Idea Sharing Session on
Political Economy of Trade
Liberalization in Bangladesh:
Research Questions and Methodology
Taiabur Rahman PhD
Department of Development Studies
University of Dhaka, Bangladesh
Globalization and Development
► Understanding
political economy of trade liberalization
warrants a working idea about globalization and
development
► Globalization is a phenomena produced by historical
changes within a broader framework of continuity.
Five different phases in history (Mercantilism (13501650),Colonialism (1650-1830),Imperialism(18301945),Neo-colonialism(1945-1985),Globalization(1985► The engine of globalization have been the expansion
of religion, the rise of empires, the triumph of
technology and the internationalization of economy
Defining Globalization
► Economists
consider globalization as a step towards a
fully integrated world market
► Political scientists consider globalization as decline of
territorial sovereignty and the rise of non-government
power players
► Business school apply the term to mean borderless
world
► Kearney M. defines globalization as ‘the movement of
people, products, productions, information, technology
and capital in the global and transnational spaces’.
► This definition misses a fundamental point that
Capitalism is the current force of globalization
Globalization-Causes
Any discussion of globalization must include economic as well
as political and Ideological factors.
► A number of factors can be identified. It has began long before
world war II, however, globalization of capital began to
accelerate after ww II./LATE 1970s. It is a feature of late
corporate capitalism.
The economic Factors of surplus
► Global marketing, /global market, higher profit
► Global production through global factories( body, soul, cultural
heritage and ethnic features) cheap labor/no environmental
constraints) a produce a product anywhere, using resources
from any where by a company anywhere to be sold anywhere
► Reorganization of Corporate structure (mega merger/ it moves
to higher profit/ it has created global corporate elites
► Global money and financialization/cyberpolitik
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Causes…
► The
role of dominant state-Global capitalism
cannot thrive without a globally interventionist
states/global
► Domestic economic decline, rising human
expectations around the world and
technological innovations
► The UN and its lead supranational
organizations-WB/IMF/WTO enhanced the
global capitalism to dominate the world through
policy dictates/neo-liberal policies
Consequences
► Globalization
has brought both positive and negative
results
► It has facilitated connection and coordination among
people, government, corporations and nongovernment organizations. Mobility of PPP has
increased at unprecedented pace
► Communication technology such as internet and
mobile phone has made revolution. Global accessibility
has been a giant step toward human advancement
► However, globalization is also building a new
civilization full of paradoxes and unevenness and is
exacerbating rapidly the gap between the poor and
the rich
Consequences…
► Not
all states and peoples have benefited from
globalization nor have they become equally
affected by it. Despite the benefits globalization
has had severe negative consequences for
developing and less developed nations
► Globalization has changed the basic nature of
the state-transforming it from a public service
state to a corporate welfare state
► The continuity of state persists but the state
has been a powerful institutional instrument of
globalization
Consequences
► Globalization
has threatened the state territorial
sovereignty forced many states to practical
colonies/sovereignty at bay
► Globalization has intensified interdependence and
competition between economies of the nations in the
world market
► This is reflected in regard to trading goods and
services and in movement of capital, labor and
employment, environment
► As a result, domestic economic developments of
developing countries are not determined entirely by
domestic policies and market conditions. Rather they
are influenced by both domestic and global policies set
up by the global community
Consequences…
► For
Braibant (2002), the process of globalization not
only includes opening up of the world trade,
development of advanced means of communication,
internationalization of financial markets, growing
importance of MNCs, population migrations and more
generally increased mobility of people, goods, capital,
data and ideas but also infections, disease and
pollution
► Globalization has thrown up new challenges to
developing countries like volatility in financial market,
abuse of labor, environmental degradations and so on.
Consequences…
► Liberals
view globalization as trade globalization and
treat it as positive-sum game
► Advocates of trade liberalization argue that it can
induce technological innovation, undermine elite
privilege and thus contribute to general economic
growth. This can happen but so can the opposite
► The imported technology can crowd out local
technology and investment while corruption can be
induced by new link with MNCs operating in
developing countries
► In short, whether trade liberalization benefits the
general population often depends on factors other
than trade liberalization itself such as governance,
income distribution and policies of equity promoted by
the government
Consequences…
► Fears
of losing foreign investors (and global retailer
and MNCs relocate their production in giant countries
and would result a potential million of job losses,
smaller developing countries had to allow their labor
wages and taxes remain low and be exploited
► In garments industry, some of MNCs like GAP and
Levi-Strauss has produced their garments in many
developing countries and look for the countries that
could produce both raw materials (textiles) and
provide full package services from cutting, sewing to
packaging (India and China) This is a threat for some
smaller countries (Bangladesh, Sri Lanka, Kenya)
which rely their foreign exchange and employments
mostly on garment exports
Consequences…
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Professor Keith Griffin (2003) has argued that we lack effective
democratic institutions at the global level that can ‘govern’
global market forces, supply global public goods, and bestow
legitimacy on the institutions of global governance.
