Bailing out Bangladeshi businesses

Abdullah A. Dewan writes

THE Bangladesh Garment Manufacturers and Exporters Association (BGMEA), the country's prime foreign currency earner, has made the following bailout proposals at a press conference on March 16.
• Rescheduling of 3 and 5yrs term loans to 7 and 10yrs term loans;
• Lowering interest rate from 15% to 7%;
• Withdrawing VAT from readymade garment (RMG) sector;
• Subsidizing diesel for RMG, like the farm sector;
• Cash pay-off to stay competitive.

Last Sunday, the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) proposed a Tk 6,000 crore rescue package for the export businesses. It included a Tk 3,300-3,500 crore bailout plan for the RMG exporters. The Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) demanded a 10% cash incentive for knitwear exporters.
The BGMEA chief Salam Murshedy asked for an additional Tk 10 against every dollar of 30% total export value. In addition, he urged the government to ask banks to reschedule BGMEA outstanding loans by at least 10 years and slash the bank interest rate to 7%.

Murshedy pleaded that these measures would help BGMEA members withstand the global recession-driven demand slack culminating in declining exports, which reached 17.58% in February. To justify the demand for bailout, Murshedy said that three major buyers of Bangladesh's RMG products, including UK-based Woolworth, went bankrupt recently. To promote exports in the present global downturn, BGMEA plans to promote RMG products in old markets and some potential export destinations. This seems to be the prudent approach to fight the recession-demand slack. FBCCI, BGMEA, and BKMEA's (the troika) plea for bailout money is no different from tax payers' subsidy to the RMG sector. The US and other governments have already started doing that through tax payers' part ownership of the businesses receiving bailout money until they stand on their own. (For example, 80% of AIG shares are owned by tax payers.) Asking banks to reschedule loan terms may endanger cash and income flow of the banking sector, putting healthy banks at risks of insolvency and requiring them to ask for bailout money later. That's a dangerous route to take. Besides, why should government persuade banks? It is the businesses' that need to make such a move.

Businesses should always discuss with their bank whether additional emergency funding is available. The medium and long-term plans should form part of any dialogue. Timely communication with the bank is important as bank managers and financiers who are aware of the problems are likely to come to their rescue. Following the US example, what the government can do is subsidize some portion of the interest if the banks are willing to lower the interest on existing loans for a limited time period. Since some of the foreign retail clients have gone bankrupt it won't be easy to achieve the previously targeted $14 billion goal of RMG exports. So, in the process, some of the weaker factories won't survive. Hence, proving them bailout money would be tantamount to knowingly buying the failing businesses with tax payers' money.

Reducing VAT is a possible option but that will be equivalent to subsidy because, to make up for the lost tax revenues, the government must resort to deficit financing. Subsidizing gas to the RMG sector is similar to reducing VAT. The worst proposal is "cash incentive," which literally means "print money and give it to us." However, the troika may ask the government to initiate guaranteed financial schemes to help viable businesses with provisional cash flow predicaments.
By any measure of economic rationality, the troika is asking for too much -- in essence, nothing is left out -- which can be interpreted as an attempt to run businesses with tax payers' financing. Just because these businesses earn foreign exchange do not make them any different from other businesses, which also generate domestic employment and income and contribute to GDP.
What about the expatriates who used to remit dollars and now are unemployed, and returned home empty handed and broken hearted? Why not some bailout money for them in the form of unemployment benefits?

In order for the government to inject bailout money or stimulus spending in infrastructure building, it must first take money out of the economy through new taxation or borrowing. Infusion of bailout money has a negative effect on the economy, and the worse if the recipient businesses fail to survive. The inflation created from deficit spending will hurt the poor consumers and the public servants living on fixed incomes. Any bailout money must be distributed in a transparent manner with proper accountability. The criterion must be the viability of the specific RMG factory concerned -- not who owns the factory. The global recession may be used as gambit by many powerful and well connected factory owners, including some lawmakers, to cash in their ailing business with tax payers money.

In the US, businesses and banks that received bailout money have squandered hundreds of millions in paying bonuses and partying in luxury resort hotels in the name of promoting businesses. Why would the business people in Bangladesh be any different?

