of 2008 is of gigantic proportions.

If we look closely at the problem, we find few fundamental causes:

Foremost among them is, complacent regulatory norms in USA. USA has enjoyed

sustainable economic development with cushion of low inflation rates over last two

decades. This resulted into complete ignorance of essential business cycle of

economy. The first signs of this problem were visible 20 months ago when America

was struggling with excess liquidity in the market. That was an ample sign of coming

of real estate bubble and asset price inflation.

Another responsible factor is cushion enjoyed by private and investment banks.

Taking their cue from good economic condition, most of these high flying banks took

higher risks. Most of their business deals were highly leveraged transactions. The kind

of risk undertaken by investment banks proved to be their nemesis as they failed to

gather enough capital to support their risky investments.

Third responsible factor is size of investment banks. Many of them witnessed huge

growth when economy was on the rise. They made huge profits based on their high

risk propensity ventures. These FIs (financial institutions) also contributed heavily to

US corporate profits.

Another important reason was failure of top echelons of management to provide sense

of direction to their deal makers. Greed took over and the rest is history. However,

USA has started taking serious policy decisions to control the worsening situation.

The $ 700 billion bailout package was first step in helping the doomed institutions.

Apart from that, taking over of AIG, orchestrating Bear Stearns' merger with JP

Morgan, taking control of Fannie Mae and Freddie Mac, merging Merrill Lynch with

Bank of America are other crucial steps. Though, all these steps won't prove to be of

much help in the short term. It is being said that, it will take another one year to

stabilize the market and credit flow.

viii

Background of RMG:

In the 1950s, labors in the Western World became highly organized; forming trade

unions. This and other changes provided workers greater rights including higher pay;

which resulted in higher cost of production. Retailers started searching for places

where the cost of production was cheaper. Developing economies like Hong Kong,

Taiwan and South Korea presented themselves as good destinations for relocations

because they had open economic policies and had non-unionized and highly

disciplined labor force that could produce high quality products at much cheaper

costs.

In order to control the level of imported RMG products from developing countries

into developed countries, Multi Fiber Agreement (MFA) was made in 1974. The MFA

agreement imposed an export rate 6 percent increase every year from a developing

country to a developed country. It also allowed developed countries to impose quotas

on countries that exported at a higher rate than the bilateral agreements. In the face of

such restrictions, producers started searching for countries that were outside the

umbrella of quotas and had cheap labor. This is when Bangladesh started receiving

investment in the RMG sector. In the early 1980s, some Bangladeshis received free

training from Korean Daewoo Company. After these workers came back to

Bangladesh, many of them broke ties with the factory they were working for and

started their own factories.

Contribution to GDP:

In the 1980s, there were only 50 factories employing only a few thousand people.

Currently, there are 4490 manufacturing units. The RMG sector contributes around 75

percent to the total export earnings. In 2007 it earned $9.35 billion. This sector also

contributes around 13 percent to the GDP, which was only around 3 percent in 1991.

Of the estimated 2 million people employed in this sector, about 70 percent of them

are women from rural areas. USA is the largest importer of Bangladeshi RMG (98%)

products, followed by Germany, U.K, France and other E.U countries.

Garment sector is the largest employer of women in Bangladesh about 3.5 million.

The garment sector has provided employment opportunities to women from the rural

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areas that previously did not have any opportunity to be part of the formal workforce.

This has given women the chance to be financially independent and have a voice in

the family because now they contribute financially. RMG export performance for the

Month of July-June, 2008-09.

