Why export diversification remains an unfulfilled promise

For decades, export diversification has been among Bangladesh’s most frequently stated economic ambitions.

Successive governments have identified leather, footwear, pharmaceuticals, agro-processing, jute products, light engineering, ICT, and other sectors as potential alternatives to ready-made garments (RMG).

Yet, the export structure remains strikingly concentrated. RMG continues to account for roughly four-fifths of Bangladesh’s merchandise exports, while non-RMG sectors have struggled to match that scale and compete internationally.

The central question, therefore, is not why Bangladesh has failed to identify potential export sectors. It has identified them repeatedly. The deeper question is why these sectors have failed to develop into globally competitive industries.

The first paradox is that Bangladesh’s greatest export success has contributed to its diversification problem.

RMG created a powerful ecosystem of factories, suppliers, entrepreneurs, workers, logistics networks, financial institutions, and policy incentives. Its scale generated economies of agglomeration that new sectors have struggled to replicate.

This success also created a powerful policy preference. Government support, including bonded warehouses, export incentives, infrastructure, financing arrangements, and other facilities, has historically been more accessible or effective for RMG than for emerging industries.

Thus, diversification has faced an unusual dilemma: the sector that needs less policy protection has the strongest institutional capacity to obtain it. In contrast, sectors that need assistance to become competitive often lack the organizational influence to secure comparable support.

A long list of “potential export sectors” is identified. However, identifying sectors is not the same as building competitive industries.

A successful diversification strategy requires a sustained mix of market intelligence, technology, skills, infrastructure, standards, finance, logistics, trade negotiations, and investment facilitation. Instead, policy initiatives have often been fragmented across ministries and agencies. The result is a proliferation of priorities without sufficient concentration of resources on a small number of sectors with realistic global potential.

Another reason diversification has remained elusive is that export competitiveness depends on far more than financial incentives. International buyers increasingly demand consistent quality, environmental compliance, labour standards, traceability, certification, and reliable delivery.

Many firms outside RMG struggle to meet these requirements. Weaknesses in testing and accreditation, compliance with technical and environmental standards, access to modern machinery, management capabilities, transportation, power, and other infrastructure are barriers to diversification.
This creates a vicious cycle.

Firms cannot invest sufficiently in technology because export markets are uncertain; they cannot secure large export orders because their technological and quality capabilities are inadequate. Breaking this cycle requires coordinated public and private investment rather than short-term subsidies.

Export diversification also depends on the broader business environment. Complex regulations, customs procedures, unreliable infrastructure, high logistics costs, limited access to finance, and slow regulatory decisions raise the cost of entering global value chains.

The challenge is especially significant because traditional competitive advantage, namely relatively low labor costs, is becoming less sufficient. Logistics costs can be as high as 12-16 percent of total costs for some manufacturers.

Consequently, Bangladesh cannot diversify simply by producing more products. It must produce them faster, more reliably, at higher quality, and with greater technological sophistication.

The unfinished diversification agenda has become more consequential because Bangladesh is scheduled to graduate from LDC status in 2026. Graduation is a major development achievement, but it also means that some LDC-specific trade preferences will eventually be phased out.

Bangladesh is particularly exposed because its export basket is concentrated in products that have benefited substantially from preferential market access. Diversification, therefore, is no longer merely an aspiration for broad-based growth. It is increasingly an element of economic risk management.

There are reasons for optimism. Bangladesh has already shown that domestic firms can move into higher-value activities when technology, market access, entrepreneurship, and supportive institutions converge. Footwear is one example.

Pharmaceuticals, agro-processing, light engineering, ICT-enabled services, and technical textiles also offer opportunities.

The challenge is to move from isolated successes to an ecosystem that systematically produces them. Bangladesh now needs to redefine export diversification. The objective should not be to artificially reduce RMG’s importance.

The objective should instead be to build additional internationally competitive sectors around Bangladesh’s existing capabilities.

That requires selecting a limited number of promising sectors; establishing sector-specific competitiveness roadmaps; strengthening testing and certification institutions; improving logistics and energy reliability; expanding technology and skills development; facilitating access to long-term finance; negotiating market access; and linking domestic firms more effectively to global value chains. Most importantly, diversification requires policy consistency.

Investors will not commit to new export industries if incentives, regulations, and trade policies change unpredictably.

Bangladesh’s export diversification has remained an unfulfilled promise, not because the country lacks entrepreneurial talent or potential products, but because it has struggled to translate that potential into sustained international competitiveness. The next phase of export-led development cannot rely primarily on selling more of the same products to the same markets.

The real challenge is to build the institutional, technological, and human capabilities needed to compete in new products and markets.

Export diversification is about creating an economy capable of supporting many globally competitive industries. Until that distinction becomes the foundation of trade and industrial policy, diversification will remain a promise repeatedly announced but only partially fulfilled.

(The author, PhD in Public Policy, UK was a former Additional Secretary to the Government. Currently, Associate Professor of Public Policy, Bangladesh Institute of Governance and Management — A constituent institute of the University of Dhaka)