The number, not the name

Posted in economics, foreign policy, politics by jrahman on November 11, 2010

A few weeks ago, I struggled to understand the economic logic behind not charging Indian vessels for using our waterways.  Since then, I’ve been doing some digging around.

First, I talked with an international trade expert who used to work in the OECD.  It turns out that there is no economic logic at all.  However, there are some technical details pertaining to international trade laws and protocols — a subject well outside my area of expertise.  So it’s important to understand what we can and can’t charge.

But the second point is more important.  I’ve been digging around for numbers.  We were told earlier that transit will be associated with our growth rate rising from 6% to 8%.  I’ve been trying, unsuccessfully, to understand where these numbers came from. 

It’s the second issue — numbers — that’s much more important.  Can we have some discussion on this.

The name

The Finance Minister recently said:

They will use our facilities to transport their goods. Our infrastructure will be used and that involves some costs for the government. So we’ll have to take something; it may be called fee or anything.

It appears that there is a bit of confusion in the public domain about fees and duties.  A duty is a percentage charge on either volume (like sticks of cigarettes or litres of alcohol) or value (a dollar or taka amount). 

Duties cannot be charged on transit goods under WTO rules.  A duty can be charged only if a container is opened in Bangladesh, regardless of final destination.  But if an unopened container passes through Bangladesh (whether from Benapole to Akhaura, or from Chittagong to Dinajpur to Nepal, or from Chittagong to Burma to Kunming, China), then we can’t charge duty.

Thus, for example, if I take, say, 2 cartons of cigarette from Dhaka to Sydney via Singapore, Singapore won’t charge me anything, but in Sydney I’d have
to pay a duty on one carton (one is duty free).

However, a fixed transit fee can be charged for goods in transit.  As far as I can tell, part of the fees the Indian vessels were being charged is perfectly compatible with the WTO rules —  the 10,000 taka per container is a fixed charge regardless of the value or the volume of the container.  However, the 1,000 taka per tonne may be breaching the rules. 

So, we can’t charge duty, but we can charge a fee — that’s pretty much as far as the debate about what will be charged (ie the name of the charge) goes. 

The number

There is a far more serious debate, and the one we aren’t having, about how much will be charged.  

Let’s go through some numbers.  According to media reports, Bangladesh collects 5 crore taka a year on transit fees on waterways.  Let’s put this number into perspective.  In 2010, Bangladeshi economy is likely to be worth 730,000 crore taka.* 

Of course, this is just the fee for waterways.  Nothing has been said about fees on road and rail transit, which will surely be larger.  Sure.  How much larger? 

Here is what Shahedul Anam Khan says in the rabid anti-Indian propaganda rag Daily Star:

However, going by a study of a leading think tank in Bangladesh, the country is likely to make $2.3 billion net profit in 30 years by giving transit to the three countries. And that comes to less than $80 million annually. The figure is in marked contrast to what we have been given to believe so far. We had been told by our neighbour and also by our development partners that milk and honey would flow in Bangladesh if we allowed our neighbours the use of our territory for transit. That we would, to a very large extent, be able to balance the much skewed trade balance between Bangladesh and India. And now all that we might end up with is a sum of Tk.600 crore annually!!

Right, 600 crore taka a year.  Our government’s tax take is way over tenhundred times that amount.  But still, 600 crore taka is nothing to scoff at.  And we shouldn’t forget the second round effects of this money flowing through our economy. 

Okay, let’s think through the second round effects. 

On the plus side, the government could spend 600 crore taka into productive things.  The Indian vehicles passing through our territory will have drivers who will spend money, which will generate further private sector income.  And the improvement in our infrastructure will also have spillover benefits.  On the negative side, there will be more pollution, more congestion, dislocation caused by land acquisition to build roads, and political fallouts (imagine dozens of Rupganj like incidences). 