Dr. Abdullah A. Dewan is Professor of Economics at Eastern Michigan University.

Real Estate and Economic Development: a response

One of my recent posts, "Bulls, Bears & Fools" received a comment from an Anonymous person a couple of days ago that I thought I would share and respond to here in a post. The comment was as follows:

"You put up some good points but has a number of weakness, for e.g. promotion of real estate growth is not good for economic development, it might increase economic growth but does not produce any economic output....so end of the day in real terms such development is useless....there are many other weaknesses in your arguments from a Development Economics standpoint however i dont the time required to talk about them here and plus shower free knowledge in a blog, how brilliant it might be" [sic]

My response is as follows.

Thanks for the comment, Anonymous. There may well be many weaknesses with some of my points, the lack of hard data being my primary weakness. I always hope readers will point out weaknesses and challenge me as you have done.

While your points were slightly besides the point of my original post, please allow me to address your main (and only) point that real estate is (a) “not good for economic development”, and (b) “does not produce any economic output” while somehow “increases economic growth” (to use your own words).

Your first point is perhaps just barely debatable (if not academic), and your second point is, besides being contradictory, not consistent with reality or facts. In fact, you couldn’t be more wrong if you tried.

Real estate basically encompasses land and any permanent fixtures on land. Real estate development encompasses trading and developing land and permanent fixtures on land (including residential, industrial, and commercial properties). In short, this would include companies involved in: labor, construction, brokering, property sales and management, architecture, financial services and investments, appraisal, etc., not to mention all the people and businesses that need a roof over their heads to live and trade under (e.g., retailers, transporters, hotels, restaurants, government, banks, hospitals, etc., etc., etc.)

From a “Development Economics standpoint” (to again use your words), real estate is one of the prime indicators of economic growth, investment, and output. In fact, you will be hard pressed to find a more tangible investment or indicator for economic development and/or output. In fact, in most nations (developed or underdeveloped) a significant portion of national wealth is in the form of real estate. There is also a strong positive link between the health of the real estate market and the overall job market.

And in the Bangladeshi context specifically, where increasing urbanization is taxing our urban centers beyond the point of tolerance for city dwellers (traffic, load shedding, crime, pollution, etc.), I would argue that real estate development in underdeveloped rural areas of Bangladesh is vital to our future social and economic stability as a nation (of course, concurrent with infrastructure development like roads, electricity, and so forth).

Or perhaps I can convince you with some evidence which I gathered online in just under 2 minutes of Googling.

According to the Bangladesh Bureau of Statistics (BBS), the real estate/renting sector was estimated to contribute Tk. 349,151,000,000 (34915.1 crores) to Bangladesh’s GDP in 2006-7, or 7.74% of total GDP, and growing at 3.77% per annum. By the way, that didn’t include the construction sector which was estimated to perhaps contribute another Tk. 367,701,000,000 (36770.1 crores) to GDP, or about 8.5% of total GDP. To put it another way, at the current exchange rate, those two sectors alone could contribute around USD $10.69 billion directly to our GDP. Or in yet another way, over 15% of our total GDP.

And to put it in yet another and final way, I wonder if the laborers who toil on construction sites all over Bangladesh would agree with you that real estate produces no “economic output”? Or the bank employees who process and issue mortgages? Or the ready-made garments industry that needs to build factories?

If you are working with an alternative definition or understanding of “economic output” or “economic development”, I would strongly encourage you to add to your comments and help us stimulate further debate. I might have misconstrued or misunderstood your comments.

To bring this all back to the original point of my original post: we should be more concerned about the state of “real” economic activity (e.g., real estate) rather than the volatility and probable bubble in the stock market (which is, again, more an indication of returns on financial capital and speculation than “real” economic output). And therefore by extension, our policy makers and economic advisers should focus on policy that stimulates “real” investment in sectors like real estate, rather than try and influence the stock market. Of course, the private sector in the form of Bangladeshi corporates will have to take a leadership position in concert with the public sector.

Perhaps you’ve also seen the recent news in the American economy regarding the subprime lending/mortgage crisis.