We have, in Griffin’s words, a closely integrated and rapidly
expanding global economy, but not a global political system.
As a result of this asymmetric globalization, the present system
of global governance favors the rich and the powerful—the
large transnational corporations (TNCs) and rich and powerful
nation states (particularly the USA).
The poor and the weak (mostly in low-income countries) are
placed at a considerable disadvantage, due to the continuing
trade discrimination against their export products;
Consequences
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Increasing numbers of women have become sex workers,
maids, or low-paid employees in export production
networks—all largely female sectors—to earn incomes in
the restructured global economy.
Many must migrate domestically and internationally.
Women encounter many risks and much insecurity in these
sectors: low wages, no benefits, long hours, harassment,
health hazards, and lack of rights or legal recourse.
as a result of globalization, economic restructuring, and
crises, 1) women have increasingly been forced into such
income-earning activities and 2) many governments have
been pushed into strategies that foster these occupations.
Trade Liberalization-Introduction
► The
performance of the Bangladeshi economy in the
past decade has been relatively strong, with annual
growth in gross domestic product (GDP) averaging
about 5 percent during the 1990s.
► Between 1991 and 2000, real GDP increased by 52
percent in real terms, with gross output in agriculture,
services, and the industrial sector increasing by about
33 percent, 50 percent, and 86 percent, respectively
(Murgai and Zaidi 2005).
► Given the widespread interest in linkages between
growth, equity and poverty reduction, investigating
the extent to which trade liberalization has contributed
to this impressive growth performance in the country
is important.
Trade Liberalization in Bangladesh:
Chronicles
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At independence in 1971, Bangladesh started on industrialization with
an inward-looking policy of import substitution (IS), with a leading
role for the public sector and a wide array of government controls
and regulations.
These included investment sanctioning, import licensing and
exchange controls, arbitrary exemptions, ad hoc concessions and
subsidized loans and allocation of activities to private and public
enterprises.
The government nationalized all large and medium industries, banks
and insurance companies and to control large segments of
international trade and payments. As a result, 92% of industrial
assets came under government control
Private sector participation in industrialization was limited by an
investment ceiling. Private enterprises were allowed an investment in
initial fixed assets of up to 2.5 million Taka (TK) with growth in assets
allowed of up to TK3.5 million through reinvestment of profits.
Foreign direct investments (FDIs) were discouraged, and foreign
private investors were allowed to set up industries only with minority
equity participation.
Trade Liberalization in Bangladesh:
Chronicles…
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From the early 1970s, Bangladesh used stringent import
controls. Traditional administrative instruments, such as
discretionary quantitative restrictions, outright ban, etc. were
used through the Import Policy Order (IPO).
The government imposed high tariffs to obtain more revenue
and protect domestic industries. Customs duties, together with
sales taxes and development surcharges, constituted about
40% of government revenue. The maximum tariff rate was
400% and rates varied widely across products.
Arbitrary price fixing without considering the cost of capital
encouraged managers of public enterprises and distributors of
products to earn rents from the system. As a result, shortages
of goods were common throughout the reform period (Sobhan
& Ahmad, 1980).
Most public sector industries suffered huge losses, which were
covered by bank credit, straightforward grants or subsidies.
Price regulation together with such subsidies created distortions
in the market.
Trade Liberalization in Bangladesh:
Chronicles…
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In 1982, the government announced the New Industrial Policy
(NIP), which aimed to promote private sector-led
industrialization.
Various reforms, like the privatization of public enterprises,
relaxation of administrative procedures and so on, were
launched.
The reform package included fiscal reform, financial
liberalization and the maintenance of a realistic and flexible
exchange rate, together with trade liberalization, reduction of
government intervention and improved management of public
enterprises.
In 1986, a Revised Industrial Policy (RIP) was adopted, which
laid greater emphasis on the private sector, extending and
strengthening the incentive measures undertaken in the NIP
and by selling up to 49% of shares in selected public
enterprises to private buyers. Nevertheless, public enterprises
still accounted for approximately 40% of total fixed assets in
the manufacturing sector.
