InM News

June 1, 2021

MoU signed between InM and Water.Org on “Pilot of a WaterCredit Adoption (WCAD) Programme”




InM and Water.Org has signed a Memorandum of Understanding (MoU) on 01 June 2021 to jointly provide technical support to WaterCredit programme-MFIs (WCP-MFIs) covering capacity building, performance based incentives, in country/oversee exchange visits and other support for implementing the WaterCredit Adoption (WCAD) model by the partner MFIs. The overall objective of the programme is to implement the WCAD model by the partner WCP-MFIs through providing vulnerable people with affordable loans for developing quality water and sanitation facilities. More specifically, the programme will help develop organisational capacity of the MFIs through technical support provided by InM. In addition, it will build the implementation capacity of WCP-MFIs to reach more customers at the BOP through the WCAD model. As a result, it will improve hygiene behaviours of the beneficiaries by educating them to avail improved water and sanitation products. Dr. Mustafa K. Mujeri, Executive Director, InM and Mr. Rachel Brumbaugh Overton, Director, Global Operations, Water.Org signed the MoU on behalf of their respective organisations.



January 22, 2021

Enhancing effectiveness of monetary policy in Bangladesh

 Mustafa K Mujeri   | Published:  January 22, 2021 20:32:43

Enhancing effectiveness of monetary policy in Bangladesh

Since the 1997 Asian financial crisis and the subsequent 2007-2008 global financial crisis, the global economy has entered into a period of elevated economic volatility, underpinning the need to use more effective policy tools for macroeconomic stabilisation, especially for the short term. From such compulsions, the importance of monetary policy has significantly increased in the absence of more appropriate tools. At the same time, there exists heightened scepticism regarding the efficacy of monetary policy in developing economies such as Bangladesh, although monetary policy tools play a central role in short term stabilisation in developed economies. Hence, a natural question for the policy makers in Bangladesh is: how effective is monetary policy in Bangladesh?

For the Bangladesh Bank (BB) to achieve its mandate, it is important that monetary transmission works seamlessly-a process through which the BB’s policy action is transmitted to the ultimate objective of stable inflation and sustainable high growth. The policy action consists typically of changing the interest rate at which it borrows or lends ‘reserves’ on an overnight basis with the commercial banks. The transmission mechanism hinges crucially on how monetary policy changes influence households’ and enterprises’ behaviour. This change can take place through several channels. The primary channels are:  (i) interest rate channel; (ii) credit (bank lending) channel; (iii) exchange rate channel; and (iv) asset price channel.

Here, we take a particular monetary policy transmission channel as a basis for measuring monetary policy effectiveness in Bangladesh-the bank lending channel. This relates as to how changes in the monetary policy instruments by BB affect the lending behaviour of the banks. More specifically, BB’s monetary policy will be considered more effective if a policy to trigger monetary expansion can elicit a larger reduction in the lending rates of the banks, thus lowering the financing cost for the businesses. And lower financing cost may be expected to encourage lending and stimulate investment and economic activities.

The immediate impact of a change in the monetary policy rate is on short-term money market rates. A bank will be willing to part with its reserves overnight to another bank only if it earns at least the rate that it could earn by keeping these funds with BB; and, if banks compete adequately for such lending, then the rate will in fact track closely the BB’s policy rate.

In turn, BB’s policy rate change will impact the banks’ cost of funds, both the rates they would pay to the depositors and the rates they would demand for making loans. For example, when BB reduces the policy repo rate with the intention to support aggregate demand in the economy, the expectation is that there would be a reduction in the banks’ cost of funds and lending rates, and other market interest rates. Lower lending interest rates of banks provide a boost to the demand for bank credit from various segments of society, and hence, increases in overall demand, income, and output in the economy.

The implicit assumption in the above is that bank balance sheets are strong and in a position to step-up quickly the supply of credit in response to lower funding cost and higher demand for credit – the bank lending or the credit channel of transmission. However, monetary transmission is greatly hindered if bank balance sheets are weak and they do not have much loss-absorption capacity to deal with their problem loans, resulting in accumulation of bad loans, misallocation of resources, productivity losses and slow growth. This way, attempts to stimulate growth with aggressive policy rate cuts when there are bank balance-sheet problems may not work and may lead to deeper balance sheet crisis. 

