Assessing the Impact of Eliminating Export Subsidies in Bangladesh

Assessing the Impact of Eliminating Export Subsidies in Bangladesh | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Assessing the Impact of Eliminating Export Subsidies in Bangladesh Mohammad Mohammad Rahman, Anna Strutt, Chanwahn Kim This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-5798981/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract The debate over export subsidy reform is crucial for many developing countries. This study analyses the impact of reducing or eliminating export subsidies for Bangladesh using a computable general equilibrium framework. Our simulations indicate that the partial removal of export subsidies has a positive effect on GDP. If export subsidies are eliminated only in the RMG sector real GDP increases by 0.04 per cent, which is similar to the full elimination of export subsidies by all sectors – perhaps not surprising given the significant contribution of this sector to GDP and that most subsidies apply to this sector. When export subsidies are reduced by 50 percent, with the funding transferred to seven targeted low-income household groups, real GDP is projected to increase by about 0.81 percent. Government transfers to households lead to an increase in real income for all seven targeted households, especially rural households, where incomes rise on average by 2.5 percent. This study indicates that there are significant inefficiencies and opportunity costs associated with export subsidies, and household income could be enhanced by redirecting the spending to more productive channels. JEL Classification: F14, F17, F47. Export Subsidies Income Distribution Computable General Equilibrium (CGE) Ready Made Garments Bangladesh Least Developed Country (LDC) Figures Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 1. Introduction Export promotion strategies are trade policy tools that have a long tradition of providing export subsidies to increase exports, with such subsidies being a key policy intervention tool used in many developing countries to offer incentives for exporters in international markets. While export subsidies may increase domestic production and exports, they are often criticized for inefficiencies and high costs to consumers in the subsidizing economy. Moreover, export subsidies could influence international market prices that could harm other exporters by reducing their market shares. The economic impact of export subsidies is inconclusive in the literature. It may boost domestic production, competitiveness, and trade for some sectors, but it could hurt the overall economy. Bangladesh is one of the leading emerging economies with a steady average economic growth rate of about 6.5 per cent over the last decade, including managing to maintain a growth rate of 3.5 per cent during the pandemic (Bangladesh Bank, 2023). It has become a global role model for its socioeconomic development miracle from a "basket case" as dubbed by Henry Kissinger in 1971. With this tremendous progress over the decades, Bangladesh is anticipating graduating from least developed countries (LDC) status to developing country (DC) status by 2026, after which Bangladesh will lose all preferential market access under the World Trade Organization (WTO) framework. In addition, Bangladesh must eliminate its domestic trade-restrictive policies, especially export subsidies. What is the impact of removing export subsidies on trade, income, and employment? This has been an important policy debate over the years. Elimination of export subsidies may have a differential impact across different sectors and income groups. Laborde et al. (2013) evaluate the impact of export taxes at the HS 6-digit level on the world economy using a general equilibrium model setting and conclude that removing export taxes would increase global welfare by 0.23 per cent. Panagariya (2000) appraises different country-specific export subsidies and concludes that Indian export subsidies have a marginal impact on its exports. He also argues that Brazil and Mexico's export subsidies eventually had a negative impact on export diversification. Anderson et al. (2023) find that domestic agricultural subsidies remain an important contributor to the welfare cost of policies that restrict trade. Coady et al. (2015) show that most subsidies are not well targeted, largely benefiting higher income groups and as a consequence, subsidies may contribute to lower productivity, leading to economic weakness in the long run. Rhee & Kang (2019) explore export subsidy policies in technologically inferior LDCS using an entry-deterrence model. They find that under complete information, only a subsidy policy can deter entry. Girma & Stepanok (2020) show that subsidizing firms increases domestic competition that makes it difficult for non-subsidized firms to export. On the other hand, Bollman & Ferguson (2018) explore the impact of eliminating export subsidies in different Canadian States and find that removing agricultural subsidies hurts rural employment, with adverse spill-over effects in the surrounding communities. Helmers & Trofimenko (2013) assess the impact of export subsidies in Colombia and find that they positively affect export volumes of the subsidized sectors. Narayanan & Rungta (2014) investigate the economic impacts of the elimination of Indian apparel subsidies and demonstrate that India may experience a welfare loss of about US $ 71.5 million, while other Asian countries may gain about US $ 218 million. Olivier et al. (2015) evaluate the short-term and long-term impact of the export promotion program in Tunisia, suggesting that in the short run, subsidies have a significant impact leading to higher exports, and greater product and market diversification but no impact in the long run. Fabrice et al. (2020) estimate the impact of Nepal’s cash export subsidies under the Cash Incentive Scheme for Exports (CISE) program and show that export subsidies have limited impact on total exports but find a positive impact in improving the performance of apparel exporters who are more successful in accessing the government subsidy scheme. Ong et al. (2019) find that a one percent decrease in farm subsidies would reduce U.S. farm exports by 0.40 percent per annum. This brief literature review indicates that the impact of export subsidies is ambiguous in the literature: removing export subsidies may adversely affect exports and employment, but the overall welfare impact for a country can be positive due to increased overall efficiency. Bangladesh has been using a range of instruments to support its export sectors. Total exports were about US $ 55 billion in 2023, of which 86 percent of exports were accounted for by apparel products, with Bangladesh being the second-largest readymade garments (RMG) exporting country in the world. Moreover, as Bangladesh is set to graduate from the LDC to a DC status by 2026, export subsidies, especially for industrial products, have to be eliminated after graduation. 1 Other WTO members could, if subsidies are not eliminated, take action against Bangladesh under Article 4 of Subsidies and Countervailing Measures (SCM) of WTO and ask for the withdrawal of the subsidy. 2 Against this background, our study's primary research question revolves around what is the likely impact of eliminating export subsidies, especially on the macroeconomy and household income distribution in Bangladesh. To answer this question, we deploy the MyGTAP model framework developed by Walmsley & Minor (2013), an extension of the standard static GTAP model (Hertel, 1997). This MyGTAP framework allows us to incorporate country specific information to investigate the impacts of trade policies on different household groups (Minor & Walmsley, 2013). We include the income share for ten rural and urban regional households, then explore the potential economic impact of reducing or removing export subsidies on the national economy as well as households' incomes and consumption. This is the first attempt to empirically estimate the impact of a reduction in export subsidies in Bangladesh, as far as we know. Export subsidies are important policy measures that directly impact trade and may have huge spillover effects on employment, income distribution, and poverty in different households. The findings of this case study of a significant emerging economy may also provide valuable policy insights for other developing economies. A brief structure of Bangladesh export subsidies is discussed in the following section. Section three explains the MyGTAP methodology and how we incorporate the Bangladesh social accounting matrix (SAM) into the GTAP framework. We then present the findings from simulations in the fourth section before turning to some conclusions. 2. Export Subsidies of Bangladesh Over the past decade, Bangladesh’s export boom, particularly in the apparel sector, has helped Bangladesh to achieve significant economic growth. Bangladesh is the second-largest apparel-exporting country in the world. In 2023, Bangladesh had a real GDP growth rate of 6.7 percent, compared to the South Asian average of 5.4 per cent (Bangladesh Bank, 2024). Bangladesh's total trade has increased from US $ 4 billion in 1980 to US $ 128 billion in 2023. The current trade openness ratio is about 36 per cent, which reflects how integrated the country is with the global economy (World Bank Indicators, 2022). The weighted average tariff rates applied by Bangladesh have decreased moderately in recent decades from 22 percent in 2000 to 7.8 percent in 2023 (Bangladesh Trade Portal, 2024). Bangladesh has been using different supporting instruments to boost its exports. The main mechanisms are the bonded warehouse facilities, duty drawbacks, direct export cash incentives, various tax concessions, tax holidays schemes, and export credits which comprised about 3.7 percent of GDP in 2022 (Bangladesh Economic Review, 2023). Figures (1) shows different export incentives ranging from 5 per cent to 20 per cent of export values in various sectors over the last decades, with little change over time. The Bangladesh Bank announced cash incentives for the 2022 fiscal year for the export of products under 36 categories, including a two percent additional special incentive for ready-made garment products (Bangladesh Bank, 2023). The government of Bangladesh declared an additional US $ 954 million in cash subsidies to boost exports in response to the COVID-19 pandemic. 3 The three main support measures to exports, i.e., duty drawback, 4 bonded warehouse facilities, 5 and cash subsidies, cost about 5.2 per cent of GDP in 2021 and accounted for 22.5 per cent of the government budget, along with 69.6 per cent of the development budget (Fig. 2 ). It is worth noting that most of the beneficiaries of such export incentives are the business elite and lobby groups which significantly influence the government. 6 There are also examples of colossal leakages and misuse of export subsidies and incentives. 7 These large expenditures could be used for more productive sectors or development programs. 3. Modelling Framework The GTAP computable general equilibrium (CGE) model is the most comprehensive model and dataset for estimating nation-wide impacts of trade policy. The detailed structure of the GTAP database, assumptions, model, equations, closures, elasticity, and parameters, are presented in Hertel, (1997). 8 Gilbert, et al., (2018) provide a detailed systematic literature review of CGE and discuss the strengths and limitations of CGE models in the context of international trade models. The GTAP framework structure includes regional households, governments, different sectors and their nests, along with global sectors across countries including how they are linked to each other. The MyGTAP model used in this paper is an extended version of the standard GTAP model (Hertel, 1997), developed by Walmsley & Minor (2013). This model allows us to incorporate country-specific data to facilitate investigation of the impacts of different domestic policies at the household level, enabling much richer country-specific analysis than is possible in the standard GTAP model, where a single regional household is modelled. In the MyGTAP framework, we incorporate multiple private households and government agents where spending is directly related to the income received from endowment factors and taxes (Walmsley & Minor, 2013). 9 The model allows for incorporating income from remittances, foreign aid, foreign capital, and government income., with the government collecting income from taxes, duty revenue and foreign aid. This income is then spent on public consumption outlays, transfers to households, foreign aid outflow, and subsidies. Similarly, private households receive and accumulate their income from factors of productions, transfers from the government, other households, and foreign remittances. This accumulated income can be spent on different activities, including consumption, transfers, remittances outflow and savings. In previous work focusing on the analysis of subsidies using the MyGTAP framework, Siddiq et al. (2014) examined the effect of elimination of the petroleum subsidy on income distribution in Nigeria and found that a reduction in the subsidy generally increases Nigerian GDP but hurts low-income households. Khan, et al. (2021) explored trade liberalization and income inequality in Pakistan using the MyGTAP model and concluded that trade liberalisation has a differential impact on income inequality in the country. 3.1 Data Extension and Aggregation to MyGTAP The main features of the MyGTAP framework allow us to incorporate country-specific data on household and factors endowment. Following Rahman and Strutt (2022), we incorporate the Bangladesh Social Accounting Matrix (SAM) data prepared from households’ income and expenditure survey (HIES) with the GTAP Version 10 dataset (Aguiar et al., 2019) applying the MyGTAP program (Minor & Walmsley, 2013). The latest available Bangladesh SAM is for 2012 and updated for 2014. 10 We aggregate the 141 regions in the GTAP 10 dataset into 15 regions (Appendix Table A1a) and the 65 sectors into ten aggregate sectors. Our regional aggregation emphasizes countries that are the leading trading partners of Bangladesh, including the United States, the European Union, China, and India. We also aggregate the 65 GTAP sectors into ten sectors considering the Bangladesh SAM. The detailed sectoral and regional aggregations are presented in the Appendix Table A1a and A1b. Table 1 Structure of the Bangladesh Economy in the Updated SAM in 2014 Aggregated Sectors Value-added Export on total output Export share Import share on Output Import share 1. Grains and Crops 11.12 0.39 0.86 8.5 8.15 2. Livestock, Fisheries and Meat Products 1.34 0.07 0.31 2.45 0.32 3. Mining and Extraction 6.8 0.16 0.1 1.92 0.68 4. Processed Food 1.45 1.53 1.57 17 9.12 5. Textiles and Clothing 7.16 51.68 87.06 17.6 20.1 6. Light Manufacturing 1.88 2.41 1.84 23.3 9.43 7. Heavy Manufacturing 1.02 1.17 1.26 59.1 41.22 8. Utilities and Construction 17.02 - - - - 9. Transport and Communication service 28.31 2.87 6.3 4.99 4.65 10. Other Services 23.9 0.25 0.7 4.88 6.33 Total 100 100 100 Source : GTAP 10 & SAM (2014) A complete mapping is required between the sectors of the Bangladesh SAM with the corresponding GTAP sectors, and with the aggregated regions. We then use the ten different rural and urban households’ income, consumption and ownership weights acquired from the SAM to incorporate into the MyGTAP model. These earnings were allocated to each of the ten households according to factor ownership shares. Household incomes were then adjusted for net foreign income, remittances, and capital depreciation, as suggested by Minor & Walmsley (2013). We use this dataset to investigate the effects of removing or reducing export subsidies on both household and macro levels. A summary description of the Bangladesh social accounting matrix and database used in this study is provided in Table 1 . Table 1 shows the structure and share of different economic sectors in Bangladesh in 2014, as shown in the SAM. Grains and crops are the leading category in the agriculture sector, which contributes 11.1 percent of value added. On the other hand, in the industry sector, textile and clothing is the leading category that contributes a 7.16 percent share of the economy. The apparel sector is also highly export-oriented. About 87 percent of Bangladesh's exports come from textiles and clothing sectors, while imports by this sector are about 20 percent, as shown in the SAM. Bangladesh is heavily dependent on importing in the heavy manufacturing sectors, which is about 41 percent of total imports, especially intermediate capital goods. Figure 3 shows factor ownership by rural and urban households while Fig. 4 demonstrates how these factors of production are employed in different sectors and where the income comes from for these ten households. Unskilled labour is largely employed in the agricultural sectors, as shown in Fig. 4 . The Figures depict that urban day labourers get most of their income from unskilled employment, and about 42 percent of value added is unskilled labour in the textile and apparel sector 3.2 Updating Bangladesh export subsidies rate using Altertax: The government of Bangladesh (Ministry of Finance) declares subsidies every year in June, and the Central Bank of Bangladesh (Bangladesh Bank) implements the decision made by the government. However, Bangladesh's sectoral export subsidy rate in the GTAP version 10 database does not reflect actual subsidies applied, perhaps because Bangladesh’s export subsidy datasets do not appear to be accurate in the WTO data employed in the GTAP database. Bangladesh's government has been providing export subsidies of an average of about 10 percent over the last decade across all sectors. Therefore, we updated the export subsidy to this rate to reflect Bangladesh’s situation more correctly and use this updated database for subsequent policy simulations. 11 3.3 Simulations Scenarios We simulate the following three different scenarios to evaluate the potential impact of export subsidies for Bangladesh: In Scenario One, we model complete elimination of the export subsidies. This simulation reflects that Bangladesh will graduate from an LDC to a developing country by 2026 and all export subsidies must be eliminated under the WTO framework. Under Scenario Two, we introduce a partial removal with a 50 percent reduction of export subsidies to all sectors, while simultaneously including the transfer of funds to seven poor rural household categories using savings accumulated from the subsidy removal. In Scenario Three, we model an elimination of export subsidies only in the apparel sector. Reducing export subsidies, especially textiles and clothing, may hurt production and employment as Bangladesh is the second-largest apparel exporter in the world and this sector encompasses about 87 percent of Bangladesh’s total exports. 4 Analysis of the Simulation Results 4.1 GDP The impact of removing export subsidies can be investigated at both the macroeconomic and household level. This section presents the results showing the simulated impacts on GDP, industry output, trade, and household income and consumption. The overall macroeconomic impact of removing export subsidies is presented in Fig. 5 . The results show that the full elimination of export subsidies has a slight positive impact on GDP due to the improvement of overall economic efficiency. Subsidy elimination increases export prices relative to import prices, which leads to a decline in exports. At the same time, there are some positive impacts due to increased allocative efficiency, with resources moving into more productive areas. Since the import tariffs of Bangladesh remain relatively high, eliminating export subsidies does not improve allocative efficiency significantly. If export subsidies are eliminated only in the RMG sector under Scenario Three, real GDP increases by 0.04 percent, which is similar to the full elimination of export subsidies by all sectors. This is not surprising, given the significant contribution of this sector to GDP (about 7.16 percent) and that most subsidies apply to it. In contrast, if export subsidies are reduced by 50 per cent with this funding transferred from the government to target seven poor rural household groups under the Second Scenario, our results suggest real GDP may increase by more than 0.81 per cent. 12 A key factor of such a significant increase in GDP is the rapid increase in output of the agriculture and manufacturing sectors. As shown in Fig. 10, overall production is likely to increase in all sectors except apparel outputs. A substantial increase in sectoral outputs influences household income and consumption. As real GDP is determined by the sum of household consumption, investment, government expenditure and net exports, a significant increase in household consumption results in a significant increase in real GDP. 4.2 Trade It is evident from the simulation results that the elimination of export subsidies will lower exports under Scenarios one and three. Our results suggest total exports could reduce by about 1.69 per cent and 1.57 under Scenario One and three respectively. However, under Scenario Two, both exports and imports show positive results relative to the reduction under Scenario One and Three. Total imports may increase by 1.37 percent due to an increase in the aggregate income at the household level, although import prices show no change, domestic prices show a slight increase. An increase in real imports is also driven by the rise in importing petroleum and other manufacturing sectors. Transferring to poor households does not hurt exports as these still increase by about one percent. Note that despite a drop in net exports, real GDP increases due to the other components of GDP, notably consumption and investment. The analysis also indicates that the overall change in the balance of trade in Bangladesh is positive and no substantial negative impact is detected in terms of trade. 4.3 Sectoral export Textiles and clothing are the main export items of Bangladesh, constituting about 87 per cent of Bangladesh’s total exports in 2023. Therefore, the exports of the RMG sector could be affected adversely if the Bangladesh government eliminates export subsidies under all three Scenarios (Fig. 6 ). Exports of the ready-made garments sector could be reduced by 4.7 per cent if we eliminate export subsidies only under Scenario Three. However, under Scenario Two the reduction in readymade garment exports modelled is 2.4 per cent. However, removing export subsidies may positively impact the exporting of all other sectors except RMG, which could be important for the export diversification strategy in Bangladesh. At the same time, imports might decrease as exports decrease, especially intermediate inputs of the RMG sector, which constitute about 20 per cent of Bangladesh's total imports (Fig. 4 ). The removal of export subsidies also reduces imports in the light manufacturing sector. 13 It is apparent that if we transfer the savings fund that accumulated from the removal of subsidies to the rural household, that would add to investment and increase GDP. However, this transfer to rural households leads to increased rural consumption. 4.4 Sectoral output The RMG industry has been enjoying various stimulus supports, including cash incentives, duty drawbacks, and bonded warehouse facilities over the decades. If we eliminate the export subsidies under all three Scenarios, apparel production would be affected negatively, as shown in Fig. 7 . Under Scenario Three, if we eliminate export subsidies for the apparel sector, the total production of textiles and clothing would be reduced by about three percent, while Scenario One has a similar negative impact but under Scenario Two, output could fall by 1.5 per cent. However, the light and heavy manufacturing sectors experience strong growth, with agricultural output also increasing significantly. The analysis indicates that the removal of export subsidies may have a negative impact on the apparel sector but a positive effect on the output of other sectors. 4.5 Impact on households Distributional analysis of households is an important supplement to the macro-economic analysis, particularly for a developing country such as Bangladesh. The estimated change in household incomes is shown in Fig. 8 . The simulation results reveal that the real household income declines only for the urban households but increases for other small rural households under Scenario One. In Scenario Two, which includes a government transfer to poor households, the household income increases across all rural household groups. Changes in the sources of household income show that households benefit from a government transfer with an increase on average of 2.5 per cent for rural households, but a slight decrease in the urban household income. Table 1 indicates that the apparel sector contributes approximately 7.16 percent to the GDP. About 42 percent of value added in the garment industry is urban unskilled households who are directly affected due to the lower output that leads to lower exports in the apparel sector. According to Haque and Bari (2021), approximately 4.2 million workers are employed in the apparel sector in Bangladesh, which is about 26 per cent of urban employees (Appendix Table A2). Therefore, incomes of urban households could decline due to a fall in RMG productions and exports, which will directly affect urban unskilled household income. The overall composition of rural households’ expenditure is mainly on food, which is about 80 percent of poor households’ spending on their total consumption. A rise in domestic demand causes a rise in endowment factor prices and contributes to an overall increase in price level. Nevertheless, it is noticed that the domestic price increases by 0.80 percent due to money transfers from the government to poor households. Figure 9 demonstrates the changes in consumption for different household groups. We find that the average consumption level may increase on an average by about 2.5 percent, mostly in the rural areas under Scenario Two. The urban households are expected to experience a decrease in consumption under Scenarios One and Three. The main reason for this is that urban households depend on the apparel and light manufacturing sectors whereas rural households mostly depend on their agricultural production. 5. Conclusion Export subsidy elimination is a critical policy decision for many developing countries. Bangladesh has been providing export subsidy support to increase its exports, amounting to about US $ 10 billion, at a cost of 3.7 per cent of its GDP. Bangladesh's main export sector is RMG therefore, most of this export subsidy goes to the RMG sector. Moreover, as Bangladesh is set to graduate from the status of a least developed country to a developing country by 2026, export subsidies, especially for industrial products, must be eliminated after graduation. Given this background, this study's main objective is to estimate the economic impact of removing export subsidies on Bangladesh's economy. This paper uses the MyGTAP program and model developed by Walmsley & Minor, (2013), to investigate the impacts of different domestic policies at the household level. We combine the Bangladesh social accounting matrix data with the GTAP version 10 database using the MyGTAP model. We incorporate both rural and urban regional household incomes, consumptions, and ownership weights in the MyGTAP model collected from the Bangladesh social accounting matrix. We then simulate the three different Scenarios to evaluate the potential economic impact of the removal of export subsidies in Bangladesh which is a complete elimination of the export subsidies under Scenario One. Under Scenario Two, we introduced a partial removal that is a 50 per cent reduction of export subsidies to all sectors and, at the same time transfer direct funds to poor households’ that savings from the subsidy to assess the income implication of different families. Also, we explore the impact of the elimination of export subsidies on the textiles and clothing sector only. The simulations indicate that the elimination of export subsidies has a positive impact on GDP due to the improvement of overall economic efficiency. But both exports and imports will drop if we eliminate the export subsidies. While, if we reduce the export subsidy by 50 per cent and transfer the accumulated savings from the government to the targeted seven household groups, real GDP may increase by about 0.81 per cent. However, the removal of export subsidies will affect the RMG sector substantially. Our simulation result suggests that removing export subsidies may reduce real household income for urban households but increase income for rural households. Government transfer to poor households leads to increased income for all different rural household groups. The real income may increase due to a rise in the return of wages and profits from the factor of production. Changes in household income sources show households benefit from a government transfer increasing by 2.5 per cent for rural households. This analysis indicates that there is a substantial opportunity cost of export subsidies, and welfare could be increased by redirecting the spending to more productive channels. Supporting export industries is compelling Bangladesh to spend a large amount, which could be used for various development programs that may bring more significant benefits to the country. Declarations Disclaimer: We have no conflicts of interest to disclose. Data availability : The dataset is available on request. Acknowledgement: This work was supported by the Hangkuk University of Foreign Studies Research Fund of 2023. This work was also supported by the National Research Foundation of Korea Grant Funded by the Korean Government (NRF- 2017S1A6A3A02079749) References Anderson, K., Corong, E. L., Strutt, A., & Valenzuela, E. (2023). The Relative Importance of Global Agricultural Subsidies and Tariffs, Revisited. World Trade Review , 22 (3-4): 382-394. https://doi.org/10.1017/S1474745623000101 Aguiar, A., Chepeliev, M., Corong, E., McDougall, R., & van der Mensbrugghe, D. (2019). The GTAP Data Base: Version 10. Journal of Global Economic Analysis, 4 (1): 1-27. 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Adjusting Tax Rates in the GTAP Data Base, GTAP Technical Paper No. 12, Purdue University, West Lafayette IN, USA. Minor, P., & Walmsley, T. (2013). My GTAP: A Program for Customizing and Extending the GTAP Database for Multiple Households, Split Factors, Remittances, Foreign Aid and Transfers, Working Paper Series, 79, Center for Global Trade Analysis, Purdue University. Narayanan, B. G., & Rungta, V. (2014). Export Subsidy Reforms and Productivity Improvements: The Case of the Indian Textile and Clothing Sector, Margin- The Journal of Applied Economic Research, 8(3 ): 327–352, doi: 10.1177/0973801014531132. Rahman, M. M., & Strutt, A. (2022). Costs of LDC graduation on market access: evidence from emerging Bangladesh, Economic Systems Research , 36 (1):24-45, https://doi.org/10.1080/09535314.2022.2138271. Olivier, C., Fernandes,A., Gourdon, J., & Mattoo, A. (2015). Are the benefits of export support durable? Evidence from Tunisia, Journal of International Economics, 97 (2): 310-324, retrieved from https://doi.org/10.1016/j.jinteco.2015.07.005. Ong, L. A., Pham, C. S., & Ulubaşoğlu, M. A. (2019). The effects of farm subsidies on farm exports in the United States. American Journal of Agricultural Economics, 101(4): 1277–1304. https://doi.org/https://doi.org/10.1093/ajae/aay112. Panagariya, A. (2000). Evaluating the Case for Export Subsidies. Policy Research Working Paper; No. 2276. World Bank, Washington, DC. Retrieved from http://hdl.handle.net/10986/22282. Rhee, K., & Kang, M. (2019). Export subsidies and least developed countries: An entry-deterrence model under complete and incomplete information, Korean Economic Review, 35: 163-182. Siddig, K., Aguair, A., Harald, G., Peter M., & Terrie, W. (2014). Impacts of removing fuel import subsidies in Nigeria on poverty, Energy Policy, 69 : 165-178, doi: https://doi.org/10.1016/j.enpol.2014.02.006. TIB. (2013). Ready Made Garments Sector: Governance Challenges and Way Forward, Transparency International Bangladesh (TIB), Retrieved from https://www.ti-bangladesh.org/beta3/index.php/en/activities/4014-corruption-and-mal-governance-grip-rmg-tib-for-strict-implementation-of-laws. Walmsley, T., & Minor, P. (2013). MyGTAP Model: A Model for Employing Data from the MyGTAP Data Application—Multiple Households, Split Factors, Remittances, Foreign Aid and Transfers. GTAP Working Paper Series, #78, Center for Global Trade Analysis, Purdue University. World Bank. (2023). World Development Indicators, The World Bank, Washington, D.C. Retrieved from http://databank.worldbank.org. Footnotes The World Trade Organization (WTO) prohibits most direct export subsidies, except for least developed countries (LDCs). The WTO rules on subsidies in industrial goods are presented in Articles VI and XVI of GATT 1994 and in the Agreement on Subsidies and Countervailing Measures (SCM). The government of Bangladesh has declared 26 stimulus packages equivalent to US $ 16.5 billion, which is about 3.9 percent of GDP, to combat the Covid-19 pandemic and rescue the economy. Of these packages, an additional US $ 560 million (BDT 50 billion) is allocated to export subsidies (Ministry of Finance, Government of Bangladesh, as of December 30, 2023). Under the provisions of section 13 of The Value Added Tax Act, 1991 and under section 37 of The Customs Act, 1969 of the Bangladesh government all import duties and taxes paid on raw materials and inputs used for the manufacture of exported goods or services shall be refunded. Bangladesh’s customs bonded warehouse regime permits licensed manufacturers to import duty-free parts and materials required for their export production purposes. The bonded warehouse facilities are mostly used by RMG industries. The Transparency International Bangladesh (TIB) study indicated that around 10 per cent of parliamentarians are involved in RMG businesses (TIB, 2013). S Alam Group laundered BDT 1.13 trillion, https://dailyasianage.com/news/327012/s-alam-group-laundered--tk-113tn-cid . For example, BDT 9.9 billion scams by Bismillah Group (BG): This BG company has managed to receive cash incentives against fake export documents and overpriced non-existing export items. https://www.dhakatribune.com/uncategorized/2013/11/03/tk9-9bn-scam-by-bismillah-group . Hertel, (1997) provides a detailed introduction to the GTAP database. Refer, Walmsley & Minor, (2013) and Minor & Walmsley, (2013), for full documentation of MyGTAP data program and model, https://impactecon.com/resources/ The updated SAM was provided by South Asian Network for Economic Modelling (SANEM), a leading think-tank in Bangladesh. We employ the Altertax method (Malcolm, 1998) to correct the subsidy rate incorporated in the GTAP database. The purpose of this procedure is to maintain the internal consistency of the database with the least possible effects on the value flows in the dataset (Burfisher, 2017 Siddig et al., 2014). We simulate the removal of export subsidies from the base data. We reduce the export subsidies to zero and define government transfers to households of that same dollar amount. We split up this value and give it equally to all seven rural low-income household. We have chosen not to include graphs related to sectoral imports as our primary focus is on exports. Additional Declarations The authors declare no competing interests. Supplementary Files Appendices.docx Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. 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Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-5798981","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":400148589,"identity":"14822a0f-0aef-4c2f-955b-4474fb925f84","order_by":0,"name":"Mohammad Mohammad Rahman","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAAzklEQVRIiWNgGAWjYLAC3gY5Bjb2BiDLwIJoLcYSbDwHQFokSNDCIJEAYhKhRbf9+DOJtzsM6vgkn1/d8KNAgoG/vTsBrxazMzlmknPPGEiwSeeU3ewBOkzizNkN+LUcyGGT5m37A9KSdoMHqMVAIpeAlvPPnwG1AG2RPJN28w9RWm4kmEG0SLAfu02cLTfeGFsC/SLZxpPDdlvGQIKHsF/Opz+8AQwxfnlg0N1888dGjr+9F78WJMBjACaJVQ4C7A9IUT0KRsEoGAUjCAAAb5tDfYusIOkAAAAASUVORK5CYII=","orcid":"","institution":"Ministry of Business Innovation and Employment","correspondingAuthor":true,"prefix":"","firstName":"Mohammad","middleName":"Mohammad","lastName":"Rahman","suffix":""},{"id":400148590,"identity":"d2e183ee-e2ac-404d-a070-c563b7fb7911","order_by":1,"name":"Anna Strutt","email":"","orcid":"","institution":"Waikato University","correspondingAuthor":false,"prefix":"","firstName":"Anna","middleName":"","lastName":"Strutt","suffix":""},{"id":400148591,"identity":"cd41641e-a984-4f71-ac27-7d2a9a2fdfbb","order_by":2,"name":"Chanwahn Kim","email":"","orcid":"","institution":"Korea University of Foreign Studies","correspondingAuthor":false,"prefix":"","firstName":"Chanwahn","middleName":"","lastName":"Kim","suffix":""}],"badges":[],"createdAt":"2025-01-09 20:14:53","currentVersionCode":1,"declarations":{"humanSubjects":false,"vertebrateSubjects":false,"conflictsOfInterestStatement":false,"humanSubjectEthicalGuidelines":false,"humanSubjectConsent":false,"humanSubjectClinicalTrial":false,"humanSubjectCaseReport":false,"vertebrateSubjectEthicalGuidelines":false},"doi":"10.21203/rs.3.rs-5798981/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-5798981/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":73468801,"identity":"e2c1503c-4e5f-4769-95cf-357b0c21a163","added_by":"auto","created_at":"2025-01-10 09:11:26","extension":"png","order_by":1,"title":"Figure 1","display":"","copyAsset":false,"role":"figure","size":29837,"visible":true,"origin":"","legend":"\u003cp\u003e\u003cstrong\u003eSectoral Cash Incentives on Exports Value in Bangladesh (% of exports)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eSource:\u003c/strong\u003e\u003c/em\u003e\u003cem\u003e Authors’ compilation from Bangladesh Bank Various SRO (2018, 2020, 2022), and Bangladesh Trade Portal (2023), Ministry of Commerce (MoC), Peoples’ Republic of Bangladesh.\u003c/em\u003e\u003c/p\u003e","description":"","filename":"1.png","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/ababbb70de02b6508a7e8762.png"},{"id":73470637,"identity":"559964d3-0d80-4c33-b96b-9f827984bd5c","added_by":"auto","created_at":"2025-01-10 09:27:26","extension":"png","order_by":2,"title":"Figure 2","display":"","copyAsset":false,"role":"figure","size":26362,"visible":true,"origin":"","legend":"\u003cp\u003e\u003cstrong\u003eExport Subsidies Relative to GDP and the Development Budget (in Billion BDT)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eSource:\u003c/strong\u003e\u003c/em\u003e\u003cem\u003e Authors compilation from National Board of Revenue (NBR, 2022) and Bangladesh Economic Review Archive, (2016, 2018, 2022 \u0026amp; 2022), Ministry of Finance, People’s Republic of Bangladesh. Note: BW-Bonded warehouse, DD - Duty drawback\u003c/em\u003e\u003c/p\u003e","description":"","filename":"2.png","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/37abc0645ff7c8bff55c30fe.png"},{"id":73469038,"identity":"ba5fd8b4-59c2-42ee-a6a8-f842132784b5","added_by":"auto","created_at":"2025-01-10 09:19:26","extension":"png","order_by":3,"title":"Figure 3","display":"","copyAsset":false,"role":"figure","size":38262,"visible":true,"origin":"","legend":"\u003cp\u003e\u003cstrong\u003eShare of Household Income from Factors of Production (%)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eSource:\u003c/strong\u003e\u003c/em\u003e\u003cem\u003e Bangladesh 2014 SAM\u003c/em\u003e\u003c/p\u003e","description":"","filename":"3.png","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/089ff4162ace8adddec3e7a0.png"},{"id":73468808,"identity":"2ac97890-a71c-4a2a-bb9a-2bd46a27ef52","added_by":"auto","created_at":"2025-01-10 09:11:26","extension":"png","order_by":4,"title":"Figure 4","display":"","copyAsset":false,"role":"figure","size":42654,"visible":true,"origin":"","legend":"\u003cp\u003e\u003cstrong\u003eShare of Factor of Production in Sectoral Value Added (%)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eSource\u003c/strong\u003e\u003c/em\u003e\u003cem\u003e: Bangladesh 2014 SAM\u003c/em\u003e\u003c/p\u003e","description":"","filename":"4.png","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/e13ce13d5bf2d01a23f22243.png"},{"id":73468805,"identity":"02a81173-bca2-4c9b-81e3-80877ec3b99c","added_by":"auto","created_at":"2025-01-10 09:11:26","extension":"png","order_by":5,"title":"Figure 5","display":"","copyAsset":false,"role":"figure","size":22477,"visible":true,"origin":"","legend":"\u003cp\u003e\u003cstrong\u003eMacroeconomic Impact of Exports Subsidy Elimination (real % change)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eSource\u003c/strong\u003e\u003c/em\u003e\u003cem\u003e: Authors’ simulations\u003c/em\u003e\u003c/p\u003e","description":"","filename":"5.png","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/596702c593c5f722d529299e.png"},{"id":73469039,"identity":"fd2c6a4e-0ccc-4172-b0ab-57783bb05c78","added_by":"auto","created_at":"2025-01-10 09:19:26","extension":"png","order_by":6,"title":"Figure 6","display":"","copyAsset":false,"role":"figure","size":23447,"visible":true,"origin":"","legend":"\u003cp\u003e\u003cstrong\u003eImpact on Sectoral Exports (real % change)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eSource\u003c/strong\u003e\u003c/em\u003e\u003cem\u003e: Authors’ simulations\u003c/em\u003e\u003c/p\u003e","description":"","filename":"6.png","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/8a057b91806104ee401edecc.png"},{"id":73469040,"identity":"cf18fbd8-6ff4-4da3-8833-91ecd545f6b6","added_by":"auto","created_at":"2025-01-10 09:19:26","extension":"png","order_by":7,"title":"Figure 7","display":"","copyAsset":false,"role":"figure","size":23219,"visible":true,"origin":"","legend":"\u003cp\u003e\u003cstrong\u003eImpact on Sectoral Output (real % change)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eSource\u003c/strong\u003e\u003c/em\u003e\u003cem\u003e: Authors’ simulations\u003c/em\u003e\u003c/p\u003e","description":"","filename":"7.png","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/5b597ac97be6c42e52d8951d.png"},{"id":73468815,"identity":"da66adb5-a442-4617-9b34-7842079094fc","added_by":"auto","created_at":"2025-01-10 09:11:26","extension":"png","order_by":8,"title":"Figure 8","display":"","copyAsset":false,"role":"figure","size":26033,"visible":true,"origin":"","legend":"\u003cp\u003e\u003cstrong\u003eImpact on Household Incomes (real % change)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eSource\u003c/strong\u003e\u003c/em\u003e\u003cem\u003e: Authors’ simulations\u003c/em\u003e\u003c/p\u003e","description":"","filename":"8.png","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/de7fb23fb29368e5b09abfdc.png"},{"id":73469048,"identity":"105ae0ca-1ca4-4739-8367-72380bd4f840","added_by":"auto","created_at":"2025-01-10 09:19:27","extension":"png","order_by":9,"title":"Figure 9","display":"","copyAsset":false,"role":"figure","size":42887,"visible":true,"origin":"","legend":"\u003cp\u003e\u003cstrong\u003eImpact on Household Consumption (% change)\u003c/strong\u003e\u003c/p\u003e\n\u003cp\u003e\u003cem\u003e\u003cstrong\u003eSource\u003c/strong\u003e\u003c/em\u003e\u003cem\u003e: Authors’ simulations\u003c/em\u003e\u003c/p\u003e","description":"","filename":"9.png","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/56963848317dfccf905ae5b9.png"},{"id":73470854,"identity":"5bf09f8f-5fa8-4bea-9c20-bbc243d67008","added_by":"auto","created_at":"2025-01-10 09:35:26","extension":"pdf","order_by":0,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":1074328,"visible":true,"origin":"","legend":"","description":"","filename":"manuscript.pdf","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/59991c4a-78b4-4014-bdef-cf0781197165.pdf"},{"id":73468799,"identity":"7bc8cc7d-9ba3-483e-af8b-10286c3d3392","added_by":"auto","created_at":"2025-01-10 09:11:26","extension":"docx","order_by":1,"title":"","display":"","copyAsset":false,"role":"supplement","size":20013,"visible":true,"origin":"","legend":"","description":"","filename":"Appendices.docx","url":"https://assets-eu.researchsquare.com/files/rs-5798981/v1/89686fa3a7f781a30c365d5a.docx"}],"financialInterests":"The authors declare no competing interests.","formattedTitle":"\u003cp\u003e\u003cstrong\u003eAssessing the Impact of Eliminating Export Subsidies in Bangladesh\u003c/strong\u003e\u003c/p\u003e","fulltext":[{"header":"1. Introduction","content":"\u003cp\u003eExport promotion strategies are trade policy tools that have a long tradition of providing export subsidies to increase exports, with such subsidies being a key policy intervention tool used in many developing countries to offer incentives for exporters in international markets. While export subsidies may increase domestic production and exports, they are often criticized for inefficiencies and high costs to consumers in the subsidizing economy. Moreover, export subsidies could influence international market prices that could harm other exporters by reducing their market shares. The economic impact of export subsidies is inconclusive in the literature. It may boost domestic production, competitiveness, and trade for some sectors, but it could hurt the overall economy.\u003c/p\u003e \u003cp\u003eBangladesh is one of the leading emerging economies with a steady average economic growth rate of about 6.5 per cent over the last decade, including managing to maintain a growth rate of 3.5 per cent during the pandemic (Bangladesh Bank, 2023). It has become a global role model for its socioeconomic development miracle from a \"basket case\" as dubbed by Henry Kissinger in 1971. With this tremendous progress over the decades, Bangladesh is anticipating graduating from least developed countries (LDC) status to developing country (DC) status by 2026, after which Bangladesh will lose all preferential market access under the World Trade Organization (WTO) framework. In addition, Bangladesh must eliminate its domestic trade-restrictive policies, especially export subsidies.\u003c/p\u003e \u003cp\u003eWhat is the impact of removing export subsidies on trade, income, and employment? This has been an important policy debate over the years. Elimination of export subsidies may have a differential impact across different sectors and income groups. Laborde et al. (2013) evaluate the impact of export taxes at the HS 6-digit level on the world economy using a general equilibrium model setting and conclude that removing export taxes would increase global welfare by 0.23 per cent. Panagariya (2000) appraises different country-specific export subsidies and concludes that Indian export subsidies have a marginal impact on its exports. He also argues that Brazil and Mexico's export subsidies eventually had a negative impact on export diversification. Anderson et al. (2023) find that domestic agricultural subsidies remain an important contributor to the welfare cost of policies that restrict trade. Coady et al. (2015) show that most subsidies are not well targeted, largely benefiting higher income groups and as a consequence, subsidies may contribute to lower productivity, leading to economic weakness in the long run. Rhee \u0026amp; Kang (2019) explore export subsidy policies in technologically inferior LDCS using an entry-deterrence model. They find that under complete information, only a subsidy policy can deter entry. Girma \u0026amp; Stepanok (2020) show that subsidizing firms increases domestic competition that makes it difficult for non-subsidized firms to export.\u003c/p\u003e \u003cp\u003eOn the other hand, Bollman \u0026amp; Ferguson (2018) explore the impact of eliminating export subsidies in different Canadian States and find that removing agricultural subsidies hurts rural employment, with adverse spill-over effects in the surrounding communities. Helmers \u0026amp; Trofimenko (2013) assess the impact of export subsidies in Colombia and find that they positively affect export volumes of the subsidized sectors. Narayanan \u0026amp; Rungta (2014) investigate the economic impacts of the elimination of Indian apparel subsidies and demonstrate that India may experience a welfare loss of about US\u003cspan\u003e$\u003c/span\u003e 71.5 million, while other Asian countries may gain about US\u003cspan\u003e$\u003c/span\u003e 218 million. Olivier et al. (2015) evaluate the short-term and long-term impact of the export promotion program in Tunisia, suggesting that in the short run, subsidies have a significant impact leading to higher exports, and greater product and market diversification but no impact in the long run. Fabrice et al. (2020) estimate the impact of Nepal\u0026rsquo;s cash export subsidies under the Cash Incentive Scheme for Exports (CISE) program and show that export subsidies have limited impact on total exports but find a positive impact in improving the performance of apparel exporters who are more successful in accessing the government subsidy scheme. Ong et al. (2019) find that a one percent decrease in farm subsidies would reduce U.S. farm exports by 0.40 percent per annum.\u003c/p\u003e \u003cp\u003eThis brief literature review indicates that the impact of export subsidies is ambiguous in the literature: removing export subsidies may adversely affect exports and employment, but the overall welfare impact for a country can be positive due to increased overall efficiency.\u003c/p\u003e \u003cp\u003eBangladesh has been using a range of instruments to support its export sectors. Total exports were about US\u003cspan\u003e$\u003c/span\u003e 55 billion in 2023, of which 86 percent of exports were accounted for by apparel products, with Bangladesh being the second-largest readymade garments (RMG) exporting country in the world.\u003c/p\u003e \u003cp\u003eMoreover, as Bangladesh is set to graduate from the LDC to a DC status by 2026, export subsidies, especially for industrial products, have to be eliminated after graduation.\u003csup\u003e1\u003c/sup\u003e Other WTO members could, if subsidies are not eliminated, take action against Bangladesh under Article 4 of Subsidies and Countervailing Measures (SCM) of WTO and ask for the withdrawal of the subsidy.\u003csup\u003e2\u003c/sup\u003e\u003c/p\u003e \u003cp\u003eAgainst this background, our study's primary research question revolves around what is the likely impact of eliminating export subsidies, especially on the macroeconomy and household income distribution in Bangladesh. To answer this question, we deploy the MyGTAP model framework developed by Walmsley \u0026amp; Minor (2013), an extension of the standard static GTAP model (Hertel, 1997). This MyGTAP framework allows us to incorporate country specific information to investigate the impacts of trade policies on different household groups (Minor \u0026amp; Walmsley, 2013). We include the income share for ten rural and urban regional households, then explore the potential economic impact of reducing or removing export subsidies on the national economy as well as households' incomes and consumption. This is the first attempt to empirically estimate the impact of a reduction in export subsidies in Bangladesh, as far as we know. Export subsidies are important policy measures that directly impact trade and may have huge spillover effects on employment, income distribution, and poverty in different households. The findings of this case study of a significant emerging economy may also provide valuable policy insights for other developing economies.\u003c/p\u003e \u003cp\u003eA brief structure of Bangladesh export subsidies is discussed in the following section. Section three explains the MyGTAP methodology and how we incorporate the Bangladesh social accounting matrix (SAM) into the GTAP framework. We then present the findings from simulations in the fourth section before turning to some conclusions.\u003c/p\u003e"},{"header":"2. Export Subsidies of Bangladesh","content":"\u003cp\u003eOver the past decade, Bangladesh\u0026rsquo;s export boom, particularly in the apparel sector, has helped Bangladesh to achieve significant economic growth. Bangladesh is the second-largest apparel-exporting country in the world. In 2023, Bangladesh had a real GDP growth rate of 6.7 percent, compared to the South Asian average of 5.4 per cent (Bangladesh Bank, 2024). Bangladesh's total trade has increased from US\u003cspan\u003e$\u003c/span\u003e 4\u0026nbsp;billion in 1980 to US\u003cspan\u003e$\u003c/span\u003e128\u0026nbsp;billion in 2023. The current trade openness ratio is about 36 per cent, which reflects how integrated the country is with the global economy (World Bank Indicators, 2022). The weighted average tariff rates applied by Bangladesh have decreased moderately in recent decades from 22 percent in 2000 to 7.8 percent in 2023 (Bangladesh Trade Portal, 2024).\u003c/p\u003e \u003cp\u003eBangladesh has been using different supporting instruments to boost its exports. The main mechanisms are the bonded warehouse facilities, duty drawbacks, direct export cash incentives, various tax concessions, tax holidays schemes, and export credits which comprised about 3.7 percent of GDP in 2022 (Bangladesh Economic Review, 2023). Figures\u0026nbsp;(1) shows different export incentives ranging from 5 per cent to 20 per cent of export values in various sectors over the last decades, with little change over time. The Bangladesh Bank announced cash incentives for the 2022 fiscal year for the export of products under 36 categories, including a two percent additional special incentive for ready-made garment products (Bangladesh Bank, 2023).\u003c/p\u003e \u003cp\u003eThe government of Bangladesh declared an additional US\u003cspan\u003e$\u003c/span\u003e 954\u0026nbsp;million in cash subsidies to boost exports in response to the COVID-19 pandemic.\u003csup\u003e3\u003c/sup\u003e The three main support measures to exports, i.e., duty drawback,\u003csup\u003e4\u003c/sup\u003e bonded warehouse facilities,\u003csup\u003e5\u003c/sup\u003e and cash subsidies, cost about 5.2 per cent of GDP in 2021 and accounted for 22.5 per cent of the government budget, along with 69.6 per cent of the development budget (Fig.\u0026nbsp;\u003cspan refid=\"Fig2\" class=\"InternalRef\"\u003e2\u003c/span\u003e).\u003c/p\u003e \u003cp\u003eIt is worth noting that most of the beneficiaries of such export incentives are the business elite and lobby groups which significantly influence the government.\u003csup\u003e6\u003c/sup\u003e There are also examples of colossal leakages and misuse of export subsidies and incentives.\u003csup\u003e7\u003c/sup\u003e These large expenditures could be used for more productive sectors or development programs.\u003c/p\u003e"},{"header":"3. Modelling Framework","content":"\u003cp\u003eThe GTAP computable general equilibrium (CGE) model is the most comprehensive model and dataset for estimating nation-wide impacts of trade policy. The detailed structure of the GTAP database, assumptions, model, equations, closures, elasticity, and parameters, are presented in Hertel, (1997).\u003csup\u003e8\u003c/sup\u003e Gilbert, et al., (2018) provide a detailed systematic literature review of CGE and discuss the strengths and limitations of CGE models in the context of international trade models. The GTAP framework structure includes regional households, governments, different sectors and their nests, along with global sectors across countries including how they are linked to each other.\u003c/p\u003e \u003cp\u003eThe MyGTAP model used in this paper is an extended version of the standard GTAP model (Hertel, 1997), developed by Walmsley \u0026amp; Minor (2013). This model allows us to incorporate country-specific data to facilitate investigation of the impacts of different domestic policies at the household level, enabling much richer country-specific analysis than is possible in the standard GTAP model, where a single regional household is modelled. In the MyGTAP framework, we incorporate multiple private households and government agents where spending is directly related to the income received from endowment factors and taxes (Walmsley \u0026amp; Minor, 2013).\u003csup\u003e9\u003c/sup\u003e The model allows for incorporating income from remittances, foreign aid, foreign capital, and government income., with the government collecting income from taxes, duty revenue and foreign aid. This income is then spent on public consumption outlays, transfers to households, foreign aid outflow, and subsidies. Similarly, private households receive and accumulate their income from factors of productions, transfers from the government, other households, and foreign remittances. This accumulated income can be spent on different activities, including consumption, transfers, remittances outflow and savings.\u003c/p\u003e \u003cp\u003eIn previous work focusing on the analysis of subsidies using the MyGTAP framework, Siddiq et al. (2014) examined the effect of elimination of the petroleum subsidy on income distribution in Nigeria and found that a reduction in the subsidy generally increases Nigerian GDP but hurts low-income households. Khan, et al. (2021) explored trade liberalization and income inequality in Pakistan using the MyGTAP model and concluded that trade liberalisation has a differential impact on income inequality in the country.\u003c/p\u003e \u003cdiv id=\"Sec4\" class=\"Section2\"\u003e \u003ch2\u003e3.1 Data Extension and Aggregation to MyGTAP\u003c/h2\u003e \u003cp\u003eThe main features of the MyGTAP framework allow us to incorporate country-specific data on household and factors endowment. Following Rahman and Strutt (2022), we incorporate the Bangladesh Social Accounting Matrix (SAM) data prepared from households\u0026rsquo; income and expenditure survey (HIES) with the GTAP Version 10 dataset (Aguiar et al., 2019) applying the MyGTAP program (Minor \u0026amp; Walmsley, 2013). The latest available Bangladesh SAM is for 2012 and updated for 2014.\u003csup\u003e10\u003c/sup\u003e\u003c/p\u003e \u003cp\u003eWe aggregate the 141 regions in the GTAP 10 dataset into 15 regions (Appendix Table A1a) and the 65 sectors into ten aggregate sectors. Our regional aggregation emphasizes countries that are the leading trading partners of Bangladesh, including the United States, the European Union, China, and India. We also aggregate the 65 GTAP sectors into ten sectors considering the Bangladesh SAM. The detailed sectoral and regional aggregations are presented in the Appendix Table A1a and A1b.\u003c/p\u003e \u003cp\u003e \u003cdiv class=\"gridtable\"\u003e\u003ctable float=\"Yes\" id=\"Tab1\" border=\"1\"\u003e \u003ccaption language=\"En\"\u003e \u003cdiv class=\"CaptionNumber\"\u003eTable 1\u003c/div\u003e \u003cdiv class=\"CaptionContent\"\u003e \u003cp\u003e\u003cb\u003eStructure of the Bangladesh Economy in the Updated SAM in 2014\u003c/b\u003e\u003c/p\u003e \u003c/div\u003e \u003c/caption\u003e \u003ccolgroup cols=\"6\"\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c1\" colnum=\"1\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c2\" colnum=\"2\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c3\" colnum=\"3\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c4\" colnum=\"4\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c5\" colnum=\"5\"\u003e\u003c/div\u003e \u003cdiv align=\"left\" class=\"colspec\" colname=\"c6\" colnum=\"6\"\u003e\u003c/div\u003e \u003cthead\u003e \u003ctr\u003e \u003cth align=\"left\" colname=\"c1\"\u003e \u003cp\u003eAggregated Sectors\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c2\"\u003e \u003cp\u003eValue-added\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c3\"\u003e \u003cp\u003eExport on total output\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c4\"\u003e \u003cp\u003eExport share\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c5\"\u003e \u003cp\u003eImport share on Output\u003c/p\u003e \u003c/th\u003e \u003cth align=\"left\" colname=\"c6\"\u003e \u003cp\u003eImport share\u003c/p\u003e \u003c/th\u003e \u003c/tr\u003e \u003c/thead\u003e \u003ctbody\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e1. Grains and Crops\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e11.12\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e0.39\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e0.86\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e8.5\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e8.15\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e2. Livestock, Fisheries and Meat Products\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e1.34\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e0.07\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e0.31\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e2.45\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e0.32\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e3. Mining and Extraction\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e6.8\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e0.16\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e0.1\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e1.92\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e0.68\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e4. Processed Food\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e1.45\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e1.53\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e1.57\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e17\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e9.12\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e5. Textiles and Clothing\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e7.16\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e51.68\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e87.06\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e17.6\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e20.1\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e6. Light Manufacturing\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e1.88\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e2.41\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e1.84\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e23.3\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e9.43\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e7. Heavy Manufacturing\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e1.02\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e1.17\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e1.26\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e59.1\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e41.22\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e8. Utilities and Construction\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e17.02\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e-\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e-\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e-\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e-\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e9. Transport and Communication service\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e28.31\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e2.87\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e6.3\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e4.99\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e4.65\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003e10. Other Services\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e23.9\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e \u003cp\u003e0.25\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e0.7\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e \u003cp\u003e4.88\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e6.33\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003ctr\u003e \u003ctd align=\"left\" colname=\"c1\"\u003e \u003cp\u003eTotal\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c2\"\u003e \u003cp\u003e100\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c3\"\u003e\u0026nbsp;\u003c/td\u003e \u003ctd align=\"left\" colname=\"c4\"\u003e \u003cp\u003e100\u003c/p\u003e \u003c/td\u003e \u003ctd align=\"left\" colname=\"c5\"\u003e\u0026nbsp;\u003c/td\u003e \u003ctd align=\"left\" colname=\"c6\"\u003e \u003cp\u003e100\u003c/p\u003e \u003c/td\u003e \u003c/tr\u003e \u003c/tbody\u003e \u003c/colgroup\u003e \u003ctfoot\u003e \u003ctr\u003e\u003ctd colspan=\"6\"\u003e\u003cb\u003eSource\u003c/b\u003e: \u003cem\u003eGTAP 10 \u0026amp; SAM (2014)\u003c/em\u003e\u003c/td\u003e\u003c/tr\u003e \u003c/tfoot\u003e \u003c/table\u003e\u003c/div\u003e \u003c/p\u003e \u003cp\u003eA complete mapping is required between the sectors of the Bangladesh SAM with the corresponding GTAP sectors, and with the aggregated regions. We then use the ten different rural and urban households\u0026rsquo; income, consumption and ownership weights acquired from the SAM to incorporate into the MyGTAP model. These earnings were allocated to each of the ten households according to factor ownership shares. Household incomes were then adjusted for net foreign income, remittances, and capital depreciation, as suggested by Minor \u0026amp; Walmsley (2013). We use this dataset to investigate the effects of removing or reducing export subsidies on both household and macro levels. A summary description of the Bangladesh social accounting matrix and database used in this study is provided in Table\u0026nbsp;\u003cspan refid=\"Tab1\" class=\"InternalRef\"\u003e1\u003c/span\u003e.\u003c/p\u003e \u003cp\u003eTable\u0026nbsp;\u003cspan refid=\"Tab1\" class=\"InternalRef\"\u003e1\u003c/span\u003e shows the structure and share of different economic sectors in Bangladesh in 2014, as shown in the SAM. Grains and crops are the leading category in the agriculture sector, which contributes 11.1 percent of value added. On the other hand, in the industry sector, textile and clothing is the leading category that contributes a 7.16 percent share of the economy. The apparel sector is also highly export-oriented. About 87 percent of Bangladesh's exports come from textiles and clothing sectors, while imports by this sector are about 20 percent, as shown in the SAM. Bangladesh is heavily dependent on importing in the heavy manufacturing sectors, which is about 41 percent of total imports, especially intermediate capital goods.\u003c/p\u003e\u003cp\u003eFigure \u003cspan refid=\"Fig3\" class=\"InternalRef\"\u003e3\u003c/span\u003e shows factor ownership by rural and urban households while Fig.\u0026nbsp;\u003cspan refid=\"Fig4\" class=\"InternalRef\"\u003e4\u003c/span\u003e demonstrates how these factors of production are employed in different sectors and where the income comes from for these ten households. Unskilled labour is largely employed in the agricultural sectors, as shown in Fig.\u0026nbsp;\u003cspan refid=\"Fig4\" class=\"InternalRef\"\u003e4\u003c/span\u003e. The Figures depict that urban day labourers get most of their income from unskilled employment, and about 42 percent of value added is unskilled labour in the textile and apparel sector\u003c/p\u003e\u003c/div\u003e \u003cdiv id=\"Sec5\" class=\"Section2\"\u003e \u003ch2\u003e3.2 Updating Bangladesh export subsidies rate using Altertax:\u003c/h2\u003e \u003cp\u003eThe government of Bangladesh (Ministry of Finance) declares subsidies every year in June, and the Central Bank of Bangladesh (Bangladesh Bank) implements the decision made by the government. However, Bangladesh's sectoral export subsidy rate in the GTAP version 10 database does not reflect actual subsidies applied, perhaps because Bangladesh\u0026rsquo;s export subsidy datasets do not appear to be accurate in the WTO data employed in the GTAP database. Bangladesh's government has been providing export subsidies of an average of about 10 percent over the last decade across all sectors. Therefore, we updated the export subsidy to this rate to reflect Bangladesh\u0026rsquo;s situation more correctly and use this updated database for subsequent policy simulations. \u003csup\u003e11\u003c/sup\u003e\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec6\" class=\"Section2\"\u003e \u003ch2\u003e3.3 Simulations Scenarios\u003c/h2\u003e \u003cp\u003eWe simulate the following three different scenarios to evaluate the potential impact of export subsidies for Bangladesh:\u003c/p\u003e \u003cp\u003e \u003cul\u003e \u003cli\u003e \u003cp\u003eIn Scenario One, we model complete elimination of the export subsidies. This simulation reflects that Bangladesh will graduate from an LDC to a developing country by 2026 and all export subsidies must be eliminated under the WTO framework.\u003c/p\u003e \u003c/li\u003e \u003cli\u003e \u003cp\u003eUnder Scenario Two, we introduce a partial removal with a 50 percent reduction of export subsidies to all sectors, while simultaneously including the transfer of funds to seven poor rural household categories using savings accumulated from the subsidy removal.\u003c/p\u003e \u003c/li\u003e \u003cli\u003e \u003cp\u003eIn Scenario Three, we model an elimination of export subsidies only in the apparel sector. Reducing export subsidies, especially textiles and clothing, may hurt production and employment as Bangladesh is the second-largest apparel exporter in the world and this sector encompasses about 87 percent of Bangladesh\u0026rsquo;s total exports.\u003c/p\u003e \u003c/li\u003e \u003c/ul\u003e \u003c/p\u003e \u003c/div\u003e"},{"header":"4 Analysis of the Simulation Results","content":"\u003cdiv id=\"Sec8\" class=\"Section2\"\u003e \u003ch2\u003e4.1 GDP\u003c/h2\u003e \u003cp\u003eThe impact of removing export subsidies can be investigated at both the macroeconomic and household level. This section presents the results showing the simulated impacts on GDP, industry output, trade, and household income and consumption. The overall macroeconomic impact of removing export subsidies is presented in Fig.