Bangladesh is the new Asian Tiger

It's succeeding using the classic formula, and defying the skeptics.

"File:Garments Factory in Bangladesh.JPG" by Fahad Faisal, CC BY-SA 3.0

I find most people’s thinking about global growth to be remarkably parochial, status-quo biased, and stereotype-driven. By now it’s generally taken as given that countries in East Asia are able to ascend rapidly to developed-country status, using a more-or-less traditional approach of export-oriented manufacturing and climbing up the value chain. After all, we’ve seen Japan do it, then Korea and Taiwan, then China, so few doubt Vietnam’s ability to do the same.

But when it comes to developing countries outside East Asia or the periphery of Europe, I find that discussions of their growth prospects suddenly turn gloomy. Top economists like Joe Stiglitz and Dani Rodrik express deep skepticism about the ability of countries outside East Asia to get rich using the manufacturing-centric model. Stiglitz glumly encourages non-East-Asian developing countries to find some entirely new and different path.

The official reason for pessimism is “premature deindustrialization”, and there’s some concern that labor-intensive manufacturing will be automated away. But really I think the reason is much simpler and more intuitive — we haven’t seen many countries outside of Europe or East Asia industrialize yet (the main exceptions being Malaysia, Turkey, and Israel), so it’s just not a thing people expect to happen.

All those skeptics should take a look at Bangladesh. The compact but populous South Asian country has quietly been powering ahead using a very traditional-looking growth model. A Bloomberg article recently reported that Bangladesh has now surpassed both India and Pakistan in terms of GDP per capita. That’s an astonishing milestone. In purchasing power parity terms, India is still ahead, but the gap is closing.

Meanwhile, a quick glance at Bangladesh’s GDP shows an astonishingly smooth and even growth path:

That looks like the kind of curve you could use to teach kids in a math class! But actually, though it’s hard to see, Bangladeshi growth is accelerating, from around 5% in previous years to 7% in 2019:

Now lest you think that all countries grow this evenly, take a look at Bangladesh’s path compared to those of India and Pakistan:

India has outgrown Bangladesh overall since 1980, but its growth has been less even, and looks to be hitting a serious slump in recent years. Pakistan is mostly stagnant, languishing in poverty (I’ll write a post about Pakistan’s dysfunction later). But Bangladesh has that smooth, even curve.

How is Bangladesh managing this feat? Did it manage to create a new type of development model based on services, as Stiglitz recommends? Nope. In fact, it’s doing the very same thing that Britain did when it became the first country to industrialize, over two centuries ago. It’s making and selling a bunch of clothes.

Bangladesh has become known as a hub of the world’s garment industry. Check out the tags on some recently-bought clothes and see if they were made in Bangladesh. In terms of volume, China and the EU still dominate world garment exports, but Bangladesh comes in third, beating out Vietnam. And apparel absolutely dominates Bangladesh’s own exports. Via World’s Top Exports, here is a list of the top ten things Bangladesh sells to the world:

1. Knit or crochet clothing, accessories: US$20.3 billion (44.5% of total exports)

2. Clothing, accessories (not knit or crochet): $19.4 billion (42.4%)

3. Footwear: $1.1 billion (2.4%)

4. Miscellaneous textiles, worn clothing: $1 billion (2.2%)

5. Paper yarn, woven fabric: $603.3 million (1.3%)

6. Fish: $532.9 million (1.2%)

7. Leather/animal gut articles: $368.3 million (0.8%)

8. Headgear: $332.6 million (0.7%)

9. Raw hides, skins not furskins, leather: $139.8 million (0.3%)

10. Plastics, plastic articles: $113.2 million (0.2%)

And who does Bangladesh sell clothes to? Rich countries, mostly in the West. From the Observatory of Economic Complexity, here’s a chart:

McKinsey has a good breakdown of the state of Bangladesh’s garment industry, and its potential for future growth.

