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Submitted by:Tanvir Ahmed Khan TanuBBA 18th, IBA, Dhaka UniversitySubmitted to:Dr. Mohammed FarashuddinVisiting Professor, MacroeconomicsMay 24, 2012
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Optimizing Agro Based Industry Prospects in Bangladesh
Optimizing Agro Based Industry Prospects in Bangladesh
Prepared for:
Dr. Mohammed Farashuddin
Visiting Professor
Course Instructor: Macroeconomics
Course Code: E202
Prepared by:
Tanvir Ahmed Khan Tanu (ZR06)
Batch 18 (A)
Institute of Business Administration (IBA), University of DhakaMay 24, 2012
Optimizing Agro Based Industry Prospects in Bangladesh
Prepared for:
Dr. Mohammed Farashuddin
Visiting Professor
Course Instructor: Macroeconomics
Course Code: E202
Prepared by:
Tanvir Ahmed Khan Tanu (ZR06)
Batch 18 (A)
Institute of Business Administration (IBA)University of Dhaka
May 24, 2012
Optimizing Agro Based Industry Prospects in Bangladesh
1. INTRODUCTION: Agro based industry – already the second largest source of export
earnings has the potential to be the next ‘garments revolution’ in
Bangladesh. Rich alluvial soil, year round frost-free climate, adequate
water supply combined with abundant cheap labor, expanding middle
class and food self sufficiency has set the stage for massive growth in
agro-based industry. Supporting this claim, many agro based companies –
both export and local market oriented – emerged recently in a very short
time. Expansion in this sector can effectively diversify the export portfolio
and thus reduce market risk of Bangladesh economy. The socioeconomic
development of Bangladesh hinges upon agro based industry
development as around 50% of labor force is employed in agriculture. The
sector has achieved impressive growth in recent years. Still, much
potential remains untapped and the scope of performance optimization is
high which will maximize growth and output from this sector.
2. AGRO BASED INDUSTRY DEFINITION Agro based industry is an industry sector that uses primary agricultural
product as raw materials and processes them to secondary manufactured
products. It deals with the processing, preservation and preparation of
agricultural production (both food and non-food) for intermediate or final
consumption. According to the International Standard Industrial
Classification (ISIC) agro-industry consists of: i) food and beverages; ii)
tobacco products; iii) paper and wood products; iv) textiles, footwear and
apparel; v) leather products; and vi) rubber products.
3. IMPORTANCE OF AGRO BASED INDUSTRIAL DEVELOPMENT IN BANGLADESH
Agro based industry is one of the most critically important sector for the
future development of Bangladesh due to a number of reasons. The
potential significances are:
1) Comparative and Competitive Advantages and Huge Potential
Market
2) Risk Minimization through Diversification of Exports
3) Increased GDP composition of Industry Sector
4) Poverty alleviation through Employment and Income generation
5) GDP and economic growth
6) Socioeconomic Development
1) Comparative and Competitive Advantages and Huge Potential
Market: Bangladesh has comparative advantages in Agro based industry
sector due to minimum opportunity cost. Bangladesh also has many
competitive advantages in agro based industry.
Firstly, the land is very fertile and the weather is frost-free ensuring whole
year production. Natural water supply and temperature is also suitable.
Overall, the climate is appropriate for a wide range of crops, fruits,
vegetables, fishes and animals.
Secondly, there is limitless supply of cheap labor in the agriculture sector.
Thirdly, Agro based industry development is labor intensive – not capital
intensive, making it suitable for Bangladesh where SMEs are driving the
economic engine.
Fourthly, the industry sector has a very large local and neighboring
foreign market. Bangladesh is the 53rd largest consumer market with a
market size of US$66692 million. Due to expansion of the middle class
and self sufficiency in food, there is now an increased demand for a
variety of processed food items and a supply-demand gap, currently
exploited by foreign suppliers. Neighboring India is the 11th largest
consumer market with a market size of US$737936 million. (UN Statistics
Devision , 2009). Capturing local and neighboring markets alone can
create significant leverage in Bangladesh economy. However, further
market potential exists as the market is not necessarily restricted to
Bangladesh and India.
2) Risk minimization through Diversification of Exports: Currently
around 75% of the economy’s export earnings come from Textile sector
alone. So much dependency in one sector is risky. Agro based industry
sector has the potential to go through a revolutionary expansion, hedging
the economy against market risks. Currently, frozen food – a component
of agro based industry is the second largest export earning sector in
Bangladesh.
