Ending the cheap labour dependency

Bangladesh has built an entire export portfolio based on cheap labour. The domestic industries also thrive on cheap labour. Both in domestic and export markets, Bangladesh competes in price-sensitive markets. Low price is the value that we deliver. To a certain degree, the dependence on cheap labour is caused by the need to create jobs for many unskilled men and women entering the labour force every year. We are looking for job-rich sectors; we are afraid of mass unemployment if we shift to high-value technology-driven industries, and our economists have spent the last several decades searching for international trade routes that offer incentives like the GSP facility. In short, we did not build the support system and the enabling environment that can help us take a paradigm shift.

Global trade pretty much follows Heckscher-Ohlin’s theory of factor endowment based on Ricardo’s theory of comparative advantage. Countries export goods which absorb the abundant factor and import goods that absorb the scarce resources. Bangladesh exports goods that absorb cheap labour but imports goods that absorb capital. Factor endowments are, however, not static. Since 2013, China has shifted from a cheap labour or extensive growth model to a resource efficiency-based model. The shift to the resource efficiency based model (an intensive growth model) is not rapid. It is triggered when there is a decline in surplus workers and an increase in wages in the high-productivity sector. This squeezes the sector’s profit, and investment in the sector drops. We reach The Lewis Turning Point, where the economy shifts from an extensive to an intensive growth model.

Bangladesh has yet to reach this point, but it must escape from the conundrum of cheap labour. In other words, surplus labour needs to drop; wages need to rise. We are not reaching this point because we want to delay our path to it. Why? Because we are afraid. Why? Political parties capitalise on cheap labour for their benefit. Labour unrests are easy to manoeuvre if we are dealing with cheap labour. The government uses them to its advantage. The opposition parties use them for their benefit. The political parties do not have the incentives to let go of the surplus labour movement to cities. This strategy is also salient in the way we approach our transport sector. We keep it inefficient to allow the flow of cheap transport labour from rural to peri-urban and urban settings.

Beyond the political reasons, we also have inertia in fast-forwarding our path to an intensive growth model because it requires capital to be available to all. We have a dearth of domestic and diaspora investments because we promote cronyism in the form of capitalism. In Bangladesh, capital and markets are open only if they satisfy political interests. Ending cheap labour dependence addresses a key political fault line while opening frontiers for economic growth. So, how do we achieve it?

We need to open our market and expand our reach to other markets. While opening our market to local and foreign investors, we must ask what we are opening our market for. Cheap labour or something more? Investors are looking for land, ports, robust financial sector, assurance of political stability, limited bureaucracy, uninterrupted power supply, and faster connectivity. When we do not offer any of these, investors will not have incentives to come to Bangladesh unless and until they have vested interests. Thus, to end dependence on cheap labour, we need to build new factor endowments based on land and service delivery. This will open doors for more highly skilled labourers in service delivery and increase aggregate output from our land (thereby increasing resource efficiency).

The next part of the equation is to find who we can partner with to improve our balance of trade, facilitate capital formation and diversify exports. Specifically, we need to take measures that will enhance our balance of trade with our counterparts. To achieve this, Bangladesh needs to immediately assess the scope of integrating with ASEAN and other trade blocs. Integrating with more trade blocks can shift the dynamics of trade. This can potentially open avenues to get into high-value export-oriented agriculture, aquaculture, and ocean fisheries. Furniture, light engineering, and shipbuilding industries can potentially see a boom. We already reached the Lewis Turning point in agriculture as surplus labour has declined and the wage rate increased. Each of these sectors offers the opportunity to leverage highly skilled labour, technology and capital. In this context, we need to learn from our failures in leather, footwear, shrimp, and Jute diversified Products (JDP). Leather struggles due to a largely inefficient tannery sector. Shrimp has declined due to poor water conditions and virus attacks exacerbated by climate change. At JDP, we struggle as our production cost is way higher than India’s. In short, we lack comparative advantage in these sectors. However, we kept pushing as we did not analyse our prospects to shift from an extensive growth model to an intensive one.

So, can Bangladesh end the cheap labour curse as a factor endowment? Political parties will not take the leap forward. Interim government can. The question is whether they dare to seize the opportunity.

Md. Rubaiyath Sarwar is Managing Director, Innovision Consulting. [email protected]

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