I have no idea what the final tally of these second round effects will be.  But I do remember what was said back in December-January.  Back then, BEI’s Faruq Sobhan told the Economist that a transit could be associated with our growth rate going from 6% to 8%.  Back then, CPD’s Mustafizur Rahman echoed this in a number of talk shows and round tables. 

Now, 2% of 700,000 crore* taka is 14,000 crore* taka.  If the government collects 600 crore taka directly, we are expected to see a net second round benefit of over twice as much.  That’s a multiplier of well over 20.  And never mind the permanent growth impact.

I’d like to see the macroeconomic model whence these fantastic numbers pop out. 

We’re being told take a lot of leaps of faith from the existing 5 crore taka to the 8% growth rate.  Instead of debating whether we are charging a duty or a fee, let’s expose these fantastic numbers.


Update (12 Nov 11.15am): The original post had an error — I thought 1 billion = 10 crore when the correct conversion is 1 billion = 100 crore).

Tagged with: , ,

14 Responses

Subscribe to comments with RSS.

  1. Diganta said, on November 13, 2010 at 2:13 am

    I saw the WTO Article V that deals with Transit related issues. ( The paragraph 3-5 discusses transit fees/charges. The article says that there are only two kinds of charges a Member may legitimately impose on traffic in transit: charges for (i) transportation and for (ii) administrative expenses caused by transit or services rendered.The explanation reads –

    “The text also requires this traffic to be exempt from customs duties and from all transit duties or other charges imposed in respect of transit, except for “charges for transportation or those commensurate with administrative expenses entailed by transit or with the cost of services rendered.””

    Also the charges are meant to be “”reasonable, having regard to the conditions of the traffic.””

  2. hijibijbij said, on November 15, 2010 at 8:03 am

    When I saw news reports regarding this and did some quick comparisons, I thought that the large portion of the benefit must be non-financial / diplomatic and thus non-quantifiable. I have not been following this issue – but I hope we are getting some other concessions in return?

  3. Diganta said, on November 16, 2010 at 3:16 am

    I wrote a lot and missed the point. Bangladesh should consider transit for their customary WTO commitment (and Asian Highway) but whether the country will be economically benefited out of it is a different question. New trade routes and ports are always two way swords, it creates new opportunities but if you can’t cash in on those, you’d end up losing.

    Let’s say Bangladesh builds a new port with world class facilities. The port will definitely create a few jobs. But a lot of exporting countries would be able to export to Bangladesh with less hassles. That could provide local producers with more and more competition. So, the increased trade may actually trigger negative benefit for a country, at least for a short term.

    In 2007-08, Bangladesh imported $84 million worth of goods from the north-east and exported $30 million worth of goods, so the trade is not that much. India is building Sittwe port in Myanmar as a gateway to NE India and once it’s completed chances of Bangladesh capturing NE market would anyway be very slim.

    • DS said, on November 16, 2010 at 3:53 am

      Just out of curiosity – definitely not a challenge – where are the figures for import and export to north-east India coming from?

      • Diganta said, on November 16, 2010 at 5:13 am
        Here’s the current reference. I think I read it in other media too.

        I trust the figure because in India trade is distributed almost as the same rate as of its SDP (State Domestic Product – as Indians call it inside). The North East India produces 2.5% of Indian GDP (and home to 4% Indians), so their trade is also close to that figure. In 2007-08, Indian trade with Bangladesh was 3.6bn USD and 2.5% of which comes to 85mn USD. The trade volume with NE is more than that because of the geographic proximity.

        The NE India does most of its trade with China because of competitiveness of Chinese products against Indian or Bangladesh ones.

      • DS said, on November 16, 2010 at 8:37 am

        Thanks a lot for the response. I love how in the article, it keeps repeating that the North East is an under-developed region – but one with which we seem to have a net-trade deficit. Classic. What exactly do we import from there?

  4. Diganta said, on November 17, 2010 at 3:02 am

    Bangladesh imports raw materials from NE India. It’s true that NE India is not industrialized but neither is Bangladesh. China or Indian mainland are far more industrialized than NE India. For example, NE India exports limestone for Bangladesh cement industry and exports fruits for Bangladesh fruit packaging industry.