Since Bangladesh’s financial system is overwhelmingly bank-dominated, the overall efficacy of monetary transmission depends critically on the extent and the pace with which banks adjust their deposit and lending rates and meet adequately the economy’s demand for credit due to changes in the policy repo rate. Overall, empirical evidence suggests that the pass-through from policy rate changes to bank lending rates is slow and subdued in Bangladesh. This lack of adequate monetary transmission is a key policy concern for the BB.

In Bangladesh, a large proportion of the loans is at floating rates i.e., the interest rate charged to the borrower keeps changing depending on the reset periodicity. The floating rate is linked to some ‘benchmark rate’. Banks also charge a spread over the benchmark to factor-in term premium and credit risk, among other factors. The actual lending rate is the benchmark plus the spread. The benchmark could be internal or external; an internal benchmark is based on elements which are in part under the control of the bank such as cost of funds, while an external benchmark is outside the control of the bank (for example, it could be market determined rate such as certificate of deposit rate or treasury bill rate or inter-bank offer rate, or it could simply be the central bank’s policy rate).

The virtue of an external benchmark is that it is transparent, common across banks, and borrowers can compare various loan offers by simply comparing spreads over the benchmark. As market rates normally move in line with the central bank’s policy rate, an external benchmark is globally considered and adopted as more appropriate than an internal benchmark for transmitting monetary policy signals. In Bangladesh, banks enjoy the flexibility to use both the internal and external benchmarks, but the banks seem to prefer internal benchmarks on two counts: first, the internal benchmark reflects their cost of funds; and second, it is perceived that there do not exist any robust and vibrant external benchmarks.

In this context, what is important for BB is to explore possibilities to reduce the weaknesses and rigidities in the transmission mechanism through effective measures. For example, the banks may determine their benchmark lending rates taking into account the marginal cost of funds, such that the lending rates could be more sensitive to changes in the policy rate. The actual lending rate may also include a spread for covering the costs of business strategy, credit risk premium and others. This will give better transparency, more flexibility and faster transmission. 

The low pass-through from policy rate to bank lending rates is affected either by the banks not changing the benchmark rate or by adjusting the spread. The rate rigidity on the liability side of the banks may be caused by several factors in Bangladesh. In the country’s banking sector, the overwhelming share of total liabilities of banks is in the form of deposits. Bank deposits are predominantly at fixed interest rates, thereby imparting rigidity to the transmission process. Further, more than one-third of the deposit accounts are fixed deposits, implying that their rates get reset infrequently and with significant lags to policy rate changes. While the banks’ marginal cost of funds may drop quickly with a cut in fresh deposit rates, the average cost of deposits comes down rather slowly, which weakens the transmission.

Further, the banks in Bangladesh have a large access to low cost current and savings account funds. These funds constitute about 30 per cent of aggregate bank deposits with the share of saving deposits at around 20 per cent. More importantly, the banks are mostly free to decide saving deposit interest rates which do not necessarily follow the monetary policy signals. In addition, the deterioration in the banking sector’s health due to worsening of asset quality over the past several years and the expected loan losses in credit portfolios also induce large variability in spreads in the pricing of assets. Indeed, the weak banks aim to maintain profitability in the short-term even at the expense of long-term profits as well as deposits and lending shares. This also has significant impact on the transmission to the lending rates. These and other factors contribute towards rigidity in the liability side of banks’ balance sheet with respect to policy rate changes, inducing a behaviour that makes the rates on the asset side of banks’ balance sheet rigid as well.

