WB is betting that our regional trade can increase by 93% by improving connectivity. But is the infrastructure really the main problem?
Bangladesh is expected to achieve developing country status in 2026. Since the creation of the least developed country (LDC) category in 1971, only six countries have managed to graduate.
While this is an incredible achievement, it comes with its own set of challenges. If Bangladesh fails to come up with strategies to design a smooth transition, our economy could have a bumpy ride.
Washington-based lender, the World Bank (WB), believes it has developed a plan to ease this transition. They have launched a $1.4 billion project to accelerate trade and transport connectivity in eastern South Asia.
According to WB estimates, Bangladesh’s regional trade can increase by 93% as a result of the project. It remains to be seen whether the project will really be able to keep its promises.
The most common economic challenge that all LDC graduates face is the loss of LDC-specific international support measures, for example preferential market access.
In addition to benefiting from duty-free trade facilities, Bangladesh currently benefits from the Generalized System of Preferences (GSP) of the World Trade Organization, which will also terminate after LDC exit.
The end of preferential access to key markets as LDCs exit could lead to an annual drop in exports of up to 11%, or about $6 billion. According to the World Bank, this can be offset by regional trade with India, Nepal and Bhutan.
The state of regional trade
In a World Bank press release, its Vice President for South Asia, Hartwig Schafer, said: “Regional trade offers enormous untapped potential for South Asian countries. Today, regional trade is only 5% of South Asia’s total trade, while in East Asia it is 50%.
South Asia can significantly boost economic growth and create opportunity for millions of people by increasing regional trade and connectivity. »
In 2020, the combined total GDP of ASEAN members was US$3.0 trillion, leading ASEAN to collectively become the fifth largest economy in the world.
Over the past two decades, ASEAN’s total merchandise trade has increased nearly 3.5 times, reaching over $2.6 trillion in 2020.
On the other hand, trade between South Asian countries currently stands at only $23 billion, well below an estimated value of at least $67 billion. Border challenges mean it is around 20% cheaper for a company in India to trade with Brazil or Germany, instead of a neighboring country in South Asia.
“According to the World Bank, the total amount of regional trade (in South Asia) in 2019 was $25 billion. But according to their projections, it should have been around $73 billion,” said the Dr. Zaidi Sattar, President of the Policy Research Institute. (CRI) and former Senior Economist, World Bank.
“Furthermore, South Asia is only 5% of their total trade. It was 5% 25 years ago, it’s 5% now. Regional trade is not growing as a proportion of total trade. South Asia’s trade with the rest of the world has increased significantly, but regional trade as a proportion of total trade has remained at 5%,” he added.
The veteran economist also said that these statistics only represent official trade. Unofficial trade takes place between Bangladesh and India, and even India and Pakistan.
In the first phase of the previously mentioned project, the World Bank will provide $1.03 billion, with the rest coming from the governments of Bangladesh and Nepal. India and Bhutan will be associated with the project later.
Poor infrastructure is the biggest obstacle
According to WB, infrastructure is the biggest impediment to flourishing trade between South Asian neighbors. The project titled Accelerating Transport and Trade Connectivity in Eastern South Asia (ACCESS) in Bangladesh seeks to do just that.
This project will transform the 43 km dual carriageway Sylhet-Charkhai-Sheola into a climate-resilient four-lane highway. World Bank officials believe this will reduce travel time by 30%, facilitating trade in the region.
“This is a unique project supported by the World Bank. The World Bank does not usually focus on projects to develop communication, build roads, etc. They usually focus more on the increasing port efficiency, decreasing the cost of trade by improving non-tariff barriers, etc.,” said Dr. Selim Raihan, Professor in the Department of Economics, University of Dhaka and Executive Director of the Southern Asia on economic modeling (Sanem).
“In this project, they seem to be investing in a Dhaka-Sylhet four-lane road, but that will probably only be a small part of the project,” he added.
Modernization of ports
The project aims to support digital systems, infrastructure and more streamlined processes at the land ports of Benapole, Bhomra and Burimari, the three largest land ports in Bangladesh handling around 80% of land trade.
