Transcript Mushtaq Khan: How Bangladesh surmounted market failures to become a leading garment exporter

00:03 Most economics textbooks are inappropriate for developing countries because they assume a background of a rule of law. So if you’re facing a problem where firms don’t have capabilities, and they can’t access resources the normal response is, why don’t we have a tax break for them or why don’t we provide some subsidies?

00:25 What that ignores powerful companies will get those subsidies, and then it’s much easier to consume those resources than the hard work of converting that into productivity and capabilities. And so the problem for the regulator becomes, you have to monitor how much effort someone is putting in, which is very difficult to monitor, and then you have to withdraw the subsidy of the failing, which is almost impossible to do, because the companies you’re subsidising, or helping in different ways, are very powerful.

01:00 Some countries like Bangladesh have managed to break out of the trap. Bangladesh, in the 1970s, was a war ravaged country. So it was, in a sense, a country where all of these networks were relatively weak, but still they were strong enough to engage in a lot of corruption and engage in a lot of resource capture.

01:22 The critical thing that happened in the late 1970s was a strategy of acquiring knowhow, that critical thing called organisational capabilities, where a firm learns how to organise its production by changing the layout of the firm, how to do quality management, how to do just-in-time inventories, how to manage your supply chain. These are things you can’t learn in a textbook.

01:46 The firm sent people to another country, South Korea. At that time, the Koreans were blocked from directly exporting to the United States because the United States had put up quotas. And so the South Koreans were looking to manufacture the shirts and trousers in another country, which did not have quota blocks from the United States.

02:07 So the deal was, the Bangladeshi firm sent people to the South Korean firm. They would learn how to set up and run a firm of a modern, competitive nature in South Korea. But the Bangladeshi firm wouldn’t be paid for this. The South Korean firm would be paid for it, and they would only be paid for it once the Bangladeshi firm began to export. If you had given that money to the firm, there’s a very high likelihood that they would have wasted it. But the firm didn’t get it, and the South Koreans didn’t get it. Nobody got it until the Bangladeshi firm had become competitive.

02:45 A part of that sales revenue, around 8%, wouldn’t go through Bangladesh, it would go directly to the South Koreans and the Bangladeshis, on their side, the firm would get no government subsidy. They would not make money till they were exporting. You’ve solved the market failure, but you’ve solved in a way that can be implemented and the resources will not be diverted to something else.

03:11 I grew up in Bangladesh during the civil War. I grew up seeing a lot of poverty but I also saw how people work their way around and make a life for themselves. The first factory, which was called Desh, was growing at 100% a year, basically doubling output every year, and out of that 150 mid-managers, something like 130 left and started their own firms. So that one firm became 130 and within a decade it had become 4000. Bangladesh became the second biggest garments exporting country after China.

03:49 I think the lesson for students is until you actually hit the ground in a real developing country and figure out who are the powerful interests, what are the capabilities, how are they network, what is their relative power, who’s likely to block what? You cannot be a good economist if you have no concept of history of the country you’re looking at, what worked in the past, what didn’t. Once you begin to understand that, you will be able to use your economics knowledge to design policies which solve a problem, but which will be implementable in that context.