Sustaining Bangladesh’s economic miracle

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Feb 26, 2019

Bangladesh is probably not the country that comes to mind when you think about economic miracles. Its GDP per capita is just $1,750, and close to 15 million of the 166 million people in the country live on less than $1.90 a day. But compared to Bangladesh a decade ago, the country is already on the upswing. Since 2009,  Bangladesh’s economy has grown by more than 6% per year, and its GDP per capita has almost tripled. In addition the rate of extreme poverty in the country has dwindled from roughly 20% to just under 9%. Bangladesh’s Prime Minister expects annual growth to reach 10% by 2021.

Much of Bangladesh’s growth over the past decade has come from the nation transforming itself into a garment manufacturing hub. Now the largest employer in the country, the ready-made garment industry currently employs more than 4.5 million people. Only second to China, Bangladesh currently exports approximately $38 billion worth of textiles and garments annually. By 2021, the government’s goal is for that number to reach $50 billion.

To help the industry further improve its manufacturing prowess and simultaneously develop the country, the government has an ambitious goal of developing 100 special economic zones (SEZ) around the country. SEZs are places in a country where the business and trade laws are different from those in other parts of the country, often offering manufacturers low (or no) taxes and fees on imports and exports. Progress is certainly being made on developing more SEZs (it has built at least 11 already), however, this won’t necessarily translate into robust and sustainable economic growth. That’s because most SEZs fall under the category of efficiency innovations, and these innovations don’t create long-term growth.

Not all innovation is created equal

From an economic development standpoint, it’s helpful to categorize innovation into three types: sustaining, efficiency, and market-creating. These different types of innovation have vastly different impacts on an economy in terms of robust economic development, sustainable job creation, and inclusive growth. Consider how they differ.

Sustaining innovations target demanding, high-end customers with better performing products than what was previously available. These innovations are designed for existing consumers and typically do not expand the market for a particular product. For example, if Ford Motor Co. decides to add new features to their Ford Explorer line, such as leather seats or adaptive cruise control, and they sell it for more money, they are targeting people for whom existing Ford Explorers are affordable. These innovations are important and keep a company and an economy vibrant, but they don’t significantly impact economic development and job creation.

Efficiency innovations enable companies to do more with fewer resources. While these innovations free up capital and keep an economy competitive, they are notorious for eliminating jobs when they are not targeted at creating new markets. For example, when a company decides to move manufacturing from a region where wages are increasing—say China—to a region where they are still low—like Bangladesh—that’s an example of an efficiency innovation. In the case of Bangladesh, we see how efficiency innovations in the garment industry have fueled a lot of growth over the past decade, but that growth is beginning to slow down as  the number of factories has reduced by 22% in the last five years. Efficiency innovations can create short-term growth, but they often don’t lead to robust and vibrant development. Market-creating innovations are what do that.

Market creating innovations transform complex and expensive products into simple and more affordable products, making them accessible to a wider segment of the population. A perfect example of a market-creating innovation is Henry Ford’s Model T car. Henry Ford was able to make, distribute, market, sell, and service a car that was inexpensive enough for an American with a modest income to purchase. Ford reduced the price of a car from roughly $10,000 in the early 1900s to around $260 in 1925 ($3,500 in 2015 dollars). In doing so, he’s largely credited for the democratization of the automobile.

Because market-creating innovations target people who have historically been unable to afford a product—typically the majority in poorer societies—innovators must hire many more people to make, distribute, sell, and service their products. As such, from a job creation standpoint, they are net positive. But perhaps of more importance is their impact on economic and societal development. Before the democratization of automobiles, for instance, the concept of long-distance travel, living in suburbs, going out to restaurants near or far, gas stations, and gasoline taxes (which helped build many of the United States’ roads) were far-reaching. The impact of market-creating innovations is vast.

A way forward for Bangladesh

Armed with the knowledge that there are different types of innovation, each having different impacts on an economy, Bangladesh can continue its economic ascendancy by investing in market-creating innovations. If the government and entrepreneurs within the country focus on making products and services more affordable for Bangladesh’s 166 million people, in areas such as  healthcare, food production, manufacturing, insurance, and entertainment, these new markets which will lead to more sustainable jobs. Efficiency innovations, such as those prevalent in garment manufacturing for the rest of the world, can only take the country so far. It is by investing in market-creating innovations that Bangladesh can not only sustain its current miracle, but also propel its economy to greater heights.

Efosa Ojomo is a research fellow at the Clayton Christensen Institute for Disruptive Innovation. Efosa’s work focuses on using Disruptive Innovation theory to fundamentally change the discourse in the global development community, thus enabling nations to engender their own path to long-term growth and prosperity.