3) Increased GDP composition of Industry sector: In Bangladesh
much of the GDP growth came from service sector. Service sector GDP
composition is 53% compared to industrial contribution of 29% only. This
situation is undesirable as economic development, to be established on a
solid ground requires higher contribution from Industrial sectors. Agro
based industry is the most viable option given the competitive advantages
and investment environment.
4) Poverty Alleviation through Employment and Income
Generation: Vibrant Agro based industry sector is found to generate
many jobs in upstream and downstream sectors (UNIDO, IFAD, FAO,
2008). Agro based industry can play a strategic role in Bangladesh in a
pro-poor growth policy as 72% of the population live in rural areas and
around 50% of labor force is employed in agriculture (CIA World Factbook,
2010). As possibilities for income generation are restricted in rural areas,
agro processing, manufacturing and commercial and service activities of
agro based industry can play a pivotal role in increasing economic
efficiency and reducing disparity.
5) Contribution to GDP and economic growth: Industrial
development in agro based sector can work as an added boost to GDP
growth in a country like Bangladesh.
An extended definition of the agro-processing sector which includes not
only agro industries but also distribution and trading activities, would
roughly account for more than a third of the GDP in Indonesia, Chile, Brazil
and Thailand, and between 20 - 25% in Sub-Saharan countries. The entire
food system, including the production of primary goods and commodities,
marketing and retailing, would account for more than 50% of developing
countries’ GDP (based on World Bank, FAO and UNIDO databases) (UNIDO,
IFAD, FAO, 2008).
On average, productivity levels in food processing are above the
manufacturing
Average, making it one of the more efficient economic sectors in least
developed countries (HDI). Incremental investment here could benefit the
overall competitive position of the countries in question (based on UNIDO
Industrial Statistics Database 2005).
In low and middle income countries the food processing sector is typically
one of the largest industrial activities in terms of value-adding. Using the
UNIDO Industrial Statistics Database 2005, agro-processing value added
as a share of
GDP amounts to 4.3% for low income countries and 5% for lower middle
and upper middle income countries. This, however, neglects artisan
production and the informal sector, which are particularly important in low
income countries. It can therefore be safely assumed that the figures
heavily underestimate the true extent of agro-industry’s contribution to
GDP in those countries (UNIDO, IFAD, FAO, 2008).
6) Socioeconomic development: Strong synergies can exist between
agro-industry and socioeconomic development. Agro-industry provides
capital and services to farmers (e.g. seeds and equipment, training,
production and market information), promotes entrepreneurship, raises
demand for agricultural products and connects farmers with markets
through the handling, processing, marketing and distribution of
agricultural products. As a result, productivity and quality of agricultural
production, farm returns, economic stability for rural households, food
security and innovation throughout the value chain can be enhanced.
Efficient agro-industry can therefore spur agricultural growth, and –
accompanied by a strong link with smallholders – enhance socioeconomic
development (UNIDO, IFAD, FAO, 2008).
4. OPTIMIZATION PROPOSITIONS FOR DIFFERENT SUBSECTORS
The agro based industry can be optimized through development in a
number of subsectors. Propositions are suggested for the following
subsectors:
1) Fisheries Industry
2) Cotton and Yarn Industry
3) Fruits and Vegetables Processing
4) Jute Processing
5) Leather
6) Meat and Halal Food Export
7) Fresh Vegetables and Flowers Export
The development propositions are given below:
1) Fisheries Industry: Fisheries export is the second largest export
sector. Bangladesh exports frozen shrimp and prawn, frozen fish, fresh
and chilled fish, shark fins, salted and dehydrated fish and dry fish to EU
countries and USA. The export volume steadily grew in the last decade
but experienced a decline in the year 2008 – 2009 and 2009 – 2010
(Board of Investment Bangladesh). The decline is caused by tightened
regulation. The recommendations are
In the short run, identifying few frozen fish export items with
comparative advantages and focusing on those items. Increasing
value through maintaining hygiene, proper sorting and packaging.
Also, diversification can be achieved through ornamental fish
farming which are premium products catering to the needs of
hobbyists.
In the long run, Compliance with demanding regulation through
capacity building. Government can help out the frozen fish
exporters through various fiscal policy mechanisms and direct
investment.
