Since the group of least developed countries (LDCs) was identified in 1971, only five countries have graduated from the group, all of which are characterised by small size or population. The projections are that the next decade will see a rapid increase in the pace of graduation, with Bangladesh in particular poised to be one of the largest countries, in terms of its economy and population, set to leave the group, after the United Nations Committee for Development Policy (CDP) recommended the country's graduation this past week at its latest triennial review.
Bangladesh has fulfilled the eligibility criteria in terms of per capita income, human assets and economic and environmental vulnerability. This is the second consecutive time since 2018 that the CDP has made the recommendation for Bangladesh for graduation from the LDC category. Myanmar and Lao PDR also met the criteria for the 2nd time.
Bangladesh will get time up to 2026 to prepare for the transition to the status of a developing country. Usually, countries are given three years for transition but this year due to the Corona pandemic, Bangladesh has been given five years for the process. On the other hand, enhanced confidence of international financial bodies, improved credit rating and higher FDI is expected to benefit Bangladesh after the transition period is completed.
While previously many LDCs viewed the prospect of graduation with some apprehension, fearing significant erosion of international support, increasingly, the move is being seen as a more positive landmark. The Istanbul Programme of Action for the LDCs for the Decade 2011-2020 (IPoA) includes as an overarching objective the graduation and smooth transition of the LDCs. Graduation from the United Nations (UN) LDC category is seen as an important milestone in the development path of each LDC. It demonstrates strong performance in key macroeconomic indicators and broad-based social developments. At the same time, the phasing-out of benefits associated with the LDC status could present challenges for graduating LDC governments to integrate into the global economy.
The least developed country (LDC) category was established by the United Nations General Assembly in 1971 as a result of the acknowledgment by the international community that special support measures were needed to assist the least developed among the developing countries. The LDCs were defined as countries with a low level of income and structural impediments to growth and requiring special measures to address those problems. While there is some overlap with the group of "low-income economies" as defined by the World Bank, several LDCs are classified as middle income economies.
Over the years, international support measures (ISMs) have been developed for LDCs in the context of international agreements and organizations as well as by individual countries, educational institutions and others. There has been an increasing number of South-South initiatives in support of LDCs. ISMs are mostly in the areas of in the areas of trade; development cooperation; and support for participation in the United Nations and other international processes.
When a country meets the graduation criteria for the first time, the United Nations Department of Economic and Social Affairs prepares assessments of the expected effects of graduation. These reports, referred to as "Impact Assessments", are one of elements on which the CDP bases its decision on whether to recommend the graduation of these countries to the Economic and Social Council (ECOSOC). Bangladesh's impact assessment was undertaken, as a pilot case, earlier in the process than in previous cases.
Trade impacts are particularly sensitive for Bangladesh. Its case stands out as the country potentially faces the biggest threat of export market loss as the largest exporter among LDCs. As the largest beneficiary of EU's Everything but Arms (EBA) scheme offered to LDCs which provides duty-free market access covering 98.7% tariff lines, Bangladesh's current utilization rate of the scheme is close to 95% for its textile and garments exports. Projections under various scenarios indicate that withdrawal of EBA may cause between 5% to 15% export loss, predominantly for textile and garments sector, depending on the nature of post-graduation access terms. By comparison, aggregate projected losses for Bhutan and Nepal, two other South Asian countries also on the verge of graduation, are estimated at 1.4% and 2.5% respectively.
After graduation and the applicable transition periods, Bangladesh will no longer benefit from LDC-specific DFQF (duty free quota free) market access and LDC-specific rules of origin. A key determinant of future impacts is whether Bangladesh will seek bilateral free trade agreements, which it currently does not have. Bangladesh has a higher level of tariff protection than many other developing countries which, along with its large and fast-growing market, could make free trade agreements attractive for partners. However, as indicated by government officials in interviews for this assessment, the country faces capacity constraints in preparing and developing negotiation strategies and undertaking actual negotiations.
New rules in the Old Continent
According to the UN's impact assessment, the main impacts of the graduation of Bangladesh on market access would be in the European Union (EU). The EU's Generalised System of Preferences (GSP) contains three arrangements: a general arrangement, a special incentive arrangement for sustainable development and good governance (GSP+), and a special arrangement for the least-developed countries (Everything But Arms - EBA). Bangladesh currently exports under the latter, which grants duty-free quota-free market access for everything but arms and ammunition. The EU's current GSP regulation will expire at the end of 2023 and is expected to be replaced by a new regulation at the beginning of 2024.
