Costs of LDC graduation on market access: evidence from emerging Bangladesh

Abstract

We empirically estimate the costs of LDC graduation on market access for Bangladesh using a computable general equilibrium modelling framework. If developed countries impose standard generalized system of preferences (GSP) tariffs while importing from Bangladesh and at the same time Bangladesh eliminates its export subsidies, our modelling suggests that real gross domestic product (GDP) may drop by about 0.38 per cent and exports could fall by about six percent for Bangladesh. The ready-made garment sector could be affected severely, with results suggesting exports could decline by about 14 per cent. Our analysis indicates that the income of urban households could decrease by three per cent, and household consumption may shrink by about four per cent. To minimize these potentially adverse impacts, Bangladesh should aim to ensure market access continues through signing preferential trade agreements. In addition, streamlined subsidy policies, enhanced domestic productivity, export diversification, and increased foreign investment, are likely to be important areas of focus for a smooth LDC graduation.

KEYWORDS:

• LDC graduation
• Bangladesh
• RMG sector
• income distribution
• CGE

JEL CLASSIFICATIONS:

• E16
• E17
• F17
• F47

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 https://www.un.org/development/desa/dpad/least-developed-country-category.html.

2 As of 11 February 2021, United Nations Committee for Development Policy (UNCPD), https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/publication/ldc_list.pdf.

3 Understanding the WTO – Least Developed Countries, https://www.wto.org/english/thewto_e/whatis_e/tif_e/org7_e.htm.

4 UN (2021) Graduation from the LDC category, https://www.un.org/development/desa/dpad/least-developed-country-category/ldc-graduation.html.

5 The HAI comprises six social indicators which are (1) Under-five mortality rate, (2) Gross secondary school enrolment ratio, (3) Prevalence of stunting, (4) Adult literacy rate, (5) Maternal mortality rate and (6) Gender parity index for gross secondary school enrolment.

6 The EVI comprises eight indicators which are (1) Share of agriculture, forestry and fishing in GDP, (2) Merchandise export concentration, (3) Instability of exports of goods and services, (4) Instability of agricultural production, (5) Share of population in low elevated coastal zones, (6) Remoteness and landlockedness, (7) Share of population living in drylands, (8) Victims of disasters. The lower index, the lower the risk.

7 The UNCDP prepared the data for 2021 for a triennial review averaging the value of GNI per capita over the last three years. United Nations; https://www.un.org/development/desa/dpad/least-developed-country-category-bangladesh.html.

8 Ibid.

9 Ibid.

10 Under the standard GSP and GSP plus(+) arrangement, the EU grants tariff reductions for products covered by about 66% of tariff lines originating from developing countries, depending on countries’ socioeconomic performance (Europa, 2020).

11 The WTO prohibits most direct export subsidies, except for LDCs. However, it is evident that many countries provide different subsidies and may not inform the WTO regularly.

12 The WTO rules on subsidies and countervailing measures in non-agricultural (industrial) goods are contained in article VI and XVI of GATT 1994 and in the “Agreement on Subsidies and Countervailing Measures (SCM)” which prohibits most direct export subsidies, except for LDCs.

13 The apparel industry in Bangladesh is mainly readymade garments (RMG), the finished products. The average MFN import duty is about 10% on RMG products, which most countries will impose on imports from Bangladesh.

14 Many other LDCs, including Bhutan, Cambodia, Lao PDR, Nepal and Myanmar, will graduate to developing country status within the next few years.

15 https://riva.negotiatetrade.org.

16 The Participation of Developing Countries in Global Value Chains: Implications for Trade and Trade-Related Policies, OECD Summary Paper, 2015.

17 The simple average applied EU import tariff was 4.35% on industrial goods in 2019.

18 Bangladesh’s customs bonded warehouse regime allows the importation of duty-free parts and materials required for export production purposes by licensed manufacturers. The bonded warehouse facilities are mostly used by RMG industries.

19 Under the provisions of Section 13 of The Value Added Tax Act, 1991 and under Section 37 of The Customs Act, 1969 of the Bangladesh government, all import duties and taxes paid on raw materials and inputs used for the manufacture of exported goods or services shall be refunded.

20 The government of Bangladesh has declared 16 stimulus packages equivalent to US$11.7 billion, which is about 3.4% of the GDP in 2020, to combat the Covid-19 pandemic and rescue the economy. Of these packages, an additional US$560 million (BDT 50 billion) are allocated to export subsidies (2020), Socio-Economic Development in Bangladesh & Stimulus Packages to Combat COVID-19, Retrieved from https://mof.gov.bd/site/publications/bdf6a97c-7327-4868-b985-7833fdb83574/Socio-Economic-Development-in-Bangladesh-&-Stimulus-Packages-to-Combat-COVID-19.

21 Refer to Walmsley and Minor (2013) and Minor and Walmsley (2013), for full documentation of the MyGTAP data program and model, https://impactecon.com/resources/working-papers/.

22 The updated SAM was provided by Dr Selim Raihan from South Asian Network for Economic Modelling (SANEM), a think-tank in Bangladesh.

23 While useful for sensitivity analysis, given our focus in this study on household impacts which rely on data from the 2014 SAM for which projections into the future are not available, it would not be appropriate to draw detailed household insights from this updated dataset.

24 https://tntcat.iiasa.ac.at/SspDb/dsd?Action=htmlpage&page=10.