    One fun fact is that if NE India at all industrializes soon, Bangladesh would actually lose more that it would gain. Bangladesh would lose easy access to raw materials but in return sale of finished products would not materialize because of Chinese competition. This is again the same story, opening up new trade routes may prove to be a double edged sword.

    • DS said, on November 18, 2010 at 12:35 am

      Ahh yes, lafarge surma and the food-processing industry in Rajshahi/Syhlet. Thanks.

  5. jrahman said, on November 18, 2010 at 9:07 am

    Wow, it’s good to see that there are some people who are thinking about issues other than the house. 🙂 A number of issues. Let me address them together.

    1. Diganta, thanks for the WTO Article. Very useful.

    3. Hijibijbij, there are non-quantifiable, diplomatic benefits to closer Indo-Bangla ties. But benefits of transit, as far as I can recall, has always been phrased in economic-financial terms. In fact, it’s the anti-transit camp has always talked about non-economic, non-quantifiable costs (sovereignty, history, geo-strategic consideration, nationalism etc).

    4/5. Diganta/DS, my starting point is that trade is beneficial. So even if imports rise, that’s not in and of itself a bad thing. For example, if a world class port is used to import heavy capital machineries that can be used to set up factories, this is clearly a good thing. Even if we import consumer products, that’s not necessarily a bad thing — those products will be consumed, and thus presumably will improve welfare / living standard. Of course, from the perspective of long term growth / poverty reduction, it’s better that imports go into investment and industrialisation than consumption. And as you say, in theory, it is possible that Bangladesh could lose out.

    My point is, whatever happens, we would expect them to show up in a reasonably simple model. There would have to be some mechanisms through which transit would produce these massive gains that were proposed. There would have to be some estimates, or some elasticities.

    I haven’t seen any. Have you guys?

    • Diganta said, on November 19, 2010 at 4:14 am

      Whatever financial impact happens on Bangladesh would be negligible for Bangladesh. I am quite sure of that. In fact any % figure in macroeconomic level is nothing but day dreaming. In that I am with agreement with this article.

      Bangladesh could probably have gained significantly from transit had it been implemented back in 1990s. First, Bangladesh economy was much smaller in those days. Second, the NE India could have industrialized (the Indian industrialization took off in 1991) along with the rest of India thanks to transit. Third, India did not have the cozy relationship with Myanmar junta in those days i.e. transit through Bangladesh would have been the only way. Finally, China did not become a export Giant in those days. But those are all past.

      Point 4, I agree and that’s why I said in short term there could be problems. In long term better infrastructure always pays off, proven all over the world.

  6. Diganta said, on November 19, 2010 at 4:16 am

    BTW, did you publish this article somewhere else too? I would like to read the user comments in those articles too.

  7. jrahman said, on November 20, 2010 at 2:43 pm

    Diganta, re: 6, there is such a thing as overivestment in infrastructure — more road means more vehicle and more pollution. Plus, infrastructure with the entire region in mind will have a different focus than infrastructure which is meant for just Bangladesh. Economic modelling should incorporate all of that.

    Of course, there could be non-economic benefits. For example, Indian government could take a very different border policy. Or even in the economic sphere, transit can be bartered for different attitude on water or migration policies. But I don’t really see any of them on the horizon. Do you?

    I plan to write about the political ramifications over the coming month (leading up to the first anniversary of the much-hyped January summit). Stay tuned. 🙂

    Re: 7, I posted it in UV. Discussion didn’t go far — crowded out by the house drama. One might say the house issue has been created to crowd out debates like this.

  8. Still don’t believe the hype « Mukti said, on February 3, 2011 at 5:54 pm

    […] facilities, and there are all sorts of talks about the ports.  Big deal?  Not on these numbers.  And not from what Mashiur ‘I don’t believe in models’ Rahman says.  To be […]

Comments are closed.

%d bloggers like this: