Bangladesh’s LDC Graduation Faces Policy Test

Anis Chowdhury

Bangladesh is scheduled to graduate from Least Developed Country (LDC) status in November this year after more than half a century. The country joined the UN list of LDCs in 1975 and has consistently met all three graduation criteria since 2018: per capita Gross National Income (GNI), the Human Assets Index (HAI), and the Economic Vulnerability Index (EVI).

However, resistance remains, and the current government has requested a delay from the UN. This is not surprising given the extent to which the state has been influenced by business interests, especially the ready-made garments (RMG) sector. In FY2024-25 alone, the RMG sector received more than USD 1.3 billion (around Tk16,000 crore) in cash subsidies and tax concessions, despite the interim government’s efforts to gradually phase out such incentives.

RMG dominance and weak diversification

Bangladesh has long been one of the biggest users of Duty-Free Quota-Free (DFQF) facilities among LDCs, largely due to the growth of its RMG sector under the European Union’s Everything But Arms (EBA) scheme. This preferential market access helped Bangladesh become a dominant apparel exporter.

But the overwhelming dominance of the RMG sector has also made the economy vulnerable. In the late 1970s, when the sector began to grow, garments accounted for less than 5% of Bangladesh’s total exports. By the end of the 1990s, that share had risen to about three-fourths. Since 2013, it has hovered between 80% and 85%, according to the Bangladesh Garment Manufacturers and Exporters Association (BGMEA).

This heavy dependence on a single export item has left Bangladesh with one of the least diversified export baskets in the world. That stands in sharp contrast to South Korea, a country that once provided technical support to Bangladesh’s RMG industry. South Korea’s textile sector accounted for 33.3% of exports in 1970, but that share dropped to 22.6% by 1990 as the country diversified into electrical machinery, transport equipment, and other manufacturing sectors.

Bangladesh’s vulnerability is not limited to export products alone. Its export destinations are also highly concentrated, with nearly 60% of exports going to the EU and the UK, more than 90% of which are apparel. The United States, which does not offer LDC-related preferential market access, accounts for around 16% of Bangladesh’s exports.

Again, South Korea offers a useful comparison. As its economy diversified, its export destinations also became less concentrated. For example, while around 63% of South Korea’s exports went to Japan alone in 1960, the combined share of Japan and the United States had fallen to around 56% by 1975.

State capture and policy imbalance

South Korea’s success was underpinned by a state relatively independent from vested interest groups, allowing policy to be shaped in the broader national interest. In Bangladesh, by contrast, policy space has long been dominated by the RMG sector.

There is no doubt that state support helped the sector expand rapidly, but that came at the cost of failing to diversify the economy. Professor Munir Quddus of Prairie View A&M University and President of the Bangladesh Development Initiative (BDI) has compared the support given to the RMG sector with that provided to leather exports, illustrating the unequal policy environment.

The usual defence of this preferential treatment is that RMG is the country’s largest export sector and biggest foreign exchange earner. But that argument is flawed. Since some of these subsidies have existed for nearly 50 years, sound policymaking would suggest it is time to redirect scarce public resources to other potentially dynamic export sectors.

Over-reliance on state support also reduced the incentive to improve productivity. Bangladesh’s RMG sector has lower average labour productivity than most of its competitors, with the exception of Cambodia. The sector has also faced growing scrutiny over environmental and labour standards. Yet because it has become so large through state backing, its demands are difficult to ignore.

The close relationship between RMG leaders and the fallen authoritarian regime is also well known. The regime allowed them to flourish through loan defaults and subsidies, while many business leaders openly backed its continuation. It is understandable, therefore, that they feared losing this privileged position under the interim government led by Nobel laureate Professor Muhammad Yunus. As a result, they began campaigning for a postponement of LDC graduation.

Graduation as a chance for transformation

The interim government accepted the White Paper’s recommendation and viewed the momentum of LDC graduation as an opportunity to accelerate structural transformation.

Despite bureaucratic inertia, it has made progress in improving the business environment. These include significant reductions in the time required to obtain business licences, certificates, and permits; simplification of customs procedures; and faster implementation of national logistics and tariff policies. It also identified bottlenecks in sectors such as pharmaceuticals, leather and footwear, electronics, light engineering, fisheries, and agro-based industries, and took steps to ease them.

Certainly, much more remains to be done as part of an ongoing reform process. But that cannot justify requesting a delay on the grounds of inadequate preparation, especially when Bangladesh’s macroeconomic performance is stronger than that of most LDCs, including Nepal and Lao People’s Democratic Republic (Lao PDR), the two countries scheduled to graduate alongside Bangladesh.

Thanks to the interim government’s macroeconomic management, Bangladesh avoided a full-scale economic collapse. It restored discipline in the banking and financial sectors, rebuilt foreign exchange reserves, stabilised the exchange rate, and regained the confidence of international financial institutions, helping reopen trade financing and sustain foreign investment inflows. It also regained the trust of the diaspora, contributing to higher remittance inflows.

The government concluded an Economic Partnership Agreement (EPA) with Japan in record time, ensuring duty-free access for 99.9% of Bangladeshi products. It has also initiated EPA talks with other major trading partners, including the EU.

Delay sends the wrong message

The UN-DESA uses three criteria to assess LDC graduation: GNI per capita, HAI, and EVI. Its February 2025 evaluation showed that Bangladesh is in a stronger position than Nepal and Lao PDR in terms of both GNI per capita and economic vulnerability. Bangladesh, with a higher income level, is also less economically vulnerable than those two countries, both of which face additional disadvantages as landlocked economies.

Bangladesh’s economy is projected to grow faster than both Nepal and Lao PDR, at around 5.0% to 5.1% in FY2025-26 and 5.7% in FY2026-27, according to the Asian Development Bank (ADB), despite somewhat elevated inflation. Bangladesh also performs better in logistics, ranking 88th out of 139 countries in the World Bank index, compared to Nepal’s 114th and Lao PDR’s 115th. It also scores better in UNCTAD’s productive capacity index.

Bangladesh will continue to enjoy DFQF market access for three years after graduation, as endorsed by the WTO. Australia and Canada have signalled extended DFQF access until at least 2034, while the UK will continue to allow duty-free access for 92% of Bangladeshi products after 2029.

Therefore, delaying graduation for a better-performing country like Bangladesh would send a negative signal to other LDCs aspiring to graduate. It would also amount to a victory for vested interest groups and slow the momentum for structural transformation.

The extent of state capture by the RMG sector is already visible. A highly professional and successful central bank governor has reportedly been replaced by a garment sector businessman with a record of loan default and no background in banking or international macroeconomics. Transparency International Bangladesh has warned that such a move risks turning the central bank once again into an instrument of business lobbies dependent on defaulted loans and political patronage, rather than an institution serving the national interest.

Bangladesh would be better served by using its diplomatic efforts to secure GSP+ facilities in the EU and finalise EPAs with key trading partners, rather than lobbying for a delay in graduation. It should be far more concerned about the EU’s stricter and mandatory Environmental, Social and Governance (ESG) standards. Failure to comply with ESG requirements could put nearly 30% of Bangladesh’s exports to the EU at risk. On the other hand, strict compliance could act as a powerful driver of production upgrading, structural transformation, and progress toward the Sustainable Development Goals (SDGs).

Anis Chowdhury is Emeritus Professor at Western Sydney University, Australia. He has held senior UN positions in Bangkok and New York and served as Special Assistant to the Chief Adviser for Finance in the interim government led by Professor Muhammad Yunus.