Figure: US million $ Products Export

target for2008-09

Export performance forJuly-June, 2008-09

% Change of export performance over export target

Export performance forJuly-June, 2007-08

% Change of export performanceJuly- June, 2008-09OverJuly-June, 2007-08

1 3 5 6 7 8

Products recorded growth over last year’s performance & also over target

Woven garments

5684.00 5918.51 +4.13 5167.28 +14.54

Terry towel 124.17 132.57 +6.76 112.88 +17.44Handicrafts 6.04 6.44 +6.62 5.49 +17.30

Products recorded growth over last year’s performance but not over target

Knitwear 6583.70 6429.26 -2.35 5532.52 +16.21Foot wear 211.58 186.93 -11.65 169.60 +10.22Home textile 343.84 313.51 -8.82 291.39 +7.59Textile fabrics 79.88 76.32 -4.46 66.57 +14.65

Source: Export Promotion Bureau, Bangladesh

Recession effect on GDP along with RMG:

The RMG sector is expected to grow despite the global financial crisis of 2009. As

China is finding it challenging to make textile and foot wear items at cheap price, due

to rising labor costs, many foreign investors, are coming to Bangladesh to take

advantage of the low labor cost.

According to the Asian Development Bank (ADB) Bangladesh may face slowing

economic growth in fiscal 2008-2009, hurt by a slowdown in the export-based

industry and decline in remittance as the financial crisis is panning out across the

world. The first wave of the world recession raced to Bangladesh with good intentions

for the RMG sector or so it seemed at the time, as more and more buyers were moving

away from china. However after six months, the effects started to go bankrupt or faced

financial/economic problems due to the recession led to canceling of ongoing

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production and other reacts. This resulted in stacking up of stocks worth of millions of

US dollars in the local factories, many of which to be closed down or trimmed to fit

the demand meanwhile the Chinese government prepared packages to keep the prices

from going over the top as they were facing circumstances similar to us, and the price

from going over the top as they were facing circumstances similar to us and by now

they have been able to control the prices, hence the buyers are now going back to

china. The companies in Bangladesh, who have been lucky enough to see through the

first blow, now have other problems to take care of such as buyers becoming more

aggressive and unsettling, as they are also frightened of being wiped out of existence.

So they are becoming very aggressive with prices, quality and time of delivery. The

quality which was sought for even six months ago has become unacceptable to some

of the buyers and which has caused companies to ship the orders at discount prices

and short shipments, causing the companies huge losses. Hence many cannot pay off

their loans to the Banks in time or the LC is not being respected, either by the buyer or

supplier which is happening for many reasons. These instances altogether has a

knockdown effect on the Bank’s mentality for which they are not ready to help out a

lot of business in this sector, which are in dire need of loans with low or no interest.

Present situation of RMG:

The RMG industry is highly dependent on imported raw materials and accessories

because Bangladesh does not have enough capacity to produce export quality fabrics

and accessories. About 90% of woven fabrics and 60% of knit fabrics are imported to

make garments for export. The industry is based primarily on sub-contracting, under

which Bangladeshi entrepreneurs work as sub-contractors of foreign buyers. It has

grown by responding to orders placed by foreign buyers on C-M (Cut and Make)

basis. During its early years, the buyers supplied all the fabrics and accessories or

recommended the sources of supply from which Bangladeshi sub-contractors were

required to import the fabrics. However, situation has improved. At present, there are

many large firms, which do their own sourcing.

The RMG sector is the leading foreign exchange earner, one of the leading employers

and one of the trainers of unskilled workers of Bangladesh, if the govt. does not

provide a bailout soon, it will be hard to survive in these conditions, as it is becoming

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harder day by day to meet the coasts of the factories. In the next few months

circumstances will become even worse as many top buyers have already have already

slowed down and are delaying order bookings. The very existence of the RMG sector

now hangs in the balance of receiving help from the Government to be able to see this

downturn through. Most of the renowned companies in Bangladesh have stopped or

postponed their investments due to the current situation, with the help from the govt.

these investments could go through and employ and train more unskilled workers,

contributing to the employment rate of the country. These businesses in Bangladesh

are very scared now, of what is going to happen as there is no net to protect them, the

orders are falling through short shipments and discount prices as they are being

retracted, but the expenses are getting higher. In the last 3 years we have had a 30%

rise in overheads (i.e. wages, expenses, prices etc), but the income has stayed the

same, as for the last 5 years the dollar rate has pretty much stayed the same hence the

