UNIVERSITY OF DHAKA

THEORY AND PRACTICE OF INTERNATIONAL

BUSINESS (EIB-510)

TERM PAPER ON
Import Substitution and/or Export Led Growth
Necessary for the Economic Development of Bangladesh

Submitted to-

Mohammad Rakib Uddin Bhuiyan

Associate Professor & Chairperson
International Business
University of Dhaka

Submission date- 01/12/2018

Submitted By
Md. Oliur Rahman Pritom 801825040

1|Page
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)
INTRODUCTION

Bangladesh is a developing country as well as its area is very limited, so its resources are also
limited than rest of the world. Bangladesh has encouraged counter-trade for many years as a means
to promote exports while conserving foreign exchange. Barter trade in commodities used to carry
out with countries in Central and Eastern Europe, Central Asia, China, and North Korea, but during
FY96 barter trade was discontinued with Bulgaria, China, the Czech Republic, Hungary and North
Korea. Bangladesh also allows special trading arrangements through the Trading Corporation
of Bangladesh. Bangladesh is one of the member countries of the South Asia Free Trade
Agreement (SAFTA) under the umbrella of the South Asia. Though Bangladesh have to face some
limitations for import and export like agents, agency legislation, labeling and packaging
regulations, import duties( tariff), quotas, dumping, custom duties, taxes and so on. Though facing
these barriers Bangladesh is trying to improve their trading system as well as their economic status.
The SAFTA agreement requires Bangladesh to bring down its tariff to zero by the end of 2015. By
reducing the tariff to zero would make import from member countries cheap which might lead to
a an increase in import but other member countries will also reduce their tariff to zero meaning
Bangladesh’s export will be cheaper as well. The rise in import or export depends solely on the
elasticity of the products being exported and imported. An analysis of the aforementioned is a
necessity.

ECONOMIC DEVELOPMENT

Economic development is the growth of the standard of living of a nation’s people from a low-
income (poor) economy to a high-income (rich) economy. When the local quality of life is
improved, there is more economic development. When social scientists study economic
development, they look at a lot of things. Economic development is the process by which emerging
economies become advanced economies. In other words, the process by which countries with low
living standards become nations with high living standards. Economic development also refers to
the process by which the overall health, well-being, and academic level the general population
improves. During the development, there is a population shift from agriculture to industry, and
then to services. A longer average life expectancy, for example, is one of the results of economic
development. Improved productivity, higher literacy rates, and better public education, are also
consequences.
2|Page
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)
IMPORT SUBSTITUTION

Import substitution industrialization (ISI) is a trade and economic policy which advocates replacing
foreign imports with domestic production. ISI is based on the premise that a country should attempt
to reduce its foreign dependency through the local production of industrialized products. ISI
policies were enacted by countries in the Global South with the intention of producing
development and self-sufficiency through the creation of an internal market. ISI works by having
the state lead economic development through nationalization, subsidization of vital industries
(agriculture, power generation, etc.), increased taxation, and highly protectionist trade policies.

Import substitution industrialization was gradually abandoned by developing countries in the

1980s and 1990s due to the insistence of the IMF and World Bank on their structural adjustment
programs of global market-driven liberalization aimed at the Global South.

EXPORT LED GROWTH STRATEGY

Export-oriented industrialization (EOI) sometimes called export substitution industrialization

(ESI), export led industrialization (ELI) or export-led growth is a trade and economic policy
aiming to speed up the industrialization process of a country by exporting goods for which the
nation has a comparative advantage.

Export-led growth is a policy strategy and a process by which a country aims at accelerating its
rate of economic growth by relying upon an expansion of its exports.

Its objective is to derive several growth-related benefits from export expansion, such as providing
employment to its hitherto unemployed and underemployed resources, higher rate of capital
accumulation, up gradation of technology through greater imports, and so on.

ECONOMIC POSITIONS OF BANGLADESH

Bangladesh has made remarkable progress in reducing poverty, supported by sustained economic
growth. Based on the international poverty line of $1.90 per person per day, it reduced poverty
from 44.2 percent in 1991 to 14.8 percent in 2016/17. In parallel, life expectancy, literacy rates
and per capita food production have increased significantly. Progress was underpinned by 6
percent plus growth over the decade and reaching to 7.9 percent in 2017/2018, according to official

3|Page
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)
estimates. Rapid growth enabled Bangladesh to reach the lower middle-income country status in
2015. In 2018, Bangladesh fulfilled all three eligibility criteria for graduation from the UN’s Least
Developed Countries (LDC) list for the first time and is on track for graduation in 2024.

Sustained economic growth has rapidly increased the demand for energy, transport and
urbanization. Insufficient planning and investment have resulted in increasingly severe
infrastructure bottlenecks. To achieve its growth aspiration of becoming upper-middle income
country by its 50th birthday in 2021, the country needs urgently to implement structural reforms,
expand investments in human capital, increase female labor force participation, and raise
productivity through increased global value chain integration. Improving infrastructure as well as
the business climate would allow new productive sectors to develop and generate jobs.

