Bangladesh’s labour force is 71 million strong as of 2020. The country holds tremendous potential in leveraging economic benefits through its workforce. In 2017, the total labour force participation rate was 58.3%, of which 48% was female. Bangladesh’s iconic readymade garment sector has pioneered gender parity in employment. Agriculture is the highest employing sector although it has seen a decline in its contribution to the economy over the past few years.

Job creation policies have increased the employment rate among youth. However, the pace of job creation needs acceleration. The manufacturing sector needs to grow faster because it the major source of labour-intensive employment.

Gustav Papanek is one of the few economists who analyses the blend of private initiatives and government interventions in developing countries. The WhiteBoard team spoke with Gustav to get his take on job creation in resource-constrained economies like Bangladesh. The conversation, edited for length and clarity, is presented below.

You have been in the policy research space of Bangladesh since before its birth. How would you explain the country’s economy to a layperson?

Let’s cut to the chase. Bangladesh needs to employ a large number of people. To employ such a large number of people who don’t have real jobs, you first need to understand an economy like Bangladesh. You need to understand that there are two different labour markets. There is the labour market in which there is a persistent demand for labour. Bangladesh’s garment manufacturing sector has been expanding over the past three decades. And it has been hiring more people.

The garment sector has been hiring people because it needs labour. But the garment sector does not have enough jobs to hire all the people from the country’s labour force. This is especially true for men because the garment industry employs mostly women.

Then there is the labour market in which there is irregular demand for labour. This covers most of Bangladesh’s economy outside of the garment industry. The people in this labour market don’t get real jobs. They need work and income otherwise they don’t eat. The majority of them hover around the poverty line.

They can’t get real jobs because there are not enough of them created in Bangladesh. So, what do they do? Most stay in agriculture. Their family may have a small plot. There used to be three people working on that plot. And now there are four people working on that plot. The output does not increase. The four people share the same output. So, their real income declines.

Are you saying that Bangladesh needs a plethora of garments-like sectors?

There have been small attempts to duplicate the achievements in the garment sector in other industries but these have been in vain. This is the big problem for Bangladesh.

Bangladesh has been very successful in expanding the garment industry. At the same time, it has been unsuccessful in expanding other industries, which will provide more jobs, especially for men. There have been small attempts to duplicate the achievements in the garment sector in other industries but these have been in vain. This is the big problem for Bangladesh.

So far, there are no real jobs created to employ the large labour force in the country. Agriculture has too many people. Fisheries has too many people. There are too many people in the sectors that are not needed. These people would leave those sectors if there were alternative jobs for them. That to me is the fundamental problem.

I understand that different sectors of the economy are failing to create real jobs. Why are these sectors failing?

The reason is, the other sectors have not had the benefit of the government letting private enterprise flourish. In Bangladesh, there are promising sectors. Shipbuilding began but never really picked up job creation pace. Similarly, shoe manufacturing has also started up. Initially, there were two factories I believe, one in the port city of Chattogram and one in the capital Dhaka, that employed a large number of people.

But the thing is, you need to have 15 such factories to kickstart and scale up jobs. That’s what the garment industry did in Bangladesh. Here the government can help. The main thing the government needs to do is to allow these industries to import those parts of the inputs that are not available domestically. That’s one of the problems that all these promising sectors have in common. The garment industry has already had that advantage.

In Bangladesh, more than 2 million people enter the job market every year. It seems like a lot of its problems are because the job market is very informal. Economies in South Asia are often informal. Does that mean Bangladesh can solve its fundamental problem by formalising its economy?

No, it’s not because the job market is informal. It’s because many of these are not real jobs. One of the problems with the statistics is that they show people ‘working.’ But, when my team did a manufacturing study years ago, in the 1970s, we found that some of these industries were actually losing money for Bangladesh. They were using inputs that cost more than the product they produced. How were they able to do this? Because of various protections and subsidies. This was also the beginning point of the garment industry.

We found that this industry was actually benefiting Bangladesh. Its output was more valuable than its input cost. We then recommended that the sector be allowed to import the inputs it needed in order to flourish. For instance, when the garment industry started, it needed to import buttons, and some of those buttons were not produced in Bangladesh.

Can you elaborate a little more about the onset of the garment industry?

Well, in the beginning, Koreans dominated Bangladesh’s garment industry. Most of the factories were owned and operated by Koreans, who were quite unpopular at the time. Fast-forward to now and Koreans operate only one factory; Bangladeshis operate the rest. This is the way to make progress.

The Koreans operated the factories. The Bangladeshis were subservient to them. But the Bangladeshis learned the business. Soon, they set up their own garment factories. Thereafter, they drove the Koreans out of the industry.

A very interesting case study for any student!