\u0026nbsp;\u003cspan refid=\"Fig5\" class=\"InternalRef\"\u003e5\u003c/span\u003e. The results show that the full elimination of export subsidies has a slight positive impact on GDP due to the improvement of overall economic efficiency. Subsidy elimination increases export prices relative to import prices, which leads to a decline in exports. At the same time, there are some positive impacts due to increased allocative efficiency, with resources moving into more productive areas. Since the import tariffs of Bangladesh remain relatively high, eliminating export subsidies does not improve allocative efficiency significantly. If export subsidies are eliminated only in the RMG sector under Scenario Three, real GDP increases by 0.04 percent, which is similar to the full elimination of export subsidies by all sectors. This is not surprising, given the significant contribution of this sector to GDP (about 7.16 percent) and that most subsidies apply to it.\u003c/p\u003e \u003cp\u003eIn contrast, if export subsidies are reduced by 50 per cent with this funding transferred from the government to target seven poor rural household groups under the Second Scenario, our results suggest real GDP may increase by more than 0.81 per cent.\u003csup\u003e12\u003c/sup\u003e A key factor of such a significant increase in GDP is the rapid increase in output of the agriculture and manufacturing sectors. As shown in Fig.\u0026nbsp;10, overall production is likely to increase in all sectors except apparel outputs. A substantial increase in sectoral outputs influences household income and consumption. As real GDP is determined by the sum of household consumption, investment, government expenditure and net exports, a significant increase in household consumption results in a significant increase in real GDP.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec9\" class=\"Section2\"\u003e \u003ch2\u003e4.2 Trade\u003c/h2\u003e \u003cp\u003eIt is evident from the simulation results that the elimination of export subsidies will lower exports under Scenarios one and three. Our results suggest total exports could reduce by about 1.69 per cent and 1.57 under Scenario One and three respectively. However, under Scenario Two, both exports and imports show positive results relative to the reduction under Scenario One and Three. Total imports may increase by 1.37 percent due to an increase in the aggregate income at the household level, although import prices show no change, domestic prices show a slight increase. An increase in real imports is also driven by the rise in importing petroleum and other manufacturing sectors. Transferring to poor households does not hurt exports as these still increase by about one percent. Note that despite a drop in net exports, real GDP increases due to the other components of GDP, notably consumption and investment. The analysis also indicates that the overall change in the balance of trade in Bangladesh is positive and no substantial negative impact is detected in terms of trade.\u003c/p\u003e \u003c/div\u003e \u003cdiv id=\"Sec10\" class=\"Section2\"\u003e \u003ch2\u003e4.3 Sectoral export\u003c/h2\u003e \u003cp\u003eTextiles and clothing are the main export items of Bangladesh, constituting about 87 per cent of Bangladesh\u0026rsquo;s total exports in 2023. Therefore, the exports of the RMG sector could be affected adversely if the Bangladesh government eliminates export subsidies under all three Scenarios (Fig.\u0026nbsp;\u003cspan refid=\"Fig6\" class=\"InternalRef\"\u003e6\u003c/span\u003e). Exports of the ready-made garments sector could be reduced by 4.7 per cent if we eliminate export subsidies only under Scenario Three. However, under Scenario Two the reduction in readymade garment exports modelled is 2.4 per cent.\u003c/p\u003e \u003cp\u003eHowever, removing export subsidies may positively impact the exporting of all other sectors except RMG, which could be important for the export diversification strategy in Bangladesh. At the same time, imports might decrease as exports decrease, especially intermediate inputs of the RMG sector, which constitute about 20 per cent of Bangladesh's total imports (Fig.\u0026nbsp;\u003cspan refid=\"Fig4\" class=\"InternalRef\"\u003e4\u003c/span\u003e). The removal of export subsidies also reduces imports in the light manufacturing sector.\u003csup\u003e13\u003c/sup\u003e It is apparent that if we transfer the savings fund that accumulated from the removal of subsidies to the rural household, that would add to investment and increase GDP. However, this transfer to rural households leads to increased rural consumption.\u003c/p\u003e\u003c/div\u003e \u003cdiv id=\"Sec11\" class=\"Section2\"\u003e \u003ch2\u003e4.4 Sectoral output\u003c/h2\u003e \u003cp\u003eThe RMG industry has been enjoying various stimulus supports, including cash incentives, duty drawbacks, and bonded warehouse facilities over the decades. If we eliminate the export subsidies under all three Scenarios, apparel production would be affected negatively, as shown in Fig.\u0026nbsp;\u003cspan refid=\"Fig7\" class=\"InternalRef\"\u003e7\u003c/span\u003e. Under Scenario Three, if we eliminate export subsidies for the apparel sector, the total production of textiles and clothing would be reduced by about three percent, while Scenario One has a similar negative impact but under Scenario Two, output could fall by 1.5 per cent. However, the light and heavy manufacturing sectors experience strong growth, with agricultural output also increasing significantly. The analysis indicates that the removal of export subsidies may have a negative impact on the apparel sector but a positive effect on the output of other sectors.\u003c/p\u003e\u003c/div\u003e \u003cdiv id=\"Sec12\" class=\"Section2\"\u003e \u003ch2\u003e4.5 Impact on households\u003c/h2\u003e \u003cp\u003eDistributional analysis of households is an important supplement to the macro-economic analysis, particularly for a developing country such as Bangladesh. The estimated change in household incomes is shown in Fig.\u0026nbsp;\u003cspan refid=\"Fig8\" class=\"InternalRef\"\u003e8\u003c/span\u003e. The simulation results reveal that the real household income declines only for the urban households but increases for other small rural households under Scenario One. In Scenario Two, which includes a government transfer to poor households, the household income increases across all rural household groups. Changes in the sources of household income show that households benefit from a government transfer with an increase on average of 2.5 per cent for rural households, but a slight decrease in the urban household income.\u003c/p\u003e \u003cp\u003eTable\u0026nbsp;\u003cspan refid=\"Tab1\" class=\"InternalRef\"\u003e1\u003c/span\u003e indicates that the apparel sector contributes approximately 7.16 percent to the GDP. About 42 percent of value added in the garment industry is urban unskilled households who are directly affected due to the lower output that leads to lower exports in the apparel sector. According to Haque and Bari (2021), approximately 4.2\u0026nbsp;million workers are employed in the apparel sector in Bangladesh, which is about 26 per cent of urban employees (Appendix Table A2). Therefore, incomes of urban households could decline due to a fall in RMG productions and exports, which will directly affect urban unskilled household income.\u003c/p\u003e \u003cp\u003eThe overall composition of rural households\u0026rsquo; expenditure is mainly on food, which is about 80 percent of poor households\u0026rsquo; spending on their total consumption. A rise in domestic demand causes a rise in endowment factor prices and contributes to an overall increase in price level. Nevertheless, it is noticed that the domestic price increases by 0.80 percent due to money transfers from the government to poor households.\u003c/p\u003e\u003cp\u003eFigure \u003cspan refid=\"Fig9\" class=\"InternalRef\"\u003e9\u003c/span\u003e demonstrates the changes in consumption for different household groups. We find that the average consumption level may increase on an average by about 2.5 percent, mostly in the rural areas under Scenario Two. The urban households are expected to experience a decrease in consumption under Scenarios One and Three. The main reason for this is that urban households depend on the apparel and light manufacturing sectors whereas rural households mostly depend on their agricultural production.\u003c/p\u003e \u003c/div\u003e"},{"header":"5. Conclusion","content":"\u003cp\u003eExport subsidy elimination is a critical policy decision for many developing countries. Bangladesh has been providing export subsidy support to increase its exports, amounting to about US\u003cspan\u003e$\u003c/span\u003e10\u0026nbsp;billion, at a cost of 3.7 per cent of its GDP. Bangladesh's main export sector is RMG therefore, most of this export subsidy goes to the RMG sector. Moreover, as Bangladesh is set to graduate from the status of a least developed country to a developing country by 2026, export subsidies, especially for industrial products, must be eliminated after graduation. Given this background, this study's main objective is to estimate the economic impact of removing export subsidies on Bangladesh's economy.\u003c/p\u003e \u003cp\u003eThis paper uses the MyGTAP program and model developed by Walmsley \u0026amp; Minor, (2013), to investigate the impacts of different domestic policies at the household level. We combine the Bangladesh social accounting matrix data with the GTAP version 10 database using the MyGTAP model. We incorporate both rural and urban regional household incomes, consumptions, and ownership weights in the MyGTAP model collected from the Bangladesh social accounting matrix.\u003c/p\u003e \u003cp\u003eWe then simulate the three different Scenarios to evaluate the potential economic impact of the removal of export subsidies in Bangladesh which is a complete elimination of the export subsidies under Scenario One. Under Scenario Two, we introduced a partial removal that is a 50 per cent reduction of export subsidies to all sectors and, at the same time transfer direct funds to poor households\u0026rsquo; that savings from the subsidy to assess the income implication of different families. Also, we explore the impact of the elimination of export subsidies on the textiles and clothing sector only.\u003c/p\u003e \u003cp\u003eThe simulations indicate that the elimination of export subsidies has a positive impact on GDP due to the improvement of overall economic efficiency. But both exports and imports will drop if we eliminate the export subsidies. While, if we reduce the export subsidy by 50 per cent and transfer the accumulated savings from the government to the targeted seven household groups, real GDP may increase by about 0.81 per cent. However, the removal of export subsidies will affect the RMG sector substantially.\u003c/p\u003e \u003cp\u003eOur simulation result suggests that removing export subsidies may reduce real household income for urban households but increase income for rural households. Government transfer to poor households leads to increased income for all different rural household groups. The real income may increase due to a rise in the return of wages and profits from the factor of production. Changes in household income sources show households benefit from a government transfer increasing by 2.5 per cent for rural households. This analysis indicates that there is a substantial opportunity cost of export subsidies, and welfare could be increased by redirecting the spending to more productive channels. Supporting export industries is compelling Bangladesh to spend a large amount, which could be used for various development programs that may bring more significant benefits to the country.