Market-oriented economic reforms, capacity realization, and technical progress in Bangladesh manufacturing

Abstract

The impact of market oriented reforms on the productive performance of an economy remains contentious, as the theoretical literature does not yet provide a clear-cut conclusion regarding the direction on such association and, thus, it remains an empirical issue. The purpose of this thesis is to examine the impact of recent economic reforms on productive performance of Bangladesh manufacturing industries. An analytical framework has been developed to measure the productive performance of manufacturing firms in terms of total factor productivity (TFP) growth before and after reforms. TFP growth is defmed as the growth of output not accounted for by growth of inputs and it is traditionally measured as the shift of production frontier and identified with technological progress. Any kind of capacity underutilization is ignored in this approach and produces flawed TFP estimates. This thesis argues that capacity realization is an important component of TFP growth and has relevance for a resource poor country, such as Bangladesh, where the high opportunity cost of holding unrealized productive capacity poses serious consequences for productivity growth. An attempt has been made to develop a methodology by using the random coefficient frontier production function to estimate :firm-specific capacity realization indices in selected manufacturing industries. Further, TFP growth has been estimated as two components: changes in capacity realization and technological progress. These two TFP components are analytically distinct, and their measurement provides an added dimension in terms of deriving policy implications, particularly for developing countries. This approach has the advantage of estimating TFP growth, rather than obtaining it as a residual, as is the case in the conventional growth accounting and index number approaches, where TFP growth estimates are likely to be contaminated by various measurement errors inherent in the data. Single equation regression models have been developed for second stage analysis to identify factors influencing inter-firm variation in capacity realization in selected industries. Among other firm-specific characteristics, the explanatory variables include measures of concentration, export-orientation (or openness), ownership patterns and effective rate of assistance (ERA) to take account of the impact of market oriented economic reforms. The principal findings of this study are: (i) There is a considerable unrealized productive capacity in Bangladesh manufacturing industries and rates of capacity realization vary across firms within industries and across industries. Following liberalization reforms, there has been little improvement in capacity realization in selected industries. (ii) The analysis of productivity growth suggests there was little, or even negative total factor productivity (TFP) growth implying that output growth was mainly input-driven. (iii) Decomposition of TFP growth shows that technological progress dominated TFP growth in some sub-sectors within industry groups, while the contribution of productive capacity realization (PCR) to TFP growth was insignificant. (iv) Technological progress biases were towards labour saving, which is inconsistent in a labour abundant economy. (v) The analysis shows that several variables such as age of firm (AG), proportion of non-production workers to total work force (PNWT), four firm concentration (CR4) and effective rate of assistance (ERA) negatively, and trade orientation (OPN), size of firm (SZ), and privatization dummy (DUMPVT) positively influenced firm-specific PCR. However, these variables were not found to be consistently significant across industries and periods. Several policy implications follow from the above findings. It appears that the problem for Bangladesh manufacturing is not one of acquisition of new production technology but one of utilizing existing technology. Clearly, attention is required to creating a competitive environment to realize maximum possible productive capacity of firms leading to productivity growth and an increase in industry output. Removing the existing foreign exchange controls, and other quantitative restrictions, along with judicious dismantling of the tariff structure, would be effective policy measures for promoting a competitive market. Simultaneously, transparency of policies must be ensured. Greater emphasis on export promotion would accelerate resource allocation performance in the industrial sector and increase productivity growth. Macroeconomic stability must be maintained for the success of trade and industry policies. On the whole, a coherent set of policies should be pursued to attain international competitiveness so that an efficient pattern of production can take firmer root in the industrial sector leading to the achievement of the sector's full potential.