RMG sector’s incomes are the same but coasts are a lot higher, as prices of raw

materials are getting higher. So the business rights now are running on thin ice, which

will not hold for long, as incomes are becoming smaller every day. Electricity load

shedding is another contributing factor of the RMG sector’s rising overheads as load

shedding is occurring 4 to 5 times everyday which costs each factory about tk.10000

to tk.30000 everyday on generator oil alone. Leaders of BGMEA apprehend 15 or 30

percent fall in orders and face unending pressure to cut prices. If this goes on for any

longer it will become very hard for factories to function efficiently, the govt. should

be pressed to come out with a solution as soon as possible, as this a huge force

working against the development of the Bangladesh

The RMG sector is enraged and de-motivated by another grave threat, in the from of

the recent demands from the RMG worker’s organization, to almost triple their

minimum wages which would definitely close down 90% of the wages and other

benefits are already making choice very hard for the factories and business, let alone

their demand. If no solution is provided very shortly a lot of business will not see the

day of new budget, where allegedly a package will be present for the RMG sector.

Recently the govt. has decided not to provide any bailout for the RMG sector. As the

govt. seem to be more concerned about the other sectors. This could be the result of

the common misconception of the govt. and some important people, that the garment

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factories are able to be as big as they are, because they are very lucrative. But they do

not bother to go in detail and actually find out that most of it exists due to huge loans

from the banks. And the garment factories have to have certain facilities which might

look like stature symbol to the people out side are in fact there for the workers to meet

international compliance requirements put forward by the buyers who otherwise will

not place orders with those factories. Because of this misconception there is a lack of

concern for this sector.

Nearly about half of Bangladesh’s population is connected to The RMG sector either

directly or indirectly, and this sector has been built in the last two decades based on

trust, confidence and personal relationships with the foreign companies/ buyers. If

there is any disruption to the RMG sector the chain breakdown would be massive and

almost impossible to fix. The economic state of the country will be in a mess GDP

will fall and inflation will rise. A move back from those circumstances to even the

state we are now will be almost impossible.

The US and UK are already closing down several hundred clothing stores which will

have a knockdown effect on the RMG sector of Bangladesh is a few months as there a

lag before the balance. The other European buyers are also showing sings of slowing

down sales which will be in full effect in a few months time. So presumably the orders

will become scarce for our RMG sector and many more factories and organizations

will take a fall. The next one year will be vital for business all over the world and

governments around the world are preparing packages and bailouts, this should be a

queue for government to do the same in order to survive and replenish the economy.

Recommendation:

BGMEA lobbying must be more directive and effective and with facts and

figures

In the last 3 years there has been huge investments in this sector the total figure

should be collected and passed on to the government. So that the government

can have a clearer picture of the situation. Out of the whole investment at last

70% is bank loans and rest is entrepreneur’s earnings from the last 10 years.

This 70% of the bank loan is supposed to be paid back to the banks in the next

10 years or so. But for the current situation and receiving no bailout from the

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government, it will be impossible to repay the banks resulting in entrepreneurs

filling bankruptcy.

Also these investments would provide the population of this country with more

job opportunities which will also fade away with the current job opportunities.

We have in this sector. These facts along with export opportunity that will be

missed if these investments were to stop should be collected and documented to

the government to stress the matter further.

BGMEA should also prepare a data sheet for the total number of people

working in this sector. With an additional data sheet to show the number of

supporting business/factories involved with this sector and the total number of

people employed

BGMEA should prepare a fact sheet to point how many small businesses

became bigger as direct result of garments factory workers buying power such

as cheap cosmetics sarees, clothing etc.

There should be a fact sheet containing the total number of insurance

companies and banks involved with this sector which will not be able to

survive outside competition without the RMG sector

Also a fact sheet showing, the rise of business such as transport, C&F agents

etc because of the RMG sector and the total number of people working in this

business.

We should also collect the total amount of income tax paid by RMG sector to

the government each year

And we should also highlight a few points such as Bangladesh’s recognition all

over the world is owed to the RMG sector. The top hotels in Bangladesh are

occupied mostly by business delegates coming to this country for the RMG

sector all year around. In turn these facts earned Bangladesh foreign currency,

world recognition and foreign investments. A data sheet should be arranged

containing detail of the foreign investments made in the last ten years in this

sector.