\u003c/p\u003e"},{"header":"Declarations","content":"\u003cp\u003e\u003cstrong\u003eDisclaimer:\u0026nbsp;\u003c/strong\u003eWe have no conflicts of interest to disclose.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eData availability\u003c/strong\u003e: The dataset is available on request.\u0026nbsp;\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eAcknowledgement:\u003c/strong\u003e This work was supported by the Hangkuk University of Foreign Studies Research Fund of 2023. This work was also supported by the National Research Foundation of Korea Grant Funded by the Korean Government (NRF- 2017S1A6A3A02079749)\u003c/p\u003e"},{"header":"References","content":"\u003col\u003e\n\u003cli\u003eAnderson, K., Corong, E. L., Strutt, A., \u0026amp; Valenzuela, E. (2023). The Relative Importance of Global Agricultural Subsidies and Tariffs, Revisited. \u003cem\u003eWorld Trade Review\u003c/em\u003e,\u003cem\u003e 22\u003c/em\u003e(3-4): 382-394. https://doi.org/10.1017/S1474745623000101\u003c/li\u003e\n\u003cli\u003eAguiar, A., Chepeliev, M., Corong, E., McDougall, R., \u0026amp; van der Mensbrugghe, D. (2019). The GTAP Data Base: Version 10. \u003cem\u003eJournal of Global Economic Analysis, 4\u003c/em\u003e(1): 1-27. Retrieved from https://www.jgea.org/ojs/index.php/jgea/article/view/77.\u003c/li\u003e\n\u003cli\u003eBBS. (2017). 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Trade liberalization and income inequality: The case for Pakistan, \u003cem\u003eJournal of Asian Economics\u003c/em\u003e, \u003cem\u003e74:\u003c/em\u003e101310, https://doi.org/10.1016/j.asieco.2021.101310.\u003c/li\u003e\n\u003cli\u003eLaborde, D., Estrades, C., \u0026amp; Bou\u0026euml;t, A. (2013). A Global Assessment of the Economic Effects of Export Taxes, \u003cem\u003eThe World Economy, 36\u003c/em\u003e: 1333-1354. doi:10.1111/twec.12072.\u003c/li\u003e\n\u003cli\u003eMalcolm, G. (1998). Adjusting Tax Rates in the GTAP Data Base, GTAP Technical Paper No. 12, Purdue University, West Lafayette IN, USA.\u003c/li\u003e\n\u003cli\u003eMinor, P., \u0026amp; Walmsley, T. (2013). My GTAP: A Program for Customizing and Extending the GTAP Database for Multiple Households, Split Factors, Remittances, Foreign Aid and Transfers, Working Paper Series, 79, Center for Global Trade Analysis, Purdue University.\u003c/li\u003e\n\u003cli\u003eNarayanan, B. G., \u0026amp; Rungta, V. (2014). 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The effects of farm subsidies on farm exports in the United States. \u003cem\u003eAmerican Journal of Agricultural Economics, 101(4): \u003c/em\u003e1277\u0026ndash;1304. https://doi.org/https://doi.org/10.1093/ajae/aay112.\u003c/li\u003e\n\u003cli\u003ePanagariya, A. (2000). Evaluating the Case for Export Subsidies. Policy Research Working Paper; No. 2276. World Bank, Washington, DC. Retrieved from http://hdl.handle.net/10986/22282.\u003c/li\u003e\n\u003cli\u003eRhee, K., \u0026amp; Kang, M. (2019). Export subsidies and least developed countries: An entry-deterrence model under complete and incomplete information, \u003cem\u003eKorean Economic Review, 35:\u003c/em\u003e163-182. \u003c/li\u003e\n\u003cli\u003eSiddig, K., Aguair, A., Harald, G., Peter M., \u0026amp; Terrie, W. (2014). Impacts of removing fuel import subsidies in Nigeria on poverty, \u003cem\u003eEnergy Policy, 69\u003c/em\u003e: 165-178, doi: https://doi.org/10.1016/j.enpol.2014.02.006.\u003c/li\u003e\n\u003cli\u003eTIB. (2013). Ready Made Garments Sector: Governance Challenges and Way Forward, Transparency International Bangladesh (TIB), Retrieved from https://www.ti-bangladesh.org/beta3/index.php/en/activities/4014-corruption-and-mal-governance-grip-rmg-tib-for-strict-implementation-of-laws.\u003c/li\u003e\n\u003cli\u003eWalmsley, T., \u0026amp; Minor, P. (2013). MyGTAP Model: A Model for Employing Data from the MyGTAP Data Application\u0026mdash;Multiple Households, Split Factors, Remittances, Foreign Aid and Transfers. GTAP Working Paper Series, #78, Center for Global Trade Analysis, Purdue University.\u003c/li\u003e\n\u003cli\u003eWorld Bank. (2023). World Development Indicators, The World Bank, Washington, D.C. Retrieved from http://databank.worldbank.org.\u003cstrong\u003e\u003c/strong\u003e\u003c/li\u003e\n\u003c/ol\u003e"},{"header":"Footnotes","content":"\u003col\u003e\u003cli\u003e\u003cspan\u003e The World Trade Organization (WTO) prohibits most direct export subsidies, except for least developed countries (LDCs).\u003c/span\u003e\u003c/li\u003e\u003cli\u003e\u003cspan\u003e The WTO rules on subsidies in industrial goods are presented in Articles VI and XVI of GATT 1994 and in the Agreement on Subsidies and Countervailing Measures (SCM).\u003c/span\u003e\u003c/li\u003e\u003cli\u003e \u003cspan\u003e The government of Bangladesh has declared 26 stimulus packages equivalent to US\u003cspan\u003e$\u003c/span\u003e16.5\u0026nbsp;billion, which is about 3.9 percent of GDP, to combat the Covid-19 pandemic and rescue the economy. Of these packages, an additional US\u003cspan\u003e$\u003c/span\u003e 560\u0026nbsp;million (BDT 50\u0026nbsp;billion) is allocated to export subsidies (Ministry of Finance, Government of Bangladesh, as of December 30, 2023).\u003c/span\u003e \u003c/li\u003e\u003cli\u003e \u003cspan\u003e Under the provisions of section 13 of The Value Added Tax Act, 1991 and under section 37 of The Customs Act, 1969 of the Bangladesh government all import duties and taxes paid on raw materials and inputs used for the manufacture of exported goods or services shall be refunded.\u003c/span\u003e \u003c/li\u003e\u003cli\u003e \u003cspan\u003e Bangladesh\u0026rsquo;s customs bonded warehouse regime permits licensed manufacturers to import duty-free parts and materials required for their export production purposes. The bonded warehouse facilities are mostly used by RMG industries.\u003c/span\u003e \u003c/li\u003e\u003cli\u003e\u003cspan\u003e The Transparency International Bangladesh (TIB) study indicated that around 10 per cent of parliamentarians are involved in RMG businesses (TIB, 2013). S Alam Group laundered BDT 1.13 trillion, \u003cspan class=\"ExternalRef\"\u003e\u003cspan class=\"RefSource\"\u003ehttps://dailyasianage.com/news/327012/s-alam-group-laundered--tk-113tn-cid\u003c/span\u003e\u003cspan address=\"https://dailyasianage.com/news/327012/s-alam-group-laundered--tk-113tn-cid\" targettype=\"URL\" class=\"RefTarget\"\u003e\u003c/span\u003e\u003c/span\u003e.\u003c/span\u003e\u003c/li\u003e\u003cli\u003e\u003cspan\u003e For example, BDT 9.9\u0026nbsp;billion scams by Bismillah Group (BG): This BG company has managed to receive cash incentives against fake export documents and overpriced non-existing export items. \u003cspan class=\"ExternalRef\"\u003e\u003cspan class=\"RefSource\"\u003ehttps://www.dhakatribune.com/uncategorized/2013/11/03/tk9-9bn-scam-by-bismillah-group\u003c/span\u003e\u003cspan address=\"https://www.dhakatribune.com/uncategorized/2013/11/03/tk9-9bn-scam-by-bismillah-group\" targettype=\"URL\" class=\"RefTarget\"\u003e\u003c/span\u003e\u003c/span\u003e.\u003c/span\u003e\u003c/li\u003e\u003cli\u003e\u003cspan\u003e Hertel, (1997) provides a detailed introduction to the GTAP database.\u003c/span\u003e\u003c/li\u003e\u003cli\u003e\u003cspan\u003e Refer, Walmsley \u0026amp; Minor, (2013) and Minor \u0026amp; Walmsley, (2013), for full documentation of MyGTAP data program and model, \u003cspan class=\"ExternalRef\"\u003e\u003cspan class=\"RefSource\"\u003ehttps://impactecon.com/resources/\u003c/span\u003e\u003cspan address=\"https://impactecon.com/resources/\" targettype=\"URL\" class=\"RefTarget\"\u003e\u003c/span\u003e\u003c/span\u003e\u003c/span\u003e\u003c/li\u003e\u003cli\u003e\u003cspan\u003e The updated SAM was provided by South Asian Network for Economic Modelling (SANEM), a leading think-tank in Bangladesh.\u003c/span\u003e\u003c/li\u003e\u003cli\u003e\u003cspan\u003e We employ the Altertax method (Malcolm, 1998) to correct the subsidy rate incorporated in the GTAP database. The purpose of this procedure is to maintain the internal consistency of the database with the least possible effects on the value flows in the dataset (Burfisher, 2017 Siddig et al., 2014).\u003c/span\u003e\u003c/li\u003e\u003cli\u003e\u003cspan\u003e We simulate the removal of export subsidies from the base data. We reduce the export subsidies to zero and define government transfers to households of that same dollar amount. We split up this value and give it equally to all seven rural low-income household.\u003c/span\u003e\u003c/li\u003e\u003cli\u003e\u003cspan\u003e We have chosen not to include graphs related to sectoral imports as our primary focus is on exports.\u003c/span\u003e\u003c/li\u003e\u003c/ol\u003e"}],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":true,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":true,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":false,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":false,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Export Subsidies, Income Distribution, Computable General Equilibrium (CGE), Ready Made Garments, Bangladesh, Least Developed Country (LDC)","lastPublishedDoi":"10.21203/rs.3.rs-5798981/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-5798981/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eThe debate over export subsidy reform is crucial for many developing countries. This study analyses the impact of reducing or eliminating export subsidies for Bangladesh using a computable general equilibrium framework. Our simulations indicate that the partial removal of export subsidies has a positive effect on GDP. If export subsidies are eliminated only in the RMG sector real GDP increases by 0.04 per cent, which is similar to the full elimination of export subsidies by all sectors – perhaps not surprising given the significant contribution of this sector to GDP and that most subsidies apply to this sector. When export subsidies are reduced by 50 percent, with the funding transferred to seven targeted low-income household groups, real GDP is projected to increase by about 0.81 percent. Government transfers to households lead to an increase in real income for all seven targeted households, especially rural households, where incomes rise on average by 2.5 percent. This study indicates that there are significant inefficiencies and opportunity costs associated with export subsidies, and household income could be enhanced by redirecting the spending to more productive channels.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003eJEL Classification: \u003c/strong\u003eF14, F17, F47.\u003c/p\u003e","manuscriptTitle":"Assessing the Impact of Eliminating Export Subsidies in Bangladesh","msid":"","msnumber":"","nonDraftVersions":[{"code":1,"date":"2025-01-10 09:11:21","doi":"10.21203/rs.3.rs-5798981/v1","editorialEvents":[{"type":"communityComments","content":0}],"status":"published","journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true}}],"origin":"","ownerIdentity":"9848433d-1613-45a6-8db1-9a4e148d1ee8","owner":[],"postedDate":"January 10th, 2025","published":true,"recentEditorialEvents":[],"rejectedJournal":[],"revision":"","amendment":"","status":"posted","subjectAreas":[],"tags":[],"updatedAt":"2025-01-10T09:11:21+00:00","versionOfRecord":[],"versionCreatedAt":"2025-01-10 09:11:21","video":"","vorDoi":"","vorDoiUrl":"","workflowStages":[]},"version":"v1","identity":"rs-5798981","journalConfig":"researchsquare"},"__N_SSP":true},"page":"/article/[identity]/[[...version]]","query":{"redirect":"/article/rs-5798981","identity":"rs-5798981","version":["v1"]},"buildId":"8U1c8b4HqxoKbykW_rLl7","isFallback":false,"isExperimentalCompile":false,"dynamicIds":[84888],"gssp":true,"scriptLoader":[]}