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The Japan connection

by tbhdesk

Can Japan’s increased presence in South Asia be a blessing for Bangladesh?

Japan has been in the news recently. The first flurry came after the India visit of the Japanese Prime Minister Fumio Kishida. There, in our neighbouring land, Prime Minister Kishida alluded to the “Bay of Bengal-Northeast India industrial value chain,” and the Japanese support for the initiative. More specifically, he talked about a Japanese industrial hub to be built in Bangladesh with a supply chain to Northeast India.

Kishida’s comments have provoked a reaction in Bangladesh. In social media, for example, people are asking what Bangladesh would gain from this. Will Bangladeshi resources, such as land, roads, ports, and railways be used solely for the benefit of the states in North-East India or is there also something for us?

The fact that the Japanese PM’s announcement, which has profound implications for Bangladesh, was made in New Delhi and not in Dhaka, has also caused some misgiving. The concerns may have been somewhat assuaged since our own Prime Minister went on a state visit to Japan just a few days after her Japanese counterpart’s visit to India.

Going forward, we need a rigorous assessment of how Bangladesh can make the most of this initiative, more commonly known as the Big-B initiative.

First advocated by the late Japanese Prime Minister Abe and agreed to by our own prime minister when they met several years ago, the Big-B initiative envisages an industrial belt extending from Cox’s Bazar to Dhaka.

We must have a public discourse, free of rhetoric and sweeping generalizations, of what this industrial agglomeration can bring for us. To put it simply, to appreciate Big-B, we must understand the “small-I”, ie, the investment and industrialization aspects of the initiative.

Given that Prime Minister Kishida alluded to a Japanese industrial hub with supply links to Northeast India, we may start the discourse with a few important questions.

First, will the planned Japanese industrial hub be confined to the Japanese economic zone being constructed in Araihazar (near Narayanganj) or will it cover several economic zones as well as enterprises outside the zones in a belt extending from Dhaka to Cox’s Bazar? The original Big-B idea suggests that it will be the latter. But we need clarity on this.

Second, why is this being called a Japanese industrial hub? Is it because Japan will fund infrastructure building in the hub? Is it because it will invest in industrial units there? Will there be non-Japanese investors as well in the hub?

It is possible that all infrastructure in the industrial belt will not be funded by the Japanese. Some may be funded by the government’s own budget, some by other governments or multilateral development partners. It is also likely that a lot of the investment in the hub will come from non-Japanese investors.

Hence, the allusion to a Japanese industrial hub may be based partly on the fact that a substantial amount of the infrastructure for the industrial hub will be built with Japanese support and that, within the broader industrial agglomeration stretching from Cox’s Bazar to Dhaka, there will be pockets with a concentration of Japanese investors.

Third, what is meant by supply chain links to Northeast India? Will that region supply inputs to the industries to be set up in the hub? Will it be the market for their products? Will it be both?

Japan has been supporting infrastructure development in Northeast India for quite some time. It is natural that it will want to see high development returns from such investment. Such returns may take the form of industrial development in this geo-politically important, natural resource-rich, but economically backward, landlocked region of India.

This is where the Matarbari deep-sea port being built near Cox’s Bazar becomes important. There is already talk about how this port will be used to bring imported raw materials and other industrial inputs for the Northeast Indian industries as well to ship out whatever exports they may have.

But what about links to the industries that will be built in Bangladesh within the planned Dhaka-Chittagong-Cox’s Bazar industrial belt?

We know that Bangladesh imports sizeable amounts of industrial raw materials from India. I do not know how much of these come from Northeast India. So, when we talk of a “Japanese industrial hub with a supply chain to Northeast India,” are we talking about increased imports of industrial inputs from the region to feed the industries that will come up in Bangladesh?

Or are we suggesting that a sizeable part of the output of the industrial belt in Bangladesh will be exported across the border, substantially augmenting the currently modest exports to Northeast India? We need some answers to these questions.

Fourth, what about supply chain links within Bangladesh? Presently, our industries import a large part of their capital equipment and inputs. The development of backward linkage industries has enhanced supply chain links within Bangladesh.

The textile industry exemplifies this. Its growth since the 1990s has increased domestic supply of fabrics to our garment industry, But there is scope to do more. As the Dhaka-Chittagong-Cox’s Bazar industrial hub develops, it will be nice if this triggers the development of a supply chain within Bangladesh, whether in the hub itself or in other parts of Bangladesh. This is another important area to explore.

Finally, the all-important question: Will the products of the hub be exported to other countries as well?

The rise of global value chains has opened exciting opportunities for countries such as Bangladesh. Bangladeshi firms can make a breakthrough in international markets by developing competence in making certain parts of a popular product, such as a laptop or a smart phone — they need not develop competence in making an entire product.

The firms need the capacity to identify some parts used in such devices which they can make with good quality and at competitive prices and deliver fast to companies in the next stage of the chain.

Even a few niches like this may mean billions in dollars in export earnings for Bangladesh, not to speak of the skills that will be acquired by making such parts — which will allow the country to make further inroads into such global value chains.

This is where the Japanese-supported Big-B initiative, with its Dhaka-Chittagong-Cox’s Bazar industrial belt, modern infrastructure including roads, railways, and a deep-sea port at Matarbari, and energy projects such as the coal-powered power plant in Matarbari, becomes very important.

It provides many of the critical ingredients for Bangladesh to make a breakthrough in global value chains — the industries which will be at the core, and the supporting connectivity and energy. What will also be required is the development of skills, and a modern policy and regulatory regime that understands, and responds promptly to, the needs of industry.

This is where Japanese FDI will be important, if not critical. Japanese investors can help Bangladesh plant its flag in the world of global value chains. But this requires more work. While Japan is a major source of official aid for infrastructure projects in Bangladesh, it is far behind when it comes to private investment.

During the past decade, only about 3% of all FDI flows to Bangladesh has come from Japan. This is a shame, given that Japan is one of the top sources of global FDI, accounting for 10-15% of world FDI outflows in the past decade (see chart).

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