Govt. to allow private power plants for bulk consumers.

NBR not to levy tax at source during recession.

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BGMEA spells out 8 point stimulus for overcoming from recession which are given

below

10 taka add up in dollar retaining exchange rate

Special exchange rate

Less than 7 pc bank interest rate

Reschedule of term-loans payment with 3-year extension

Removal of VAT on textile industries

Subsidized diesel for generators

Captive power plants

Implementation of rationing system for workers

Conclusion:

All these above data should be collected and presented to the government as soon as

possible. The govt. previously did not pay attention to the notion of the RMG sector’s

clash with the recession. But now it is absolutely vital that the govt. lends out a

helping hand in all the areas we touched in the article to help us survive and prosper to

a better future for the RMG sector and of Bangladesh. These are very harsh times and

if we do not act quickly and efficiently we might face a very different future.

Reference:

xv

Bangladesh’s Current Export Debacle in the Context of the Ongoing GlobalBangladesh’s Current Export Debacle in the Context of the Ongoing Global Recession Recession by Dr. Mustafizur Rahman

Professor, Department of Accounting, Dhaka University and Research Director, Centre for Policy Dialogue

The Bangladesh Garment Manufacturers and Exporters Association (BGMEA) leaders

said the global financial crisis has already started to impact apparel industry and the

very gloomy forecast for the apparel market will continue at least for the year 2009.

Though Bangladesh's RMG export figure showed growth till February 2009, but

according to our Utilization Declaration (UD) Statistics, export order has dropped by

18 percent in February and 5 percent in March and the consequent reflection will be

visible at our April and May export.

Bangladesh’s Current Export Debacle in the Context of the Bangladesh’s Current Export Debacle in the Context of the Ongoing Global RecessionOngoing Global Recession

by Dr. Mustafizur Rahman Professor, Department of Accounting, Dhaka University and

Research Director, Centre for Policy Dialogue

The world economy is currently passing through yet another phase of recession.

Though there is sharp difference of opinion as regards the beginning of the recession,

its depth and severity, contributing factors, and projections about its end, most

analysts agree that the recession has by now crossed the critical threshold of eleven

months which has been the average period of longevity for the six major post-war

recessions. In the beginning it was hard for many to accept that there was at all a

downturn in the global economy - after all following the last global recession of the

early 1990s the world economy has been performing rather well for almost a decade

and, as a matter of fact, has attained its highest growth rate for over a decade in the

year 2000. However, the world economy started to experience a sharp downturn in the

last quarter of 2000 which subsequently continued, sustained and deepened in 2001.

Some experts were hoping that there would be an upturn in the global economy by the

beginning of the last quarter of 2001. This, however, was shattered by the September

11 terrorist attacks in the USA. US growth forecast by the IMF for 2002 has now been

revised from 2.2% to a lowly 0.7%. The projections of growth of the world economy

xvi

for 2002 was cut back from 2.4% to 1.5%. It is to be noted here that such a low

growth rate would make 2002 the second consecutive year when economic growth

would fail to keep pace with the expansion of the world population. An obvious

consequence of this is that the world per capita GDP would continue to remain static

in 2002. OECD growth forecast for 2002 for the 30 member countries, at 1%, is the

most gloomy since 1982. Investments have come down significantly and OECD

manufacturing production index has already declined by 2%.

The recession in the global economy could not but have severe negative implications

for the world trade, a consequence which have had important consequences for

Bangladesh’s export sector performance in recent months. World trade, which

registered a robust growth of 12.5% in 2000, began to slow down in tandem as

recession strengthened its grip on the economies of the major trading blocs and

countries. Overall growth rate of world trade in 2001 was a paltry 0.8% and though

the UN forecast for 2002 is somewhat higher, at 3%, it is still far off the trend line.