The market-based economy of Bangladesh is the 31st largest by purchasing power parity and
42nd largest in the world in nominal terms; it is classified among the emerging market middle
income economies and a Frontier market. According to the IMF, Bangladesh's economy is the
second fastest growing major economy of 2016, with a rate of 7.1%. Dhaka and Chittagong are
the principal financial centers of the country, being home to the Dhaka Stock Exchange and the
Chittagong Stock Exchange. The financial sector of Bangladesh is the second largest in the
subcontinent.

Over the past two decades, the country has recorded an annual average growth rate of 6% of
GDP and has reduced the poverty rate by half : in 2016, 24,8% of the population was considered
under the poverty line, compared to 48,1% in 2000. Growth amounted to 7% in 2017 supported
by remittances from nearly 7,5 million Bangladeshi living abroad (USD 12.85 billion in 2017),
garment exports, increased wages and low inflation. Continued growth is expected given
macroeconomic stability along with credit growth and increased private investment. According
to the Bangladesh Bureau of Statistics, per capita income grew from USD 1,532 to USD 1,660
from fiscal year 2017 to 2018 (a 8% growth). The inflation rate is estimated to reach 5.8% in
2018 while the interest rate sits at 6.75%. In 2017, agriculture benefited from higher agricultural
commodity prices and an increase in farmed land and grew by over 4%. However, the sector is
expected to stall due to an expected fall in rice production in 2018. Given rising prices of
agricultural products, inflation is expected to increase. Despite lower agricultural incomes and

4|Page
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)
higher inflation, household demand is expected to increase, which should lead to a significant
rise in imports, reducing trade’s contribution to growth.

The 2017-2018 budget gave priority to the development of education, technology, transport,
communication, and defense. Almost 14% of the annual budget (1.93% of GDP) is dedicated to
education, although such spending is still below UNICEF recommendations of 20% of annual
budget and 6% of GDP. Tax collection improved significantly in 2017 while spending declined,
which reduced the fiscal deficit.

See more at https://www.adb.org/countries/bangladesh/economy

SWOT ANALYSIS OF BANGLADESH ECONOMY

A SWOT analysis is a strategic balance sheet of an organization; that is the strengths of the organization,
the weaknesses of the organization, the opportunities facing the organization, and the threats facing the
organization. It is one of the cornerstone analytical tools to help an organization develop a preferred
future. It is one of the time-tested tools that have the capacity to enable an organization to understand
itself, to respond effectively to changes in the environment. The purpose of the SWOT analysis is to
provide information on strengths and weaknesses in relation to the opportunities and threats.

Bangladesh is one of the poor and most densely populated

country in the world with around 160 million people .The country was under British and Pakistani
colonial rule over 200 years. The country became independent in 1971. The land of the country is
devoted mainly to cultivation. Soon after become independent Henry Kissinger (former infamous
foreign minister of USA) called Bangladesh “International Basket Case” but now a day’s scenario
has changed. Though By most standards, Bangladesh looks like a disaster but yet Bangladesh has
done better than most countries at improving the basic standard of living of its people.

See more : https://www.scribd.com/doc/102664684/Bangladesh-Economy-SWOT-Analysis

5|Page
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)
Bangladesh has improved a lot for understanding it you need not to be an economist just look at
the national budget. In 1972-73 very first year of independence the national budget of Bangladesh
was Taka 786 crore and in 2018-19 (on going fiscal year) national budget is Taka 4,64,573 crore.
The amount of budget tells us about improvement and progress.

Strengths of Bangladesh Economy:

 Huge man power  Service Sector

 Agriculture  Capital Market

 RMG Industry  Remittances

 Textile Industry  Sea port

Weaknesses of Bangladesh Economy:

 Lack of capital  Poor power supplies

 Insufficient infrastructure  High illiteracy rate

 Lack of quality education  Frequent natural calamities

 Lack of new technology

 Slow implementation of income

Opportunities of Bangladesh Economy:

 Low production cost  Availability of labor

 Tread friendly Govt. policy

 Bangladesh has too many historical and scenic place which is world famous (Cox’s bazar,
Sundarbans, Paharpur buddha bihar, ect). If we can attract foreigners to visit these spots it will

6|Page
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)
 help to earn foreign currency. So it’s a real great opportunity to build up a good tourism sector
all over the country.

 Bangladesh is a big market as a huge number of people live in this small country. So if we can
assure safety and protection for multinational organizations they will come here to business,
as a result our unemployment would diminish.

Threats of Bangladesh Economy:

 Corruption
 Money laundering
 Poverty
 Vulnerability in agriculture sector
 Inept bureaucracy
 Power shortage
 Political instability
 Terrorism
 Unrest in industry sector


Due to climate change Bangladesh experiencing different types of natural disasters. So government
is to invest more money in environment sector and has to reduce investment in other sectors. That
hampers national economy.

IMPORT SUBSTITUTION OR EXPORT LED GROWTH OR BOTH

In Bangladesh economy import substitution and export led growth both are important to make any
economical changes of Bangladesh. But Low-income countries must industrialize to become more
developed; but as they could not compete with already industrialized markets, firstly they have to
protect themselves from the imports, which came from already industrialized and highly
productive economies and concentrate on their production in order to achieve this goal. They have
to reach a level, which make them compete with foreign industries in all over the world.