Bangladesh Bank needs to take steps to enhance the transparency and transmission from monetary policy signals to the actual lending rates of the banks. In the long run, the need is to shift to an external benchmark based lending rate system as the internal benchmark based pricing regimes are not consistent with global practices on pricing of bank loans. The transformation should be pursued in a time-bound manner. While recognising that no external instrument in Bangladesh meets all the requirements of an ideal benchmark, the Treasury Bill rate or the BB’s policy repo rate may better serve as an external benchmark. Similarly, the periodicity of resetting the interest rates by banks on all floating rate loans, retail as well as corporate, may be reduced to once in a quarter to expedite the pass through from the monetary policy signal to the actual lending rates. To reduce rigidity on the liabilities side, the banks may be encouraged to accept deposits, especially bulk deposits, at floating rates linked directly to the selected external benchmark.

Efforts should be directed to improve the monetary transmission by ensuring that changes in the policy rate transmit quickly and adequately to banks’ lending rates in a transparent manner.  The aim is to make the banks’ liability side more flexible so that the objectives of improving monetary transmission by BB and maintaining healthy net interest rate margins by the banks are effectively aligned.

Obviously, efficient monetary transmission is a pre-requisite for the successful pursuit of its objectives by any central bank. The transmission from the policy repo rate to bank lending rates, which is the dominant transmission channel in Bangladesh, remains an issue of concern. The key issue is to address: who should bear the interest rate risk in the economy – the borrower, or the depositor, or the bank? Retail depositors and borrowers are unlikely to have efficient tools to manage the interest rate risk. Banks, however, should have the ability to manage the interest rate risk. Similarly, large depositors and large corporate borrowers can also be expected to be in a position to manage the interest rate risk. Non-bank financial institutions with less exposure to interest rate risk, such as insurance and pension funds, could also be good repositories of this risk. A combination of interest-rate risk transfer mechanisms through market products such as interest rate derivatives (e.g. swaps) and securitised products such as collateralised loan obligations (CLOs) can also be good vehicles.

In particular, monetary policy will be more effective with deeper financial markets, more competitive banking system, stronger institutional and regulatory environment, and a more transparent BB. On the other hand, higher integration with the international financial markets with greater exposure to global shocks will limit the role of monetary policy and dampen its effect.

Going forward, monetary policy will have to play a bigger role in Bangladesh in the coming years. For the purpose, BB needs to adopt new instruments and procedures, improve its existing frameworks, and gain greater autonomy in the conduct of monetary policy. The government, on its part, will have to strengthen its efforts to enhance BB’s transparency and refine policy and operational frameworks. Structural reforms are also necessary to strengthen institutional and regulatory structures, allow greater competition in the banking sector, and deepen financial markets.

It is well known that monetary policy changes are more likely to affect the bank lending rates in the theoretically expected directions in countries that have better institutional frameworks, more developed financial structures, and less concentrated banking systems. Bangladesh scores poorly in all of these dimensions, and hence the country indeed exhibits much weaker transmission of monetary policy changes to bank lending rates than do the advanced economies.



January 18, 2021

5th IIDC Board Meeting held

The 5th Board meeting of IIDC was held on 18th January 2021. Due to Covid 19, the meeting was organised virtually. The Chairman of IIDC, Dr. Qazi Kholiquzzaman Ahmad presided over the meeting and Mr. Jahirul  Alam, Managing Director presented the meeting agenda. Other board members also attended the meeting.



January 7, 2021

Women’s Economic Empowerment and Future Development of Bangladesh

Mustafa K Mujeri | Published: January 05, 2021 20:22:40

Bangladesh’s development story over the past fifty years is full of development surprises and extraordinary resilience of the people in the face of frequent natural disasters and manmade calamities. The country’s economic transformation has largely been driven by social changes, initiated by women empowerment, and providing a rare example of a neo-liberal development model under which social progress has far outstripped economic growth. In the process, the role of the state has been critical in pursuing sound macroeconomic policies, disaster management, investments in public health and education and partnerships with NGOs and civil society, along with pursuing a reasonably pro-poor growth and social policy agenda highlighting women’s empowerment and grassroots activism.

