Optimizing Agro Based

Industry Prospects in
Bangladesh

Optimizing Agro Based Industry

Prospects in Bangladesh

Prepared for:
Dr. Mohammed Farashuddin
Visiting Professor
Course Instructor: Macroeconomics
Course Code: E202

Prepared by:
Tanvir Ahmed Khan Tanu (ZR06)
Batch 18 (A)

Institute of Business Administration (IBA), University of Dhaka

May 24, 2012

Optimizing Agro Based Industry

Prospects in Bangladesh

Prepared for:
Dr. Mohammed Farashuddin
Visiting Professor
Course Instructor: Macroeconomics
Course Code: E202

Prepared by:
Tanvir Ahmed Khan Tanu (ZR06)

Batch 18 (A)

Institute of Business Administration (IBA)

University of Dhaka
May 24, 2012

Optimizing Agro Based Industry

Prospects in Bangladesh
1. INTRODUCTION:
Agro based industry already the second largest source of export earnings
has the potential to be the next garments revolution in Bangladesh. Rich
alluvial soil, year round frost-free climate, adequate water supply combined
with abundant cheap labor, expanding middle class and food self sufficiency
has set the stage for massive growth in agro-based industry. Supporting this
claim, many agro based companies both export and local market oriented
emerged recently in a very short time. Expansion in this sector can
effectively diversify the export portfolio and thus reduce market risk of
Bangladesh economy. The socioeconomic development of Bangladesh hinges
upon agro based industry development as around 50% of labor force is
employed in agriculture. The sector has achieved impressive growth in
recent years. Still, much potential remains untapped and the scope of
performance optimization is high which will maximize growth and output
from this sector.

2. AGRO BASED INDUSTRY DEFINITION

Agro based industry is an industry sector that uses primary agricultural

product as raw materials and processes them to secondary manufactured
products. It deals with the processing, preservation and preparation of
agricultural production (both food and non-food) for intermediate or final
consumption. According to the International Standard Industrial
Classification (ISIC) agro-industry consists of: i) food and beverages; ii)
tobacco products; iii) paper and wood products; iv) textiles, footwear and
apparel; v) leather products; and vi) rubber products.

3. IMPORTANCE OF AGRO BASED INDUSTRIAL

DEVELOPMENT IN BANGLADESH
Agro based industry is one of the most critically important sector for the
future development of Bangladesh due to a number of reasons. The potential
significances are:
1)
2)
3)
4)
5)
6)

Comparative and Competitive Advantages and Huge Potential Market

Risk Minimization through Diversification of Exports
Increased GDP composition of Industry Sector
Poverty alleviation through Employment and Income generation
GDP and economic growth
Socioeconomic Development

1) Comparative and Competitive Advantages and Huge Potential

Market: Bangladesh has comparative advantages in Agro based industry
sector due to minimum opportunity cost. Bangladesh also has many
competitive advantages in agro based industry.

Firstly, the land is very fertile and the weather is frost-free ensuring whole
year production. Natural water supply and temperature is also suitable.

Overall, the climate is appropriate for a wide range of crops, fruits,

vegetables, fishes and animals.

Secondly, there is limitless supply of cheap labor in the agriculture sector.

Thirdly, Agro based industry development is labor intensive not capital

intensive, making it suitable for Bangladesh where SMEs are driving the
economic engine.

Fourthly, the industry sector has a very large local and neighboring foreign
market. Bangladesh is the 53rd largest consumer market with a market size
of US$66692 million. Due to expansion of the middle class and self
sufficiency in food, there is now an increased demand for a variety of
processed food items and a supply-demand gap, currently exploited by
foreign suppliers. Neighboring India is the 11th largest consumer market
with a market size of US$737936 million. (UN Statistics Devision , 2009).
Capturing local and neighboring markets alone can create significant
leverage in Bangladesh economy. However, further market potential exists as
the market is not necessarily restricted to Bangladesh and India.

2) Risk minimization through Diversification of Exports: Currently

around 75% of the economys export earnings come from Textile sector
alone. So much dependency in one sector is risky. Agro based industry
sector has the potential to go through a revolutionary expansion, hedging
the economy against market risks. Currently, frozen food a component of
agro based industry is the second largest export earning sector in
Bangladesh.