Trade Liberalization in Bangladesh:
Chronicles…
► Since
1982 the investment climate was
gradually liberalized
► Private investment ceilings were abolished. A
number of special incentives were introduced to
attract FDI.
► More recently, the Taka has been made
convertible in current accounts. In capital
accounts, foreign exchange can be freely
converted into Taka, but, except in a few cases,
conversion of Taka into foreign exchange needs
the permission of the Bangladesh Bank.
Trade Liberalization in Bangladesh:
Chronicles…
► The
government announced significant
liberalization in the Industrial Policy of 1991.
► These reforms made industrial raw materials
more accessible and reduced the existing 24
tariff slabs to 11. The maximum tariff rate was
reduced from 400% in 1978 to 100% in 1991,
except for a few luxury goods.
► In 1991, preferential rates for public sector
enterprises were eliminated. Tariffs were
brought to a maximum of 20% on raw
materials, 75% on intermediate products and
100% on final products.
Trade Liberalization in Bangladesh:
Chronicles…
To facilitate export-oriented industrialization, various incentives,
including
► export performance benefits (XPBs),
► access to restricted imported inputs,
► a duty drawback system,
► bonded warehouse facilities,
► easy access to industrial credit and subsidies, tax
► rebates on export and concessionary duties on imported
machinery were offered to investors.
Major fiscal incentives to support export-oriented industries
included
► Tax holidays and tax rebates,
► income tax exemption,
► accelerated depreciation allowances and
► excise tax refunds on domestic intermediates.
Trade Liberalization in Bangladesh:
Chronicles…
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In the mid-1990s, a more comprehensive liberalization program
was put in place.
The coverage of protective quantitative restrictions (QRs) fell
from 253 four-digit codes to 28;
the maximum tariff rate was reduced to 37.5%, and the
(unweighted) average tariff rate to around 17%.
Further, Bangladesh unified the multiple exchange rates and
adopted a “managed” flexible exchange rate system. The
gradual removal of trade barriers has certainly reduced the
anti-export bias of the trade regime.
The ratio of effective exchange rate for imports, a measure of
this bias, fell from 1.66 in 1991/92 to 1.26 in 1995/96, and
stayed at that level through 1998/99.
These reforms significantly reduced the role of government in
investment and pricing and made the economy more market
oriented.
Trade Liberalization in Bangladesh:
Role of Regimes
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Bangladesh’s move toward the market began formally with the
ascension to power by General Zia in 1975 and a somewhat
incremental approach to economic liberalization.
The pace of pro-market reform quickly changed after the coup
of March 1982 that brought General Ershad to power.
Ershad adopted a more radical path to marketization by
introducing a comprehensive reform package which was
seemingly designed to restore macroeconomic balance in
general, and to improve the prospects for the emerging private
sector in particular.
The pace of economic liberalization reached a new high
following the assumption of power by a democratically elected
regime led by Khaleda Zia in 1991.
Khaleda Zia and successive regimes made efforts to complete
reform program’ through the removal of barriers to the
development of a liberal-capital model.
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Trade Liberalization in Bangladesh:
Role of Regimes
However, there is very little empirical evidence to show that pro-market
reforms were undertaken to either improve Bangladesh’s macro-economic
performance or to alleviate poverty by ensuring rapid economic growth.
Successive regimes, both civilian and military, implemented various types of
economic liberalization programs, including the transfer of SOEs to the
private sector, financial sector reform, and trade and import liberalization
primarily to develop political coalitions with both external and internal key
actors.
In particular, the two military regimes of Generals Zia and Ershad largely
used economic reform programs as a tool to both legitimize and consolidate
their unconstitutional power base.
Both sought to develop political alliances with senior bureaucrats and
businessmen, mainly through their reform measures.
They allowed big business to emerge as a major player in national decisionmaking which, in turn, adversely affected the state’s ability to either enforce
contracts or to develop a mechanism for redistributing assets.
Both generals also indirectly encouraged the accumulation of huge wealth
through the abuse of scarce public resources.
In return, big business lent its political support to the military authoritarian
regimes’ legitimization programs.
Trade Liberalization in Bangladesh:
Role of Regimes
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Even under democratically elected regimes, economic liberalization did not
appear to be a means of improving either the performance of the economy
or the living standards for the majority.
