Bangladesh in global supply chain of edible oil

http://print.thefinancialexpress-bd.com/2016/05/07/140841 VOL 23 NO 174 REGD NO DA 1589 | Dhaka, Saturday, May 7 2016

Bangladesh in global supply chain of edible oil M S Siddiqui The theory of absolute advantage of Adam Smith proposed in 1776 unrestricted free trade for benefits of all. We find two additional theories based on the theory of absolute advantage developed by English economist David Ricardo and subsequently two Swedish economists Eli Heeckscher and Bertil Ohlin, whose theory is named as Heeckscher-Ohlin theory of free and unrestricted free trade. After the change the socialist economic system and gradual opening up of closed economies have created a congenial atmosphere for a global single market. This has accelerated through bilateral, regional and multilateral free trade agreements greatly facilitating the access to markets of other countries.

The developing countries find an opportunity to use their low cost labour, proximity to market and location near the sources of major inputs, minimal environmental regulations and easy electronic communication system and facilitate interpretation of global value chain (GVC).

GVC depends on fragmentation of production and trade of intermediate products in order to exploit cost advantage of each location/stage in the chain, up to the assembly stage. GVCs are value chains, which are activities that companies engage in to bring a product from producers to the final consumer, and that are global in a way that are spread over several countries.

The developed market finds cost advantages to buy low technology-based consumer products from developing countries. This value-added global value chain is foundation of economic development. The domestic value added to gross exports is the real value added by an economy in producing goods and services for export. It is the difference between gross output at basic prices and sale value of the final products.

Bangladesh is at the lower end of global supply chain of garments for the end market in developed countries. The chain starts from production of cotton - yarn - fabric - stitching garments. This fragmentation of production has created new opportunities for developing countries to enter global markets as components or services suppliers, without having to build the entire value chain.

GVC has changed the concept of "country of origin" as the value of an imported item does not necessarily fully originate from the geographical origin of export. For example, Korea is

importing cotton from the USA (USA origin) and producing yarn for export to Indonesia (Korea origin) and Bangladesh is importing fabric from Indonesia (Indonesian origin) and stitching garments for export (Bangladesh origin) to the USA. This is in the other way internationalisation of supply chains and the addition of local value is the real income from the supply or export to another economy. Bangladesh economy rose with export of readymade garments having increased value addition to exports and it got the dividend with uninterrupted growth of gross domestic product (GDP) for many years and attract the attention of economists and thinkers for supplementing the Heeckscher-Ohlin theory of free and unrestricted free trade.

Due to globalisation of production, economies use to give the highest priority to those sectors which have special export potentials, but such potentials could not be utilised properly due to certain constraints, and more success is attainable, if adequate support is rendered to them.

Our export trade is featured by the dominance of a few commodities in a narrow market. Such dependence on a limited number of export items targeting a limited market is not desirable for economic development. We must, therefore, aim both at product and market diversification or else our export trade will become stagnant in the near future.

The Export Policy Order 2015-18 included the following product sectors as the special development sectors: (1) Light engineering products (including auto-parts and bicycles); (2) Electric and electronic products; (3) Jute products; (4) Handloom fabrics; (5) Ceramic products; (6) Frozen fish; (7) Printing and packaging; (8) Rubber; (9) Uncut diamonds and jewelry; and (10) Cosmetics and toiletries.

Government decided to provide the priority project loans at comparatively low rates of interest on a priority basis; consideration for export loans on soft terms and at reduced interest rates; provide subsidies in consistence with the WTO Agreement on Agriculture, and Agreement on Subsidies and countervailing measures; shipment of products at reduced air fare; duty drawback/ bond facilities; priority in getting utility services such as electricity, gas, telephone for setting up backward linkage industries including infrastructural development to reduce production cost; expansion of technical facilities to improve the quality of products; assistance in marketing product; assistance in exploring foreign market; 14 possible financial benefits for utility services such as electricity, water and gas etc. The government will take necessary initiatives to attract foreign direct investments (FDI).

The government has decided to offer many facilities such as bond system, duty draw-back, subsidies etc. Similarly, the project will assess and take necessary steps regarding issues such as product development and market expansion, trade cooperation and infrastructural constraints hindering export trade. It will undertake a project to acquire modern technology promoting expansion of export trade and strengthening the export development activities of these diversified export products.

But unfortunately the Export Policy has the legacy of the last caretaker government of banning export of soyabean and palm oil with a plea to "keep domestic prices stable". The measure was

temporary for six months but now it has been included in the negative list of the current export policy. Moreover, there is hardly any co-relation between local market and global supply chain as evident in our garment sector.

According to the policy, Bangladesh used to import and consume cholesterol-prone soyabean and palm oil and allowed export of rice bran, the raw material for completely cholesterol-free natural oil namely rice bran oil. The rice bran oil is considered as nutrition-rich cooking oil.

Doctors advise to replace soyabean and palm oils by this. This is like a saying that "somebody sells milk and buys wine and somebody sells wine and buys milk."

The rice millers are producing three by-products, namely husk, bran oil and de-oiled bran while the grain is extracted. Of those, bran oil is used for producing edible oil, de-oiled bran is used as poultry and cattle feed, and husk as fuel. According to the Export Promotion Bureau (EPB), the export figure of rice bran in 2012-13 stood at around $16m while it was only about $6.0m in 2013-14.

Bangladesh already has few manufacturers producing oil from rice bran. The annual demand for rice bran as a raw material for the existing seven rice bran oil factories is around 0.76th million (7.65 lakh) tonnes; the total demand for all 13 factories will stand at 1.24th million (12.45 lakh) tonnes. The country produces around 2.4 million (24 lakh) tonnes of bran annually. Bangladesh may set up more Rice bran oil factories and stop export of rice bran.

Bangladesh entrepreneurs have already invested in fixed assets and local oil refiners currently have the capacity to produce 6.0 million (60 lakh) tonnes of soyabean and palm oil per year against the local demand for only 2.0 million (20 lakh) tonnes. Local producers used to export edible oil to India until the then caretaker government imposed a ban on edible oil exports in 2007. Bangladesh has already entered the global value chain of edible oil by remaining close to a market like India and successfully exporting to India. Entrepreneurs developed the edible oil market without any support from the government.

The government has also decided that the National Board of Revenue (NBR) will consider the possibility of providing bonded warehouse facilities to import-dependent export industries.

Especially, the Board will examine whether bonded warehouse facilities can be extended to all other export-oriented industries. Besides, providing additional bonded warehouse facilities to trading houses and export houses under certain conditions will be examined.

Bangladesh now should ban export of rice bran and increase capacity of manufacturing rice bran oil for own consumption and allow export soyabean and palm oil to India, Nepal and other countries, since it is already in the GVC of edible oil.

The writer is a Legal Economist; e-mail: mssiddiqui2035@gmail.com