COMMENTARY

Exports from Bangladesh during the Recession

M A Taslim

Bangladesh exports held up rather well during the global recession, even as major exporting nations including China and India suffered heavily. More than 90% of the goods exported from Bangladesh are final consumer goods, such as apparels and frozen food. Import data for the two largest markets for Bangladeshi exports show that the import of final consumer goods either did not decline or declined much less than the non-consumption goods. Using insights from income-consumption theories, this article argues that the principal reason for the relatively good performance of the export sector is the nature of the export basket of Bangladesh.

he global recession of 2008-09 had a devastating effect on world trade. The value of world merchandise exports, which had registered a healthy growth of over 15% in 2007 and 2008, fell by a massive 23% in 2009 (WTO 2010). Few countries escaped the harsh impact of the recession. The top 30 exporting countries of the world suffered a reduction in their exports ranging from 11% (Hong Kong) to 40% (Saudi Arabia).1 Developing economies experienced a decline of 22% in merchandise exports. The least developed countries were the hardest hit; their exports fell by a whopping 27%. The impact of such a large decline in the export trade on the livelihood of the poor and the vulnerable cannot be underestimated.

Bangladeshs Export Puzzle

To the surprise of many, the export sector of Bangladesh, a least developed country that exports mostly manufactured goods, withstood the ravages of the global recession quite admirably. Export revenues dec lined by only 2% in 2009 (Export Promotion Bureau 2010), which compares rather well with the large reductions of 16%-31% suffered by exporting giants such as B razil, Canada, China, European Union (EU), I ndia, Japan and the United States (US).2 There has been much speculation as to why Bangladeshi exports were spared the severe fallout of the recession. During the early months of the recession, exports of Bangladesh, especially apparel, which constitutes 80% of the total exports, actually soared. Some people, including the leadership of the Bangladesh Garment Manufacturers and Exporters Association, hypothesised at the time that falling incomes due to the recession had forced consumers in the importing countries to switch from the high-priced to the low-priced apparel items. Since Bangladesh exported mostly low-priced apparel

items, the demand for Bangladeshi e xports had increased. This argument essentially implied that Bangladeshi apparel export products were inferior goods. However, available data do not support this view. Taslim and Haque (2010) have shown that the global import demand of the EU and US for most of the top apparel export items of Bangladesh experienced robust growth when the incomes in the EU and the US were rising strongly before the recession, and suffered a reduction only during the recession.3 Furthermore, as the recession dragged on, the exports of these items from Bangladesh also started falling. In these circumstances, the hypothesis was obviously untenable, and it lost appeal. However, a more sophisticated version of the hypothesis, which has since gained some currency, claimed that the worlds total import demand for the low-priced items exported by Bangladesh did not suffer as badly during the recession as the more expensive items exported by the r elatively more developed countries, and consequently exports from Bangladesh did not suffer much.

Challenging the Hypotheses

While it is quite clear that the first hypo thesis suggests that the unit price of the products that Bangladesh typically e xports is less than the unit price of the exports of the same products (at the six digit or eight digit HS code level) by the relatively more developed countries, it is not clear if the second hypothesis implies the same.4 If it does, then the two hypo theses essentially offer the same explanation. How ever, if the latter implies that the unit prices of Bangladeshi export products are less than the unit prices of the products exported by the more developed countries, then we run into the difficulty of comparing the values of dissimilar goods, which is further compounded by the fact that they could be measured in different units. For example, are dress shirts cheaper than wine or coal? Even if we ignore these problems, the hypothesis is difficult to sustain since the exports of many products by the developed countries did not fall during the r ecession. Indeed, exports of some products such as pharmaceuticals, tobacco,

I am grateful to M S Haque for research assistance. M A Taslim (m_a_taslim@yahoo.com) is at the Bangladesh Foreign Trade Institute, Dhaka.

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Table 1: Import Growth in the EU and the US by HS Code (2009)
HS Code/Product EU (euro) (in %) US ($) (in %) HS Code/Product EU (euro) (in %) US ($) (in %)

