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.