With Bangladesh’s vision of becoming an upper middle income country by 2031 and a high income country by 2041, the key to success will be to integrate three development dimensions covering desirable structural changes, growth to reduce income and productivity gaps (convergence), and enhanced equality. For Bangladesh, interactions between structural transformation and social development are critical since technology has radical impacts on social interactions, leading to adaptation and regeneration of social relations. These developments indicate the need for embracing a multi-sectoral and interdisciplinary view on structural transformation in Bangladesh to include institutions that mediate social outcomes such as gender relations.

In Bangladesh, although women constitute half of the population, women’s labour force participation rate is only 36.4 per cent compared with 84.0 per cent for men in 2020.  Women’s participation in formal labour force is rising (e.g. in RMG industry), but huge gender inequalities continue to persist in the labour market in Bangladesh. Women are heavily concentrated as unpaid family workers and day labourers in the rural areas (in low productivity daily work with low wages and often concentrated in public food for work programmes) and in unpaid family businesses.

Moreover, despite a strong convergence in human capital characteristics (for example, in terms of educational attainments) since the 1990s, wages of men and women have not converged to the same extent and a sizeable gender gap persists. In Bangladesh’s patriarchal society, women are assigned most of the reproductive role and they suffer from high workload and unpaid labour, lack of decision-making in the household and society and subordination, while gender-biased social norms keep most women trapped in disadvantaged situations.

As a result, women’s level of employment is much lower than that of  men due to factors working on both the demand and supply sides. On the supply side, women’s labour market participation depends on a host of socio-economic factors, including household income, age, marital status, education, household dependency ratio and others. While, on the demand side, women employment depends on factors, such as firm level characteristics, technology, location of activities, and others. There are also some sector-specific issues that affect the expansion of women’s employment in certain economic activities.

A woman driving a car in Dhaka —FE Photo
A woman driving a car in Dhaka —FE Photo

In terms of quality, women are mostly involved in low-paid and low-productivity activities and, according to the Labour Force Survey, 92 per cent of the employed women labour in 2017 are engaged in the informal economy. The outcomes in the labour market shows that women’s economic empowerment in Bangladesh has to address many dimensions, e.g., patriarchy and purdah, double burden and time poverty, financial and business knowledge, gender gap in digital technology, access to networks and markets, and many socio-cultural and techno-economic constraints.

The participation in the formal economy is an important vehicle for women’s economic empowerment and for raising the status of women and promoting gender equality. The regular wages and salaries, relative job security, prospects for promotion and regulated working conditions in formal employment offer significant potential benefits for women. Formal employment has the ability to increase women’s access to skill development, market information, credit, technology and other productive assets, social protection, pensions and social safety nets. The benefits of women’s participation in the formal economy create spillover effects on overall gender equality, productivity growth, poverty reduction and the sustainable development goals (SDGs). These are important for Bangladesh since the educational gains for women have not been matched by equal gains in their economic opportunities as many women with education are either excluded or employed in positions that do not make full use of their education and skill.

If we assume that women’s economic empowerment is reflected in the realisation of the full labour market potential of the female labour force, this will result in significant macroeconomic gains, including GDP growth. For quantifying the potential impact on GDP growth, we use the accounting relationship: yt = (Y/P)t = (Y/H)t  x (H/E)t x (E/L)t x (L/P)t  where yt is GDP per capita in year t, Yt  is GDP in year t, Ht is the number of working hours in year t, Et  is the number of employed persons in year t, Lt  is the total number of working age population (aged 15-64) in year t and Pt  is total population in year t. On the right hand side, the first term (Y/H) is the labour productivity per hour, (H/E) is the annual average working hour per employed hour, (E/L) is the employment rate, and (L/P) is the demographic dividend.

In Bangladesh, as in most other developing countries, women labour force participation rate is much lower than the men participation rate (estimated at 36.4 per cent for women compared with 84.0 per cent for men in 2020). While calculating the impact of greater women participation in the labour market in an economy, it is usually hypothesised that if women labour force participation rate can be increased to the level of the men participation rate (that is, if gender parity in labour force participation rate is ensured), this would substantially raise the overall employment level, which can be approximated by (men labour force participation rate-to-total labour force participation rate/total labour force participation rate), and hence GDP per capita would also increase by a similar magnitude. Hence, if we adjust the women labour force participation rate to the level of the men participation rate to estimate the impact of women’s economic empowerment, we find that GDP per capita rises by between 0.5 to 0.7 percentage points on an average in Bangladesh which can be a substantial gain for the country.    