Reforms were used primarily to protect and enhance the goals of big
business during the rule of democratically elected regimes.
Despite widespread optimism, the government did not succeed in winning
popular support in favor of the regime’s fast-track reform programs. Nor did
it make any visible progress in meeting the expectations of developing a
broad consensus on market reform.
More importantly, successive regimes’ massive economic reform programs
substantially increased the power of businessmen and industrialists , and
subsequently further reduced the state’s ability to develop an effective
regulatory framework.
More specifically, big business emerged as the dominant political force in
Bangladesh and successfully prevented the state from carrying out various
redistribution programs for those badly affected by the country’s economic
transition.
Economic liberalization thus continued to frustrate the hopes of both its
advocates and the ordinary citizens of Bangladesh.
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Trade Liberalization in Bangladesh:
Labor Resistance
Pro-market economic reforms enjoy less social support in most
developing countries, including Bangladesh. Labor response to
reform policies, in particular, has been quite unfriendly and
often violent.
Nuruzzaman (2006) finds that the spate of labor resistance in
the industrial sector in the 1980s and 1990s had the potential
to halt or roll back the reform program but it did not succeed
due to a host of factorsincluding workers’ disunity,
ideological divide between various trade unions,
Lack of organizational structure,
control of pro-reform national political parties over their
respective trade unions,
the diminishing influence of leftist trade unions in labor politics
and the lack of an alternative leftist political agenda in
Bangladesh politics.
Trade Liberalization-Agriculture sector
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The reforms in agriculture started around the late 1970s and by the
early 1990s the system was privatized gradually and in phases. The
reform policies mainly focused on:
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Withdrawal of input subsidies
Sale and distribution of fertilizer through private traders
Private ownership of irrigation equipment (all kinds of tube wells and
power
pumps) with large-scale irrigation projects being executed by the
public sector;
Expansion of the private sector role in import, domestic manufacture,
sale and servicing of irrigation inputs and
Greater private sector involvement in production, processing and
distribution of seeds.
The reform policies involved increased private sector involvement in
sales and distribution of agricultural inputs and reductions in
subsidies of agricultural inputs through privatization, deregulation and
liberalization.
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Trade Liberalization-Agriculture sector…
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reforms have been associated with increased food
grain production, improved food security conditions
and easy access by farmers to agricultural inputs.
► A study by Salim and Hossain (2006) finds that there
are wide variations in productive efficiency in
Bangladesh agriculture across farms and regions and
average efficiency ( in terms of farm size,
infrastructure, households’ off-firm income and the
reduction of government anti-agriculture bias in
relation to trade and domestic policies) of all regions
increased modestly by 8 percentage points from prereform(1977) to post-reform (1997)
Trade Liberalization-Agriculture sector..
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As result of these and other inputs, Bangladesh has experienced a
number of significant changes in its agrarian structure.
Generally, while there has been a long-term growth trend in
agricultural production since the 1970s, it has been uneven, varying
according to the regional location and the sector.
In fact, since the 1970s, the impact of liberalization in agriculture has
been felt in different ways across different regions. For example, as
Ben Crow(1999) has demonstrated, the north-west of Bangladesh,
especially Bogra, has, until the late 1990s, been characterized by
investment in irrigation and accumulation by the peasants, giving rise
to ‘rapid agricultural growth and local prosperity’.
By way of contrast, in the south-east, most notably Noakhali, there
has been little investment in the land by cultivating peasants,
stagnation prevails and the surplus has been appropriated by
landlords and traders (some of it relocated to the garment industry in
Dhaka).
In this way, then, it can be seen how local factors may impinge on
the national and international accumulation process.
Trade Liberalization-Agriculture sector…
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While policy reforms led to a wider range of cheaper equipment
in the case of irrigation, it saw a rise in the cost of fertilizers.
However, whereas access to cheaper irrigation equipment
appeared conducive to the generalization of production based
on irrigation among the peasantry, the low market price of HYV
Boro rice during this period limited the profitability of such
production for the poor peasants.
Instead, it was the richer peasants, operating on a larger scale,
who invested in this capital input. At the same time, given that
irrigation equipment could be dispensed with on the grounds of
profit, all cultivators required fertilizers.
Yet the increase in cost—which was due in large part to the
profits appropriated by traders in fertilizers in the context of the
unregulated market—reduced the poorer peasants’ access to
this input.
