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ISSN 1010-9536 GLOBALISATION AND ITS IMPACT ON STRATEGIC PARTNERSHIPS 77 Does Distance Matter for Bangladesh’s Exports? Mahfuz Kabir 93 Bangladesh-India Water Negotiations: Challenges and Way Forward Shanjida Shahab Uddin Syeda Tanzia Sultana 119 Bangladesh-China Relations: From Closer Comprehensive Partnership to Strategic Partnership Samia Zaman Roksana Islam Sujana 139 Indian Ocean Rim Association (IORA) at 20: An Assessment Moutusi Islam 163 Russia’s Revival in Global Aairs: Will there Be New Conicts with the West? Mahbubur Rashid Bhuiyan Volume 38 Number 2 2017 I Contacts Designation Telephone (Oce) E-mail Chairman, Board of Governors 88-02-9347914 [email protected] Director General 88-02-8312609 [email protected] Research Director-1 88-02-9331977 [email protected] Research Director-2 88-02-8360198 [email protected] VOLUME 38 NUMBER 2 APRIL 2017 Disclaimer: This is a peer reviewed journal. 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Abstract Geographical proximity plays an important role in international trade. The gravity model of modern trade theory reveals that the closer the two countries the greater the volume of their bilateral trade. Bangladesh’s export trade has demonstrated impressive performance over the last one and a half decades. The exports are still dependent heavily on Readymade Garments (RMGs) for which the major destinations are distantly located countries, which is opposite to the prediction of the gravity model. Geographical diversification in destination has become an important policy priority for the existing mix of export items in the current and recent past export policies of the country, which is supposed to reverse the current role of distance. Given this context, the present paper is an attempt to examine whether the direction of distance has changed in the country’s export with panel data econometric model. An export weighted distance index has been developed to reveal the relative change in economic geography of Bangladesh for its major export destinations. The empirical results reveal that the policy initiatives of geographical diversification have obtained mixed results, but they have not been significantly successful to reverse the direction of distance in exports. 1. Introduction Geographical distance is important in international trade. The gravity model of modern trade theory demonstrates that the closer the geographical location of the two countries the greater the volume of their bilateral trade given their economic size, factor endowments and similarity of preference. This prediction of the standard gravity model prevails in the typical circumstances where the traded items, economic size and product preference of the trading partners are identical. However, the prediction may not work if the demand for majority of traded items of the origin is located in distant destination. Bangladesh’s export trade has demonstrated impressive performance over the last one and a half decades even though the export basket has remained highly concentrated on a very few products. The exports are still dependent mostly on textiles and clothing, especially Readymade Garments (RMGs) for which the major destinations are distantly located countries. This pattern of the country’s exports seems to be opposite to the prediction of the gravity model. Nevertheless, the country’s Mahfuz Kabir, PhD is Acting Research Director at Bangladesh Institute of International and Strategic Studies (BIISS). His e-mail address is: [email protected] © Bangladesh Institute of International and Strategic Studies (BIISS), 2017. 77 BIISS JOURNAL, VOL. 38, NO. 2, APRIL 2017 Seventh Five Year Plan (2016-2020) as well as the current and recent past export policies identified geographical diversification in destination as an important priority for the existing mix of export items of the country.1 The policy priority is expected to reverse the current role of distance, i.e., Bangladesh is expected to gradually export more in terms of proportion of its total exports with nearer countries. Market analysis of Bangladesh’s export items demonstrates that only two major destinations explain about 72 per cent of total export earnings in fiscal year 2016-17, which were the European Union (EU) with US$19.35 billion (55.6 per cent of total exports) and the United States (US) with US$5.85 billion (16.78 per cent). The two other most important export destinations were Canada with US$1.08 billion (3.09 per cent) and Japan with US$1.01 billion (2.91 per cent). Conversely, in 2008- 09 the major export destinations were the EU (52.86 per cent) and the US (26.1 per cent) with the joint market share of about 79 per cent of the total export destinations. The other notable partners were Canada (4.3 per cent) and Turkey (2.1 per cent). 2 All these locations are geographically distant from Bangladesh despite a number of initiatives by the Government of Bangladesh (GoB) to increase export earnings from nearer destinations, such as India and China. This export outcome is opposite to the prediction of the standard gravity model. However, the relative share of the top two destinations has decreased, which implies that the share of other export destinations has increased in this period. However, from this data it is unclear whether the share of the nearer destinations has been increasing significantly, which can be attributed to the policy initiatives and efforts of the government. Given this context, the present paper is an attempt to examine whether the direction of distance has changed significantly in the country’s export in the most recent period. In doing so, it adopts a gravity model augmented for four distance variables with panel data of top 20 export destinations of the country each year for the period of nine years. It is the first kind of analysis to understand the importance of distance exports in country-disaggregated panel. The rest of the paper has been organised as follows. Section 2 presents a detailed review of literature of the import contributions in this field of study. Section 3 describes the methodology and data sources of the present paper. Section 4 presents the findings and analysis of the paper. The paper ends with concluding remarks in section 5. 1 See, for detailed policy and outcomes on export diversification, General Economics Division, Seventh Five Year Plan FY 2016-FY2020, Dhaka, Bangladesh: Planning Commission, Government of Bangladesh, 2016, pp. 184-203; and Ministry of Commerce, Export Policy 2015-2018, Dhaka, Bangladesh: Government of Bangladesh, 2015. 2 Based on the database of Export Promotion Bureau of Bangladesh. Available at www.epb.gov.bd, accessed on 29 December 2017. 78 DOES DISTANCE MATTER FOR BANGLADESH’S EXPORTS? 2. A Review of Literature In the earliest form, using the gravity model to explain bilateral trade flows and potential of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) countries can be expressed in the following basic form, where value of bilateral trade flow is directly proportional to home and partner’s Gross Domestic Production (GDP) and inversely proportional to the distance between two countries. Following Newtonian ‘force of gravity’ function, Tinbergen3 shaped the gravity equation to explain trade between countries. In the other earliest gravity models, for example Pöyhönen4 and Pulliainen5, bilateral trade flows depend only on the national income of the importer and exporter, and the geographical distance between two countries (rij). In the ‘basic’ form, the gravity model can be described as follows to explain the exports of country i to j: y ay b (1) c =cc c i j ij i j ( d ) rij where, yi and yj are the gross national income of the two countries, ci and cj are their 6 export and import parameters, rij is the distance between them and c is a scale factor. The GDP of importers and exporters are trade enforcement variables. The output of an exporter implies the ability to supply and the output of an importing country represents the propensity to demand.