Following the September 11 attacks the growth in world trade during the last quarter

was almost zero. The combined impact of the recession and the September 11 terrorist

attack on the US economy which is the singlemost important export destination of

Bangladesh, has been specially severe. The US economy is expected to grow by only

0.7% in 2002; nationally the unemployment rate was 5.8% in December 2001; more

than 1.2 million jobs were lost because of the recession. Total unemployment figure in

USA has reached 7.0 million and it is to be noted that this exclude millions of workers

who lost part time jobs. The state of the economy obviously had a dampening impact

on consumer confidence - consumer expenditure index in the USA is down by 1.8%,

the fastest drop since the late 1980s and all time low since the early 1990s. A report

prepared by the WTO projects that the strong slowdown in consumer demand in

Western Europe will continue in 2002. Evidence suggests that the current stagnation

in imports to the US have deepened further during the fourth quarter of 2001

(October-December, 2001).

As was mentioned earlier, the recession which was officially recognized to have

started in March 2001, has now been there for almost 11 months, the average period

xvii

of post-World War II recession. If the downturn continues in the coming months, the

recession is likely to get more severe, with attendant negative consequences and

implications for exports of countries such as Bangladesh.

As is well known, Bangladesh economy has passed through a heightened pace of

global integration in the 1990s. The degree of openness of the Bangladesh economy is

now higher than most of the LDCs and many developing countries – exports and

imports of goods and services currently account for about a-third of the country’s

GDP. Thus, by definition, the state of the global economy is likely to have a stronger

impact on the Bangladesh economy now than at any time in the past. The impact of

the state of the global economy would continue to be increasingly felt in terms of the

country’s macroeconomic performance, GDP growth rate, external sector

performance, foreign exchange reserves, and health of the financial institutions. This

is perhaps one of the most important legacies that the Bangladesh economy has

inherited through its developmental practice and reforms of the 1990s.

It is now widely recognized that, as far as developing countries and LDCs such as

Bangladesh are concerned, global integration has both its opportunities and risks.

Policy makers, therefore, can not afford to ignore this new reality in the governance of

the country, both in terms of preparedness to address the attendant risks, and taking

initiatives to access the emerging opportunities. As global experience shows,

increased global integration does not necessarily mean strengthened global

integration and it is in times of recessions such as the current one that this dichotomy

exposes the inherent challenges for a globalising developing economy such as ours. It

also perhaps provides an opportunity to take on, with due urgency, the task of

designing the short and medium to long-term policy initiatives and reforms to address

the attendant risk factors in order to make globalisation work for the economy and the

people of the country.

As is known, Bangladesh’s export sector registered double-digit real growth rate

throughout the 1990s. As a matter of fact, real export sector growth rate was almost

three times the real GDP growth rate during this period. Even during FY 1990 and FY

1991, a period which coincided with the last major global recession, Bangladesh’s

xviii

export sector posted robust growth rates of 17.9% and 12.7% respectively. The

structure of export was different, though, at the time. Raw jute, jute goods and leather

were some of the major export commodities in the early 1990s, their combined share

being equal to the share of RMG in total exports of Bangladesh. A relatively

diversified base and market provided some sort of a cushion against sudden

fluctuations of the global market. As was mentioned, the context of the current

recession contrasts significantly when compared to the period of the earlier recession.

Bangladesh economy at present is more globally integrated than at any time in the

past. At the same time the export base has also become increasingly concentrated,

both market wise and product wise – for example, share of RMG export is now about

eight times high compared to the combined contribution of abovementioned three

products; markets have also become more concentrated with the USA and EU

accounting for about four-fifths of Bangladesh’s total exports. Bangladesh does not

have a captive market; she has to compete in an increasingly competitive global

environment. On the other hand, as was pointed out in a recent study conducted by the

CPD, Bangladesh’s exports are, in general, more income elastic, rather than price

elastic. This would mean that exports remain highly susceptible to fluctuations in the

income levels in the major developed market economies. Consequently, any recession

is likely to have, and in future will continue to have, increasingly negative

consequence for Bangladesh’s export sector.