It’s regrettable that you didn’t have the time to “shower” us with your “free knowledge” or elaborate your points further in your comments. That’s what will keep this blog from becoming, in fact, quite "brilliant". In the meantime, I humbly suggest you study economic development and investment a little bit further, and then use your knowledge to contribute to our economic development.

Kind regards,
Bf
(bengalfoam at gmail dot com)

Is growers’ market workable?

A growers' market is a market where growers themselves are the sellers without involvement of middlemen or professional traders. It is not altogether a new idea. In such a market both the sellers and buyers are supposed to be benefited. It introduces new products, establishes direct relation between producers and consumers and may help bringing down prices to some extent It is a welcome initiative at times of soaring prices of essentials. But its role is limited in bringing down prices.At a time when prices of essential commodities soared up beyond the reach of the low-income groups of people, the government and concerned quarters thought over different options to bring down prices. The growers' market and the BDR shops are some of them. Recently the Joint Forces, the Jessore District Administration, the Chamber of Commerce and Industry and the Pourasabha jointly opened a growers' market at a corner of the town where more than 250 sheds were erected for the use of the sellers without paying rent for them.The idea behind opening this market was that growers would come with their products and they themselves would sell their goods directly to the buyers. In a growers' market the producers themselves are the sellers of their commodities. It is for this reason that prices of essentials remain moderate in such markets provided the supply line of commodities is not disrupted. The producers get beter prices of their produces while the buyers can also buy them at economy rates. This is how the sellers and buyers are benefited in such a market system.Market price of commodities is determined according to the law of demand and supply. Along with the laws, strata of middlemen in between the producers and the end consumers are responsible to a great part for the rise of prices of commodities. In the existing market mechanism manipulated by the middlemen, the margin the peasants gain over the cost of production is quite narrow; whereas the middlemen as a whole can keep a big margin in their transactions. Due to the existence of the middlemen, prices of commodities go up and the buyers have to pay excessively.In addition to the immediate benefits of the sellers and buyers, the most important economic feature of the growers' market is that it helps bringing down prices of agricultural products to some extent and can influence the market proportionately. So the idea of organising such markets is appreciable particularly in a situation where prices of essential commodities go up sharply beyond the reach of the common buyers and when it needs to be brought down.In addition to influencing commodity prices, growers' market, at the same time, plays some other roles as well. It introduces newer products to the markets and thus creates a new demand for the same. It establishes a direct economic relation between the producers and the end consumers. Such a relation is almost impossible in the modern market system manipulated by middlemen.It is for these additional roles that even developed countries organise such markets. The Hay markets in Chicago and Boston in the USA and the Sunday market in London are such markets of the growers. At weekends, certain avenues are closed for traffic and growers' markets organised. One important factor for successful operation of such markets is communication network that facilitates easy access of the sellers and buyers with minimum transport expenditure.But on investigation, it was found that the socalled growers' market at Palbari Moore in Jessore could not actually be the same. Out of near about 300 shops, a very few were found used by the growers. Almost all of the sellers are professional traders who used to conduct businesses in a nearby kitchen market To take advantage of the rent-free use of the sheds, they reportedly shifted their shops to the newly organised market running all day long. But instead of reducing prices that free use of sheds might make possible, they sell almost all of their goods at prices as in other markets of the town.Only beef and muton were found to sell Tk 20 to 30 below the usual prices. The growers are absent from the market and the buyers get no price benefit from it Neither was any impact on price situation of the markets in the town observed. The only benefit the buyers of the locality claimed to be enjoying was that a dawn to dusk kitchen market was set at their doorstep. The market did not prove to be viable and gainful from the point of view of the buyers as well. As such this market did not have any impact on the price situation. If even growers could have come with their commodities, in spite of the immediate benefit of the sellers and buyers, the influence of such markets on the overall price situation would have been limited owing to their insignificant proportion of growers' market The growers market is an interim arrangement at times of price hike. This is not a very effective means to bring down prices. Economists and experts suggest that the most effective way to bring down prices is to strengthen the supply line of commodities through increased production and import to make up the shortfall.The field reality of the growers' market at Jessore is at variance with what was envisaged. The aim of the market could have been achieved if the presence of the growers with their products could be ensured. It seems the concerned authorities did not give much thought to this aspect of the eventuality.

Sarker Nazrul Islam