72 Iron and steel -61.4 53 Other vegetable textile fibres -28.3 75 Nickel and articles thereof -54.6 31 Fertilisers -48.4 25 Salt; sulphur; earths and stone; lime and cement -44.5 27 Mineral fuels, mineral oils and distillation -36.4 74 Copper and articles thereof -42.3 81 Other base metals; cermets; articles thereof -47.6 50 Silk -37.6 47 Pulp of wood or other fibrous cellulosic material -27.0 78 Lead and articles thereof -38.3 28 Lnorganic chemicals -19.8 73 Articles of iron or steel -28.3 80 Tin and articles thereof -45.8 26 Ores, slag and ash -46.5 41 Raw hides and skins and leather -36.0 76 Aluminium and articles thereof -41.3 51 Wool, fine or coarse animal hair -38.3 87 Vehicles other than railway or tramway -28.4 97 Works of art, collectors' pieces and antiques -26.0 44 Wood and articles of wood; wood charcoal -30.1 86 Railway or tramway locomotives 3.3 55 Man-made staple fibres -20.9 52 Cotton -21.0 79 Zinc and articles thereof -37.5 15 Animal or vegetable fats and oils -29.6 91 Clocks and watches and parts thereof -13.6 38 Miscellaneous chemical products -16.4 68 Articles of stone, plaster, cement, asbestos, mica -23.2 01 Live animals -18.6 69 Ceramic products -21.4 10 Cereals -51.1 92 Musical instruments -13.5 99 Other products -8.4 58 Special woven fabrics; tufted textile fabrics -14.2 40 Rubber and articles thereof -27.9 54 Strip and the like of man-made textile materials -24.2 82 Tools, cutlery, spoons and forks, of base metal -22.4 45 Cork and articles of cork -6.8 83 Miscellaneous articles of base metal -19.8 57 Carpets and other textile floor coverings -11.9 71 Pearls, precious or semi-precious stones and metals -20.3 37 Photographic or cinematographic goods -18.1 49 Printed books, newspapers, pictures -10.9 70 Glass and glassware -19.9 94 Furniture; bedding, mattresses -15.0 29 Organic chemicals -14.9 32 Tanning or dyeing extracts -18.5 39 Plastics and articles thereof -18.8 43 Furskins and artificial fur; manufactures thereof -30.0 48 Paper and paperboard; articles of paper pulp -7.7
Source: Eurostat, USITC websites.

-61.4 -53.3 -50.4 -50.3 -46.0 -45.2 -45.2 -45.2 -41.9 -39.0 -38.1 -36.5 -35.7 -35.3 -34.8 -34.6 -33.9 -33.5 -32.6 -32.5 -30.7 -30.6 -29.8 -28.8 -28.7 -28.2 -28.1 -27.4 -27.4 -27.3 -26.1 -25.8 -25.7 -25.6 -24.4 -24.2 -24.0 -23.2 -22.7 -22.5 -22.4 -22.3 -21.8 -21.7 -21.7 -21.6 -21.4 -21.1 -20.6 -20.2 -19.8

12 Oil seeds and oleaginous fruits 35 Albuminoidal substances; modified starches 46 Manufactures of straw, basketware and wickerwork 42 Articles of leather; travel goods, handbags 89 Ships, boats and floating structures 84 Nuclear reactors, boilers, machinery 56 Wadding, felt and nonwovens; 60 Knitted or crocheted fabrics 85 Electrical machinery and equipment 14 Vegetable plaiting materials; vegetable products nes 65 Headgear 88 Aircraft, spacecraft, and parts thereof 34 Soap, washing preparations 04 Dairy produce; birds' eggs; natural honey 62 Articles of apparel , not knitted 95 Toys, games and sports requisites 66 Umbrellas, walking-sticks, 90 Photographic, cinematographic, medical instruments 22 Beverages, spirits and vinegar 59 Impregnated, coated, or laminated textile fabrics 67 Prepared feathers and down and articles 20 Preparations of vegetables, fruit, nuts 96 Miscellaneous manufactured articles 05 Products of animal origin, nes 61 Articles of apparel, knitted 33 Essential oils, perfumery, or toilet preparations 63 Other made-up textile articles 64 Footwear 09 Coffee, tea, mat+ and spices 02 Meat and edible meat offal 06 Live trees and plants; bulbs, roots; cut flowers 11 Products of the milling industry 13 Lac; gums, resins 03 Fish and crustaceans, molluscs 16 Preparations of meat, of fish or of crustaceans 36 Explosives; pyrotechnic products; matches 07 Edible vegetables and certain roots and tubers 23 Residues from the food industries; animal fodder 19 Preparations of cereals, flour, starch or milk 21 Miscellaneous edible preparations 08 Edible fruit and nuts; peel of citrus fruits or melons 17 Sugars and sugar confectionery 18 Cocoa and cocoa preparations 30 Pharmaceutical products 24 Tobacco and manufactured tobacco substitutes 93 Arms and ammunition Total

-16.5 -19.7 -6.4 -19.6 -16.9 -19.6 -12.0 13.0 -20.6 -15.1 -3.0 -19.2 -18.8 -18.1 -16.8 -16.3