3) Increased GDP composition of Industry sector: In Bangladesh much of

the GDP growth came from service sector. Service sector GDP composition is
53% compared to industrial contribution of 29% only. This situation is
undesirable as economic development, to be established on a solid ground
requires higher contribution from Industrial sectors. Agro based industry is
the most viable option given the competitive advantages and investment
environment.

4) Poverty Alleviation through Employment and Income Generation:

Vibrant Agro based industry sector is found to generate many jobs in
upstream and downstream sectors (UNIDO, IFAD, FAO, 2008). Agro based
industry can play a strategic role in Bangladesh in a pro-poor growth policy
as 72% of the population live in rural areas and around 50% of labor force is
employed in agriculture (CIA World Factbook, 2010). As possibilities for
income generation are restricted in rural areas, agro processing,
manufacturing and commercial and service activities of agro based industry
can play a pivotal role in increasing economic efficiency and reducing
disparity.

5) Contribution to GDP and economic growth: Industrial development in

agro based sector can work as an added boost to GDP growth in a country
like Bangladesh.
An extended definition of the agro-processing sector which includes not only
agro industries but also distribution and trading activities, would roughly
account for more than a third of the GDP in Indonesia, Chile, Brazil and
Thailand, and between 20 - 25% in Sub-Saharan countries. The entire food
system, including the production of primary goods and commodities,
marketing and retailing, would account for more than 50% of developing

countries GDP (based on World Bank, FAO and UNIDO databases) (UNIDO,
IFAD, FAO, 2008).
On average, productivity levels in food processing are above the
manufacturing
Average, making it one of the more efficient economic sectors in least
developed countries (HDI). Incremental investment here could benefit the
overall competitive position of the countries in question (based on UNIDO
Industrial Statistics Database 2005).
In low and middle income countries the food processing sector is typically
one of the largest industrial activities in terms of value-adding. Using the
UNIDO Industrial Statistics Database 2005, agro-processing value added as
a share of
GDP amounts to 4.3% for low income countries and 5% for lower middle and
upper middle income countries. This, however, neglects artisan production
and the informal sector, which are particularly important in low income
countries. It can therefore be safely assumed that the figures heavily
underestimate the true extent of agro-industrys contribution to GDP in
those countries (UNIDO, IFAD, FAO, 2008).
6) Socioeconomic development: Strong synergies can exist between agroindustry and socioeconomic development. Agro-industry provides capital
and services to farmers (e.g. seeds and equipment, training, production and
market information), promotes entrepreneurship, raises demand for
agricultural products and connects farmers with markets through the
handling, processing, marketing and distribution of agricultural products.
As a result, productivity and quality of agricultural production, farm
returns, economic stability for rural households, food security and
innovation throughout the value chain can be enhanced. Efficient agro-

industry can therefore spur agricultural growth, and accompanied by a

strong link with smallholders enhance socioeconomic development
(UNIDO, IFAD, FAO, 2008).

4. OPTIMIZATION PROPOSITIONS FOR DIFFERENT

SUBSECTORS
The agro based industry can be optimized through development in a number
of subsectors. Propositions are suggested for the following subsectors:
1)
2)
3)
4)
5)
6)
7)

Fisheries Industry
Cotton and Yarn Industry
Fruits and Vegetables Processing
Jute Processing
Leather
Meat and Halal Food Export
Fresh Vegetables and Flowers Export

The development propositions are given below:

1) Fisheries Industry: Fisheries export is the second largest export sector.
Bangladesh exports frozen shrimp and prawn, frozen fish, fresh and chilled
fish, shark fins, salted and dehydrated fish and dry fish to EU countries and
USA. The export volume steadily grew in the last decade but experienced a
decline in the year 2008 2009 and 2009 2010 (Board of Investment
Bangladesh). The decline is caused by tightened regulation. The
recommendations are
In the short run, identifying few frozen fish export items with
comparative advantages and focusing on those items. Increasing value
through maintaining hygiene, proper sorting and packaging. Also,
diversification can be achieved through ornamental fish farming which
are premium products catering to the needs of hobbyists.

