Goodbye to Adamjee: Significance of its closure
July 24, 2002
*Syed Akhtar Mahmood is with the Private Sector Advisory Services Group of the
World Bank. The views expressed here are his own and does not necessarily
reflect the views of the World Bank Group.
BOLD decisions are rare in Bangladesh. Implementation of such decisions are
rarer still. The fact that the government of Bangladesh has gone ahead with its
decision to shut down the Adamjee Jute Mills may go down as a landmark in the
history of economic management and, indeed, of industrial development in
Bangladesh.
To many, this may appear an odd statement. There was a time when the Adamjee
Jute Mills was considered the pride of our industrial sector. There was at least
one product, jute goods, in which we were a major world supplier and Adamjee was
the symbol of this flagship industry. How can the closure of this huge factory
be considered a landmark in economic management, leave alone a highlight of our
history of industrialization? Is this not more a sign of failure, a symbol of
national shame?
There are many in Bangladesh who may think so and that is why the formal
closure of an enterprise is not a common incident in our country. It is not just
that labour often objects and stops non-viable enterprises from being closed
down. It is also because it is deeply engrained in the Bangladeshi psyche that
the closure of a business or the shutting down of an enterprise is a great loss
of face, a national disaster almost.
Yet, orderly liquidation of non-viable enterprise is common in developed
countries. This is strikingly evident when one compares over time the list of
the top 100 or 500 companies in a developed economy. Every year the Forbes
Magazine publishes the "Forbes 100" list, a list of the 100 largest
companies in the US. This list was first prepared by B.C. Forbes in 1917 and,
seventy years later, the magazine re-published that list, comparing it to its
1987 list of the top 100 US companies. How many of the original 100 were still
there, at the top? Only 18! In fact, 61 of the top companies of 1917 did not
even exist in 1987. The same story comes out if we look at the S&P 500. Of
the five hundred companies originally making up the S&P 500 in 1957, only 74
remained on the list through 1997. Change, not continuity, is what drives these
economies.
Many years ago, the great German economist, Joseph Schumpeter, talked about
this when he coined the phrase "creative destruction". Schumpeter
wrote extensively about how creativity is critical to development; how the
innovation of new products and new ways of doing things is key to generating
growth. But he was quick to point out that building new things is only half the
story. Equally important for development is the less popular task of eliminating
and disbanding obsolete industries; creative destruction, as he put it.
One reason why closure of enterprises is likely to be unpopular in any
country is evident from the many heart-wrenching pictures and stories published
in Bangladeshi newspapers in the days following the closure of Adamjee; pictures
and stories that bring out the human dimension of this huge factory's closure:
the uncertainty, the fear and the tearful goodbyes as workers and their families
took leave of their long-standing friends, co-workers and neighbours.
Particularly poignant was a picture published in the Prothom Alo of an old
worker, crying uncontrollably as he said good-bye to his loom, a loom that he
had worked on for years, perhaps decades, a piece of machine which he may have
tended to all these years with as care as he would give a child. He may have
given his best all these years, worked as hard as he could and learned as much
as he was given the opportunity to learn. He did his best within his domain. Now
forces beyond his control have brought an end to all this.
Many would want to view Adamjee's closure from this human angle, moving
beyond the cold calculations of accounting and the apparently heartless
principles of economics. Yet one should not forget that there is nothing
humanitarian about the adoption of inappropriate economic principles. The huge
amount of subsidies that had kept Adamjee open, and this old man employed, all
these years had its human costs too. The money that had kept Adamjee afloat
could have been spent on building clinics and hospitals in rural areas or
building and maintaining schools for poor children. Some of it could have gone
to build rural roads, to develop irrigation networks or electrify our villages.
Not that this would have happened necessarily -- governments could have
squandered away the money on useless projects -- but there would at least have
been an opportunity to spend on socially useful projects. It may have been nice
to keep the Adamjee workers employed all these years but there was also an
opportunity lost to spend the money in other, more worthwhile, ventures. As is
often said, there is no free lunch.
