Towards a new job-creation agenda in Bangladesh

Generating sufficient productive jobs in Bangladesh is arguably the most important developmental challenge facing the country today. A recently published World Bank report offers new insights into how to meet this challenge. It calls for a shift in the country’s development strategy so that it caters for both frontier and non-frontier firms, thereby negating the historical focus on a narrow group of the most productive firms.
 

Frontier Firms: Big Players, Small Employers

Historically, frontier firms, especially those in Ready Made Garments (RMGs), made impressive strides, earning Bangladesh a leading position in export markets. The problem is that although they offer some high-skill jobs, they do not generate jobs at a scale large enough to achieve sustainable and inclusive growth. While accounting for three-quarters of all revenues in the private sector in 2022 and the bulk the country’s exports, they host only a fraction of employment (Figures 1 and 2). Otherwise, the overwhelming majority of jobs are hosted in non-frontier firms, who tend to be relatively less productive and accordingly pay lower wages.  

For a Growing Workforce, Where Would the Jobs Come From?

The job creation challenge is further aggravated by recent demographic developments. Between 2013 and 2022, the working-age population grew at 1.5 percent annually, while employment expanded by only 0.2 percent (Figures 3). Consequently, unemployment has been on the rise (Figure 4). The problem is even more severe for young people, who face additional hurdles in transitioning from education to employment, often with inadequate market-relevant skills.

What is Behind the Disparity in Outcomes Between Frontier and Non-Frontier Firms?

Frontier firms did not succeed by accident. By virtue of their capabilities and resources, and the room for discretion in the implementation of regulations, they have enjoyed a preferential lane in navigating the prevailing complex business environment. Moreover, they have benefited from an array of tax exemptions, preferential credit, interest rate subsidies, and a trade regime that offered duty-free imports. In 2021 alone, corporate tax exemptions to garments amounted to 2.4 percent of GDP. These privileges reflect the nature of the prevailing political economy at the time.

In comparison, non-frontier firms face a very different reality. They have tended to operate within an import substitution strategy, which has accorded them heavy protection and restrained competition. As a result, they have been on average 11 times less productive than frontier firms, and therefore, only able to offer lower-paying jobs. Currently, non-frontier firms face a more challenging business environment than their frontier counterparts. Non-frontier firms experience longer times to secure regulatory approvals and poorer access to public services, most notably, more frequent and longer power outages. At the same time, they do not enjoy most of the benefits of selective government interventions that frontier firms receive.
 

Changing Course is Now Urgent

Several factors make the need for reform urgent. The 2024 Quota Reform Movement, protests that sparked a student-led uprising, stemmed from a yearning for decent and merit-based jobs. The impending LDC graduation will strain export competitiveness as over 80 percent of Bangladesh’s exports enter preferential markets and will be subject to higher tariffs. The fiscal cost of exemptions and subsidies to frontier firms is straining an already tight fiscal position. Female employment in RMG, which amounted to 90% of the sector’s workforce in the 1980s, has declined to 50% today, with an average retirement age of just 35.

Towards a New Job-Creation Agenda

To meet the challenge of creating sufficient and productive jobs in Bangladesh, it would be necessary to adopt a new strategy that caters for all firms—frontier and non-frontier—and to ensure that both have the opportunity to grow and be more productive. The main features of the new strategy would combine reforming the business environment, revising industrial policy, and strengthening state capacity. With respect to the business environment, the agenda should aim at leveling the playing field by reducing and simplifying the regulations themselves and diminishing the room for discretion in their implementation. Similarly, it is time for the government to evaluate and rationalize its pattern of selective interventions. Following best practices, it would be advisable to attach sunset clauses to these interventions, broaden their scope to include SMEs and service sector firms, and shift away from traditional top-down mechanisms to more collaborative strategies. Implementing the above reforms requires adapting to new circumstances and opportunities and demands stronger institutional capacities of the entities charged with improving the business environment and designing and implementing industrial policy.
 

Conclusion

None of the proposed reforms alone will achieve the desired outcomes, nor will they materialize without political champions at the highest level. It will take a coherent bundle of reforms, even if implementation is phased over time, for Bangladesh to have a pathway to fulfilling the aspirations of its people. The good news is that Bangladesh is at a critical juncture of its history where this is possible.