-16.0 -15.3 -7.8 -15.2 -4.0 -15.1 6.6 -14.8 -13.4 -13.9 -7.8 -13.7 -4.8 -13.4 -15.4 -13.2 -11.6 -13.1 -4.5 -13.1 -7.0 -12.9 -17.9 -12.3 -10.9 -12.3 -12.4 -11.9 -11.9 -11.6 -5.3 -11.3 -2.6 -10.7 -6.3 -10.5 -5.3 -9.4 -3.8 -9.2 -5.2 -9.0 -7.3 -8.5 -5.1 -7.6 -7.2 -5.9 -7.0 -2.6 -10.3 -9.9 1.2 0.8 -8.9 -13.5 17.0 15.7 15.6 -5.2 -8.1 -8.1 -7.6 -7.5 -6.5 -4.7 -4.3 -4.1 -1.4 -0.2 4.2 4.3 5.4 6.1 6.8 19.7

c ocoa and cocoa preparations, food preparations, etc, by the EU or the US actually recorded positive growth rates. Furthermore, a large number of the relatively less developed countries export the same cheap goods (for example, apparels) that Bangladesh exports. Most of these countries, especially those in Africa and central America, suffered large reductions in their exports. Thus the relatively better export performance of Bangladesh at a time when most other countries performed poorly cannot be explained by the hypothesis above. One of the principal reasons for Bangladeshi exports holding out well during the recession is the competitive strength of the apparel industry of Bangladesh. This strength derives from the innovativeness of the domestic entrepreneurs, duty-free access in all developed countries (except the US), and most importantly, an abundant supply of cheap labour. These advantages enabled Bangladeshi exporters to offer cheaper prices than those by exporters of competitor countries. As shown by Taslim and Haque (2010), the unit prices of the top export items of Bangladesh were among the cheapest in the world market.5 Moreover, Bangladeshi exporters have also gained a certain reputation in the global market as reliable suppliers. Many reputable global apparel companies are now either transferring their manu facturing facilities to, or sourcing their imports from Bangladesh. Buy-out of d omestic manufacturing units by foreign companies has begun to take place. While this provides an explanation for the better export performance of Bangladesh, it does not explain why some other countries such as China and India, which are by all accounts equally or more competitive than Bangladesh did not fare as well. This article suggests that the answer lies in the composition of the export basket of these countries and the nature of the demand for the export commodities.

Common Patterns
An important question that arises is: why did the import of apparel by the major importers decline less during this recession than the import of most other products? Import statistics of the EU and

-23.4 -25.9

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COMMENTARY
Figure 1: Growth of GDP and Consumer Spending of the US (%)
10.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0

Consumer Spending

in both markets s uffered relatively smaller declines than the non-consumption goods.

Revisiting Theory
Theories of consumption have pro pounded that consumer spending does not d epend on current income, but rather on per manent or life cycle income. Permanent (or life cycle) income is less than the actual income during business booms and greater than the actual income during r ecessions. In other words, permanent (or life cycle) income, being in the nature of expected income over the long term, fluctuates less than the actual short-term i ncome. Since consumption spending is related to permanent income in a stable manner, it fluctuates less than the actual income. This implies that consumer spend ing fluctuates less than the fluctuations in actual income, which makes the short-run consumption function flatter than the long-run consumption function. This has solid empirical foundations. As an illustration, Figure 1 shows the quarterly changes in the gross domestic product (GDP) and consumer spending of the US since 1995. It is immediately obvious that consumer spending tends to fluctuate less than the GDP. This tendency is sometimes referred to as consumption smoothing. The demand for non-consumption goods such as raw materials and intermediate goods is related to current production, i e, current income. Consequently, their demand fluctuates in line with the fluctuation of the current income. Inventory adjustments and expectations could amplify these fluctuations.

-4.0 -6.0 -8.0

GDP

1995.I

1996.I

1997.I

1998.I

1999.I

2000.I

2001.I

2002.I

2003.I

2004.I

2005.I

2006.I

2007.I

2008.I

2009.I

1995.III

1996.III

1997.III

1998.III

1999.III

2000.III

2001.III

2002.III

2003.III

2004.III

2005.III

2006.III

2007.III

2008.III

Source: US Department of Commerce, Bureau of Economic Analysis (30 September 2010).

Table 2: Export of Bangladesh 2009-10 (million $) All Products Knitwear Woven garments Frozen food Home textile Footwear Terry towel Ceramic products Agri products Pharmaceutical products Others
Source: Export Promotion Bureau, Bangladesh.

16,205 6,483 6,013 445 539 204 157 31 41 242 2,048

the US given in Table 1 (p 20) reveal that the import of knitwear (HS61) by the EU declined by only 2.7% and that of woven garments (HS62) by 4.8% while the total import declined by 23.4%. US import of knitwear declined by 10.7% and that of woven garments by 13.4%. These reductions are much less than the average reduction of 25.9% in the total US imports in 2009. Although the rate of decline of apparel imports in both the EU and the US was modest, there were several other commodities at HS two-digit level whose imports either increased, or fell by less than or at about the same rate as the import of knitwear or woven garments. Some of these commodities are arms and ammunitions, pharmaceuticals, tobacco, cocoa and cocoa preparations, fruits and nuts, footwear, fish, coffee, tea and cereal, vegetable and meat preparations, etc, in the case of the US. The corresponding products for the EU are cocoa and cocoa preparations, pharmaceuticals, tobacco, footwear, headgear, cereal preparations,

etc. Note that all these commodities are final consumption goods, most of them non-durable consumption goods.6 The imports of railway and tramway l ocomotives, aircraft, ships and boats by the EU also increased significantly. These goods are long-lasting investment goods. One would expect their demand to fall during a recession. However, their production requires a long gestation period, especially that of large aircraft and ships. Orders for such goods have to be placed long before the actual delivery (import), and it is also not easy to cancel orders. I mport (export) of cereals is dependent on weather conditions, which greatly influence total production, and hence the i mport requirements. Therefore, their i mports may not always bear a strong relationship with the current state of the economy. The demand for arms and ammunition is significantly influenced by the security policy and the state of belligerence, such that these may offset the i ncome effects. Import growth (decline) rates in the EU and the US at the two-digit HS code level between 2008 and 2009 as reported in T able 1 show that there is a remarkable similarity between the two markets in res pect of the pattern of import growth. The correlation coefficient between the two series is 0.81, which is quite high. Hence, it can be said that the recession had a similar effect on the import demand of the commodities at the HS code two-digit l evel in both the markets. Especially noteworthy is the fact that the import of final consumption goods

2009.III

2010.I

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COMMENTARY

Assuming a stable relationship between the imported and domestic component in the consumption of a tradable good la Armington, the consumer theory implies that the imports of consumer goods will fluctuate less than the non-consumption goods. The patterns in the import demand of the EU and the US appear to be consistent with this story. The export basket of Bangladesh comprises mostly non-durable consumer goods (Table 2, p 21). In fact, more than 90% of the total exports, including knitwear and woven garments, frozen food, pharmaceuticals, footwear and home textiles, are final consumption items. More than 70% of the exports are shipped to the EU and the US. As evident from Table 1, the import demand of these markets for the con sumer goods either increased or did not d ecline much during 2009. Consequently, the demand for export products of Bangladesh in these markets also did not suffer as badly as the demand for other c ommodities. Exports of consumption goods such as apparels or pharmaceuticals from China and India to the US performed quite well. Indeed, if the export baskets of these

countries comprised mostly these goods, their export performance could have been better than that of Bangladesh.7 However, in sharp contrast to the composition of the export basket of Bangladesh, a large part of the export products of large exporters such as China, India, EU and US are non-consumption or investment (or durable) goods. The import d emand for these goods usually fluctuates a great deal more with the state of the economy since the total demand is directly related to actual production, future outlook and business confidence, or their purchase could be delayed. As the world economy recovers, the e xports of countries that suffered large declines due to the recession will bounce back. However, Bangladesh cannot expect a large increase in its exports. The very reason that prevented a large fall in its e xports during the recession will also e nsure a slow increase in exports during the recovery. In order to accelerate its e xport earnings beyond this rate, Bangladesh will have to expand supply capacity, improve productivity and establish new m arkets and products.

Notes
1 See WTO (2010) for details. 2 During the fiscal years (July-June) 2008-09 and 2009-10, the export earnings of Bangladesh actually increased by 10.3% and 4.2%, respectively. 3 Nearly 90% of the total apparel exports of Bangladesh go to these two markets. 4 HS, short for Harmonised Commodity Description and Coding System, is an international system of classifying traded goods. 5 Unit price is derived by dividing export value of the product by the export volume of the concerned HS code. 6 Final consumption goods are sold to final users and are not resold or used for further production. 7 Export of apparels, food products and pharmaceuticals brought in less than one-fifth of the total export earnings of India. For China, the proportion was lower.

References
Eurostat (various years): EU27 Trade Since 1995 By HS2-HS4, datasets available at http://epp.eurostat.ec.europa.eu/newxtweb Export Promotion Bureau (2010): Export Data 2009-10, Ministry of Commerce, Bangladesh, available at http://www.epb.gov.bd/ Taslim, M A and S Haque (2010): Global Recession and Exports of Bangladesh, Discussion Paper no 201011, Bangladesh Foreign Trade Institute. United States International Trade Commission (various years): Interactive Tariff and Trade Data Web, data available athttp://dataweb.usitc.gov WTO (2010): World Trade Report 2010, available at http://www.wto.org/english/res_e/booksp_e/ anrep_e/wtr10-1_e.pdf

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