Now is the time to focus on FDI composition

Economist Syed Akhtar Mahmood, former Lead Private Sector Specialist in the World Bank Group who researched extensively on reforms in various parts of the world for three decades, shared his views with The Business Standard on the economic challenges ahead for Bangladesh and possible ways out

Where do we stand now as the year starts amid worldwide uncertainties? 

After being able to maintain macroeconomic stability for a long time, we have been facing some challenges since 2022, with foreign exchange reserves and the value of the Taka declining. It seems that the measures taken by the government have resulted in slowing the decline in reserves to some extent. But there  is a flip side to this as the measures have caused substantial decline in imports as well. Traders and industrialists are complaining that they are not being able to open as many letters of credit as required, which will have some impact in the coming months. We may see many industries scaling down production. If it happens, unemployment will go up. This is an ominous sign. 

Inflation remains high causing suffering for the majority of the people. Also, since our industries need to import most of their raw materials, global inflation spills over into our country. This may hike production costs further and thus erode our competitiveness. We have started the year 2023 with all these worries.

What are your views about the capacity of Bangladesh's private sector?

There was a perception in the past that Bangalis cannot be entrepreneurs. We love to gossip, write poems, listen to music and draw paintings, instead of doing business. But over the last 50 years, we have proved this notion wrong. We have seen an unleashing of entrepreneurship across the board. Generally, we talk about the garment industry. But we forget that farmers might have been the first group of entrepreneurs in independent Bangladesh, who abandoned their age-old traditional farming and switched to high-yielding varieties of rice. This was a new activity and a bit risky too at the beginning. But farmers took the risk showing their entrepreneurial zeal. 

A remarkable evolution has taken place in the rural economy since independence. Farmers have not only gone into a wide range of crops but also into non-crop activities such as fisheries and poultry. They have also gone into non-farm activities. All these together have created a rural resilience with entrepreneurship at the core. 

The entrepreneurial spirit has flourished across the board, not confined to conglomerates. It is a great asset for the country — a spirit that is missing in most other developing countries. Many countries, such as Pakistan, have taken many policy initiatives, but those have not triggered much entrepreneurial response. 

Infographics: Analysed by Mohsin Bhuiyan/TBS Research

Has Bangladesh achieved the best phase of the private sector's journey?

Bangladesh has not yet seen the full bloom of its people's entrepreneurship. Our export economy is still not diversified. Only one product, i.e., garments accounts for 80% of our exports. Within garments, 75% of the output value comes from a small list of five product groups, including trousers, shirts and sweaters. There is great scope for diversification within the garment sector, as well as beyond garments. 

Though there is tremendous growth in industrial production, there has not been much improvement in productivity. We have already become a lower middle-income country, but productivity remains a challenge for us to elevate to the next stage. 

There also remain some governance issues, such as how the private sector companies treat their workers, how good is their workplace condition, and whether they give decent wages. 

Regulatory uncertainties are among the issues you often speak about. How do those stand in the way of foreign investment?

I did research on this for the World Bank Group. We did a survey through IFC in Bangladesh to see if businesses here suffer from regulatory uncertainties, and if they do, where and how. We tried to see if such uncertainties impact their investment decisions. It was a small survey but the findings are revealing. About 60-70% respondents identified regulatory uncertainties as a big problem for them.

Which issues did they point out?

Firstly, they cited the way rules and regulations are written. A rule or regulation often contradicts another. Businesspeople start following a rule and soon confront another rule, which tells the opposite. This sort of inconsistency exists in rules and regulations as written. But there are also inconsistencies in the way they are enforced by government officials. 

Secondly, there are inconsistencies in the operations of various government agencies, such as between the investment promotion agency BIDA, the Bangladesh Bank and NBR. Also, it is difficult to obtain information on all laws and rules a businessperson has to comply with. In many other countries, it is easy to find such information. For example, suppose you want to open a restaurant in Singapore and you have to comply with 10 laws. You may get all the information you need in five minutes from a website. You won't get that here so easily. These sorts of uncertainties dog our investors.

Thirdly, we had asked the respondents if such uncertainties discourage their investments. Half of them said they did not carry forward their investment plans, citing regulatory uncertainty as a major reason, apart from factors like non-availability of funds. 

We often say investment will decline if the interest rate is hiked. But interest rate may turn out not to be a major factor compared to regulatory uncertainty. If we can fix this problem, investment may rise even if interest rates remain a bit high. In a recent global survey of 700 global CEOs, the World Bank found regulatory uncertainty as the number one factor discouraging foreign investment.  

What sort of reforms do you think are needed here to remove regulatory uncertainties?

Number one is the way the laws and regulations are written. We need to review existing laws and regulations and see if there are inconsistencies that lead to uncertainty. When a new law or rule is framed, there should be sufficient research on its likely impact. Businesspeople should be informed that a law is being drafted and asked how it may impact their businesses. There should also be assessment of whether the new law would contradict existing laws. These are the steps you need to follow before formulating a new law or regulation.

Secondly, the necessity of existing laws should be reviewed periodically as is done in many countries. Laws may have been relevant when originally enacted but not any longer. In such cases, the laws should be amended or repealed. Discretionary power of government officials, whom the business people need to deal with for seeking permits or other approvals, is too high. 