Bangladesh has been declared as a developing country but still it is literally a low income under
developed country. Export growth is not feasible because

More at : https://www.slideshare.net/MohaimenBarson/swot-analysis-of-success-of-bangladesh-in-
international-trade

7|Page
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)
a) It is not feasible to achieve rapid economic growth by shifting demand on to domestic
production. There are no examples of rapid growth based on domestic oriented production. Of
course, a large percent of production will be for the domestic market but these demands will not
increase rapidly enough to support rapid growth.

b) The RMG sector will be the core of the manufacturing sector for the next 25 years and support
for its growth and competitiveness is essential. The arithmetic is simple: To achieve 8 per cent real
growth for 25 years; ratio of RMG to other exports equal to 50 per cent after 25 years; exports to
GDP ratio reaches 40 per cent after 25 years. All of this means that exports grow at 12 per cent;
RMG exports grow at 10 per cent and other exports at 17 per cent.

c) The RMG sector’s expansionary effect is slowing. First the increase in domestic contribution
has more or less come to an end. There is room for further progress but the weaving factories are
still limited in providing cloth of required quality for export. Second, the prospects for growth in
production capacity are slowing with difficult infrastructure problems and shifting demands from
traditional markets.

On the other hand, import substitution is import substitution is important for Bangladesh because;

a) It protects infant industries against competing with well-established international companies

and markets. Competition would lead to the closure of such industries due to international entities
having a competitive advantage over the local industries in terms of pricing and supply. IS
technique serves to incubate the evolving industries to grow and have the capacity to compete in
the international markets. Hence, it aids in making local economies self-sufficient, grow and
reduce collapse of start-ups. There are now lot of infant industries are growing like; Pathao,
Sohoz.com, Sheba.xyz which needs a shelter to grow up.

b) Employment generation due to domestic industrialization. Import substitution enhances the

demand for labor intensive industries that create job opportunities. This, in turn, reduces the
unemployment rate in the economy. Further, livelihoods get improved that would reduce the
percentage of individuals living in poverty. Moreover, an economy becomes more resilient to
global economic shocks thus building economic stability and sustainability. Thinking about Pathao

8|Page
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)
transport service; they are creating lots of self-employed person. Not only that; even our online
business shop is also growing.

c) Reduces the cost of transportation from long distances to confined home boundaries. The
focus shifts to developing home products and the cut-transportation costs to investing in
industries. Moreover, import substitution does not limit the importation of machinery and
equipment necessary for industrialization.

Thinking about the overall scenario, import substitution is necessary for Bangladesh. Few
drawbacks will also be there in every time like; failure to meet consumer demands by the growing
domestic industries may result in the development of “black markets”. Financial leakages take
effect reducing government revenue and the overall capital base of the economy. That is why,
almost every item; especially cosmetics products in Bangladesh is found duplicate in all time.

CONCLUSION:

As argued by Kruger (1974) and Bhagwati (1974, 1987), a liberal strategy is considered to be more
beneficial to developing countries than trade control, because it brings efficiency in resource
allocation, eliminates directly unproductive profit seeking and rent seeking activities, encourages
foreign investment and stimulates dynamic positive effects for the domestic economy so is our
point of view. Any form of switch would be costly for Bangladesh as it lacks the technological
capacity to innovate; half of the labor force is engaged in production of primary products and the
existing technological lag. However, the export oriented growth that we are enjoying is likely to
suffer, if the current political situation does not subside. There are pros and cons of both of these
factors but its adoption would be viable based on our country demand. This is to ensure the
economy remains in balance without any threat to growth and economic stability. None of these
ideas is new. But lined up together we can see that this is going to require the society make peace
with itself, and concentrate on making the changes needed for getting a better life.

9|Page
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)
REFERENCES:

1. International Business: Competing in the Global Market Place; McGraw-

Hill Higher Education; 10th edition

2. Bangladesh Economy: SWOT Analysis by Marshal Richard; Research

based author of Scibd.com

3. BlogSpot of The Independent; see more at

http://theindependentbd.com/post/122849

4. Bangladesh Economy 2018 SOURCE: 2018 CIA WORLD FACTBOOK

AND OTHER SOURCES; see more at
https://theodora.com/wfbcurrent/bangladesh/bangladesh_economy.html

5. https://www.scribd.com/doc/102664684/Bangladesh-Economy-SWOT-
Analysis

6. Find more at –
http://siteresources.worldbank.org/INTSARREGTOPINTECOTRA

7. GDP (current US$)". World Development Indicators. World Bank.

Retrieved 3 July 2018.

8. https://theodora.com/wfbcurrent/bangladesh/bangladesh_economy.html

9. https://istiak228.blogspot.com/2016/06/a-swot-analysis-bangladesh-
economic.html

10.More at : https://www.slideshare.net/MohaimenBarson/swot-analysis-of-
success-of-bangladesh-in-international-trade

10 | P a g e
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)
11 | P a g e
Import Substitution & Export Led Growth Strategy; Necessity for the economic development of Bangladesh
By Oliur Rahman (80182504)