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Leather goods: Bangladesh’s next

cash cow
Mohammad A Razzaque
 Published at 11:22 pm February 24th, 2018

As Bangladesh prepares to advance to the next level of economic development,


our policymakers have to start thinking about how to remain internationally
competitive as well as ensure greater economic activity -- more jobs, greater
output -- and higher average incomes. In order to achieve that, Bangladesh
desperately needs to upgrade and expand its export sector, from our export
composition to value, volume, and range. The success of our readymade
garments (RMG) industry provided a much-needed momentum over the past three
decades or so, making the country an exemplary export success-story among
many low-income economies and least developed countries (LDCs).
Nevertheless, for a country our size, we are far behind most of our Asian
competitors. With a population of 160 million, Bangladesh’s current export volume
of $35 billion is rather small in comparison with countries like Vietnam ($170bn in
exports and a population of 91 million), Indonesia ($220bn in exports and a
population of 258 million), or the Philippines ($74bn in exports and a population of
101 million).
Bangladesh’s current export volume of $35 billion is rather small in comparison
with countries like Vietnam, Indonesia, or the Philippines
Again, much smaller countries in East Asia such as Malaysia ($200bn in exports,
with a population of 28 million) and Singapore ($500bn in exports with a
population of 5.7 million) are extremely successful exporting nations. Therefore,
Bangladesh must vigorously expand its range, value, and volume of exports
while, at the same time, try to generate enhanced export response from non -RMG
sectors.

A promising industry

When it comes to export expansion while promoting export diversification, the


industry that holds a great promise is leather and leather goods (LLGs) -- the
second largest exporters in our economy. The export policy of 2015 -18 aims to
take target-oriented steps to raise export earnings to $60 billion exports by 2021,
of which $5 billion is expected from LLGs. However, both targets now seem like
daunting prospects. In 2017, the total value of leather and leather goods exports
from Bangladesh stood at $1.2bn, accounting for 3.54% of the country’s total
merchandise exports. The industry’s contribution to total output or gross domestic
product (GDP) is estimated to be 0.35%. Total employment in the industry in 2016
was 129,000 -- up from 91,000 in 2013. During the same period, the industry’s
share in total employment rose from 0.16% to 0.22%. The leather export sector
has a strong backward linkage in terms of its using mostly locally sourced raw
materials. The estimated domestic value addition is as high as 80 -95%. The
global experience shows that successful garment manufacturing countries tend to
find it easier to develop specialization in leather products and footwear (and vice
versa). The leather sector should thus be a natural driver of export diversification
in Bangladesh.

Opportunities for expansion

The global LLGs market expanded from $75bn in 2000 to $167bn in 2015 –
indicating growing demand around the world and, thus, lucrative prospects for
exporting countries. During the same period, Banlgadesh’s exports expanded by
about $1bn (from $200 million to $1.2 billion). Compare that with China’s
expansion of $46bn, India’s $5.4bn, and Indonesia’s $2.7bn in leather exports. In
2015, Vietnam’s leather and leather goods exports reached almost $8bn -- up
from a very negligible amount in 2000. These countries were able to cash in on
growing opportunities by investing to further develop their domsetic LLG
industries. There has also been a shift in the export composition of the leading
exporters. The average share of raw leather in total LLGs declined from 33% in
2000 to 18% in 2015. That is, most leading exporters have shifted from raw
leather to higher value-added and more sophisticated finished leather products. In
2015, the share of raw leather in Bangladesh’s total LLG exports was 28%.
Although it has declined considerably over the years, the share of raw leather in
Bangladesh’s total leather exports is still very high. Bangladesh’s LLG exports are
highly concentrated in a few markets. It exports 44 leather product s (at the HS 6-
digit level) to 84 destinations. In comparison, Vietnam exports 59 items to 122
markets and China sends 65 products to 209 foreign markets. The share of
Bangladesh’s exports to the USA, the largest importer of LLGs, is substantially
lower than that of its competitors. While China, India, and Vietnam export 24%,
19%, and 41%, respectively, of their export sales of finished leather articles to the
USA, the corresponding figure for Bangladesh is only 7%. A comparative analysis
shows that Bangladesh exports very high quality raw leather. Although some
Bangladeshi leather articles and finished products are also of good quality, for
these products there exists a substantial scope of overall quality improvement,
which will help us to grab more market share and sell at higher prices. Particularly
in leather footwear, Bangladesh’s quality is rather mediocre, as revealed by the
unit value prices. Given the availability of local raw materials, know -how of the
supply management within the export industry, and expressed policy support, the
leather industry has a huge potential for transformation, generating billions of
dollars in additional export earnings. The realization of this potential however
depends on several factors. The second part of this article will discuss those
factors and the challenges we have to overcome. Dr Mohammad A Razzaque
is an economist. This article is an outgrowth of a project of the Bangladesh
Enterprise Institute (BEI).