Yes. The same thing needs to be done in other industries. They need to be given the opportunity to import those things that they cannot get domestically. The textile industry, the shoe industry, the furniture industry, the toy industry, these are all industries that employ a large number of people with limited education.

What do you think about alternative job creation options, such as digital jobs and overseas jobs, that Bangladeshi policymakers are talking about?

I talked to a Bangladeshi policymaker who put an emphasis on high-tech industries and the concept ‘Digital Bangladesh.’ He said that this was the future of the country. And I said to him that there were millions of people who did not have the education to participate in Digital Bangladesh. These people need employment now. What will you do with these millions of people who will not get employment in Digital Bangladesh? He said that it was not a problem, we would shift them all abroad. That is ridiculous!

If you have only digital jobs that are high-tech, you need people who have at least a high school education; most need university education. Here, all you have is millions of people who have only primary or middle schooling. I think you have some people who haven’t even finished primary education!

You have worked extensively in Indonesia. Do you think Bangladesh can learn job creation lessons from this country?

I have not recently looked at education statistics but I have looked at Indonesian education. It has had universal primary education now for 10 years. Still, there are people who have not completed primary school because they were in school 20 years ago, when there was no universal primary education. Given its education level, Indonesia is a country that sends people abroad for work. Indonesia has a per capita income about twice that of Bangladesh.

The number of Bangladeshis going abroad to earn their living I don’t think is increasing very rapidly because there are not enough job openings.

Jobs are available in Saudi Arabia and the other oil-rich countries for all the millions of Bangladeshis who need employment. But the number of Bangladeshis going abroad to earn their living I don’t think is increasing very rapidly because there are not enough job openings.

The Saudis are now increasingly trying to keep the jobs for Saudis rather than for imported labour. Some of the jobs that no Saudis will take, they will hire people from abroad for those. But these are not tens of millions, which is what we need for Bangladesh. You simply need to develop other industries other than garments. There is no alternative.

What are you saying is basically Bangladesh has to expand its export-led manufacturing base?

What I am saying is, in order to develop manufacturing-led industries, you need to have an environment in which they can flourish. People invest in an industry because they expect to earn good profits. Industries can’t grow if they can’t get low-cost inputs. Another thing is, sometimes the industries need foreign technical labour.

So, you are an advocate of importing labour?

My suggestion has been that anybody who needs a foreign worker should be able to freely import him or her. No restrictions. You get the permit automatically. You can import whoever you need but you have to pay a tax that increases over time. So, the longer you keep the foreign person, the higher the taxes you pay. The more valuable the foreign person is, the higher the tax you pay.

In other words, if you keep a foreign worker for 10 years, you pay a very high tax; if you keep them for 20 years, you pay an even higher tax. So, you have every incentive to train Bangladeshis to take over these jobs. The tax that you pay for having a foreign worker is refunded to you as a subsidy for the programmes to train Bangladeshis for the same jobs. This is actually a market system under which you have incentives to train Bangladeshis to take over a foreigner’s job.

Let’s talk about poverty a little bit. Income levels in Bangladesh have risen recently. You are talking about job creation but is there any other poverty alleviation policy that you recommend?

I have been working in this area of poverty alleviation all my life. I am a democratic socialist, and have been all my life. But when Marx and Engels wrote, there was no progressive income tax. The only taxes that existed at that time were trade taxes, meaning export taxes or import taxes. These were not good taxes to improve income distribution.

In order to gain control of resources you need to own the factory. Hence, Marx and Engels advocated government ownership of industry. But the problem with government ownership of industries is that it is then very difficult to close them down – because the workers in the factory use their political power to prevent the closing of the factory. So, you get a lot of zombie factories, factories that are not really efficient; rather, they lose income.

When we did the study of Bangladesh’s manufacturing industry in the 1970s, we found that these large sectors were losing money. Bangladesh was better off if the factories were closed. But they couldn’t be closed because of the political power of the workers and because they were government-owned factories.

The other thing I have become convinced of, after looking at government poverty programmes all over the world, is that they are never big enough or long enough to make a lasting impact on the poverty situation. Why? Because government poverty programmes require taxing the rich to benefit the poor. The rich resist those taxes quite naturally. They are powerful and influential. They always succeed. Well, I thought that Sri Lanka was an exception.

Why did you think Sri Lanka was an exception?

For years, Sri Lanka subsidised rice for the poor. In fact, they had free rice for the poor. This went on for a long time so I thought it was a real exception. When I looked into it, I discovered the reason. They could do it because the people who paid the taxes were British plantation owners who didn’t vote in Sri Lanka. It went on until the plantations went into the hands of Sri Lankans. Then the system stopped because these were politically powerful people. Unlike them, the British plantation owners had not been that politically powerful.

The new Sri Lankan tea plantation owners resisted the high taxes. As such, the rice subsidy programme came to an end. Since seeing this case study, I have become persuaded that the way to reduce poverty is to create jobs for the poor that give them higher income.

Can you give a good example of a country that has reduced poverty through the policy prescription you are suggesting?

I have recently been working in Indonesia, so I know that system well. There, the wages of industrial workers are double the wages of agricultural workers. When someone leaves agriculture and gets a job in manufacturing, they stop being poor and they enter the lower middle class. Why? Because their income doubles.

At the same time, if people leave agriculture, then the people who remain in agriculture have higher incomes. Why? Because the same output is shared among fewer people. So, both the person going into industry and the person staying behind in agriculture have a higher income.

The problem that has arisen in Indonesia is that a surplus of people in agriculture, which is about 20 million, who should be getting jobs in manufacturing are not doing so. This would eliminate poverty in Indonesia. This is an unfortunate situation because these people are the families that have no one in the labour force. So, families that have handicapped people or have no able-bodied people in the labour force may still be poor.

But anybody who is in the labour force, their income will be increasing and they will stop being poor. That’s to me the way to eliminate poverty. It’s entirely feasible. Nobody really objects to expanding manufacturing!

Your cross-sectoral research of the 1970s paved the way for many policy decisions of today’s Bangladesh. Can you share some other stark findings of the study? 

As mentioned before, one finding was related to the industries that were using more foreign exchange to buy inputs than the value of their output represented. They were losing foreign exchange for Bangladesh. They were spending more on inputs than they were earning on outputs. How was that possible? Well, because of tariffs. If the tariff on their outputs were high and that on their inputs were low, they could sell their goods in Bangladesh at a higher price. They could buy the inputs at a lower price because the tariffs on the inputs were low.

And that’s quite typical: the tariff on cotton is less than on yarn, on yarn it is less than on cloth and on cloth it is less than on shirts. So, there was a high tariff on shirts, let’s say 30%, which meant that you could sell your shirts at 30% above the world market price. You could buy the cloth to make the shirt at a tariff of 15%. So, we had to study what the real costs and benefits were.

If you have these industries that exist only because they have high tariff protection, then the country is worse off.

Now, if you didn’t have a tariff, you could buy the shirt at less than 30%, at the world market price. So, there was no real benefit in producing the shirt. You are just losing money by buying it from the Bangladesh market.

So, if you have these industries that exist only because they have high tariff protection, then the country is worse off. You should be fostering the industries that need this high tariff protection. You may want to give them tariff protection temporarily to overcome the infant industry problem. But this also has its own problem: in some cases infant industries never grow up.

Why don’t some infant industries grow in Bangladesh? How long do they take to grow? Should the government adopt a ‘timebomb policy’ in protecting infant industries?

It depends on how complicated the industry is. My recommendation would be that the length of the tariff should be stated when the tariff is first imposed. It automatically comes to an end at the stated time, so that you don’t have to make a decision. So, it’s best to establish that ‘this tariff’ will last 15 years, then it will go from 30% to 20% and after 5 more years it will go to 10% and after 5 more years there will be no tariff.

The garment industry is quite efficient because it competes in the world market. And Bangladesh as you know is the second largest exporter of garments in the world. Now, it’s also an industry that does not have world-class protection for its workers. It should have better protection for worker safety, and that will increase costs. But the industry has such low labour costs that it can compete even if it has more safety protection.

It is interesting that you are talking about protection. Agriculture is an interesting sector in Bangladesh, and it’s semi-protected. Do you think a country like Bangladesh should be protecting its agriculture or that this also should be left to market competition?

Then the local farmers in Bangladesh will have to make planting decisions before they know the price of the product they will produce.

Well, when you say protected, you mean it has subsidies. I think subsidies can be justified when you try to introduce something. In general, you can also justify guaranteed prices for the output, because the prices vary so much in agriculture. Right now, the prices of wheat and other grains are phenomenally high because of the Russia–Ukraine war. Both Russia and Ukraine are big exporters of grain. Those exports have diminished and the prices have gone up. When the war comes to an end, the price may come way down. Then the local farmers in Bangladesh will have to make planting decisions before they know the price of the product they will produce. Such prices can vary tremendously.

You see, I think there are some justifications for price stabilisation and price guarantees. If there is very large production and the price comes down, the government can buy up parts of it at the guaranteed price in order to keep farmers from losing money that year. That, I think, is the most justified support for agriculture. It will make it possible for farmers to invest in irrigation and fertilisers and so on. Because the farmers know that they will get at least a minimum price that the government has guaranteed.

So, you have been doing research on South Asia – Bangladesh, India, Pakistan and Sri Lanka – now Indonesia. A very open-ended question: how has Bangladesh fared in terms of all these economies that you have observed?