For moving towards the cherished development vision, the key for Bangladesh will therefore be to introduce good practices for increasing women’s contribution to the country’s formal economy through advancing women’s economic empowerment using multiple channels, such as reducing structural barriers to women’s productive economic participation, removing restrictive gender norms and stereotypes, creating institutional mechanisms to assist the young women to plan their careers and ensure gender-sensitive balance between job and family responsibilities, providing non-traditional and innovative forms of employment for women, supporting private sector networks to promote gender equality in the workplace and society and other potential options.

In Bangladesh, gendered power structures and social norms lock women in positions that limit both their productivity and their ability to contribute to the economy and society, particularly since women are marginalised as economic actors due to the structural inequalities that leave them insecure. As such, women’s economic empowerment requires a holistic approach that recognises the importance of societal and political, as well as individual empowerment as essential contributors to economic empowerment. Within the approach, women’s economic empowerment needs a comprehensive framework to address the ‘what’ and the ‘why’ of the concept to identify the key areas for effective interventions and the pointers for effective implementation of the women’s economic empowerment agenda, both in the local and national contexts.

Over the last fifty years, targeted efforts by the government and the nongovernment actors have played important roles in creating the initial condition state at the micro-level through initiating grassroots level transformations for promoting women’s economic empowerment. These initiatives, no doubt, have created the essential building blocks for developing the critical linkages between micro and macro levels which can trigger rapid transformations in economy-wide and sector-specific gender barriers to prepare the macro economy to effectively respond to these micro-signals to women’s economic empowerment. These micro-macro transmissions and interactions, which are seldom acknowledged in the traditional development literature, are the key features of Bangladesh’s innovative neo-classical development model which has brought significant socio-economic transformations over the last fifty years; and these are also critical towards ensuring women’s rapid economic empowerment in the coming years.

The current need is to explore the dynamics of micro-macro interactions of the women’s economic empowerment interventions in Bangladesh and identify both systemic and gender-induced barriers and challenges, both at micro and macro levels that hold women back from economically empowering themselves. For targeting specific policies, we should move towards country-specific model capable of revealing and quantifying the causal relationships of women’s economic empowerment and the country’s economic outcomes at the macro level in Bangladesh to better design future interventions and facilitate their scaling up to cover more women and in varied locations. 


Dr Mustafa K Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM).     



December 25, 2020

Balancing global and regional value chains for RMG industry

 Mustafa K Mujeri | Published:  December 25, 2020 21:02:37 | Updated:  December 25, 2020 21:31:13

Balancing global and regional value chains for RMG industry
As the Covid-19 pandemic ravages global production and trade linkages, the policy makers are increasingly exploring the possibilities of shifting more towards regional value chains (RVCs) from global value chains (GVCs) as pathways to sustaining export growth. Bangladesh’s RMG and apparel sector is one of the country’s biggest growth drivers with a global apparel market share of 6.8 per cent in 2019. The sector accounts for about 84 per cent of the country’s total exports and employs nearly 4 million people of which 61 per cent are women.

The country’s RMG and apparel industry has seen a devastating impact of Covid-19. Cancelled orders, unsold stock and declining demand have led the sector to struggle for sustaining its past successes at expected levels. Bangladesh’s close competitor in the RMG market is Vietnam which had 6.2 per cent of the global market share in 2019; and Vietnam managed to achieve strong export growth since the late-2019. Vietnam has also shown better performance than Bangladesh in containing the Covid-19 pandemic and is currently threatening rather successfully to capture Bangladesh’s position as the 2nd largest exporter of RMG after China.

