The Present State

Performance highlights

C K Hyder

Haunted by the so-called famous observation by a former US Secretary of State that it was a basket case, Bangladesh has come a long way with its development efforts during the 35 years since her independence. It can boast of some convincing progress in terms of socio-economic development, including industrialisation. Yet, the country is faced with serious constraints, particularly in investable resources. It needs investment of US$12 to US$13 billion a year to achieve a 7 percent to 8 percent growth in the medium term. For this, Foreign Direct Investment (FDI) has an important role as there is a big gap between domestic savings and investment requirement.

In this perspective, the publication of UNCTAD's World Investment Report (WIR), 2005 is welcome. After declining for two consecutive years, FDI inflows in Bangladesh increased to $460 million in 2004 -- a 72 percent increase from $268 million in 2003. The FDI growth is the second highest in Asia after Pakistan, which secured a 74 percent increase in FDI in the same year. With this growth, Bangladesh has advanced to 122nd position in UNCTAD's FDI performance index from the previous 133rd.

Meanwhile, the Board of Investment (BOI) has announced FDI inflow of $660.8 million in 2004. Currently, three big investment proposals worth over $15.5 billion are under negotiation. The Tata Group of India plans to invest $2.5 billion in power, steel and fertiliser. The UAE-based Dhabi group has signed an MOU to invest more than $1 billion in telecommunication and hospitality business. The UK-based Asia Energy Corporation submitted a feasibility study on its investment plan worth $12 billion in coal mining project in the next 30 years.

Some large scale investments in pharmaceutical and textile sectors are also expected in the near future.

Opportunities created by the WTO's TRIPS rules for the LDCs to produce and export drugs should also encourage foreign investors to invest in these two sectors.

The UNCTAD report does not provide the sources of FDI, but the BOI survey of FDI in 2004 shows that about two-thirds (63.30 percent) of total FDI in 2004 came from the developed countries and about one-third (36.70 percent) from developing countries. Among the developed countries, Western Europe was the largest source (45.22 percent) of FDI in Bangladesh of which 18 percent came from EU and 27.22 percent from other European countries. North America's investment amounted to 13.33 percent, and Japan's 4.72 percent. Among the developing country sources, South, East, South East, and West Asia contributed 33.61 percent, and Africa contributed 3.02 percent of FDI in 2004.

The increase in FDI from $268 million to $460 million may appear large in percentage terms, but in absolute terms it is small. For achieving sustained economic growth, Bangladesh will need much larger doses of FDI on a continuing basis. In per capita terms, FDI inflow in Bangladesh is still the lowest in South Asia. Nor does the advancement in the ranking in FDI performance has much significance. For example, Pakistan has managed to secure $950 million, a 74 percent increase in net FDI inflow over the past year but its ranking has slid down 5 steps from the previous year. On the other hand, India's position in the WIR's FDI performance index has gone up two steps although it has suffered an 8 percent decline in FDI inflows. Even though FDI growth in India was negative last year (2004), the inflow of $5340 million to that country is 12 times bigger than what Bangladesh received during the year.

The composition of the FDI inflows is also important. Reportedly, most of the increased FDI inflow in Bangladesh was reinvestment by existing multinational organisations. It is significant that while Bangladesh was able to advance 11 places in the FDI performance index to reach the 112th position, it has slipped two places down in the FDI Potential Index to 115th among 196 countries. This implies that Bangladesh has certain problems which, unless properly tackled, will vitiate the country's investment potentials.

In fact, one should not ignore the reports of other international organisations, all of which found flaws in Bangladesh's investment environment. The Global competitiveness Report released by the World Economic Forum at around the same time as the World Investment Report claimed that business competitiveness in Bangladesh deteriorated due to persistent corruption, poor infrastructure, and indecisiveness on the part of the government.

The UN Human Develop-ment Report 2005 published last month observed that while Bangladesh made some progress in human development, its ranking in human development index fell. Among the South Asian countries, including Myanmar, Bangladesh was placed at the bottom. The state of a country's human resource development can significantly influence the foreigners' desire to invest, the Report says. Another recent report entitled "Doing Business in 2006" and released by the International Finance Corporation (IFC) says that in terms of the cost of doing business Bangladesh is most expensive in South Asia. It says that start-ups of new business in Bangladesh take only 35 days, but the expenses thereof take a disproportionately high amount of money. Cost of land registration and the time required for registration are

high compared to other South Asian countries. Income tax on business profits is also high in the country after Pakistan, the reportnoted.

A JETRO survey on comparative investment-related costs in 21 major cities in Asia released in May 2005 says that while investment costs in certain components were showing a declining trend, in several areas like telecommunications, internet connectivity, infrastructure, corporate income tax rate etc., Bangladesh appeared less competitive than most other Asian countries. The JETRO survey called upon the government to introduce much more attractive incentives than those given by China, Vietnam and other Asian countries. For that purpose, it emphasised the need for: (i) improving the country's infrastructural facilities, (ii) simplifying and expediting the procedure of granting permission by government departments/agencies, putting in place efforts to abolish "unforeseen expenses" at each step of the procedure, and (iii) maintaining the continuity of government policies. The JETRO report observed that a sudden reversal of policy or abrupt cancellation of an ongoing project gave a wrong signal to investors about the operating environment in the country.

A lot, therefore, need to be done. The bureaucracy needs to be overhauled to provide speedy delivery of utility and other regulatory services. Infrastructure needs to be improved, including the development of a deep-sea port.

A permanent business regulatory commission with representation from the private sector may be formed to monitor developments in the business sector to facilitate investment. Most importantly, the political leadership should give unbiased attention to the problems created by the culture of confrontational politics in the country. It has cost the country dearly, particularly the country's foreign investment potentials.

Obviously, constraints for foreign investment are not unique in Bangladesh alone. On the other hand, it is well-known that investments in Bangladesh as reflected in the published accounts of the companies having foreign investments, are more profitable than reportedly those in other comparable nearby countries like Vietnam, Cambodia and Laos. In fact, there are several sectors such as, gas-based operations, infrastructures, ports tele-communi-cations, and the like where Bangladesh is put in a higher position vis-a-vis other nearby countries. It is regrettable that it has not been possible to attract foreign in investments in these sectors.

While political situation and economic fundamentals are important to attract FDIs, it is being increasingly established that investment incentives are more effective determinants. Even in the industrialised countries, the subsidies from a FDI related job have worked as a strong determinant for investment. Summarising data from a dozen investment location decisions in the US and EU during the period 1983-1995, UNCTAD (1995) reports financial subsidies ranging from US$ 14,000 per job for Mazda's 1984 investment in Flat Rock, Michigan to US$ 254,000 per job for Ford and Volkswagen investing in Setubal, Portugal in 1991. Similarly, Neven and Siotis (1993) report subsidies of about 30,000 ECUs per worker for investments in Belgium, France and Luxemburg. The developing countries which are not in a position to make direct payment out of scarce public funds, offer tax holidays and other fiscal concessions. Though at one time, there were differences of opinions as to whether fiscal incentives play any role, it is being established increasingly that such incentives are strong determinants for investment. As a result, more and more countries offer attractive fiscal incentives and "decisions that would not have been influenced by a mere two-year tax holiday may well be swayed by a 10-year holiday" (Easson 2001:272).

The move to abolish tax holiday and a few other investment incentives, therefore, needs to be reviewed if the country is to project itself as a profitable FDI destination.

Illustration: Sabyasachi Mistry

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The writer is the Secretary-General of Metropolitan Chamber of Commerce and Industry, Dhaka.