To talk about Bangladesh’s performance, you need to talk about its political economy. For a period of time, in every election in Bangladesh the opposition came to power. The two main political parties, the social democratic Awami League and right-leaning Bangladesh Nationalist Party (BNP), alternated power. This created uncertainty about policy because they had different approaches. It also created the danger that, if you invested when the Awami League ruled, then BNP might make your life difficult. So, the environment was uncertain and that slowed investment.

Then something new happened. The Awami League succeeded itself. The Awami League stayed in power. For the first time, there was stability in policy. And there was the potential for more rapid growth and above all for diversifying growth. I thought that the shipbuilding industry and the shoe industry would arise. I thought that Bangladesh would finally become a country that produces a variety of goods and not just garments.

Unfortunately, it didn’t happen. The Awami League government’s policies have to take their share of blame. I think they were more focused on political power balancing and less on diversifying industry. That is a great pity. Many of these economic policymakers are my students and apprentices. There are some very good people in the Awami League government in senior positions. They could have really transformed the lives of many poor people. But the potential was not fully realised, and I think that’s very sad.

To boost manufacturing, countries like China have developed industrial parks, commonly referred to as special economic zones. Do you think special economic zone-type policies can help Bangladesh?

Special economic zones are useful if they make a difference. Just calling something a ‘special economic zone’ doesn’t do anything. There are two things that you can do through special economic zones. One is, you can focus infrastructure investment in the zones. It basically lowers the infrastructure cost for a factory set up there. This is a hard thing but a useful thing for Bangladesh to do. Bangladesh has a low labour cost but its infrastructure costs are very high.

Bangladesh has a low labour cost but its infrastructure costs are very high.

Second, you can focus on transport logistics from the zones. Industry is concentrated around Dhaka and the big port is in Chattogram, and moving goods from Dhaka to Chattogram is costly and time-consuming. Maybe policymakers should prioritise factory setup locations. Locations closer to Chattogram, or easily accessible by rail or boat, would help. Do you know if they can ship goods by river?

They can; I don’t know whether they do it but it is possible.

That’s what I was told. It’s very difficult in Bangladesh given the flooding and the swampy terrain. So, the road system, the rail system, they are all weaker than those in India or Pakistan or Sri Lanka. And the situation could become worse because of rising sea levels that will flood some of the low-lying areas.

So, one advantage of special economic zones is that you can focus on the infrastructure ecosystem. This would create an advantage to enable Bangladesh to compete more effectively in the world market. You will be able to export at a lower cost and compete with any manufacturing exports.

This conversation with you seems to be about the switch from agriculture to manufacturing. Bangladesh is still a rural country, and agriculture remains important. Should policymakers ignore rural priorities?

Bangladesh has been phenomenally successful in the garment industry. It has gone from exporting nothing to being the second largest exporter in the world. That’s a remarkable achievement. But, on the other hand, Bangladesh faces rising sea levels, which will be costly to deal with. It faces the fact that it has a large number of poor people who need employment in manufacturing. So, it has to move beyond garments into other industries. And that’s not easy to do.

In a unique turn of events, the current Bangladeshi government has now been in power for over a decade. So, it has the opportunity to achieve these two things that are necessary – namely, to move beyond garments into other industries, and to expand their exports in order to create jobs for people who now have a surplus in agriculture, in fisheries, in trade, in services.

You have people selling magazines, shining shoes, selling all sorts of goods that are clearly surplus. They are doing these because they can’t get other jobs and they need some income. I have studied agriculture in Bangladesh in the past. I think it was in the late 1970s–early 1980s, there was a period of very rapid growth in irrigation, which caused all sorts of problems. That was a time when too much groundwater was used. This is the tragedy of the commons.

The ground doesn’t belong to anybody. When a well is sunk, the surface goes down and eventually salt water comes in and the whole system breaks down. That was a bad policy. While groundwater was reduced, though, agricultural production increased. Despite the growth in the garment sector, agriculture remains the most important industry in the country. So good agriculture sector policies are very relevant for Bangladesh.

 

Photo ©️ Mahmud Hossain Opu

Gustav Papanek
Gustav Papanek is Professor Emeritus at Boston University and President of the Boston Institute for Developing Economies. He is an economist. He was Director at Harvard University Development Advisory Service. He was a consultant to the World Bank and ADB and an advisor to prime ministers, presidents and ministers in Argentina, Bangladesh, Egypt, Greece, India, Iran, Korea, Malaysia, Nepal, Pakistan, Sri Lanka and Venezuela. He specialises in income mobility of the poor and transitions from a controlled to a market economy. He pursued his doctoral studies in economics at Harvard University.