Vietnam has also entered into a free trade agreement (FTA) with the EU in August 2020 which is the most comprehensive agreement that EU has ever concluded with a developing country. At present, only 42 per cent of Vietnamese exports to the EU enjoy zero tariffs under the GSP. It will be almost 99 per cent elimination of duties after the FTA. The EU is also a major export destination for Bangladesh’s RMG. Bangladesh is yet to negotiate a similar FTA or bilateral trade agreements once the GSPs are removed. Vietnam’s RMG export basket is also more diversified with relatively higher value-added products than Bangladesh; and per hour labour productivity per worker is 19 per cent higher in 2016–USD 4.09 in Vietnam compared with USD 3.45 in Bangladesh as estimated by the Asian Productivity Organisation (APO). It is more likely that Vietnam still holds this advantage although the labour cost is lower in Bangladesh. It is therefore high time for Bangladesh’s RMG sector to regain its position of power and adopt a sustainable pathway for going forward. 

Along with sustained low labour costs, Bangladesh’s big advantage is its leadership in LEED (Leadership in Energy and Environmental Design) certified green RMG with 91 LEED-certified factories in Bangladesh, which is higher than in any other country. Of the 10 highest rated LEED-certified factories in the world, six are located in Bangladesh. These give a preference on the part of the foreign buyers and investors for importing RMG from Bangladesh and treat the country as a lucrative destination for FDI. On the other hand, some critical constraints for Bangladesh are that the country does not have a diverse range of export destinations and possesses a low product range of RMG and low labour productivity.

At present, the urgent need for Bangladesh is to secure FTAs or bilateral trade deals to expand the access of its RMG to multiple destination markets. China has announced a tariff exemption for 97 per cent of Bangladesh’s products in July 2020 which provides an excellent opportunity to benefit from trading with China and adopt more advanced production processes and technology from China to move up in the ladder of global RMG market. The key for Bangladesh will be to take the advantage of being a world leader in Green RMG to add higher value to its RMG products. In particular, Bangladesh’s RMG sector will have to provide more attention towards maintaining factory standards and labour welfare regulations to overcome the disruptions in the post Covid-19 world.

Since its beginning, Bangladesh’s RMG exports are led by the GVC-led production and distribution channels. The process has been characterised by cross-border fragmentation of production processes, which entails specialisation in a narrower range of tasks by domestic firms organised within the global production networks. With limited productive capacities, integrating  with  GVCs has  provided  wider  trade  opportunities  for Bangladesh’s  domestic RMG industry to gain  access to new markets through specialising in a single or limited number of  tasks in the production chain.

The  typical  feature  of  the  GVC-oriented RMG is  that  the firms  in Bangladesh  focus  mainly  on  manufacturing (processing) activities, while research and design (R&D) for product development is provided by the global brands or importers in the developed country markets, raw materials are sourced from a cheaper source in another country,  and  marketing  and  after sales services are provided by the providers in countries where the consumers are located (this is called the ‘smile curve’ process). The issue for Bangladesh is that the manufacturing stage in the smile curve generates very little value in proportion to the retail prices paid by the consumers of the RMG products.

With a huge advantage in terms of cheap labour, Bangladesh  is  mostly  involved  in  two  low-value  stages  of  cut,  make  and  trim  (CMT)  and  original  equipment  manufacturing  (OEM)/free  on  board  (FOB). In short, most of Bangladesh’s RMG export  does  not  fall  under the  high-value  added   models,  such  as  original  design  manufacturing  (ODM)  and  original brand manufacturing (OBM). Thus, Bangladesh is mostly known as a source of low-cost garment items in bulk rather than a source of relatively high-priced garment products sold by the global brands.

Thus, the key for Bangladesh in RMG upgrading is to move up the GVCs through developing product and process upgradation capabilities. Product upgrading involves producing high value garment items by moving into higher segments of the value chain, while process upgrading requires advancing production methods using better and modern technologies and more skilled labour force. Although Bangladesh has made a beginning, still it needs to go a long way in both upgradation processes.

