Taiabur Rahman PhD Department of Development Studies University of Dhaka, Bangladesh

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 (1350-1650),Colonialism (1650-1830),Imperialism(1830-1945),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

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 non-government 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… • 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 • 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 • 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… • 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… • 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… • 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 • 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.

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 decision-making 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 • 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.

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 factors- • including 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 • 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: • 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.

Trade Liberalization-Agriculture sector… • The 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 pre-reform(1977) to post-reform (1997)

Trade Liberalization-Agriculture sector.. • 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… • 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 product regardless of the price.

Trade Liberalization-Agriculture sector… • In 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.. • Moreover, 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 • 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… • Indeed, 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 • 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.

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

Taiabur Rahman PhD Department of Development Studies University of Dhaka, Bangladesh