The situation was compounded by constraints on credit. While
the larger peasants were able to utilize banks and cooperatives,
the poorer peasants remained tied to the money-lender, a link
that brought higher interest rates and forced them to sell their
Trade Liberalization-Agriculture sector…
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short, the incorporation, by means of structural
adjustment policies, of the Bangladesh agricultural
sector into the global market accentuated problems
that such policies were supposed to alleviate.
► It intensified differentiation among the peasantry;
► enhanced the facilitation of capitalist development
among the richer peasantry;
► and did little to improve the working conditions of the
poorer peasants and landless laborers—that is, the
large majority of workers in Bangladesh.
Trade Liberalization-Agriculture sector..
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a significant problem has arisen
recently: the sale of low quality and
underweight agricultural inputs sometimes at
higher prices has become common.
► Not only is this problem undermining the
positive impact of the reforms, it is also
threatening their sustainability.
► Azmat and Coghill (2005) argued that the
problems with regulatory quality, rule of law
and control of corruption — indicators of good
governance — are the underlying reasons for
this problem.
Trade Liberalization-RMG sector
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Trade Liberalization has also impacted on the manufacturing industry, which
accounts for 17 percent of GDP and 10 percent of the labor force. Jute,
which was once the embodiment of Bangladesh’s traditional industrial base,
has been replaced by ready-made garments.
Now, the ready-made garment industry provides over 80 percent of the
country’s exports.
Significantly the decline of the Jute industry and the rise of the latter can be
seen in part as the product of the transformations that have been occurring
in the global economy and attributed to the implementation of structural
reforms as defined by the Fund/Bank combine.
‘Restructuring’ has provided a manufacturing basis for the investment of
local and foreign capital; and the means whereby a large body of female
garment workers could be mobilized from the reserve army of labor located
in the rural regions.
In itself, as Marilyn Rock and others have argued, this represents a
significant advance for women workers in Bangladesh. Yet, while
acknowledging this advance and their gains in a relative sense, it is also
important to note that their wages(24 USD per month) and working
conditions are, by global standards, poor.
Trade Liberalization-RMG sector…
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such gains have been in part diminished as
Bangladesh’s trading position continues to be defined
by a narrow export base (largely ready-made
garments) and
► by a limited market (USA and the European Union),
making it vulnerable to shifts in policy and demand in
these countries.
► the ready-made garment industry in Bangladesh has
survived amid phasing out of Multi-Fibre Agreement in
2005, the entry of China into the World Trade
Organization (WTO), and the increased competition
from other countries.
► However, hartal, political turbulence and militant labor
force have cause of concerns.
Trade Liberalization-FDI
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Foreign Direct Investment (FDI) flows into Bangladesh have traditionally
been very poor (Reza, 1990). It is to be noted that, in spite of significant
policy incentives provided over the last three years, Bangladesh has failed to
attract a substantial amount of foreign investment, either direct or portfolio,
in the export processing zones.
Bangladesh, is one of the most liberalized countries in South Asia.
capital flows as the result of foreign direct investment have been relatively
inconsequential—less than $US 90 million in the mid 1990s, growing to less
than $US400 million in the late 1990s(McGuire 2003).
Rahman (2000) argues that it is not only the attempts of trade liberalization
but also the credibility of liberalization that among other things matters to
attract FDI inflow.
Credibility of liberalization matters to attract FDI, as a considerable amount
of sunk cost is associated with FDI. FDI unlike portfolio equity flow is
relatively stable and is more integrated with a country’s long-term
development vision.
In fact, its importance has further strengthened in developing countries
following several stock market crashes in recent years and political instability
(including the 1996 Bangladesh’s one).
Research Questions
Who are the major actors/stakeholders (IFIs, political and
administrative functionaries, business community and the
common masses) in the process of trade liberalization in
Bangladesh? What are the key institutions involved?
► What are the real-world impact of trade liberalization on
(agriculture, RMG AND FDI) the lives and employment of the
poor in Bangladesh?
► What are the factors that get the poor step-sided in the
development strategies and actions despite their major
contribution( agriculture, RMG and remittances) to economic
development of the country
► What are the link between trade liberalization and privatization.
This is necessary to appreciate the role and interest of internal
actors (bureaucrats, politicians, business community and labor
union) in trade liberalization.
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Methodology
► Secondary
Literature Review/ government
reports, BBS data
► Interviewing government officials
(politicians, former MPs)
► Interviewing members of related
associations/the poor
► Interviewing labor union leaders
► Interviewing economists/scholars