According to Dr. Sattar, “About 50% of the trade between Bangladesh and India is done through land borders. The capacity of land borders is very limited.”
“When a truck from India arrives, it has to be unloaded at the port, then the goods have to be loaded onto another truck in Bangladesh, and then it goes to its destination. It’s very expensive and time-consuming, this is not a 21st century trade deal,” he explained.
The project aims to bring this trade agreement up to 21st century standards. Electronic truck entry and exit tracking, electronic queuing and smart parking would be installed.
This will improve transparency and reduce congestion and truck idling, which will result in faster clearance times and, most importantly, greater freight throughput.
Harmonization of the customs process
Rapid growth in trade volumes has overwhelmed the Custom House Chattogram, originally built in 1920. The customs office is vitally important to Bangladesh’s trade, processing 90% of the country’s import and export declarations (13,000 per day) and serving more than 45,700 merchants per year.
Another program of this project is the construction of a resilient, certified and state-of-the-art Custom House Chattogram.
“It is also very clear that there is no harmonization of the customs process. Whether I export or import, I have to go through customs processing twice. I have to go through customs processing first. customs in India and then again in Bangladesh,” said Dr Sattar.
He added: “It’s tedious, it takes time and it’s too expensive. And the end consumers pay the price.”
This project aims to solve this problem by supporting the development and improvement of IT services for commerce and by reducing touchpoints and human interaction.
“Given the hassles that traders have to go through to obtain customs clearance, improving the efficiency of land ports will reduce the cost of trade and make trade more efficient. As a result, the intra-regional trade volume of Bangladesh is expected to increase,” said Dr Raihan.
Dream or achievable goal?
The Bangladesh-India-Nepal Motor Vehicle Agreement (MVA) was signed on June 15, 2015 by transport ministers of Bangladesh, Bhutan, India and Nepal, but has yet to take effect. its flight.
Experts believe that shortcomings holding back the implementation of the MVA include restrictions on visas, entry and exit points and vehicle-accessible routes. However, infrastructure alone will not solve these problems, countries also need to trust each other enough to allow each other better access, according to a World Bank study.
So to assume that infrastructure is the only problem plaguing trade in South Asia is too simplistic. Other issues are also at play here. The constraints here go way beyond brick and mortar.
“A study shows that it costs India less to trade with Brazil than with Bangladesh. Brazil is in Latin America, so these costs are not just customs duties. other complex issues at play here,” Dr Sattar said.
The list of constraints includes protective tariffs, real and perceived non-tariff barriers, investment restrictions, and a wide confidence deficit across the region.
“High tariffs are one of the reasons why we don’t have enough trade between South Asian countries. After graduating from LDC status, if we don’t have trade agreements in place with India, we will have to pay higher tariffs. But if we compare tariffs, Bangladesh has higher tariffs than India,” Dr. Sattar said.
“So if we want to go for a free trade agreement or a Comprehensive Economic Partnership Agreement (CEPA) with India, the first program on the table should be tariffs,” he added.
Prime Minister Sheikh Hasina is due to visit India from September 5-7 and it is speculated that the announcement of the launch of formal negotiations for the signing of CEPA between the two countries could come at that time.
“Bangladesh and Nepal both have high tariff regimes. However, there are many non-tariff barriers and certification issues with the Bangladesh Foreign Trade Institute,” Dr Raihan said.
There has been much research on why regional trade has not taken off in South Asia. Discussions took place at different levels.
“One of the main reasons is the fact that South Asian countries discriminate against their neighboring countries. They favor trade with the rest of the world more than they favor trade with their own neighbors. state of mind,” said Dr. Sattar.
“Borders that were created in 1947 have now turned into economic barriers,” he added.
Experts believe that if trade with our neighbors increases, we will be able to meet the challenges of LDC graduation and catch up on business that we may end up losing.
But according to Dr Raihan, “there are many bilateral political discontents among South Asian countries that go beyond infrastructure, which must be addressed to increase intra-regional trade and help it reach its true potential. “.