Under current rules, and assuming no alternative schemes are negotiated, once Bangladesh graduates from the LDC category, first, it would be entitled to a transition period of three years, meaning that if it graduates in 2026, it would have access to the EBA until 2029. Bangladesh would then be eligible for the general arrangement (or standard GSP). Under current regulations, Bangladesh would be eligible for the standard GSP until it crosses the World Bank's upper middle-income threshold. It should be noted that both EBA and the standard GSP can be temporarily withdrawn in exceptional circumstances, notably in cases of serious and systematic violation of principles laid down in human rights and labour rights conventions.
In principle, graduating LDCs can apply to the Special Arrangement for Sustainable Development and Good Governance (GSP+), which grants duty free access to 66 per cent of EU tariff lines (in addition to products that are subject to zero MFN duties). However, under current regulations, eligibility for the GSP+ requires that the country meet certain criteria, some of which Bangladesh does not fully meet at this time.
After graduation, Bangladesh would no longer be able to use the LDC-specific rules of origin, which will make it more difficult to use the GSP (or GSP+, if found eligible) than it is to use the EBA, according to the UN's impact assessment. Generally, the minimum local value added for a product to be granted preferential treatment would be 50 percent, as opposed to 30 percent as an LDC. For garments, only products that go through double transformation would qualify for preferential treatment, whereas as an LDC Bangladesh's products are only required to undergo single transformation in order to export under the GSP. In practice, this could mean that certain garments produced with imported fabric would not qualify. Assuming no alternative arrangements are negotiated, failure to comply with the rules of origin would mean that those products would face MFN tariffs, which are 12 percent for most garments.
According to information provided to UN DESA by the Ministry of Commerce, despite the fact that Bangladesh has had access to the EBA since 2001, it was only since the simplification of the rules of origin in 2011 that the country was able to fully use the preferences. Before 2011, knitwear products fared better than woven garments as they more easily met the EU rules of origin, which required a double transformation from yarn to fabric and from fabric to garment for the product to be eligible for the EBA. In the knitwear segment there were stronger backward linkages to spinning factories, and a high level of local content. In the woven goods segment, local content accounted for a small share of the output price. Bangladesh's production of cotton is insignificant. The change in the EU rules of origin in 2011 changed that, with the woven garments segment starting to grow at higher rates than knitwear. In 2010, before the simplified rules of origin, Bangladesh supplied 6% of the EU's imports of woven garments. In 2017, it supplied 16% The withdrawal of LDC-specific rules of origin is therefore expected to affect the woven garments segment most severely, as Bangladesh does not have the capacity to supply locally produced high-quality fabrics at the necessary scale.
As part of the impact assessment, UNESCAP has suggested that Bangladesh consider the use of the regional cumulation provision contained in the EU's Commission Delegated Regulation of 2015, which recognizes the members of South Asian Association for Regional Cooperation (SAARC) as a regional group. Using this provision would mean that Bangladesh could source certain materials from other SAARC members to comply with rules of origin under the GSP.
US, UK and others
Approximately 10 percent of exports to the EU in FY 2018-2019 were destined for the United Kingdom. It is expected that following Brexit, the UK would adopt a preferential market access scheme equivalent to that of the EU. Following the first meeting of the UK-Bangladesh Trade and Investment Dialogue in February, the two countries issued a joint statement in which they agreed to develop a future trade partnership that will enhance mutual prosperity and further Bangladesh's economic development as it graduates from Least Developed Country (LDC) status. The statement added their aim to improve the trade relationship through a mutual commitment to private sector-led growth, encouraging investment, and addressing barriers to trade faced by their companies in exporting goods and services. They also committed to continuing the preferential scheme for Bangladesh currently in place for three years after graduation.
The United States suspended the GSP for Bangladesh in 2013 under the Obama administration, when the U.S. Trade Representative considered that Bangladesh had failed to meet basic standards for workers' rights and worker safety that were a condition of eligibility, following a complaint by the AFL-CIO, an international confederation of labour union groups. Unless Bangladesh is reintegrated, graduation will not change the terms of access to the United States market. If it is, graduation would imply a shift from the LDC-specific GSP to the standard GSP. Any impacts are expected to be minimal.
Ninety-five percent of Bangladesh's exports to the United States in 2016 were clothing, footwear, leather articles and similar items, none of which are covered by the GSP for LDCs. Even so, in 2016-2017, Bangladesh was the third largest supplier of apparel to the United States, after China and Vietnam. The United States GSP for LDCs does not cover the main products exported by Bangladesh to the country, and thus the impact of GSP suspension was relatively light.
In Canada, the standard GSP does not cover an important part of the products exported by Bangladesh. Tariffs for most garments and footwear, which are currently covered under Canada's preferential tariff scheme for LDCs, would be 16 to 18 percent under MFN. For the products that are covered by the GSP, Bangladesh would need to comply with more stringent rules of origin: import content would need to be below 40 percent as opposed to the 60 percent for LDCs; Bangladesh would no longer benefit from the provision whereby all beneficiaries of the LDC preferential tariff are regarded as one single area and would instead be regarded as part of a single areas with other beneficiaries of the General Preferential Tariff; Bangladesh would no longer benefit from the special rules in place for LDCs on textiles and clothing (though most of these products are not covered by the standard GSP).
