On trade deficits, the India bogey, and a disturbing vision
In 2004-05, Bangladesh exported goods and services worth 8.7 billion taka to India. This was double the amount exported in the previous year. But in that year, Bangladesh’s import from India amounted over 84 billion taka. This massive trade deficit is a major irritant in Indo-Bangla relationship. On any given day, one is likely to read an op-ed in the print media or hear a talking head in the electronic media arguing that India must take more action to narrow this deficit. And there is a degree of truth in these arguments. India does have significant non-tariff barriers against Bangladeshi goods and services while the Bangladeshi market is essentially open. You can’t export Bangladeshi books to Kolkata for example. Nor are Bangladeshi TV channels available across the border.
But there is more to the story of our trade deficits. How often do you hear about our ‘massive trade deficit with China’, and how this is a proof that China is crippling our economy?
I must confess, I’ve never heard that. Even though in 2004-05, our trade deficit with China was nearly 127 billion taka (we exported about 4.2 billion taka and imported about 131 billion taka). And as the chart below shows, while the trade deficit with India narrowed significantly in the late 1990s, the deficit with China has been widening for most of the past 2 decades. How come no one is concerned about the China bogey?
Let’s ask a different question: should we be concerned with the fact that we are running trade deficits with these countries?
Not necessarily. If our exports are rising, and if we are moving up along the value add chain, and as a result nationwide productivity rises, then trade deficit by itself need not be a cause for concern.
Well, as this chart shows, our exports have been rising – I’ve used annual data to abstract from the recent shocks to the economy.
So both exports and imports are rising, and we know that our economy grew quite strongly in the decade to 2006-07, so trade deficit is no problem? Well, we could be more confident in saying so if the following held:
1. We were rising up the value add chain – that is, we were moving on from making and exporting shoes and t-shirts into electronics. Unfortunately, this is not the case. Ready made garments made up over 65% of all our exports in 2007, compared with 59% in 1997.
2. Our imports have not been made up of luxury items – if we are importing intermediate goods, machinery and necessities, then that’s better than importing luxury cars etc, for example. I have not been able to find any evidence in the data that we have been importing unnecessary luxuries, but that’s partly because it is hard to know from the aggregate data what is necessary and what is luxury.
If we continue to run trade deficits, how do we pay for our extra imports? This chart gives the answer.
The yellow columns are our trade deficits (export less import). The red bits are our income deficits (profits repatriated by foreign companies from Bangladesh). If not for the green and blue bits, the trade and income deficits would have meant our current account would have been in continuous deficit. What that means essentially is this – we would have been running up debts against the rest of the world.
Running up debt is not necessarily a bad thing, it depends on what we do with our debt. If we have a student loan to finance medical or law degree then that’s not a bad thing. If we borrow to buy a house, that’s not a bad thing provided we can pay off the mortgage. If we have no job or income, but a large credit card debt, then that’s pretty bad.
Forunately for Bangladesh, we don’t have to worry about what kind of debt we’d have been running up – the blue and green columns make sure that we are either running a current account surplus, or a pretty small current account deficit.
What are these colours? Blue is official transfers – foreign aid and such like. That’s pretty small compared with the green bit, which is private transfers, mostly remittances.
So let’s sum up then. Our trade deficit against India is smaller than the one against China. Overall, the trade deficit may not be as much of a problem as we might fear, particularly so long as the NRBs keep remitting money. But still, is this a good picture?
In a different context, Tacit paints a rather disturbing vision for Bangladesh:
“…it does not manufacture, it does not produce, and it does not industrialize. Instead, it exports manpower to the Gulf Kingdoms of the Middle East, to United States, and to United Kingdom and Europe. In these countries, our potential engineers, doctors, industrialists, businessmen, and enterpreneurs hold down menial jobs and send them back to their relatives back in Bangladesh. The vast foreign reserves thus generated are then used to import every possible good, thus turning our country only into a vast potential market to be flooded and controlled. We only exist as a vast pool of unskilled laborers, adding no value to any production chains, only serving as a transit point between South and East Asia, letting out excellent deep-seaport transport oil and gas all over the world.”
Politically, I have no disagreement with Tacit (see the post here). But I’m afraid the reality is much like the vision depicted. And so long as we hear ‘trade deficit’ and think ‘India is taking over’, we will not be able to change the reality.
(Thanks Udayan for making me think about this issue).
(Cross-posted at UV).