Further, the impending graduation from the LDC status, which represents a major development transition for Bangladesh, also gives rise to concerns about the adverse implications of the loss of access to various support measures on RMG export such as duty-free market access and   relaxed rules of origin (ROO) provisions in the EU. Bangladesh’s RMG industry needs to go for industrial upgradation within GVCs including automation and deepening of capital-intensive techniques for promoting export competitiveness of its products.

It is true that the GVCs are making important contributions to the growth of the export-oriented RMG in Bangladesh since the 1980s including rapid expansion of women employment in the industry. On the other hand, the role of RVCs has been rather limited–the strength of which lies in supporting higher-value activities, such as design and branding. At present, the heightened uncertainty unfolding in the GVCs due to recent trade wars and the Covid-19 pandemic has forced several stakeholders to give a new look at RVCs as complementary drivers of RMG. In this context, the major route is to strengthen intra-regional trade and RVCs for which designing of optimal regional policies is the key to move forward.

In Bangladesh, no serious study is available in the textiles and apparel sector on the value chain directionality of firms – their orientation to different value chains – and how these affect upgrading opportunities and outcomes. Further, only limited knowledge exists on the impact of industrial and trade policies on firms’ incentives to capitalise strategically on the benefits created by different types of value chains. Available evidence from other countries suggests that various types of value chain offer distinct opportunities for upgrading, job creation, and development of backward linkages to domestic and/or regional suppliers.

In general, GVC-oriented RMG make the greatest contribution to current job creation and export growth. But the focus is mostly on a narrow range of lower-value products. On the other hand, the RVC-oriented RMG are likely to be more involved in a wider range of product categories and related activities, including vertical integration to the textiles sector producing own yarn and fabric inputs and higher-value activities involving design and branding. These RMG are also more likely to source inputs from the regional markets.

Over the years, Bangladesh’s RMG have experienced significant economic and social upgrading; but weak linkages with the RVCs still preclude the industry to avail the full advantages of these regional networks as stepping stones to more demanding but lucrative global markets. A successful RVC-oriented RMG firm can build its capabilities, to begin with, as an own-brand manufacturer in the domestic market, then learn to export by serving the regional market, before meeting the tough requirements and competition of the global market.

In practice, all RMG firms undergo process upgrading, but GVC-oriented firms remain closest to the technological frontier. The reasons are manifold. The high degree of process upgrading (and low level of functional upgrading) by GVC firms is partly due to its nature of ownership. Most of the GVC-oriented firms are either foreign-owned or under foreign-partnerships where higher value activities are reserved for their overseas parent companies.

In terms of policy, rents allocated through multi-scalar industrial and trade policies (e.g. removal of tariffs under regional trade agreements) both at the regional and global levels can be critical for RVC-oriented RMG. For the RMG industry, Bangladesh needs to carefully assess the implications for the design of ROO and similar initiatives such as whether to opt for double transformation requirements or the more relaxed single transformation rules allowing manufacture from imported inputs. Often, the more relaxed single transformation rules favouring regional RMG export might result in backward linkage effects (e.g. more new investments in textiles). The relaxed single transformation rules of origin can allow Bangladesh’s RMG manufacturers to import their inputs but still benefit from the duty-free market access to the major importing countries.

With the graduation of Bangladesh from the LDC status in the near future, it is high time for the GVC-oriented RMG firms to reconsider their business models since the uncertainty over the future course may reduce incentives for new investments and the investors may prefer to wait for policy stability. A key concern for the policymakers will be to secure the continuity of market access in the developed countries without exposing the domestic RMG producers to additional competition.

At the present level of development of the country’s RMG industry, the value chain directionality matters for Bangladesh. Although GVC-oriented firms have made the largest contribution to the growth of RMG industry in the past, global experience suggests that the RVC-oriented RMG firms perform a wider range of higher-value activities, have greater incentives to move towards high value products, procure more inputs locally, and have a tendency to engage more in end-market upgrading. The key for Bangladesh’s policy will be to redefine the country’s multi-scalar industrial and trade policies to strategically combine the benefits of both types of value chain.

Dr Mustafa K Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM).   



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