Uncertainty is generated when government officials are not made accountable for how they are exercising their power. If their decisions cause problems for a business and the affected persons are not allowed to seek redress, then uncertainties accumulate. Such uncertainties are low in countries where there are adequate safeguard measures, where  adequate accountability measures are in place that prevent officials from giving whimsical decisions. Some mechanism should be there for businesses to seek remedies in case any regulatory decision harms their investment. 

Do you feel the FDI flow to Bangladesh is satisfactory now?

No. For two reasons: first, FDI remains less than 2% of GDP here. If you compare with other countries and collect time series data, you will see that 30 years back Vietnam had the same ratio as we do now. Now their ratio has gone up to 6-7%. This is about the volume of FDI. Another one is composition of FDI. We often hear government agencies saying that FDI flow is growing this year, economic zones are getting more FDI, but we are not asking about the composition of FDI. 

Those of us who do research on global flow of investment, talk about three kinds of FDI. One is natural resource seeking FDI, such as that in the oil and gas sector, where foreign investors seek to exploit natural resources. Chevron is a good example in this category. Secondly, Bangladesh offers a huge market which will also attract investors. We call it market-seeking investment. Our per capita GDP is low, but our total GDP is huge. Foreign investors will naturally be attracted to this market. And we have got such investments in the past and benefited from these. Our huge mobile telephone market got a lot of foreign investment that we needed. Such investment also came in the electricity sector, which was also much needed. But when we talk about export diversification, exporting sophisticated products such as electronics, as Vietnam and Malaysia have done, we will not be able to go much further with local investors alone, though we know that many of them have potential and are doing well. 

We need to fetch foreign investors in this category if we want to go far. We thus need to focus on FDI composition — what kind of foreign investment are we getting. 

There is cost efficiency in Bangladesh — be it because of cheap labour, or quickly-trainable workforce, or other factors. Products made in Bangladesh can be exported elsewhere in a cost-effective way. FDI aimed at such activities is called efficiency-seeking investment. Such FDI will help us diversify our exports and enter global value-chains in a big way as seen in Vietnam, Malaysia and Thailand. They did this with the help of foreign investment, which we need to attract here too. 

But we are not getting enough investment in this category. If you study the interest shown by foreign investors in economic zones in the last two years, you will not find many instances of export-oriented, efficiency-seeking investment. If you find some from Korea or China, it will be in trousers or shirts which our local investors are making quite efficiently.  We do not need such investment. There is no point in leasing out valuable land to such investors in economic zones.      

What are the other factors, as you see, that can discourage investment inflows to Bangladesh?

We see that BIDA, or some other agencies, hold roadshows abroad often with 5/6 secretaries joining. Now let us say 600 potential investors attend such a roadshow. How many of them move further with their investment interest, how many of them physically visit Bangladesh, how many start investing seriously? You know that between showing initial interest and actual commissioning of a factory, there are many stages. Competent investment promotion agencies track how many potential investors move forward and whether anyone is stuck at some point. BIDA does not have such a tracking system yet. 

We are event-conscious, interested in holding big events. But we are not process-conscious. We do not track those who register initial interest in investment. We care little about the problems being faced by those investors who are already here. In other countries, authorities do it in a very systematic way. They want to know where the investors are facing problems and take these up with the ministries concerned. 

If you look at the FDI portfolio, 40-50% is re-investment by existing investors. If you do not solve their problems, they may not proceed with their further investment plans. Potential new investors will naturally weigh the experience of the existing ones before taking their own investment decisions. They will put more weight on the real experience of existing investors than in what the government says. 

Overall, how is the investment climate in Bangladesh?

We have many good things here. Though there are some problems on the macroeconomic front now, these are likely to be temporary. Overall, we have macroeconomic stability which is a positive thing. Our infrastructure, despite some bottlenecks in  Chattogram Port and in logistical services, is not that bad. However, access to bank loans is not easy for investors except a few influential ones. The stock market has not yet developed as an alternative source of finance. We have some weaknesses in skills required for diversified sectors. There have been some improvements in the overall investment climate over time, but not at the desired pace. 

Do you think Bangladesh's private sector needs more protections?

This needs to be thought through carefully. Take the electronic sector as an example. This sector is getting heavy protection. There is a policy named 'Made in Bangladesh', which has been announced in last year's budget, which offers protection for some industrial sectors and electronics is one of them. They are protected by import tariff walls. The textbook logic cited for protection is that infant industries need some protection at the beginning. But the problem, as we see from the experience of many countries, is that once given, such protection cannot be withdrawn easily. We should not fall into this trap. 

During the '60s or '70s, East Asian countries such as South Korea or Taiwan extended many facilities to businesses, but there were tough conditions too, such as enhancing productivity and export volume, and introducing  new products through innovation. If such conditions were not met, the privileges were to be withdrawn. And the governments meant it-- protectionism was withdrawn irrespective of the size of the company. This discipline matters. We are offering privileges, but I don't think there is any discipline here. The garment sector is 40 years old and we are the second largest exporter in the world, but we are still giving cash subsidies to this industry. The logic behind it is not clear to me. Subsidies can be linked to innovation, including the introduction of new products. But it seems our privileges are offered to preserve the present status while, in other countries, such support is given to transform the present situation. 

The government may be congratulating itself by offering protection to the electronics sector in the hope that the industry will be a major exporter in future. But it may not happen in the next 10 years.