 In the long run, Compliance with demanding regulation through

capacity building. Government can help out the frozen fish exporters
through various fiscal policy mechanisms and direct investment.
2) Cotton and Yarn Industry: Cotton is directly related to the basic human
needs of clothes. Self sufficiency in food and clothes is often prerequisite for
development. Unfortunately, in Bangladesh the textile industry growth has
been artificially generated largely from foreign exports of cotton and yarn.
Only 3% of cotton demand is met by national production (BCA, 2010). This
sector must grow to provide back linkage support to textile industry which
now depends on international cotton price. The recommendations are:

In the short run, the policy makers should incentivize cotton

farming and development of yarn industry. Cotton should be
recognized as a high priority sector. Tax benefits can be given to

textile companies for using locally produced cotton.

In the long run, research and development should be initiated to
produce high yielding and resistant cotton variants.

3) Fruits and Vegetables Processing: Fruits and vegetables can be

processed into jams, jellies, juices, ketchups, sauces, pickles and chips.
Traditionally, this segment of the local market was dominated by foreign,
especially Indian brands. Auspiciously, a burgeoning growth in local brands
is seen in recent times which are now competing for market shares with
foreign brands. Leading groups in this segment are Pran foods and AFBL. If
the growth continues soon local brands will not only dominate local markets
but compete in international markets. Currently, export is there but the
volume remains insignificant. The recommendations are:

In the short run, government should facilitate local brands by giving

tax benefits, by imposing higher taxes on foreign brands and by

developing local electronic media which will reduce viewership of

foreign brands and advertisements.

In the long run, government can set up research and development
institutes for formulation of new process items.

4) Leather Industry: Leather industry can be included as an agro based

industry given the broad definition. Leather industry in Bangladesh has not
reached its full potential due to environmental noncompliance, which is
becoming an increasingly important issue in exporting countries. Legal
compliance is low due to high fixed and operating costs. The
recommendations are:

In the short run, government should facilitate legal compliance

through subsidizing establishment of ETP plants.

In the long run, the industry should be relocated in separate
processing zones with integrated and common pollution
minimization facilities. The operating cost can be divided among
companies.

5) Meat and Halal Food Industry: Halal food market is a fast growing and
highly profitable market worldwide. Beef and Chicken meats can be
processed, packaged and marketed. But development in this sector is capital
intensive. Moreover, the local supply of meat does not meet local demands
currently. The recommendations are:

In the short run, government can incentivize large scale poultry and
cattle farming to meet the supply demand gap. Private investment in

this sector should be encouraged through tax benefits.

In the long run, the government should incentivize establishment
large scale meat processing through tax benefits and subsidies.

6) Jute Processing: Raw jute can be processed into various range and type
of secondary products. With increasing environmental concern jute can
regain its lost glory if jute products are innovatively designed, properly
planned and marketed. The recommendations are:

In the short run, government should identify jute as a priority

sector and encourage private sector contribution through incentives

and awareness campaigns.

In the long run, government should establish jute research and
creative design institute who will come up with novel and diversified
design of jute products.

7) Fresh Vegetables and Flowers Export: Fresh vegetables and flowers can
be stored in cold storage and exported. This subsector is underdeveloped
due to lack of storage facilities and high freight time and cost. The
recommendations are:

In the short run, decentralized cold facilities can be setup by the

public sector. Alternatively, Private sector can be incentivized to

encourage private cold storage companies.

In the long run, Special air route can be opened to allow rapid export
of perishable items at lower costs.

5. CONCLUSION
Agro based industrial development can ensure food and cloth security,
thereby laying the foundation of an advanced economy. Developed agro
based industry is a prerequisite for surefooted and sustainable development.
Bangladesh is on her way to become a middle income country. Agro based
industrial development can work both as an acceleration factor and as a
solidification factor, giving the GDP growth the much needed push and
hedging our economy against market risk. The policymakers therefore, must
give this sector its proper weightage and develop effective incentive
mechanisms to encourage private sector involvement.

BIBLIOGRAPHY
Board of Investment Bangladesh, 2012. s.l.: s.n.

CIA World Factbook, 2010. s.l.: s.n.

Development Associates Inc., March 2005. An Evaluation of The Bangladesh

Agro Based Industries and Technology Development Project, s.l.: s.n.

UN Statistics Devision , 2009. s.l.: United Nation.

UNIDO, IFAD, FAO, 2008. The importance of Agro Industry in

Socioeconomic Development and Poverty Reduction. UN Commission of
Sustainable Development.