Thus, the current deceleration experienced by Bangladesh’s export sector needs to be

seen in the context of the ongoing recession. For the first time in recent history, over

the past few months export sector of Bangladesh has been consistently posting a

negative growth rate. Export earnings during the first five months of the current

FY2002 (July-November, 2002) have come down by about 11% compared to the

matched period of FY 2001. Between January-October 2001, a period which coincides

with the current global recession, Bangladesh’s export earning was $5089 million,

down from the $5236 million registered during January-October, 2000, a fall of

almost $180 million. What is of interest to note here is that during January-July

period, export was still somewhat higher in 2001 ($3084 million) compared to 2000

($3007); export sector was feeling the burden of the emerging pressure emanating

xix

from the onslaught of recession, but continued to show some resilience. However,

with the deepening of global recession there was significant deceleration during the

next four months – exports during July-October, 2001 was only $2005 million, down

from $2230 million registered over the corresponding period of 2000. Exports of all

major items suffered a setback: woven and knit-RMG, principal exports of the

country, posted growth rates of –9.5% and –3.3% respectively; exports of shrimp

came down by 32.8%. What is also of interest to note here is that if the growth rate of

–10.06% during the first four months is decomposed, it is seen that most of it

originated from a decline in the volume of export (-9.74%), rather than fall in unit

price of export (-0.32%), underscoring the importance of the income effect in the

deceleration of the export earnings. It is to be noted here that L/C opening figures for

imports of fabrics under b/b L/Cs during July-November, 2001 is also showing a

negative growth of - 5.5%. This would indicate a fall in export orders which would

mature during the first quarter of 2002 with consequent expected fall in earnings from

export of RMG over the corresponding period.

As was mentioned earlier, the forecast for the growth of world trade in 2002 is rather

bleak and obviously Bangladesh is not the only country whose export sector has

suffered a setback. Pakistan had to revise downward by about 10% its export target of

$10.1 bln for 2002; India’s export of some of the major items in FY 2002 (April-

October) is also showing negative growth trends. Consequently, India’s growth

projection for the current year was scaled down from 6.4% to 5.2%; China, which

registered a significantly high export growth rate of 29.8% in 2000 was able to attain

only a 3% growth in 2001.

Increasing product and market concentration, weak domestic linkage of export-

oriented industries and shallow domestic market of goods that are exported make

Bangladesh’s export sector specially vulnerable to external shocks. Recent global

initiatives such as USTDA 2000 and special preferential treatment accorded by EU

and USA to Pakistan are in all likelihood having adverse impact on Bangladesh’s

exports and accentuating the negative consequences of the ongoing recession. The

recently introduced initiative of EU’s everything but arms initiative providing LDCs

zero-quota zero-tariff access to EU market is not expected to benefit Bangladesh much

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either – a recent study conducted by the Commonwealth Secretariat showed that from

a static perspective, Bangladesh’s gain is expected to be very negligible, about $8.0

million. Bangladesh, however, stands to gain substantively if such a treatment was

accorded globally in which case the gains for Bangladesh are estimated to be $1200

million annually. However, as is known, the recently held fourth WTO Ministerial

Meeting in Doha failed to come up with such an initiative.

Thus, there is hardly any cushion available to Bangladesh to mitigate the adverse

impact of the ongoing recession. The purpose of this write up, however, is not to come

up with policy suggestions for addressing the current debacle. This would call for a

separate and serious professional exercise. As a matter of fact, a number of areas

requiring policy interventions towards raising the competitiveness of domestic export-

oriented sector and enhancing trade related capacity building have already been

identified and put on the table. The task now is to seriously get on with the business of

implementing the agendas. The upshot of the above discussion is to reemphasise that

in the coming months and years Bangladesh’s increasingly globalised economy will,

of necessity, have to be adequately prepared to face the consequences of the

fluctuating fortunes of the global economy. The current debacle suffered by

Bangladesh’s export sector should transmit appropriate signals to the country’s policy

makers to the effect that it is only from strengthened global integration that

Bangladesh stands to benefit in the context of her increasingly globalised economy;

failing this, the price to be paid will rise in direct proportion to the degree of the

country’s lack of preparedness. The ongoing global recession should thus serve

Bangladesh both as a wake-up call, and as an warning bell.

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