Products that fail to comply with the rules of origin would be subject to the MFN rate of duty administered by Canada.
In Japan, which is an important market for clothing and footwear, most exports from Bangladesh are not covered by the standard (non-LDC) GSP. These products would face tariffs ranging from 7.4% to 12.8% under MFN. In footwear, of which Japan is the second largest importer, tariffs for the products most exported would range from 22 to 175 per cent.
Japan does not have specific rules of origin for LDCs. Simplified rules of origin under the GSP for certain products apply in practice only to LDCs since the chapter is not covered by the standard GSP. The rule becomes irrelevant for Bangladesh after graduation. Products may be excluded from Japan's standard GSP when Japanese imports from that country exceed on average, over three years, 1.5 billion yen and 50% of the total value of Japan's imports of the product.
In Australia, Bangladeshi products would qualify for the GSP for non-LDC developing countries. The top export products are garments, which are not covered by that arrangement. MFN tariffs on most garments exported by Bangladesh to Australia are 5 percent. LDC-specific rules of origin would no longer apply.
How much will it cost?
The limitations of modelling for this kind of assessment are illustrated by predictions of the consequences for Bangladesh's garments industry of the phasing out of quotas under the Multifibre Arrangements, many of which proved wrong. Considering those limitations, UNCTAD (2016a) calculated, for all LDCs, the effects of preference losses related to LDC graduation vis-à-vis G20 countries, considering a scenario in which only the country in question graduates and another in which all LDCs graduate. For Bangladesh, it estimated a reduction in exports of close to 7 percent in the first scenario and a little over 5 percent in the second scenario.
Overall, the biggest impact of the loss of LDC-specific preferential market access is expected to be on the garment industry given its dimension and importance in Bangladesh's exports. Estimates based on a simple partial equilibrium model developed by the Commonwealth Secretariat (2018) indicate losses equivalent to approximately 1.8 billion dollars or 9.81 per cent of Bangladesh exports of apparel to the EU, Canada and Australia. It's hard to speculate much else beyond that.
Tripped up by TRIPS?
There are three main aspects to Bangladesh's graduation as it relates to the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), according to the UN's impact assessment. Of them, the impact on the pharmaceutical sector is held to be most relevant. The TRIPS agreement exemptions for LDCs is what allowed Bangladeshi firms like Beximco Pharma and Eskayef to come out and produce a drug like Remdesivir, patented by California -based Gilead Sciences, at the height of the pandemic last year, as a potential therapeutic for COVID-19.
However, it is advised in the impact assessment that Bangladesh has the possibility of requesting an extension of its eligibility for the waiver on pharmaceuticals. Given Bangladesh's role as a producer of low cost medicines for its domestic market and for other developing countries, the Doha Declaration on the TRIPS Agreement and Public Health and the commitment to ensure "access to safe, effective, quality and affordable essential medicines and vaccines for all" under SDG 3.8 as well as to "provide access to affordable essential medicines and vaccines, in accordance with the Doha Declaration on the TRIPS Agreement and Public Health" under SDG 3.b of the 2030 Agenda for Sustainable Development could be elements of support for a request to extend the TRIPS waiver beyond the date of graduation. The country's policymakers should take note.
ODA: Insignificant, and not going away
As stated in the UN's impact assessment, graduation from the LDC category is expected to have only limited impacts on development cooperation with Bangladesh, reflecting the fact that most assistance programmes are determined based on a range of factors including Bangladesh's needs and vulnerabilities and the policies and priorities of development partners. Graduation is not expected to affect assistance by the World Bank, the Asian Development Bank, most United Nations system entities, GAVI - the Vaccine Alliance, the Global Fund, most official development assistance (ODA) from OECD-DAC Members (including Canada, the United Kingdom, the United States and the European Union) or South-South cooperation.
When it comes to ODA (official development assistance, or money) Bangladesh's ratio of net ODA to GNI (gross national income) is relatively low, having remained under 2 percent - significantly below the LDC and low-income country averages - since 2009. ODA from both bilateral and multilateral partners has increased significantly in recent years, particularly in the form of loans. And you may expect it to continue, because development has spawned its own industry around the world by now, and Bangladesh has always been a significant market in that sphere. The large numbers in need of upliftment has always helped in that regard. Despite recent trends, the International Development Association (IDA) and the IMF continue to assess Bangladesh's risks of external debt distress and overall debt distress as low, it is stated in the impact assessment, an indicator that development partners plan to remain engaged.
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