Size matters

Some reflections on economic (in)dependence

by Farida C Khan

INDEPENDENCE — how do we understand it? I will lay out one way of thinking about the concept of independence at the risk of being called linear or nerdy. While getting across the fundamentals of basic economic models, I tell my students that a system is a collection of variables that are explained within the framework of that system or model. The variables that are being explained through the system are cast in, in terms of those that are independent or autonomous (also called parametric or exogenous). Therefore, the autonomous variables or parameters are outside the system and independent of it. They, in fact, explain the system.
What does this have to do with Independence Day? A meaning of independence is autonomy or being on the outside. The outside of a system. Therefore, if Bangladesh has attained independence, as a place, it should also have attained an independence that allows it to be outside something, autonomous from something.
What is it then that we have attained autonomy or independence from? The answer could be the British Raj in 1947 or Pakistan in 1971. But what about the larger systems in the world today, especially those that affect our material conditions?
Let us examine our economy and ask two related questions: (1) Are we independent from the world economic system? (2) Can we autonomously negotiate with that system?
Starting with question (1). In this day and age, the concept of economic independence is the exact opposite of all prescriptions for development, which appears to be our primary goal. Bangladesh is a small country (to be explained later) with an openness index that has risen from less than 17 per cent of GDP in 2000 to 24 per cent of GDP in 2012. The openness index shown here is defined as the average of exports and imports as a proportion of GDP. It indicates the extent to which international trade is important to the economy of a country.
This corresponds to the 6 per cent growth rate over the same period of time, all of it evident if one glances around at the extent of urbanisation, provisions in infrastructure, and new or expanded businesses. The growth in Bangladesh’s exports was about 13 per cent in the 1990s and has maintained at 11 per cent from 2000 to 2012, despite reaching a higher base by the turn of the millennium. The growth of foreign direct investment is not commensurate, of course, and the problems are known — political instability, problems with power, transportation, or a reliable healthy skilled workforce, too many days to start a business, as well as other institutional problems typical in Third World countries. However, the amount of foreign exchange reserves that the country has (thanks to garments exports and worker remittances) makes the taka fairly stable, if we look around and compare to other countries in South Asia such as Pakistan, Nepal, or Sri Lanka.
The reason for comparing with our smaller neighbours is that not everybody in a neighbourhood is the same. Large countries are far less dependent on trade, more inward looking, and get much more done within the country than they do with those outside their borders. They are also able to take advantage of large internal markets. Despite the outward looking stance of China, which has caused turmoil around the world, most large countries do not tend to have high openness indices.
Paul Krugman, who won the Nobel Prize in economics in 2008, challenged that concept in the 1990s that economies of scale determine international trade today. Large volumes of trade allow costs to be cut through various spill-over effects in a particular industry — external and internal economies of scale. Transportation also matters — and it is interesting to see nowadays how production can actually occur on the ship that is carrying the product to its destination — of course the Chinese have come up with this.
Should Bangladesh worry about being too small to reap these economies of scale? Clearly it did not and continued to export garments and send people out. Should we worry about monoculture in labour and labour-intensive products? Krugman also talked about product differentiation. Look at the different types of products that we export — knit vs. woven, adult male clothes vs. girls, jeans vs. leather jackets. There are differences but those are not relevant when we note that trade policies are usually decided by aggregated sectors, and when countries negotiate on trade policy they take decisions on clothes in their entirety. Product differentiation simply makes producers and companies more competitive and efficient. They do not really increase the diversity of the products being exported, particularly from countries such as ours. So, yes the downside of specialising in one product to reap economies of scale does make our export diversity very low.
What would happen if we lost our competitive edge in the garments sector? It is not that hard to lose something that we have built carefully over time. Reliable suppliers keep costs of production down. Our businesses have relationships that have been solidified over the past decade. We have survived disasters such as the great recession in the West as well as Rana Plaza.
Therefore, this is not something that should be our concern in the short term. But what about fifty years hence? Will we continue to produce garments? Will we rely on global demand to set the terms for our manufactures? Will our products continue to be cheap simply because our wages are so low that we can keep supplying these clothes no matter what happens in the world? Is there no way for Bangladesh to gain market power in exports? That brings us to question (2). Are we able to autonomously negotiate with the rest of the world?
Consider our reliance on foreign official assistance for decades. Consider how much of the changes in our economy were donor driven. They have generated growth and modernisation, but they were not necessarily based on any vision of leaders through popular consensus. By now, we rely much less on foreign official assistance at concessionary interest rates (foreign aid) and more on foreign exchange earnings from garments and worker remittances. Does that make us more autonomous? Only if our workers go abroad on terms that are certain, for jobs that give them dignity and decent working conditions and allow them to live outside the deepest squalor that prevails in the destinations they go to. Only if we are able to negotiate the terms at which we can sell our products to other countries, rather than always bidding making our prices do the limbo and see how low they can go. Data from the US shows us that Bangladesh is the lowest cost producer of men’s cotton jeans. Even with the duty that is tacked onto products from countries such as Bangladesh and Vietnam, as opposed to no duty on sources such as Honduras, Nicaragua, or Colombia, Bangladesh remains the lowest cost source, even lower than China.
The sources of foreign exchange earnings that we seek never allow us to negotiate on our own terms. It is the nature of global interdependence that makes countries such as Bangladesh (so-called ‘small’ countries) wind up with little autonomy. To return once more to the classroom, my students have always wondered what makes a country small — is it the number of people, land size, military power, or GDP? We may be the eighth largest country in the world by population but we remain small because of our GDP and we are no Japan or the UK. (That I have ignored military power is not an oversight). Small countries have to take the terms of the world market and be content with not being able to influence it. Theory, born out of an esoteric world of competitive markets and a medley of simplifying assumptions, tells us that small countries can gain from trading with the world. Their primary source of gain is from importing consumer products at cheaper prices.
Let us enjoy our interdependence then. If you Google ‘economic independence’, you will find at best a manifesto on how the Palestinian economy can survive in the face of military assault. Economic independence has little meaning today and the notion of national independence it at most bound up with an identity that a nation’s polity can construct. Since we do not have much real choice regarding autonomy as far as the material world, it may be prudent to at least construct our identity in a plural, consensual, and ethical manner. If it were up to me, I would symbolise that by calling this land after our many rivers, so that the very naming of our nation would be more inclusive.
Farida C Khan is professor of economics, University of Wisconsin-Parkside.

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