There is another dimension to the human story and for that we may return to
the old man whose picture we had seen in the Prothom Alo. Would he have been
better off if Adamjee had shut down much earlier and he had been re-employed in
another industry with much better prospects? The skills that he had acquired
over the years, the dedication that he had developed over time, all these were
assets for him which could have earned him greater dividends had he been
employed more productively in a more prospective industry. This, in essence, is
what resource reallocation is all about. We may believe that by providing a
secure job to hundreds of Adamjee workers all these years, we did them a great
favour. We may believe that we are doing the same with many others who continue
to work in factories that have long outlived their usefulness but which can't be
closed because of what economists call barriers to exit. But, in actual fact, we
are not. In the longer run, income and welfare of workers depend on how
productive they are. And how productive they are depends on the kind of
enterprises they work in and the nature of complementary inputs and machines
they work with. We do not do favours to workers by keeping them in the same
enterprise year after year, even after it is clear that the enterprise is no
longer viable, and then one day spring a nasty surprise on them. They are better
off in an economy where resources, including human resources, can move freely
from less to more productive uses.
The closure of Adamjee should be viewed in this light. The shutting down of
an enterprise does not symbolize the death of assets, but rather their re-birth.
Already we are hearing about proposals about how the huge land on which Adamjee
sits could be better utilized; some have spoken about establishing an
export-processing zone, others have suggested an IT-village. It is possible that
some of the machines in Adamjee could be used elsewhere. And, of course, if new
enterprises develop, many of the workers could be re-employed and perhaps use
their skills more productively. Some years ago, my friend the economist Binayak
Sen, wrote a very interesting paper called "The Anatomy of Closure".
Binayak studied a number of industrial enterprises in the Tongi area which had
reportedly shut down. He found that, in reality, very few of them had actually
closed. Many of them had shifted to other lines of production, sometimes related
to their original business and sometimes in totally different areas but always
in more remunerative ventures. It is rather sad that this has remained a largely
un-read paper, symbolizing perhaps the national attitude to closure of firms
that I had alluded to at the outset.
If we are to think seriously about Bangladesh's development, it is imperative
that we develop a better understanding of the importance of resource
re-allocation in the process of development, of the value of closing down
enterprises that are no longer viable, of the need to free up resources so that
they are put to better use. All this requires that we systematically identify
and remove the barriers to exit; i.e., factors that prevent non-viable
enterprises or obsolete product lines from being closed down. We should realize
that while there might be some merit in providing support to an enterprise that
is in temporary difficulty caused by extra-ordinary conditions, such support
could only be provided on an exceptional basis. The enterprise should be
intrinsically viable and the support should be time-bound. Open-ended support,
especially for enterprises with doubtful viability, has rarely, if ever, proved
to be a wise policy.
Some discussions of industrialization in Bangladesh emphasize the need to
create conditions that allow new enterprises to enter the arena. In other words,
people argue for entry policies. That is all very justified; indeed, free entry
and competition are key to industrial development. However, it needs to be
stressed that effective exit mechanisms are part and parcel of effective entry
policies. When non-performing firms are not allowed to fail, they need to be
propped up with subsidies or other forms of protection. Barriers to exit are
thus also barriers to entry as these measures impose a "tax" on new
entrants that do not benefit from them. Barriers to exit have been shown to have
significant deleterious effects in many developing countries, India being a
notable example. "Hard budget" constraints, another term for effective
exit mechanisms, have been crucial to the success of the private sector in
transition economies such as Poland. In summary, exit policies or the
"freedom to fail" are precisely meant to enable assets (people, ideas,
funds and physical assets) to be withdrawn from bad businesses and to be
re-allocated to better uses. Good exit policies do not destroy assets and harm
development; bad businesses do.
One can hope that the bold decision to close down Adamjee will forever change
our attitude to the closure of non-viable enterprises. By changing our mind-set
and helping to create conditions that allow more flexible movement of resources
from low-productivity to high-productivity uses, the closure of Adamjee may
indeed be viewed in future as a landmark in Bangladesh's industrialization.
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