This strategy didn’t just happen; it was intentional. A 209-page report by the Asian Development Bank includes some history of Bangladesh’s industrial policy. A few excerpts:

In the late 1970s, Bangladesh policy makers turned their attention to developing new industrial capacity and rehabilitating the economy…Five-Year Plans have guided development priorities with increasingly sophisticated design and implementation…

This transformation through garment exports did not occur in a vacuum: the government decided very early on to promote the sector and to provide incentives to get it where it needed to be. As in many countries, an important part of that strategy entailed designing special economic zones, areas in which regulations, incentives, and basic infrastructure could be provided to ensure conditions for success. This also made it easier for FDI to engage in production…

In addition to SEZs, a series of policies and external factors over the years contributed to the stellar performance of RMG exports…The Multi-Fiber Arrangement, which allowed Bangladesh to import quota-free until 2005, provided the initial impetus…The policy of creating a special bonded warehouse system designated RMG as a “100% export-oriented” industry and created a duty-free environment for the sector even though huge tariff and non-tariff barriers affected the rest of the economy. Moreover, effective taxation of earnings from RMG was very low and income from RMG enterprises is exempt from taxes.

In other words, Bangladesh picked a traditional labor-intensive light manufacturing industry, laid out plans for promoting that industry, and successfully built a dominant position in that industry. This is very different from how Britain’s First Industrial Revolution worked, but the effect has been similar.

It’s a big victory for industrial policy. Note that Dani Rodrik’s prophecy of premature deindustrialization hasn’t come true — like other countries that went from poverty to wealth, Bangladesh has seen manufacturing increase its share of the economy as growth has accelerated:

In other words, Bangladesh ignored the dire warnings that labor-intensive manufacturing was about to be automated away, and ignored the skepticism about whether a country outside Europe or East Asia could pull off manufacturing-led industrialization, and simply powered ahead with a traditional development strategy. And dammit, it’s working.

Of course, that doesn’t mean it’ll keep working forever. The ADB report warns that supports for the garment industry have crowded out other industries that will be necessary for continued growth. Bangladesh needs to diversify into other light manfuacturing industries like toys and furniture, etc. And to really climb up the value chain, Bangladesh needs to start making electronics. This will require the country to build better infrastructure, and to broaden its incentives and supports away from just the clothing sector. But it’s doable.

The biggest threat to Bangladesh’s growth is probably politics. The country has a substantial Islamist element, which was suppressed in 2016 only with the aid of harsh authoritarian measures. Though it has become more democratic, it still has problems with corruption, suppression of opposition parties, and other factors that could tip it into instability. But the ADB report is optimistic, noting that growth seems to have taken on something of a life of its own, and may now be more insulated from politics than before:

Although bouts of political instability have periodically undermined economic activity since the late 1980s, these moderated significantly over time. At the least, the correlation between downturns and significant political events seems to have been reduced. This is possibly because political uncertainty has declined with every new political event.

The other big threat is probably climate change; the country’s geography makes it one of the most exposed to the flooding, storms, shifting rainfall patterns and sea level rise that come with a warming world. But the ADB report argues that Bangladesh can take steps to make its river delta region significantly less vulnerable.

But challenges aside, the fact of the country’s recent success can’t be denied. Make no mistake — this is still a very poor country, with a per capita GDP (PPP) of only around $5800, similar to that of Ghana or Honduras. It’s going to be many decades yet before Bangladesh can reach developed-country status, and it’s sure to hit setbacks along the way. But it has already proven two crucially important facts about the modern world:

1. The traditional strategy of export-led, manufacturing-based development, starting with light industry, still works.

2. Countries outside of East Asia and the European periphery are capable of using this strategy.

That’s a huge deal. It should give a massive amount of hope to people and governments in other populous poor countries — Egypt, Tanzania, Ethiopia, and so on. The traditional model of development may not work forever, but for now, it looks like it’s holding up.

And for Americans, Bangladesh’s growth should remind us that globalization is still an incredibly powerful force for good. Access to European and U.S. export markets has been crucial. We should remember not to throw a wrench into that progress by restricting trade and closing our markets. We should remember that far away from our bickering culture wars and policy debates, the lifting of the world’s indigent masses to the safety and comfort of material plenty is still the biggest and most important story in the world.

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