On trade deficits, the India bogey, and a disturbing vision

Posted in economics by jrahman on June 5, 2008

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). 

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11 Responses

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  1. […] Original post by Mukti […]

  2. DS said, on June 5, 2008 at 7:11 pm

    Haaf cherey baachlam. Now there’s one less really difficult blog post that I have to do!:)

  3. […] (More at Mukti)   […]

  4. sotacit said, on June 6, 2008 at 12:19 am

    I think Jyoti Bhai, the point is what we do with the money that is remitted to us. If we use to tide over our economy while it grows and finance current account deficits caused by importing machinery and capital equipments, then there will be long-term benefits.

    But if we do not, then we will be in trouble.

    In exclusively economic terms, you are right, we should also be fussing about China. But look at it from geo-politics, and things take on a different angle. China, at the most, will use us as a balancing factor in the South Asian game. India has every aspiration and potential to thoroughly dominate us in every respect.

    I’d just like to add, about two weeks ago, the current CPD Executive Director, Dr. Mustafizur Rahman, who is filling in Dr. Debapriya’s hallowed shoes, came on tv and made comments along similar lines: that the main thrust of government policy in Bangladesh should be trying to send as many Bangladeshi abroad as possible, and we should refashion our economy so that it revolves around the remittance sent by the NRBs.

  5. […] On trade deficits and related matters 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 … […]

  6. fugstar said, on June 6, 2008 at 2:52 pm

    the book availability in india matter is interesting, for all its meaning and consequences. Though i wonder if many deshis actually publish their work through indian outfits.

    and remittance though large, is through individuals, GoB has as much ownership over that as say it does over arab oil.

    That CPD wallah should be supersceded, not by more jaw jaw, but some young creative productive mojo *holds up hands to the sky*.

  7. […] Mukti on the issue of Bangladesh's trade deficit with India and China. Posted by Neha Viswanathan Share This […]

  8. Rumi said, on June 7, 2008 at 10:16 am

    Economics bujhi na. Nor I try to do so. But what worries me is that Bangladesh is making itself dependent on India on some essential items, like rice, spices, pulses (Dal), livestocks ( Cow), transportation vehicles ( Buses, taxis etc.). It is very important for Bangladesh to reduce this dependence. It could happen preferably by local production or exploring alternate source of these products. With increasing anti-Bangladesh sentiments in India, total dependence on Indian onion or Indian dal is a very scary thing.

  9. jrahman said, on June 17, 2008 at 3:53 pm

    Rumi bhai, given the very high population density, and the impending environmental problems, it’s quite likely that achieving and maintaining self sufficiency in food is going to be very difficult. Even if we get self sufficiency in rice, we will have to trade daal/onion/cow, and given the geography, it’s easy to see why India makes the best supplier. And you’re very right to worry about India cutting off the supply. We can tackle this in two ways. Firstly, we need to get into a bargaining position with India where they buy enough goods/services from us so that cutting off trade with us hurts them as much as it hurts us. Secondly, we need to tackle the image problem.

    And books and cultural items are the best way to improve our image. Think about it this way. Most educated Bangladeshis know about College Street and Coffee House. How many Kolkata folks know about Aziz Market and Neelkhet?

    Fug, at the moment, Indian publishers like the Ananda Group publish only a handful of Deshi writers, basically anyone they like. As long as they get to choose which Deshi writer they allow, they get to choose the image of Bangladesh that the average Kolkata family gets.

  10. Nikus said, on August 6, 2008 at 11:02 am

    Though ABP group try to force BD authors in their Puja Barshiki Special publications, but that generally does not make much difference. People are yet to accept Tillottama Majumder and her generation. Forget about BD authors…

    Rumi – India itself is facing food shortage. Neither Indian economy is dependent on food export. BD people get it in cheapest rate (almost same as internal market rate of India) from India….

  11. […] it that easy? Probably not. Jyoti Rahman once explained how trade deficit with India might not be that bad for Bangladesh. In this case also, if I look […]

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