Go west, to Bangladesh?

COMMENT No, it's not the old tripe that says that smart money ought to pull out of the East and head to the West. Nor is it saying this is the reverse of the old jingle, absurdly popularised by that wacky school of neoclassical economics, that the East was paved with gold and the West’s money sniffed giddy opportunities to make even more money, so it gravitated towards Asia's growth 'miracles'.     

In the same way that Japanese companies, having hitched their very survival to global markets for their exports, turned outwards from Japan after the 1985 Plaza Agreement. They scoured the world for new and cheaper labor-intensive sites for their production. The same thing is happening again. Today.

Southeast Asia became the first primary beneficiary of Japanese foreign investments. The Taiwanese were also marching. They found a ready-made, 'natural' home in their neighborhood, just across the strife-torn straits in Fujian province on China’s west coast.

Then the Japanese got wind of the dynamism of Chinese capitalism and started to make a beeline to China. So did the rest of the world: South Koreans, Americans, Europeans and Singaporeans. Even the Brazilians want a piece of China.

But all this was spawned in the 1980s by the triangulation of the southern (Guangdong) and western (Fujian) belt of China with Hong Kong and Taiwan. Much of early Taiwanese money was funneled through its Hong Kong conduits.

It’s no co-incidence that Hong Kong’s business elite - like Li Ka Shing and Gordon Wu - were stitching up business deals everywhere with Chinese Communist Party’s leaders, that would have Mao Zedong turning violently in his grave. Deng Xiaoping, though, would be sitting up in his, lauding his ‘capitalist roader’ instincts that Mao had so brutally abhorred.

Since then two things have happened, and almost simultaneously. One, global finance has been making a straight line to China for almost three decades now, including capital from within Southeast Asia. Nowhere in the world were the returns greater than in China. Two, Japanese manufacturing presence in the Asean economies were already pulling out, albeit slowly, also to make a killing in China.

And just as Japanese labor costs were rising too sharply for Japan’s big business, the same was happening in the US and Europe. All this gave rise to ‘catch up’ economics, in relative terms. Luckily, unlike Japan, there has not been an economic hollowing out in Southeast Asia. But it can’t be too far off.

Bangladesh the new China?

China’s labor costs have been rising sharply enough that the Americans, Europeans and even Hong Kong entrepreneurs have been recalculating their costs and benefits of doing business in China. They’ve surmised, preliminary data shows, that China is becoming an expensive place to do business. Whilst still able to make a killing in China, their profit margins are being reduced.

Moreover, given the rising cost of capital, especially short-term finance, and the ongoing uncertainties surrounding the world economy after the so-called Great Financial Crisis, the early windfalls are no longer guaranteed. What was once China’s (and Southeast Asia’s) boon through their competitive advantage, mostly achieved through market manipulation by governments, their bane is probably closer than they’d like to think.

You wouldn’t think of it in a million years, but Bangladesh - a country renowned for its seemingly perennial political-military, naturally hazardous problems, and mass export of its labour -  has been pinging on the radar of global companies and investors, more so in the last couple of years.

As the site of a potentially lucrative, labour-intensive, manufacturing export economy, Bangladesh looks on its way. Still a largely agri-based economy, with a trenchant system of caste, class and radical-conservative Islamism at its contemporary core, it may just have the inside track to securing more and more foreign investments to carve out a niche in global manufacturing.    

Something else. Six million Bangladeshi migrant workers - not the Bangladeshi diaspora - remit home their foreign earned incomes, 60 percent of which are earned in the Middle East. It has been growing by 30 percent annually throughout this decade, and frames the bulk of Dhaka’s total foreign exchange inflows. These have kept Bangladesh’s current account in the black, even though the trade deficit has widened.

Foreign investment the key

In FY2010/11, however, current account surplus is forecast to shrink and trade deficit to widen more. The June budget showed Dhaka taking an expansionary fiscal policy whilst the rest of the world tightens its spending. But Dhaka's pro-growth, pro-business policies have broad support in government and business.

On this, though, the World Bank is tepid. It says Dhaka’s budget deficit will be about 5 percent of GDP. The economy is expected to grow at 6 - 7 percent this year. Still, Dhaka must keep attracting more foreign investments, and hope, too, that world oil price, the Indian rupee and prices for Indian imported and homegrown food stabilise at current levels to keep the inflation rate at 5 percent or less.

Any higher and workers will rise again, as they did in June, demanding higher wages, up to 200 percent more.            

With a labor force of 72.5 million, 45 percent are in agriculture, 30 percent in industry and 25 percent in services. But the rate of labor absorption into industry, particularly manufacturing, is growing strongly. As the likes of America’s Wal-Mart seek more, and cheaper, textiles, clothing and footwear - an early domain of China’s high growth - Bangladesh looks poised to take over the sector.

Dhaka’s Centre for Policy Dialogue says only one-fourth of Bangladeshi workers are as productive as China’s. Bangladeshi workers in this sector earn half, or less, than the Chinese monthly minimum wage which, in this sector, ranges from US$110 to US$150.

Foreign investors began to see the potential for growth in Bangladesh a lot sooner than most others. Hong Kong apparel sourcing companies, such as Li & Fung, acting for multinational firms, have been watching Bangladesh keenly. They, amongst others, think Chinese low-paid jobs will move offshore sooner rather than later.

Any ideas that Bangladesh cannot compete with China's textiles, clothing and footwear sector have a point, but a small one, in terms of exports. Once foreign investments grow, Dhaka will move heaven and earth, and borrow internationally, to build new infrastructure and modernise existing ones. That is on the cards.

Bangladesh’s garments exports were more than 80 percent of the US$7.1 billion in total exports. And if the US and the EU exert enough subtle pressure, Beijing could let go of the shackles around the yuan. If the yuan appreciates, Bangladeshi exports will be even more competitive.    

Shorter economic cycles

The same thing happened in 1985 and again in 1989 with the Louvre Accord. Japanese costs rose, as did the yen, and China and Taiwan, and especially Southeast Asia, won. Funny thing about economics: it has the same sense as history. It repeats itself.

But how long did China think that it could hold on to its artificially created competitive advantage? Japan tried it throughout the Meiji period and succumbed in 1985. America, Europe, Taiwan too. Southeast Asia is now at the crossroads. And now China, after less than 30 years of furious but highly uneven growth and development trajectories.

The late, great economic historian, Alexander Gerschenkron - Russian-born, Austrian-trained, Harvard University professor - had predicted Russia, Japan and Germany may be forced to miss stages of development even during their long economic cycles. China and Bangladesh are at the next stage of Gerschenkron's 'catch-up' economics.

It could be a natural progression or trajectory, but they have much more wriggle room than do Japan, Singapore and Taiwan.    

Some countries have done well out of 'catch-up' economics. But many have failed, and miserably. One other problem: we don't have the luxury of long economic cycles anymore. They’re dead. Gone. The cycles are shorter these days. Much shorter. And much more erratic. Bangladesh cannot escape this. The challenges ahead will be phenomenal.