2) Cotton and Yarn Industry: Cotton is directly related to the basic
human needs of clothes. Self sufficiency in food and clothes is often
prerequisite for development. Unfortunately, in Bangladesh the textile
industry growth has been artificially generated largely from foreign
exports of cotton and yarn. Only 3% of cotton demand is met by national
production (BCA, 2010). This sector must grow to provide back linkage
support to textile industry which now depends on international cotton
price. The recommendations are:
In the short run, the policy makers should incentivize cotton
farming and development of yarn industry. Cotton should be
recognized as a high priority sector. Tax benefits can be given to
textile companies for using locally produced cotton.
In the long run, research and development should be initiated to
produce high yielding and resistant cotton variants.
3) Fruits and Vegetables Processing: Fruits and vegetables can be
processed into jams, jellies, juices, ketchups, sauces, pickles and chips.
Traditionally, this segment of the local market was dominated by foreign,
especially Indian brands. Auspiciously, a burgeoning growth in local
brands is seen in recent times which are now competing for market shares
with foreign brands. Leading groups in this segment are Pran foods and
AFBL. If the growth continues soon local brands will not only dominate
local markets but compete in international markets. Currently, export is
there but the volume remains insignificant. The recommendations are:
In the short run, government should facilitate local brands by
giving tax benefits, by imposing higher taxes on foreign brands and
by developing local electronic media which will reduce viewership of
foreign brands and advertisements.
In the long run, government can set up research and development
institutes for formulation of new process items.
4) Leather Industry: Leather industry can be included as an agro based
industry given the broad definition. Leather industry in Bangladesh has
not reached its full potential due to environmental noncompliance, which
is becoming an increasingly important issue in exporting countries. Legal
compliance is low due to high fixed and operating costs. The
recommendations are:
In the short run, government should facilitate legal compliance
through subsidizing establishment of ETP plants.
In the long run, the industry should be relocated in separate
processing zones with integrated and common pollution
minimization facilities. The operating cost can be divided among
companies.
5) Meat and Halal Food Industry: Halal food market is a fast growing
and highly profitable market worldwide. Beef and Chicken meats can be
processed, packaged and marketed. But development in this sector is
capital intensive. Moreover, the local supply of meat does not meet local
demands currently. The recommendations are:
In the short run, government can incentivize large scale poultry
and cattle farming to meet the supply demand gap. Private
investment in this sector should be encouraged through tax
benefits.
In the long run, the government should incentivize establishment
large scale meat processing through tax benefits and subsidies.
6) Jute Processing: Raw jute can be processed into various range and
type of secondary products. With increasing environmental concern jute
can regain its lost glory if jute products are innovatively designed,
properly planned and marketed. The recommendations are:
In the short run, government should identify jute as a priority
sector and encourage private sector contribution through
incentives and awareness campaigns.
In the long run, government should establish jute research and
creative design institute who will come up with novel and
diversified design of jute products.
7) Fresh Vegetables and Flowers Export: Fresh vegetables and
flowers can be stored in cold storage and exported. This subsector is
underdeveloped due to lack of storage facilities and high freight time and
cost. The recommendations are:
In the short run, decentralized cold facilities can be setup by the
public sector. Alternatively, Private sector can be incentivized to
encourage private cold storage companies.
In the long run, Special air route can be opened to allow rapid
export of perishable items at lower costs.
5. CONCLUSION Agro based industrial development can ensure food and cloth security,
thereby laying the foundation of an advanced economy. Developed agro
based industry is a prerequisite for surefooted and sustainable
development. Bangladesh is on her way to become a middle income
country. Agro based industrial development can work both as an
acceleration factor and as a solidification factor, giving the GDP growth
the much needed push and hedging our economy against market risk. The
policymakers therefore, must give this sector its proper weightage and
develop effective incentive mechanisms to encourage private sector
involvement.
BIBLIOGRAPHY
Board of Investment Bangladesh, 2012. s.l.: s.n.
CIA World Factbook, 2010. s.l.: s.n.
Development Associates Inc., March 2005. An Evaluation of The
Bangladesh Agro Based Industries and Technology Development Project,
s.l.: s.n.
UN Statistics Devision , 2009. s.l.: United Nation.
UNIDO, IFAD, FAO, 2008. The importance of Agro Industry in
Socioeconomic Development and Poverty Reduction. UN Commission of
Sustainable Development.